Natera, Inc. (NTRA) Earnings Call Transcript & Summary

Okay. We're going to go ahead and get started. I'm Tycho Peterson from the Life Science team. It's my pleasure to introduce our next company this morning, Natera. We'll do a breakout right after in the Olympic Room. And with that, let me turn it over to Steve Chapman.

Great. Thank you, Tycho. So we really had a fantastic 2019, which was my first year as CEO. I think I presented here at the conference probably a week into the job last year. So I want to first talk about some of the strong performance and key milestones that we achieved right at the tail end of last year that have set us up for a very successful and strong 2020. So first, I'm pleased to announce we processed roughly 800,000 tests in 2019, which accounts for roughly 20% growth through 2018. And we had a very strong Q4 2019, which actually from a quarter-on-quarter standpoint, the growth between Q3 and 4 was stronger this year than it even was in 2018, which will obviously set us up for a very strong year. So we're very pleased with our performance. We have also announced that we outperformed our 2019 pharma total contracted value goal, where we had set an expectation to get $40 million to $50 million in total contracted value. So we exceeded that and achieved $55 million in total contracted value, which I'll talk about a little bit more in a minute. We received our final local coverage decision for Prospera in December of 2019, and we expect to have final pricing and commercialize at some point in Q1 of 2020. In addition, we extended our leadership position in colorectal cancer. So earlier this week, we announced that we had 8 new issued and allowed patents in oncology in 2019, and that augments our suite of around 60 IP assets in the field of oncology. In addition, we've now signed multiple colorectal cancer trials. This morning, we announced a very large trial with the National Cancer Center in Japan in addition to a trial that I'll be announcing today for the first time. And previously, this week, we had announced the BESPOKE registry trial in the United States. So we feel like we're in a very strong position, particularly in colorectal, which is where we've now received our draft coverage decision from Medicare. I'm also very pleased to announce that we have hired Eric Evans, the Cofounder and former Chief Scientific Officer of Counsyl, who was responsible for a significant amount of their innovation, I mean, automation, scale and throughput and low COGS genetic testing, as the Chief Scientific Officer of Natera. We're very pleased to welcome him to the team. So first, a little background on Natera's technology. So today, we are the market leader in cell-free DNA testing. We performed over 2 million tests commercially. And to do that, we use a novel approach that combines molecular techniques with bioinformatics. The platform has now been applied across reproductive health, oncology and organ transplantation. Our test volumes continue to grow at a rapid pace in reproductive health. We've continued to extend our leadership position in 3 ways: So the first, we have technical and clinical superiority against the competition; second, we have a very dominant commercial presence of greater than 125 sales representatives; and third, we focused extensively on being a leader and improving the user experience to make it easy for customers to work with us. Our goal in the reproductive health business is to get that business unit cash flow breakeven. And we think we can do that when we get to $200 gross margin per test and roughly 900,000 tests per year. Combined, that will cover our operating expenses of about $180 million. Now I'm pleased that we've seen a recent uptick and stabilization in our average selling price, and we've continued to make momentum -- make progress and seeing great momentum on our initiative to hit $200 combined cost of goods sold. Now we've already announced previously our NIPT COGS are already below $200. So this represents the combined COGS across our business. In Q4, we executed one of our very large COGS projects for the year. And we have multiple projects underway in 2020, where we've already passed scientific feasibility, and we're just in the process of completing execution. So we feel very strong about our execution against our COGS road map. Now the NIPT opportunity ahead of us is very large. In fact, the average risk market today from a volume standpoint is only about 15% penetrated into a 3.4 million patient market in the United States. Now we're poised to take advantage of the significant growth over the next few years in both volume and ASP that will come from getting average risk coverage from the American Congress of Obstetrics and Gynecology and receiving coverage from big payers like United and Aetna. Now one of the potential tipping points for that will be the readout of Natera's SMART trial, which we think will publish in 2020. 5 years ago, we initiated a prospective trial of more than 20,000 patients where we're actually doing blood draw very early in pregnancy, and we're doing complete genetic follow-up on all the babies born. All the collection is done. At this point, the data is in the process of being analyzed, and we expect that to read out in 2020, and that's going to be a very significant event for both aneuploidy and for microdeletion testing where we've been priced by CMS in the range of $700 but today are receiving almost no reimbursement despite having an 80% attachment rate to our chromosomal aneuploidy testing. So I want to close on our prenatal business by just highlighting our clinical and technical leadership. So on the left of the slide here, you see 9 different points where we're highly differentiated with our unique SNP-based technology in a sea of Illumina licensees that all have the exact same massively parallel sequencing counting test. We are the only differentiated technology. And in addition to being biologically and analytically and technically different, we've now published way more data in support of moving clinical guidelines forward than any other company, so greater than 20 peer-reviewed publications in the field of NIPT and over 1 million patients studied. And that's compared to some groups who just simply haven't published any data at all. So we feel like we've now solidified after being fourth to market in 2013 our very strong leadership position, and we have a long way to go in women's health. I want to move now to talk about oncology. So in the liquid biopsy space, you have asymptomatic screening, which is represented here on the left. And then you have therapy selection, which is represented here on the right. So we're not going after either of those markets. What we're doing is going after the minimal residual disease and recurrence monitoring market, where you say, "Does the patient have presence of tumor in their body after surgery or treatment with curative intent? And after doing the patients in remission, and you do sequential testing, can you detect recurrence early? Or if the patient is on therapy, can you detect the performance of the therapy by measuring circulating tumor DNA levels?" Now this is a very big opportunity. We estimate it to be about $15 billion. And Natera's technology, which is a tumor-informed multiplex PCR capability that trades at greater than 100,000x coverage per variant, is poised to be the leader here because in the adjuvant setting you have to get down to extremely low levels of variant allele frequency because the doctor has done everything that they can possibly do to eliminate the tumor. With our test, we're sequencing at greater than 10x that of some of the other companies that are using Hybrid Capture-based approaches. And because we're looking at the exome to inform the variance we select, we get 4 to 5x the number of variants to test than what you get with a standard Hybrid Capture approach. So we think our technology is well positioned to lead here. We've now backed this up with multiple peer-reviewed publications across colorectal, lung, breast, muscle-invasive bladder in top journals, such as JAMA Oncology and Nature, where we've consistently shown that if you're positive with Signatera and you have no further therapy, you will recur with a positive predictive value of 98%. And on average, we can detect recurrence in the range of 9 months earlier than using clinical indications alone. We've now expanded our data set with 2 very significant studies that I'll talk about in the field of therapy monitoring. So the first on the left is the results of the INSPIRE study, which was done with Princess Margaret Cancer Centre and Merck, looking at the immunotherapy, KEYTRUDA. So in this study, we had roughly 100 patients, where we had a blood draw at the initiation of treatment, and then we had a second blood draw at the end of cycle 2 or roughly 6 weeks into their treatment. What we saw was that the change in Signatera during that 6-week interval could actually predict the patient's progression. So patients that had a reduction in Signatera over that time, about 54% of those patients were still on treatment after 6 months. Patients that had an increase in their circulating tumor DNA, as measured by Signatera at that time, about 90% of those patients had, had a progression event at 6 months. So this is very meaningful, and it really sets up a couple of clinical opportunities that we're excited about. So the first is we can distinguish between pseudoprogression and actual progression by looking at the circulating tumor DNA measurement, which is going to be very helpful to inform physicians about what's going on with the patient. The second is, if you can very early predict which patient is not responding, you have the opportunity to provide them a different course of treatment. The third is that we've identified a very unique category of patients that are exceptional responders. Now these patients we've shown in that 6-week interval when they completely clear their circulating tumor DNA status, they never recur, and we had up to 3 years follow-up on these patients. So that gives an opportunity for clinicians to take patients off of immunotherapy, where today there's no real clear guidelines about who should come off immunotherapy. The second study I'll talk about on the right is a study that we did with UCSF as part of the I-SPY consortium in neoadjuvant breast cancer. Now in this study, we had about 80 patients where we did 3 time points during neoadjuvant treatment. And what we saw was that the Signatera status during neoadjuvant treatment was more informative than the routine metric of pathological complete response, which is how the physicians typically grade the likelihood of recurrence. So you can see the Kaplan-Meier curve here on the right. The top 2 lines represent patients that were deemed Signatera-negative and you can see the follow-up on these patients up to 5 years, where very few of them had distant relapse after screening negative with Signatera during the course of adjuvant treatment. And the gray line represents people that were Signatera-positive, and you can see the vast majority of those patients in up to 5 years of monitoring actually recur. So this is very significant implications, both clinically and also for pharmaceutical companies who might be interested in using this as the surrogate endpoint in clinical trials. So our commercial channel for oncology includes a partnership we announced earlier with Foundation Medicine, our direct clinical channel which we're in the process of building; our direct pharma channel, where we have a targeted business development team that calls directly on the top pharma companies; and our partnership with Beijing Genomics Institute, which we've previously announced. So in pharma, we've now signed more than 50 deals. We have had significant momentum in the second half of the year, where we've now moved into prospective studies that include colorectal, non-small cell lung cancer and pancreatic, among a few. And usually, these studies are for enrichment or for using Signatera as an early endpoint in a clinical trial sooner. So we're very pleased, as I mentioned earlier, with our performance, greater than $55 million in total contracted value, outperforming the goal that we set for ourselves at the beginning of 2019. On the clinical side, we are going after an indication colorectal cancer that we think is going to be very large and have very significant impact on care. So there's about 140,000 patients that are diagnosed every year with colorectal cancer, and about 30% of those patients will recur within 5 years of diagnosis. So with our test, doing serial monitoring, we believe we can detect about 90% of the patients that will recur about 9 months before they would have clinically relapsed. Now this gives a physician the opportunity to do surgery at the oligometastatic stage where it's already proven that doing surgery at that stage could save the patient's life. So we recently received a draft coverage decision from Medicare that would give us approval, if it becomes finalized, to do about 1 million screening tests per year on these stage II and III colorectal cancer patients. Now we believe that, that would make this test one of the largest specialty diagnostic tests ever covered by Medicare and would make an enormous impact to Natera's business over time. So when you look at colorectal cancer, we have now set up a very strong leadership position. So we announced the BESPOKE colorectal trial earlier this week, where we're going to be recruiting top centers around the United States and running a registry trial where we're going to look at decision-making around adjuvant chemotherapy based on the Signatera result and then serial monitoring of patients over time using Signatera. We plan enrolling about 1,000 patients. In addition, this morning, we announced the CIRCULATE-IDEA trial in Japan, which we think could be guideline-changing, and it's in collaboration with the National Cancer Center of 1,500 patients across roughly 100 of the top centers in Japan for treatment de-escalation and escalation. Now this is one of those once-in-a-lifetime studies that's not going to be repeated, and we were very glad after a competitive bidding process that we were selected as the provider. And we think that there's a lot of opportunity in Japan. So I'm also excited today for the first time to announce that Natera has been selected by AstraZeneca for the COLUMBIA 2 trial, which is a prospective, randomized platform study, looking at stage II and III stable colorectal cancer patients tested with Signatera after surgery. So MRD-positive patients will receive adjuvant chemo and they'll be randomized to also receive a novel agent. So this is a really exciting trial, and we're excited to be partnering with AstraZeneca on this. But importantly, and we believe now, for the first time, the endpoint of the trial is the clearance of circulating tumor DNA 6 months after treatment. So we think this could be the future of using Signatera, which is as an endpoint in clinical trials. So we're really excited to make this announcement today. We have a lot of momentum in colorectal cancer. In addition to the studies that I've announced, we've already started building a sales team, and we plan to expand that over the course of 2020. As we get our coverage decision finalized by Medicare, we can get reimbursed on the test. So now I'll switch gears and talk about organ transplant. So for the past 15 years, we've had roughly 100 scientists and PhDs and bioinformaticians working on refining our cell-free DNA workflow. And there's things that we do very differently than our competitors in that workflow. And those differences have a meaningful impact on the performance of the test. So we wanted to test this hypothesis, and we did so in our analytical validation, which is usually designed the same between different technologies because everybody has to follow the CLSI guidelines. So you take a dilution series of samples at different cell-free DNA levels and you run them over and over and over again on the same sequencer and then you run them over and over and over again on different sequencers. And what you want to find is that your test performed similarly every time. And that measurement is the measurement of precision, as measured by the coefficient of variation. If your test is bouncing around all the time, just from the randomness of what sequencer you're using or the randomness of the run, you're not going to have good clinical performance. What we found in our analytical validation was that our coefficient of variation was up to 5x better than that of our competitor. And we believe these changes in the workflow that are unique to Natera and this outperformance in precision in the analytical validation really underpin the differences that we're seeing in our clinical validation. So we've now published the largest renal transplantation donor-derived cell-free DNA study in collaboration with UCSF. In that study, we had the highest overall sensitivity for TCMR and ABMR. In fact, our sensitivity was about 50% better than that of our competitor. And remarkably, in TCMR, which is about 30% of all transplants, we had 100% sensitivity compared to our competitor who has a 27% sensitivity. So we've now published 2 papers on our technology, and we've announced the ProActive trial, which will be enrolling 3,000 patients in a registry study, working with top centers around the United States. We're going to start recruiting this year. In addition, we've announced a second prospective trial, which is in collaboration with One Lambda and University of Alberta, looking at combination of molecular tests, including Prospera, One Lambda's DSA test and the molecular microscope product, which helps differentiate ambiguous pathology after a biopsy. So we're excited to be recruiting about 15 centers in the United States for this study. So in December, we received our final coverage decision from Medicare, enabling us to begin the process of the commercialization for our Prospera test. Now we were very happy that Medicare weighted Natera's strength of evidence independently above that of the AlloSure product. And in addition, we were very pleased with the overwhelming number of positive comments that we received during the open comment period. In fact, we received 4x as many positive comments as our competitor was able to generate against us, where most of the comments against us were either from our competitor themselves or from known paid advisers. In fact, to our knowledge, there were no independent comments against us, which we're very proud of. We plan on commercializing in Q1 after we receive pricing and we've already started the process of building a very strong team, which includes many experienced individuals. So to wrap up, I want to talk about some of the investments that we're going to be making next year to ensure that we can execute on the significant path that we have ahead of us of growth in these new business units. So in the reproductive health space, we will continue to focus on extending our commercial leadership position. And we will also be introducing product enhancements on our core product lines that we think will continue to further differentiate us from the competition, and we'll be executing COGS reductions, which we have already well underway, to help us meet our goal of getting that business unit cash flow breakeven. On the oncology side, we're building out a direct commercial channel to support our colorectal launch. We're going to be supporting our launch of product in China with Beijing Genomics Institute and our biopharma launch with Foundation Medicine, which we think will happen toward the end of 2020. In addition, we're going to be doing many clinical trials to support additional submissions to CMS. We previously announced that we've already had a second pre-submission meeting with Medicare on a new oncology indication, and we're in the process of preparing that for a full submission. On the organ transplant business, we will be supporting the growth of our direct sales and marketing channel as we commercialize our product in Q1. In addition, we expect to have some product line extensions in the organ transplant space we're excited about, and we'll be supporting the launch of our registry study. So we put ourselves in a really incredible position to leverage the strength of our core technology now across reproductive health, oncology and organ transplant. And we intend to make the appropriate investments and execute, so that we can rapidly grow revenue and we can help patients around the world. So with that, thank you, and questions will be in the breakout room.