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Ron Baron Comments on Adaptive Biotechnologies Corp

Adaptive Biotechnologies Corporation (NASDAQ:ADPT) uses DNA sequencing, computational biology, software and machine learning to read and interpret cells in the immune system. We view Adaptive as a platform company, with applications across research, diagnostics and drug discovery. In total, we believe that the company serves an addressable market that exceeds $40 billion in annual revenue. The company has assembled a compelling set of sustainable competitive advantages including a proprietary database of over 20 billion immune receptors, a deep patent portfolio, and collaborations with Microsoft for artificial intelligence and machine learning and Genentech for drug development. The company boasts an outstanding management team led by co-founders Chad and Harlan Robins, brothers who made the scientific breakthroughs upon which Adaptive products are based and built the associated business model.

Adaptive's current portfolio consists of a product for the life sciences research market and a product for diagnostics. ImmunoSEQ, which sequences immune system cells, has been used for research purposes by over 2,000 academic researchers and more than 125 biopharmaceutical companies. ImmunoSEQ serves to answer translational research questions relating to the adaptive immune system, monitors response to therapies and discovers new signals. ClonoSEQ is a diagnostics product for detection and monitoring of minimal residual disease in patients with multiple myeloma and B-Cell Acute Lymphoblastic Leukemia. ClonoSEQ enables hematologists to detect relapse early, help predict patient outcomes and monitor response to therapy. ClonoSeq has FDA approval and Medicare coverage and the company has been securing reimbursement from commercial payors. We expect Adaptive to expand ClonoSEQ's approval to additional blood cancers, including chronic lymphocytic leukemia and non-Hodgkin's lymphomas.

Adaptive's new product pipeline is potentially transformational. Adaptive is developing ImmunoSEQ Dx for early detection of diseases, including certain cancers such as ovarian cancer and autoimmune diseases such as celiac disease. Adaptive is also building a map of the immune system as part of its strategic collaboration with Microsoft, the ultimate goal of which is the development of a universal diagnostic blood test that can detect any early stage disease. Additionally, Adaptive is working with Genentech to develop, manufacture and commercialize T-cell therapies for the treatment of a broad range of cancers.

We made a modest initial investment in Alector, Inc. (ALEC), a biotechnology company focused on finding cures for neurodegenerative diseases. Alector's efforts currently focus on frontotemporal dementia ("FTD"), the most prevalent form of dementia in patients under 60 years of age. We estimate that approximately 170,000 people in the U.S. and EU currently suffer from FTD. Sadly, patients with FTD develop brain atrophy that is visible via MRI within 6-to-12 months of disease onset, and have an expected life span of approximately 10 years. At present, there are no therapies for FTD that have been approved by the FDA.

While there are still many open questions regarding the pathology of FTD, it is clear that a subset of FTD patients suffer from a loss of function in a gene called progranulin. Alector has developed a targeted therapeutic to treat this subset of FTD patients. The company has begun clinical trials to determine whether recovery of progranulin levels can stop brain atrophy. If successful, we believe the market opportunity is several billion dollars. Additionally, the company believes that the recovery of progranulin levels might also play a role in recovering function in the broader group of non-genetically-driven FTD patients, which would significantly broaden the market.

In addition to the FTD opportunity, Alector is developing two drugs for Alzheimer's disease in partnership with AbbVie Pharmaceuticals. AbbVie paid Alector $225 million upfront will provide Alector additional milestone payments up to $1 billion, and will incur most of the clinical development costs. Once in clinic, Alector can elect to receive a royalty stream or an equal share of future profits from AbbVie. While we view the Alzheimer's opportunity as more speculative outcome, the financial risk to Alector is low and the potential rewards significant.

From Ron Baron (Trades, Portfolio)'s Baron Growth Fund second-quarter 2019 shareholder commentary.
This article first appeared on GuruFocus.