Biotech

Bhavneesh Sharma

Top 20 Ranking (28.2% Avg Return) --TipRanks

Adaptive Biotechnologies: Analysis of this recent Immunesequencing space IPO

Adaptive Biotechnologies (NASDAQ: ADPT) (the company) was founded in 2009 and is headquartered in Seattle, WA and has its cellular immunology/TCR discovery lab in Southern San Francisco, CA. The company recently launched its IPO on NASDAQ and the stock was up >250% within a week after the IPO. The stock has pulled back from its high of $51/share earlier this week and was down 25% from its high to $38.30 before it started trending up. The stock was up 3.45% on Friday despite a down day for biotech indexes. A key reason for the investor interest in the stock is $10M in insider buying in the open market this week, including executives like the CFO and Senior VP, Operations. In this report, I will discuss the company’s product pipeline and analyze its commercial potential, including competitive landscape.

Novel Immmunesequencing technology with origins at Fred Hutchinson Cancer Center in Seattle

The company’s platform sequences cells of the adaptive immune system, including both T cells and B cells, identifies and maps millions of receptors against antigens on these immune cells using next-generation high-throughput sequencing simultaneously, and uses this information in diagnostics and therapeutics (Immunosequencing). The technology has its origins at Fred Hutchinson Cancer Center in Seattle. Immunosequencing can have an important application in patient management in cancers where lymphocytes play an important role, for example, lymphoid malignancies.

ImmuneSEQ is the company’s proprietary platform that sequence single chains of ‘Y-shaped’ T cell or B cell receptors using next generation sequencing (providing insights at a scale thousands of times than previously possible). pairSQ platform builds on ImmuneSEQ by helping to accurately pair the alpha and beta chains of TCRs at high throughput, which is challenging to do with other methods. MIRA (Multiplexed Identification of T cell Receptor Antigen Specificity) maps millions of TCRs to thousands of clinically relevant antigens. Combined with ImmuneSEQ, MIRA identifies the potential diseases that a person’s immune system has encountered or is actively fighting. TruTCR identifies the optimal TCRs that can be used to develop cell-based therapies. The company has established partnerships and commercial relationships with over 125 biopharmaceutical companies.

cloneSEQ, the first FDA approved assay to monitor for minimal residue disease in B cell lymphoid malignancies

The company has made big progress in its platform over the past two years. It received FDA clearance for cloneSEQ, the first and only FDA approved assay for the detection and monitoring of minimal residual disease, MRD in multiple myeloma and B-cell lymphoblastic leukemia, ALL by periodic monitoring of bone marrow samples using next-generation DNA sequencing during the course of a patient’s treatment. MRD refers to the small number of cancer cells which may remain in the body after treatment and may cause recurrence of the cancer. MRD monitoring is recommended in the practice guidelines for both these cancers. The assay is also covered by Medicare and several large private payors, thus increasing the number of covered lives to $140M. It is also available for use in other lymphoid cancers as a CLIA-regulated laboratory developed test service provided by the company (target market=600,000 people with B-lymphoid malignancies. It can help clinicians to predict long-term outcomes, assess treatment response, monitor the remission status, and detect potential relapse. Using the company’s next generation sequencing, cancer cells which were missed by conventional methods can now be detected cloneSEQ can detect even a single cancer cell). Monitoring for MRD is also important since MRD negative patients have a higher progression free survival than those with MRD positive status.

(Source: cloneSEQ data in multiple myeloma)


In another study, MRD negative status by cloneSEQ was prognostic for time to progression and overall survival.


In another study in multiple myeloma in 475 patients, 322 patients were MRD negative by flow cytometry. 163 of these 322 MRD negative patients were tested using cloneSEQ and 84/163 were found to be MRD positive. 

NCCN, National Comprehensive Cancer Network guidelines recommend monitoring for MRD using next generation sequencing like cloneSEQ. Similar results like multiple myeloma were also found in ALL. In a study of 579 pediatric ALL patients, cloneSEQ identified an additional 87 patients who were MRD negative by flow cytometry. NGS MRD negative patients had higher event-free survival than NGS MRD positive patients in pediatric ALL. MRD assessment by cloneSEQ had prognostic value in pediatric and adult ALL patients (NGS MRD- patients had lower relapse rate than flow cytometry MRD- patients). At the recent ASCO scientific conference, the company also presented data showing the utility of closeSEQ assay to diagnose and monitor MRD in other lymphoid malignancies like CLL and diffuse B cell lymphoma. The assay also may be useful in assessing treatment responses to therapies like CAR-T. cloneSEQ is being used by approximately 300 healthcare institutions, including 25 of 28 member cancer centers of NCCN, National Comprehensive Cancer Network, and more than 120 biopharma companies in over 120 clinical trials. .

Lucrative licensing deal with Genentech for TruTCR platform, which could pay potential $1.8 billion in milestone payments and royalties

The company’s immune platform received further validation earlier this year when Roche’s Genentech signed a deal to license Adaptive’s TruTCR platform (see figure below), which will identify T-cell receptors (TCRs) than can accurately identify and target cancer neoantigens.

TruTCR uses the company’s different platforms like immuneSEQ (for sequencing), MIRA (for TCR mapping) and pairSEQ (for pairing receptor chains). Roche will use the TruTCR platform to identify the cancer neoantigens for each patient, and develop cell-based oncology treatments targeting these neoantigens (other companies in the cancer neoantigen space that I like are Genocea Biosciences, GNCA and Gritstone Oncology, GRTS). Adaptive has identified and characterized >1200 unique antigen-specific TCRs against 600 clinically relevant targets using TruTCR platform, which could be possible pipeline candidates. Proof-of-concept was shown in the platform’s TCR against WT-1, which was 4x more effective in killing cancer cells compared to a benchmark WT-1 TCR.

Data presented by Genocea has shown that accurate identification of optimal neoantigens is very important to develop T cell based personalized therapies (both autologous and off-the-shelf). Adaptive Biotechnologies received a lucrative deal in this partnership, receiving $300M upfront, another $1.8 billion in potential milestone payments, and royalties ranging from mid-single to mid-teens percentage of net sales. Using TCRs to identify cancer neoantigen targets is an important area as shown by other deals like Bluebird Bio’s (BLUE) deal to use Gritstone Oncology and Regeneron’s technology to develop cell-based cancer therapies. 

Microsoft deal to develop a single blood test, ImmuneSEQ Dx for various diseases

Microsoft has signed a deal with Adaptive Biotechnologies to use its immunomics artificial intelligence (AI) and machine learning technology (see the figure below) to decode the immune system to diagnose disease by analyzing its massive database of 30 billion immune receptors (collected using immuneSEQ and MIRA). 

The goal of the partnership is to create a universal blood test, immunoSEQ Dx, that analyzes the immune system to diagnose diseases like cancers, autoimmune disorders and infections at an early stage. The companies mentioned their ambition to develop an ‘X-Ray for the immune system.’ The two companies plan to develop a universal TCR/antigen map to enable early and more accurate diagnose disease. The partnership is a part of Microsoft’s Healthcare NExT’s initiative to combine life sciences and computer capabilities to accelerate the diagnosis and treatment of diseases. The first proof-of-concept of this initiative was established in using TCRs to identify cytomegalovirus (CMV) infection. Other therapeutic areas which are being explored under this initiative are cancers (pancreatic, ovarian), autoimmune disease (type 1 diabetes, celiac disease), infectious disease (Lyme’s) and other diseases which may need a blood-based diagnostic test. 

Summary of the product pipeline:

Experienced management team for flawless execution of the company's strategy

The company also had several industry veterans join its management team this year. Lance Baldo, MD, former Senior Vice President and Head of U.S. Medical Affairs at Genentech as Chief Medical Officer and former Global Medical Director for Roche Global Product Strategy/ Global Medical Affairs was appointed as the company’s Chief Medical Officer in April this year. President Julie Rubinstein has a Harvard MBA and served in various commercial development roles at Pfizer’s Oncology division (PFE) , and Johnson and Johnson (JNJ). CEO and co-founder Chad Robins has held numerous executive-level positions in medical technology, investment and real estate companies and has an MBA from Wharton. Chief Scientific Officer and co-founder, Harlan Robins served as the Head of Program in Computational Biology at the Fred Hutchinson Cancer Center in Seattle. He is a physicist with degrees from Harvard and UCLA, Berkeley. Chief Technical Officer, Sean Nolan served as the General Manager of Microsoft’s Healthvault and Health Solutions Division Group. Senior VP, Drug Discovery Sharon Benzeno served as a Senior Scientific Manager at AstraZeneca.

Next milestones:

 

  • cloneSEQ: FDA submission for approval of the use of blood sample (less invasive) to detect MRD (vs. current approval of marrow sample). 
  • cloneSEQ: IND submission for FDA approval for MRD monitoring in CLL in 2019.
  • ImmunoSEQ Dx: Select first indication for IND submission among oncology/autoimmune diseases in 2020.
  • TCR-based cell therapies: Genentech will select the first indication for IND submission by Q4, 2020.

 

Financials, target market opportunity and valuation:

Net proceeds from IPO were $316M. Cash reserves after IPO are expected as $756M. Operating cash use was $32.26M in 2018. The management expects the cash reserves to be enough to fund its operations for the next 24 months. 

Total revenue was $55.66M (at 2018 end), increasing from $38.45M at 2017 end. R&D expenses increased from $31.99M at 2017 end to $39.15M at 2018 end. The public float is 17.75M shares out of 123.2M outstanding common shares

 

Target addressable market:

 

  • Global target market opportunity for immune-based medicine = $48.7 billion (source: IPO prospectus). 
  • Estimated global TAM for immune sequencing life sciences research = $1 billion.
  • Estimated global TAM for diagnostics= $16.3 billion (including cloneSEQ).
  • Estimated global TAM for cloneSEQ= $1.2 billion (U.S.) and $3.3 billion (outside U.S.).
  • Estimated global TAM for immuneSEQ Dx= $11.8 billion.
  • Estimated global TAM for Genentech-partnered TruTCR programs= $31.4 billion.

(Source= IPO prospectus)

Comparison with competitors in immune sequencing space:

 

Company

Market Cap

Revenue

Price/Sales (PS) of the company, sector median=6.28

Revenue growth (annual), sector median= 9.6%

PS/revenue growth ratio (sector median=0.65)

Adaptive Biotechnologies (ADPT), at present

$5B

$55.66M

89.8

44.7%

2.0

Adaptive Biotechnologies (ADPT), at IPO price of $20/share

$2.46B

$55.66M

44.34

44.7%

0.99

Thermo Fisher Scientific (TMO)

$120.2B

$24.6B

4.88

16.4%

0.29

Illumina 

(ILMN)

$55.6B

$3.4B

16.37

15.7%

1.04

Qiagen (QGEN)

$9.1B

$1.51B

6.05

3.68%

1.64

Fluidigm (FLDM)

$799.94M

$117.8M

4.38

15.9%

0.27

 

As shown in the relative valuation table above, Adaptive Biotechnologies is a growth stock, with annual revenue growth which is almost 3x of Illumina and Thermo Fisher, the two big players in the immune sequencing space. Looking at Price-Sales ratio/annual revenue growth metric, Adaptive’s stock looks pricey when compared to the competition. It appears even pricey at the IPO price of $20/share considering the median P-S ratio/annual revenue growth of 0.65 for the sector. 

I however, won’t short Adaptive’s shares at this level. The large partnership deals like with Genentech and Microsoft, and significant post-IPO insider buying add a premium to the common stock. In addition, the company’s immune sequencing technology has shown better results than conventional methods being used by other companies e.g. in TCR mapping and MRD detection. Considering these competitive advantages, the shares deserve to trade at a premium in my opinion. 

Momentum investors could try to play the upward ride by entering a starter position (with a stop at recent low of $38/share) and add more if shares trend upwards. Shares appear to be attempting to make another shot at the recent high of $48.30. Upcoming milestones mentioned above could keep enough investor attention in the company to maintain upward momentum in the short-term.

Value investors could wait for the hype to settle down and if we see a significant market correction in the coming months, shares could retrace to close to or even below the IPO price, which would be a good opportunity to enter the stock with a long-term timeframe. Shares could fall to at P-S ratio/annual revenue growth metric equivalent to the sector median at $13/share. 

Conclusion:

In conclusion, Adaptive Biotechnologies has a revolutionary platform in immunesequencing. cloneSEQ is already FDA approved and its use is being expanded in other indications. Partnership with Genentech could also add significant milestone and royalty revenue in the future. Microsoft partnered ImmuneSEQ Dx test also has the potential to accelerate the diagnosis and treatment of diseases using a single blood-based test. The company's cloneSEQ and TruTCR technologies have shown superiority over conventional methods. Shares appear pricey at present. My strategy will be to wait for the shares to retrace at least below $30/share before starting to establish a long-term timeframe position (3-4 years timeframe) in 25% increments. Considering the large target market opportunity and the market cap of rivals like Illumina and Thermo Fisher, shares could have significant room for price appreciation over next several years.

 

Risks: The company’s closeSEQ may face competition from Thermo Fisher Scientific, ArcherDx, 10X Genomics, Invivoscribe, iRepertoire, Qiagen, Takara Bio, Fluidigm, etc. The company uses Illumina’s NextSeq System to supply it with reagents used in its sequencing. Any interruption in the supply of reagents may affect its lab operations. Other competitors in TCR space include GSK, Adaptimmune, Kite/Gilead, June/Celgene, Neon Therapeutics, etc. Outside the U.S., cloneSEQ faces competition from flow cytometry based tests. Products like TruTCR and ImmuneSEQ Dx are not yet FDA approved. Shares are trading at a premium to the IPO price and other competitors and may fall down to close to IPO price.

Disclaimer:

This article represents my own opinion and is not a substitute for professional investment advice. It does not represent a solicitation to buy or sell any security. Investors should do their own research and consult their financial adviser before making any investment. Investing in equities, especially biotech stocks has the risk of significant losses and may not be suitable for all investors. While the sources of information and data in this article have been checked, their accuracy cannot be completely guaranteed.

I/we have no position in ADPT. Long GNCA, GRTS.

Bhavneesh Sharma covers biotech as one of the original contributing analysts at FATRADER. A market expert with a medical degree and MBA, he is ranked among the top 15 financial bloggers and top 100 overall financial experts (including Wall Street analysts) on TipRanks.
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