Is Adaptive Biotech a good stock to buy?

Valuation: Undervalued

Investment Thesis:

The biotech. Industry is a very speculative space in the stock market, often we see huge gains in some stocks that are awaiting their FDA decisions, and conversely, we have seen massive losses on negative trial news and FDA decision being made.
- These same “principals” are exhibited by Adaptive Biotechnology, but how can we take advantage of this?
However, it is very hard to put a price target on these stocks, especially when they are awaiting approvals and clinical trials.
- This could discount my valuations that I made in this analysis due to the increased volatility in these stocks during certain periods of time.
Based off of my comparable analyses, I found Adaptive to have a fair value of $44/share, which implies an upside of 25%.
- However, there are risks and catalysts that will influence the share price, which are listed below.

Company Overview:

Adaptive Biotechnology’s immune system platform analyzes the genetic code of their patient’s immune system in order to detect and treat disease. These analyses are stored in their database, which they then use to develop products/services to cure certain diseases. Adaptive’s goal is to understand the adaptive immune system to develop new medicine quicker and more effectively.

Adaptive Biotechnology has a partnership with Microsoft to create an interactive map of the interactions between the adaptive immune system and diseases. This map helps Adaptive to conduct research and create new product for diagnosis and treatments.

Adaptive Biotechnology believes that there may be applications for their products/services in Lyme disease, cancer, COVID-19, types of leukemia, and many other diseases.

Investment Information:

Immune Medicine Platform:

Adaptive Biotechnology’s immune medicine platform combines a suite of chemistry, biology, and machine learning to generate data used to decode the adaptive immune system. This data enables Adaptive to design and tailor their clinical products specifically to each patient’s unique immune system.

Adaptive’s Medicine Platform gas 4 key functions:

Sequence: Adaptive’s sequencing allows them to understand their biological samples, enabling them to draw advanced insights into individual/collective immune responses exponentially greater than before.
Map: Helps to identify/explain potential diseases their patients are fighting or have been exposed to.
Pair: Pair two separate chains of receptors to enable the reconstruction of receptors for therapeutic purposes.
Characterize: Discovers and develops optimal clinical candidates, to help Adaptive get the best results quickly.

Adaptive generates large amounts of data which are stored in their database of over 58B immune receptors. Adaptive’s machine learning helps them to accelerate their findings/developments, which they then use to develop products/medicines.

The COVID-19 pandemic helped adaptive to expedite their research on immune systems and has made Adaptive the “go-to “company for immune diseases (and T-Cell research). Additionally, because of the COVID-19 pandemic, many top-tier vaccine developers recognized and used Adaptive’s mapping product to aid in their vaccine distribution/manufacturing efforts.

Drug Discoveries:

In 2018, Adaptive entered into an exclusive collaboration with Genentech to develop cellular therapies in oncology. Adaptive and Genentech are pursuing 2 product development pathways for T-Cell therapies. One of their products is a TCR (T-Cell Receptor) cancer antigen drug for solid tumours. This drug is in the early stages of the FDA application process, however, any news/advancements in the process for this drug could help bump the stock.

On May 5^th, 2021, Adaptive Biotechnology’s COVID-19 detection device “T-Detect” was cleared for Emergency Use by the FDA. This device is said to have 97.1% success rate in determining whether the patient has/does not have COVID-19. However, within 2 days of this announcement their stock fell nearly 10%, which is a classic case of “buy the rumour, sell the news”. This is important to keep in mind as their future pipeline of drugs near their FDA decisions.

This T-Detect device also has potential uses in Lyme disease, Gastro-Intestinal (GI) Disease, and Ovarian cancer, which are all being clinically tried and submitted/to be submitted, for approval from the FDA.

Furthermore, Adaptive is the early stages of the process to produce their own products/therapies. There is not a lot of information out about this yet, however they hace 2 products in this process TruTCR (T-Cell Receptors), and TruAB (Antibodies).

Lastly, Adaptive Biotechnology has previously developed their clonoSEQ system, which tests patients for MRD (measurable Residual Disease). An example of MRD is the cancer cells left behind in a patient’s body after their treatment, which could lead to recurrence of the cancer. Adaptive was able to develop their clonoSEQ device to accurately identify the quantity of MRD’s in a patient during their treatment/remission processes. This device has been cleared by the FDA for uses in multiple myeloma, Acute-Lymphoblastic Leukemia, Chronic-Lymbastic Leukemia, and Non-Hodgkin’s Leukemia.

Genentech Agreement:

As I previously mentioned, Adaptive Bioscience entered into an exclusive collaboration agreement with Genentech in 2018. Tis agreement was for the development/manufacturing of T-Cell therapies for several types of cancers.

In this deal Adaptive is responsible for screening/identifying T-Cell Receptors (TCR’s) that can recognize/target neoantigens (essentially use TCR’s to fight diseases).

Genentech has taken responsibility for the clinical, regulatory and commercialization efforts of these therapies.

In Feb 2019, Adaptive received $300M from Genentech, and are also eligible to receive up to $1.8B more over time (monetary incentive for each large milestone they reach).

Furthermore, Adaptive will receive a royalty on every unit sold, if they are able to take their therapeutics to the market.

In 2020, 53.7% of Adaptive’s revenues came from this agreement.

Microsoft Agreement:

As previously stated, Adaptive Biotech. And Microsoft entered a strategic collaboration in 2017 for the mapping of TCR sequences and antigens they bind with. In this deal Microsoft provides machine learnings and computational statistics to Adaptive’s large amount of data. If any clinical products are cleared using this mapping, Adaptive has the right to commercialize it. On the other hand, Adaptive has to use Microsoft’s Azure Cloud for the length of the agreement and for an additional 5 years after the agreement has concluded.

This agreement has a 7-year term and can be terminated via a mutual agreement or a breach of contract.

Financial Information:

Financial Performance (Good): In 2020, Adaptive was able to grow their total revenue by 16% and their development revenue by 37%. Additionally, they limited their cost of revenue growth to 1%, which helped them to achieve better gross margins (77% in 2020 compared to 74% in 2019).
Financial Performance (Bad): In 2020, Adaptive increased their operating expenses by 54%, increased their loss from operations by 95%, and increased their net loss by 110%.
Stock Issuance (IPO related): Adaptive IPO’ed in 2019, however some of their shares were yet to be issued into the markets until 2020. These shares were offered for the underwriter’s discounts and offering costs of the IPO. In 2020, there were 7,200,000 of these shares released to the market which had a dilutionary effect of 5.75%.
Issuance of Common Stock (Option Exercising): In 2020, Adaptive had various common shares that were issued to the exercising of options. In total there were 5,204,254 common shares that were issued as a direct result of exercising options. This had a dilutionary effect in the existing shares of 4.15%.
Vesting of RSU’s Restricted Stock Units): In 2020, Adaptive vested 4,500 common shares from their RSU’s. These RSU’s are common in employee stock plans, and in total these shares diluted Adaptive’s common stocks by .004%.
Total Dilution: By taking the sum of all factors of dilution, Adaptive had a total share dilution in 2020 of 9.9%. This is not a lot of dilution; however, it is still enough to catch my eye. However, upon diving deeper into their streams of dilution we can see that majority of it comes from the activities from their (somewhat) recent IPO, and dilution from this source is not likely to continue for much longer.

Competition:

In order to undergo a comparable analysis, I had to select 4 companies (and their accompanying financial ratios/multiples) that I could compare to Adaptive Biotechnology.

These 4 companies have to be publicly listed, have similar operations, be of similar geographies, and be of similar market cap.

I selected the follow 4 companies based off of the above criteria, and these companies are as follows:

$TECH - Bio-Tecne Corp: Develops, manufactures, and sells their life science instruments and services for research and diagnostics worldwide. Bio-Techne operates in the protein science space, as well as the Diagnostics/Genomics space, working in part with T-cell activation technologies.

$NVAX – Novavax: Novavax focuses on the discovery, development, and commercialization of vaccines to prevent infectious disease. Like Adaptive, Novavax has focused their efforts on COVID, and have one of their vaccines in Phase 3 clinical trials.

$CRSP – CRISPR Therapeutics: CRISPR focuses on gene editing medicines for serious human diseases. One of CRISPR’s focuses is on B-Cells, which is also something which is in the scope of Adaptive’s operations (through their TruAB system).

$QGEN – Qiagen NV: Qiagen offers nucleic stabilization and purification kits that process samples for analyses. Out of all of the comparable companies, I would have to say that this is the least convincing comparable company.

Investment Valuation:

Comparable Analyses:

EV/Assets:

By comparing Adaptive’s EV/Assets multiple to their publicly listed competitors, (listed above in the “competition” section of this report) I found that Adaptive’s fair value should be $43/share, which implies an upside of 22%.

EV/Revenue:

By comparing Adaptive’s EV/Revenue multiple to their competitors, I found that Adaptive’s fair value should be $1744/share, however this is very unreasonable and is inflated due to CRISPR’s abnormally high EV/Revenue multiple. As a result of this, I decided to factor it out of my comparable valuation.

P/B:

Lastly, I compared Adaptive’s P/B ratio to that of their competitors, and by doing this I arrived at a fair value of $45/share, which implies an upside of 28%.

Average Comparable:

As I previously state, the EV/Revenue comparable needs to be factored out of the valuation. As a result of this I took the average of the other 2 comparable analyses, which came out to be $44/share, implying an upside of 25%.

Plan:

My plan with an investment into Adaptive Biotechnology is to buy in right now $38 (current price) and scale out of 75% of my position at $44 (valuation price). I plan to do this to limit the downside risk of this investment, and in turn increase the potential upside as well.

I would keep the other 25% of my position until there is perhaps a run up on pre-FDA approval news and sell then.

Risks:

Financial Performance: Adaptive’s financial performance in 2020 was less than ideal. Both their operating loss and their net losses increased substantially, which is not good to see as an investor. If this poor financial performance continues, investors will be itching to dump their position, and in turn hurt the share price.
Dilution: Overall, in 2020, Adaptive experienced a total share dilution of 9.9%, which is somewhat high, but not of much concern. This is because there was still some dilution caused by the activities surrounding their IPO (which are expected to subside). However, if this dilution continues without their IPO dilution, investors may be concerned and exit their positions.

Catalysts:

Financial Performance: Despite their poor financial performance in 2020, there was some good that came out of it. Adaptive was able to grow their revenues by a significant amount while maintaining their cost of revenue. If Adaptive can keep this growth up and perhaps start to post profitable quarters then investors may be inclined to enter into positions, thus increasing the share value.
FDA News: As mentioned in this analysis, Adaptive has a couple of other drugs and systems that are in trials and are awaiting an FDA approval. Typically, what we see with FDA approvals is a pre-anticipatory run-up, then a dump on the news breaking. This has happened previously with Adaptive and is something to look out for in the future.