ClonoSEQ And NovaSeq X Will Transform Clinical Testing Pipelines

Key Takeaways

• Strategic partnerships and initiatives to raise test prices and efficiency are expected to drive substantial revenue and margin growth.
  
• Focused efforts on cost management and achieving EBITDA positivity aim to enhance earnings and financial stability by 2025.
  
• Reliance on MRD, technology integration, NeoGenomics collaboration, and contract renewals creates uncertainty, potentially impacting revenue and margins despite potential gross margin improvements.

Catalysts

A commercial-stage company, develops an immune medicine platform for the diagnosis and treatment of various diseases.

• The new gapfill rate for the clonoSEQ test at $2,007 and the ODAC vote in favor of MRD as a primary endpoint could significantly drive revenue growth, with expectations that these changes will enhance revenue from both clinical testing and pharmaceutical partnerships.
  
• Initiatives to increase the average selling price (ASP) of tests to $1,300 in 2025, such as improved collections, expanded coverage, and new contracts with large payers, are likely to improve revenue and net margins.
  
• The exclusive strategic commercial partnership with NeoGenomics is expected to expand Adaptive Biotechnologies' presence in the community, potentially increasing test volumes, and contributing to revenue growth.
  
• The transition to the NovaSeq X in the second half of the year is expected to improve operating efficiencies, reducing the cost per sample, and thus positively impacting net margins and operating income.
  
• The goal to be EBITDA positive in the second half of 2025, supported by continued growth in MRD volumes and pharma studies, and cost management strategies, is a catalyst for improving earnings and financial stability.

Adaptive Biotechnologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Adaptive Biotechnologies's revenue will grow by 21.3% annually over the next 3 years.
• Analysts are not forecasting that Adaptive Biotechnologies will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Adaptive Biotechnologies's profit margin will increase from -89.1% to the average US Life Sciences industry of 12.9% in 3 years.
• If Adaptive Biotechnologies's profit margin were to converge on the industry average, you could expect earnings to reach $41.2 million (and earnings per share of $0.27) by about April 2028, up from $-159.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 44.1x on those 2028 earnings, up from -7.0x today. This future PE is greater than the current PE for the US Life Sciences industry at 34.8x.
• Analysts expect the number of shares outstanding to grow by 0.82% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.15%, as per the Simply Wall St company report.

Adaptive Biotechnologies Future Earnings Per Share Growth

Risks

• The company's reliance on achieving milestones with MRD pharma services and regulatory decision-making introduces uncertainty, which can impact revenue projections if expectations are not met.
  
• The integration of new tech platforms like the NovaSeq X is expected to improve gross margins, but delays or issues in this transition could impact cost efficiencies and earnings.
  
• There is a risk that the collaboration with NeoGenomics may not materialize significant volume contributions as expected due to the slow ramp and pilot nature, potentially impacting future revenue growth.
  
• While there is an assumption of increased ASPs due to better contracting with payers, any renegotiation or delay in contract renewals could flatten the ASP progression, affecting revenue targets.
  
• The company's Immune Medicine segment faced a decline due to lower Genentech amortization, and a continued focus on drug discovery without guaranteed success could adversely affect operating expenses and net margins.

Valuation

• The analysts have a consensus price target of $9.714 for Adaptive Biotechnologies based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $12.0, and the most bearish reporting a price target of just $7.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $319.5 million, earnings will come to $41.2 million, and it would be trading on a PE ratio of 44.1x, assuming you use a discount rate of 7.2%.
• Given the current share price of $7.49, the analyst price target of $9.71 is 22.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.