ADAPTIVE BIOTECHNOLOGIES CORPORATION You should read the following discussion and analysis of our financial condition and results of operations together with the unaudited condensed consolidated financial statements and related notes and the other financial information appearing elsewhere in this report, as well as the other financial information we file with theSEC from time to time. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties relating to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. As a result of many factors, including those factors set forth in the "Risk Factors" section of this report, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are advancing the field of immune medicine by harnessing the inherent biology of the adaptive immune system to transform the diagnosis and treatment of disease. We believe the adaptive immune system is nature's most finely tuned diagnostic and therapeutic for most diseases, but the inability to decode it has prevented the medical community from fully leveraging its capabilities. Our immune medicine platform applies our proprietary technologies to read the diverse genetic code of a patient's immune system and aims to understand precisely how the immune system detects and treats disease in that patient. We capture these insights in our dynamic clinical immunomics database, which is underpinned by computational biology and machine learning, and use them to develop and commercialize clinical products and services that we are tailoring to each individual patient. We have commercial products and services and a robust pipeline of clinical products and services that we are designing to diagnose, monitor and enable the treatment of diseases, such as cancer, autoimmune disorders and infectious diseases. Our immune medicine platform is the foundation for our expanding suite of products and services. The cornerstone of our platform and core immunosequencing product, immunoSEQ, serves as our underlying research and development engine and generates revenue from biopharmaceutical and academic customers. Leveraging our collaboration with Microsoft, we are creating the TCR-Antigen Map. We are using this map to develop research solutions by disease, called immunoSEQ T-MAP, and a diagnostic product for many diseases from a single blood test, called T-Detect. Regarding our specific products and pipeline, T-Detect COVID, for which we have received Emergency Use Authorization, is designed to confirm past SARS-CoV-2 infection, the virus that causes COVID-19. It is the first indication for the T-Detect product line. We expect to launch a second indication, T-Detect Lyme, during this year's Lyme season. In addition, we have confirmed signals in Crohn's disease, celiac disease and multiple sclerosis, and we have identified signals in ulcerative colitis and rheumatoid arthritis. In the future, we intend to sell other diagnostic products and services, including other indications for T-Detect. Our therapeutic product candidates, being developed under theGenentech Agreement, leverage our platform to identify specific receptors on immune cells to develop into cellular therapies in oncology. We also extended our platform to identify highly potent neutralizing antibodies against SARS-CoV-2 and we believe this differentiated approach may be leveraged across multiple disease states. Our first clinical diagnostic product, clonoSEQ, is the first test authorized by theFood and Drug Administration for the detection and monitoring of MRD in patients with multiple myeloma, B cell acute lymphoblastic leukemia and chronic lymphocytic leukemia, and is also available as a CLIA-validated laboratory developed test for patients with other lymphoid cancers. We disclose our clonoSEQ test volume, which now includes the number of clonoSEQ reports and results we have provided to ordering physicians inthe United States and international technology transfer sites. These volumes do not include sample results from our biopharmaceutical customers or academic institutions utilizing our MRD services. Historically, we have sold immunoSEQ as a fee-for-service offering. These research offerings have comprised the majority of our revenue to date, although our business is pursuing broader opportunities. As we continue to expand the use of our clonoSEQ diagnostic tests, develop and commercialize T-Detect and develop and commercialize therapeutic product candidates with our drug discovery collaborator, we expect our mix of revenue to shift to clinical products and services, which we believe will become our largest sources of revenue. 22 --------------------------------------------------------------------------------Adaptive Biotechnologies Corporation We are actively pursuing opportunities to deepen our relationships with current customers and initiate relationships with new customers. We have an experienced, specialty salesforce that is targeting department heads, laboratory directors, principal investigators, core facility directors, clinicians, payors, research scientists and pathologists at leading academic and research institutions, biopharmaceutical companies and contract research organizations. As MRD assessment becomes standard practice for patient management across a range of blood cancers, we believe it will be essential for clinicians and patients to have access to a highly accurate, sensitive and standardized MRD assessment tool. We are focused on establishing and maintaining collaborative relationships with payors, developing health economic evidence and building billing and patient access infrastructure to expand reimbursement coverage for our clinical diagnostics. We continue to seek expanded coverage of our clonoSEQ diagnostic test and have successfully expanded coverage through contractual agreements or positive medical policies with Medicare and several of the largest national private health insurers inthe United States . We recognized revenue of$38.6 million and$38.4 million for the three months endedMarch 31, 2022 and 2021, respectively. Net loss attributable toAdaptive Biotechnologies Corporation was$62.7 million and$40.6 million for the three months endedMarch 31, 2022 and 2021, respectively. We have funded our operations to date principally from the sale of convertible preferred stock and common stock and, to a lesser extent, revenue. As ofMarch 31, 2022 andDecember 31, 2021 , we had cash, cash equivalents and marketable securities of$500.7 million and$570.2 million , respectively.
Reduction in Workforce
InMarch 2022 , we began implementing a restructuring plan to reduce operating costs and drive future growth aligned with the strategic reorganization of our business around our MRD and Immune Medicine market opportunities. Under this restructuring plan, we reduced our workforce by approximately 100 employees. We estimate that we will incur aggregate restructuring costs of approximately$2.0 million , all of which has been recognized in the three months endedMarch 31, 2022 . These costs primarily relate to one-time termination benefits and ongoing benefit arrangements, both of which include severance payments and extended benefits coverage support and are contingent upon the impacted employees' execution and non-revocation of separation agreements. Our estimated aggregate restructuring costs also include certain contract termination costs. The activities related to our reduction in workforce were primarily completed inMarch 2022 and$1.4 million of the$2.0 million aggregate restructuring costs were paid as ofMarch 31, 2022 . The remaining$0.6 million in cash payments are expected to be disbursed in the year endedDecember 31, 2022 .
Revenue Reclassification and clonoSEQ Test Volume
We previously disclosed revenue bifurcated into sequencing and development financial statement captions and now present total revenue on the unaudited condensed consolidated statements of operations included elsewhere in this report. We disaggregate revenue under our Immune Medicine and MRD market opportunities in Note 3 of the accompanying notes to the unaudited condensed consolidated financial statements included elsewhere in this report.
The following table presents the amount of sequencing revenue and development
revenue recognized under our Immune Medicine and MRD market opportunities for
the periods presented (in thousands):
Three Months Ended
December 31, September 30, June 30, March 31,
2021 2021 2021 2021Immune Medicine revenue Sequencing revenue$ 6,860 $ 8,170$ 5,404 $ 4,048 Development revenue 14,514 15,445 17,635 16,057 Total Immune Medicine revenue 21,374 23,615 23,039 20,105 MRD revenue Sequencing revenue 16,201 13,936 13,151 11,126 Development revenue 355 1,916 2,315 7,211 Total MRD revenue 16,556 15,852 15,466 18,337 Total revenue$ 37,930 $ 39,467 $ 38,505 $ 38,442 23
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Adaptive Biotechnologies Corporation
Three Months Ended
December 31, September 30, June 30, March 31,
2020 2020 2020 2020Immune Medicine revenue Sequencing revenue$ 3,310 $ 3,691$ 2,036 $ 3,170 Development revenue 17,155 12,438 12,856 11,077 Total Immune Medicine revenue 20,465 16,129 14,892 14,247 MRD revenue Sequencing revenue 9,399 7,585 5,949 6,299 Development revenue 321 2,585 147 364 Total MRD revenue 9,720 10,170 6,096 6,663 Total revenue$ 30,185 $ 26,299 $ 20,988 $ 20,910 We also previously disclosed the number of clonoSEQ reports provided to ordering physicians inthe United States , referred to as "clinical sequencing volume" or "clinical sequencing volume, excluding T-Detect COVID volume" in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of certain of ourSEC filings. We now present the number of clonoSEQ reports and results we have provided to ordering physicians inthe United States and international technology transfer sites, collectively referred to as "clonoSEQ test volume." Our clonoSEQ test volume does not include sample results from our biopharmaceutical customers or academic institutions utilizing our MRD services. The following table presents our clonoSEQ test volume for the periods presented: Three Months Ended December 31, September 30, June 30, March 31, 2021 2021 2021 2021 Clinical sequencing volume, excluding T-Detect COVID volume 6,356 5,928 5,475 4,757 clonoSEQ reports or results provided to international technology transfer sites 494 413 422 543 clonoSEQ test volume 6,850 6,341 5,897 5,300 Three Months Ended December 31, September 30, June 30, March 31, 2020 2020 2020 2020 Clinical sequencing volume 4,509 4,023 3,136 3,518 clonoSEQ reports or results provided to international technology transfer sites 704 375 310 238 clonoSEQ test volume 5,213 4,398 3,446 3,756
Components of Results of Operations
Revenue
We derive revenue by providing diagnostic and research services in our Immune Medicine and MRD market opportunities. Our Immune Medicine revenue consists of revenue generated from (1) providing sample testing services for our commercial research product, immunoSEQ, to biopharmaceutical customers and academic institutions; (2) providing our T-Detect COVID tests to clinical customers; and (3) our collaboration agreements withGenentech and other biopharmaceutical customers in areas of drug and target discovery. Our MRD revenue consists of revenue generated from (1) providing our clonoSEQ report to clinical customers; (2) providing MRD sample testing services to biopharmaceutical customers and certain academic institutions, including investigator-led clinical trials; and (3) providing our clonoSEQ report or results to certain international laboratory sites through technology transfers. For our research customers, which include biopharmaceutical customers and academic institutions for both our immunoSEQ and MRD services, delivery of the respective test results may include some level of professional support and analysis. Terms with biopharmaceutical customers generally include non-refundable upfront payments, which we record as deferred revenue. For all research customers, we recognize revenue as we deliver sequencing results. From time to time, we offer discounts in order to gain rights and access to certain datasets. Revenue is recognized net of these discounts and costs associated with these services are reflected in cost of revenue. In periods where our sample estimates are reduced or a customer project is cancelled and, in either case, we have remaining related deferred revenue, we recognize revenue using a cumulative catch-up approach based on the proportion of samples delivered to date relative to the remaining samples expected to be delivered. Certain of our MRD revenue arrangements with biopharmaceutical customers include consideration in the form of regulatory milestones upon regulatory approval of the respective biopharmaceutical partners therapeutics. Such revenue is constrained from recognition until it becomes probable that such milestone will be achieved. 24 --------------------------------------------------------------------------------Adaptive Biotechnologies Corporation Under certain agreements with our biopharmaceutical customers who seek access to our platform to support their therapeutic development activities, revenues are generated from research and development support services that we provide. These agreements may include substantial non-refundable upfront payments, which we recognize over time as we perform the respective services. Revenue recognized from these activities relate primarily to our Genentech Agreement. For our clinical customers, we primarily derive revenue from providing our clonoSEQ report to ordering physicians. We bill medical institutions and commercial and government payors based on reports delivered to ordering physicians. Amounts paid for clonoSEQ by medical institutions and commercial and government payors vary based on respective reimbursement rates and patient responsibilities, which may differ from our targeted list price. We recognize clinical revenue by evaluating customer payment history, contracted reimbursement rates, if applicable, and other adjustments to estimate the amount of revenue that is collectible. For our clonoSEQ coverage under Medicare, we bill an episode of treatment when we deliver the first eligible test report. This billing contemplates all necessary tests required during a patient's treatment cycle, which is currently estimated at approximately four tests per patient, including the initial sequence identification test. Revenue recognition commences at the time the initial billable test report is delivered and is based upon cumulative tests delivered to date. Any unrecognized revenue from the initial billable test is recorded as deferred revenue and recognized either as we deliver our estimate of the remaining tests in a patient's treatment cycle or when the likelihood becomes remote that a patient will receive additional testing. We expect revenue to increase over the long term, particularly as the mix of revenue migrates to clinical diagnostics and drug discovery. The pace by which this mix migrates will be determined by the level of customer adoption and frequency of use of our products and services. Our revenue may fluctuate from period to period due to the uncertain nature of delivery of our products and services, the achievement of milestones by our customers, timing of expenses incurred, changes in estimates of total anticipated costs related to our Genentech Agreement and other events not within our control, such as the delivery of customer samples or customer decisions to no longer pursue their development initiatives.
Due to the ongoing uncertainties related to the COVID-19 pandemic, we may experience variability in revenue in the near term as our customers' abilities to procure samples for their research initiatives change, as customer initiatives evolve and as clinical testing is impacted by the pandemic.
Cost of Revenue
Cost of revenue includes the cost of materials, personnel-related expenses (including salaries, benefits and share-based compensation), shipping and handling expenses, equipment costs and allocated facility costs associated with processing samples and professional support for our service revenue activities. Allocated facility costs include depreciation of laboratory equipment, as well as allocated facility occupancy and information technology costs. Costs associated with processing samples are recorded as expense, regardless of the timing of revenue recognition. As such, cost of revenue and related volume does not always trend in the same direction as revenue recognition and related volume. Additionally, costs to support our Genentech Agreement are a component of our research and development expenses. We expect cost of revenue to increase in absolute dollars as we grow our sample testing volume and make investments in laboratory automation and facilities, but the cost per sample to decrease over the long term due to the efficiencies we may gain as assay volume increases from improved utilization of our laboratory capacity, automation and other value engineering initiatives. If our sample volume throughput is reduced as a result of the COVID-19 pandemic or otherwise, cost of revenue as a percentage of total revenue may be adversely impacted due to fixed overhead costs.
Research and Development Expenses
Research and development expenses consist of laboratory materials costs, personnel-related expenses, equipment costs, allocated facility costs, information technology expenses and contract service expenses. Research and development activities support further development and refinement of existing assays and products, discovery of new technologies and investments in our immune medicine platform. We also include in research and development expenses the costs associated with software development of applications to support future commercial opportunities, as well as development activities to support laboratory scaling and workflow. We are currently conducting research and development activities for several products and services and we typically use our laboratory materials, personnel, facilities, information technology and other development resources across multiple development programs. Additionally, certain of these research and development activities benefit more than one of our product opportunities. We do not track research and development expenses by specific product candidates. A component of our research and development expenses are costs supporting clinical and analytical validations to obtain regulatory approval for future clinical products and services. Additionally, the costs to support ourGenentech Agreement are a component of our research and development expenses. Some of these activities have generated and may in the future generate Immune Medicine collaboration revenue. 25 --------------------------------------------------------------------------------Adaptive Biotechnologies Corporation We expect research and development expenses to experience moderate increases in the short term. However, we expect research and development expenses to decrease as a percentage of revenue in the long term, although the percentage may fluctuate from period to period due to the timing and extent of our development and commercialization efforts.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of personnel-related expenses for commercial sales, product and account management, marketing, reimbursement, medical education and business development personnel that support commercialization of our platform products. In addition, these expenses include external costs, such as advertising expenses, customer education and promotional expenses, market analysis expenses, conference fees, travel expenses and allocated facility costs. We expect our sales and marketing expenses to experience moderate increases in the short term. In the long term, we expect sales and marketing expenses to increase in absolute dollars as we expand our commercial sales, marketing and business development teams and increase marketing activities to drive awareness and adoption of our products and services. However, we expect sales and marketing expenses to decrease as a percentage of revenue in the long term, subject to fluctuations from period to period due to the timing and magnitude of these expenses.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel-related expenses (including salaries, benefits and share-based compensation) for our personnel in executive, legal, finance and accounting, human resources and other administrative functions, including third-party billing services. In addition, these expenses include insurance costs, external legal costs, accounting and tax service expenses, consulting fees and allocated facility costs.
We expect our general and administrative expenses to experience moderate decreases in the short term driven by reduced headcount. In the long term, we expect these expenses to decrease as a percentage of revenue as revenue increases.
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