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Is Adaptive Biotechnologies a Buy?

By Cory Renauer – Jul 30, 2020 at 6:19AM

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Does this unusual biotech stock have what it takes to deliver market-beating gains?

There's nothing like a viral pandemic to remind investors how important it is to understand the human immune system. Shares of Adaptive Biotechnologies (ADPT 3.11%) soared when the biotech took steps to address the coronavirus pandemic and partnered with Amgen (AMGN -0.25%) and Microsoft (MSFT 1.48%) in the process.

Earlier this year, an enthusiastic market more than doubled the price of Adaptive Biotechnologies stock. Now that shares are trading around 22% below their recent peak, investors are wondering if it's a good time to buy.

Stuffing cash into a doctor's pocket.

Image source: Getty Images.

There are plenty of good reasons to buy Adaptive Biotechnologies. Let's weigh them against the risks to see if it deserves a spot in your portfolio.

Increasing popularity

Adaptive Biotechnologies gets paid for sequencing samples of genetic material for the biopharmaceutical industry and academic researchers. The company also bills Medicare to test patients for residual signs of multiple myeloma and acute lymphocytic leukemia.

In the first quarter of 2020, research-sequencing volume rose 23% year over year to 6,030 sequences delivered. First-quarter clinical sequencing volume rose 75% year over year to 3,518 tests.

Room to grow

Monitoring cancer patients in remission is a practice taking big steps forward thanks in part to Adaptive Biotechnologies' clonoSEQ service and its ability to look at immune systems for signs they're battling diseases on a level that older screening methods can't see.

Biopharmaceutical companies testing new cancer therapies have also made minimal residual disease (MRD) measurements standard practice during clinical trials. Soaring research-sequencing volumes suggest many of them are using Adaptive Biotechnologies to take those MRD measurements.

At the moment, the company generates clinical revenue by looking for just two relatively rare forms of blood cancer in bone marrow samples. If Adaptive wins approval to check blood samples for a wide range of cancer types, as expected, quarterly sequencing volumes could explode higher. 

Big partnerships

In partnership with Microsoft, Adaptive Biotechnologies is developing a broad-based diagnostic product, immunoSEQ Dx, that aims to detect many diseases from a single blood test. In March, Adaptive Biotechnologies extended its collaboration with Microsoft to study the immune response to SARS-CoV-2, the virus that causes COVID-19.

In April, it entered into an agreement with Amgen to develop potential antibody therapies for COVID-19. The company also has a hand in the business of new drug discovery through a collaboration with Roche (RHHBY 0.18%).

In 2018, the Swiss pharma giant gave Adaptive $300 million up front to develop cellular cancer therapies. Should any of those candidates earn approval, the company stands to receive a tiered royalty percentage on sales that tops out in the mid-teens.

A hundred dollar bill in a beaker.

Image source: Getty Images.

Know the risks

Social-distancing measures that kept patients at home had a visible effect on clinical sequencing volume, but it wasn't a disaster. The number of tests delivered fell from 3,518 during the first quarter to 3,136 during the second quarter. 

The company felt more COVID-19 pressure on its clinical testing segment. Adaptive Biotechnologies delivered 4,185 sequences during the three months ended June 30, which were 31% fewer than the 6,030 sequences delivered during the first three months of the year.

At the moment, Adaptive Biotechnologies isn't bringing in nearly enough revenue to cover soaring expenses. First-quarter revenue grew 65% year over year to $20.9 million while operating expenses soared 70% year over year to $55.5 million. The company hasn't reported second-quarter operating expenses, but revenue fell to a range between $20.0 million and $20.5 million.

A buy now?

The company finished June with $628 million in cash and then raised another $270 million through a secondary share offering in July. This gives Adaptive Biotechnologies at least a few years at its current cash burn rate before it needs to visit the equity tap again.

Cell-based cancer therapies have produced impressive results in clinical trials, but they're so difficult to sell that investors probably shouldn't rely on another big cash injection from Roche. If Amgen is running clinical trials with a COVID-19 treatment candidate discovered in partnership with Adaptive, the big biotech is keeping it secret along with any financial details of their months-old collaboration.

Given the company's losses and its recent slowdown, it's probably best to keep this stock on your watch list and not in a portfolio.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Cory Renauer has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft. The Motley Fool recommends Amgen and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

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