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

Good afternoon, and this is Jack Meehan with the life science tools and diagnostics team here at Barclays. Thanks for joining our presentation now this afternoon with Natera and CFO, Mike Brophy. Mike is going to walk through some slides, and appreciate you joining us in the new virtual format. And Mike, I'll hand it over to you.

Awesome. Thanks, Jack. So I hope everyone can see the slides. I'm just going to kind of just verbally kind of call out what slide I'm on as I go through this. So maybe before jumping in, just a quick summary for those of you that are new to Natera, a public company, ticker NTRA. It's about $2 billion to $3 billion market cap company, depending on the [ day ] and the coronavirus situation. The core products are reproductive health diagnostics. So we are the market leader in what's called noninvasive prenatal testing, which is a blood draw from mom early in the pregnancy, screen the fetus for a range of inherited disorders, including Down's syndrome. We also have a market-leading test for carrier screening that screens mom to see if she's a carrier for additional inherited disorders, like cystic fibrosis or fragile X. We did about $300 million in revenue in 2019. So -- and the vast majority of that was generated via the women's health business. So that's a quick snapshot. And maybe I'll just dive in now to Slide 3. So this how it looks like, transformative 2019. So clearly, '19 was a transformational year for us across kind of all of our focus areas. We delivered financial results above the top of our previous guide from Q3. And we've beaten Rare a couple of times in '19. In the reproductive health business, we expanded our leading market share with strong volume growth, new features and new peer-reviewed data. We grew kind of our realized revenue per test, which you'll hear me refer to as average selling price, if you've ever joined our earnings calls. We kind of incrementally grew that realized revenue per test in each quarter sequentially Q1 to Q4. And we again significantly reduced the cost of goods sold per unit in that reproductive health business through the course of the year, which I'll get to here in a moment. In my summary, I just talked about the core business. But really, we had some transformational events in our 2 new business areas. So in organ transplant, we achieved each of the stated milestones that we laid out previously. We published compelling peer-reviewed data, successfully executed our CLIA validation and received a positive final coverage decision from Medicare. And all of that lays the foundation for commercial launch now in 2020. In oncology, we published truly groundbreaking clinical validity data in multiple cancer types. We signed some significant commercial partnerships with both Foundation Medicine and the Beijing Genomics Institute. We exceeded what we thought was an ambitious goal for total cumulative contracted value with our pharma partners. And last but not least, we secured a draft coverage decision from Medicare in colorectal cancer. So quite a year there, took us years of work to get to that point. I know a lot of you guys have been tracking us for a while. So we continue to appreciate your support. On to Slide 4. So we just have 3 goals that we have for 2020. These goals are kind of pasted up around the company everywhere. From these goals flow kind of almost every daily decision that we make at the company. So in reproductive health, our 2020 goal is to just continue to drive that business towards cash flow breakeven while extending our leadership position in terms of volumes. We're going to do that with a combination of smart volume growth. So we're going to continue to grow that business, and we're going to continue to improve our unit economics. So we'd very much like to see realized revenue per test continue to grind upward. And we've got more work to do on further reducing cost of goods sold per unit. In transplant, we're super excited about receiving the final Medicare coverage for Prospera from MoIDx while we got our final pricings just about a week ago or so from MoIDx. Now we just need final coverage from Noridian, which is our local Medicare administrator, and we feel like that's on the way. And we now are prepared to have a successful commercial launch in '20. And then finally on oncology, we've got an opportunity to really make Signatera the standard of care for minimum residual disease testing and recurrence monitoring. And our goal in '20 is just to execute the first major product launch for us in oncology through colorectal cancer and just continuing to be the partner-of-choice for major clinical trials that define that space in the coming years, so all of which I'll talk about. Next slide, Slide 5. Let me jump into Q4 in the 2019 results. So this Slide 5 just shows our long-term track record of just driving volume growth in our reproductive health business. When we launched this business back in 2013, we report to market in NIPT, we were up against some very deep-pocketed players, like Roche and Illumina and others. And we very quickly got to the #1 market share position. And we've maintained and grown that market share over time. Three core reasons why we're able to do that. One is the core technology itself. So as was true in '13, so is true today, we have our own technology that we developed in-house. And every single one of our major competitors is just using the Illumina test. They just have their company label on it, but it's the Illumina test. They pay a license into an IP pool that's jointly owned by Illumina and LabCorp. So the technology competition were remarkably stable over this time frame that you see on the slide. And our test -- our technology has certain performance advantages over the competition, so fewer false-positives and fewer false-negatives to be a really core, sustainable competitive advantage. Second is the sales channel. So we now have more than 125 direct sales reps calling on the OB/GYNs in the United States. This is now, just because of all the M&As that's happened in this space, is right now the longest-tenured field force in the United States calling on the OB/GYNs. And these folks are just solely focused on this premium segment, genetic testing sale. So that really allows them to be just hyper-focused on driving growth in these couple of product areas. And then finally, the third variable is the combination of the first 2. So you've got technology and you've great channel. We've just been able to be more constant through that channel. The same point of pregnancy, 9 weeks in the pregnancy, same needle stick for the patient, one requisition form for the physician. We can offer the patient a best-in-class noninvasive prenatal test, a best-in-class carrier screening test and also really, by far, the best test for a screen of the fetus for a set of diseases that are collectively known as microdeletions, which cause similar outcomes to Down's syndrome or worse. And we really have the best game -- best test in the game for that as well. So we have very comprehensive genomic screens fairly early in the pregnancy -- physician from a rep that they've known for a long time and they trust. Maybe just a point -- just a comment on the -- just the question there around coronavirus. We feel like -- so far, I mean, the business is totally unaffected by coronavirus. We continue to see strong volume growth as we mentioned on our Q4 earnings call. We feel like -- I don't want to be overconfident about this. But we do feel like this business is reasonably well protected from future kind of coronavirus disruption in the following ways. One is that the vast majority of our volume comes from a very distributed set of OB/GYNs kind of independent offices. These are kind of the community OB/GYNs that send us their volume, so not really important like a binary decision to close down one hospital, for example. Second is, at least so far, the patients are actually still going to see their doctor. As to the extent that physicians start to evolve to more like an electronic model, a virtual model, we can absolutely accommodate that. And we, for years, have had a mobile blood draw network, where any patient can just call up on their iPhone and on our app and schedule a van to come to their house, their office and draw their blood and have that sent on to us at our lab in California. And that's the capability that -- that's the capacity that we can definitely accommodate, any customers that want to go that route. So again, pretty distributed customer base, people are still going to see the doctor. And then we do have lots of capability to accommodate an evolution to a more virtual model here in the immediate term. That's a quick one on coronavirus. So let me just keep going on now to Slide 6. This just summarizes kind of where we landed on 2019. We exited with excellent momentum here. So 2019, we exceeded the top end of our annual guidance with $302 million revenues and we had 42% gross margin for the full year. So there's a couple of caveats here, like we sold our Evercord business in the middle of the year, which cost us some revenue. And so these -- frankly, this performance could have been even optically quite a bit stronger if we hadn't exited that business, which we think was the right thing to do for the company. Same spiel on gross margin, so very strong gross margin year. And the key driver of both the revenue and the gross margin performance was just volume growth combined with just improving unit economics that I described. And maybe that's a good segue to the next slide, Slide 7. You see on the left-hand side, this is kind of total revenues divided by tests that are reported out in our lab every quarter. Importantly, like the total revenues has a few haircuts in it. So anything that's like partnership revenue or something other than ongoing sustainable reimbursement from the insurance reimbursed tests is stripped out of the revenues here. So if you just do this math, total revenues divided by tests per quarter, you'd get bigger numbers here. And that's intentional. It kind of gives you a more conservative view of what are the sustainable economics for the tests in our lab. You see Q4 of '18, Q1 of '19, we actually put a step down in anticipation of some more stringent prior authorization requirements that were coming down from the payers. And then since then, the landscape has been remarkably stable. And so we've just been just steadily executing quarter-after-quarter, just grinding that ASP higher and higher. And that kind of relates to what we expect for this year, which is the guide has a little bit of conservatism in it. Just in the spirit of being conservative, we think that's appropriate. If the landscape remains stable, we feel like there is some scope for us to continue to kind of grind these ASPs incrementally higher through the course of the year, which would be a very positive outcome, would be upsized to our guide. On the cost of this whole trajectory -- probably divided by the test that we accessioned in our lab every quarter. You see back -- historically, the cost upwards was almost $400 per unit for running our labs. And you see the trajectory has been quite dramatic. So even from Q4 of '18, we have dialed down to $263 per unit. And then the most recent quarter, we were down to $224 per unit. So we've made a significant amount of progress. This is not just like scale-related stuff. This is primarily R&D projects that improve the efficiency in the lab chemistries and algorithms that actually make the tests cheaper to run. We have long set out a -- this target for $200 blended cost of goods sold. And we feel like we're on track to get there. So we feel like we've got a handful of projects that can launch in calendar year '20 that will then enable us to kind of get to $200 over time. Great. So now maybe with that, let me just transition over to transplant. So just as a reminder on this market, there are roughly 20,000 kidney transplants per year and about 180,000 patients living with a transplanted kidney. Within the first 5 years, about 30% of recipients will lose their kidney. And within the first 10 years, roughly 50% will lose their kidney. Our test, which is called Prospera, uses proprietary technology that we've been developing for years in the pursuit of an ever more efficient NIPT, same workflow largely as our Panorama test. We use that to detect derived cell-free DNA in the plasma of the donor recipient and we use that as a biomarker of organ rejection. Using that biomarker significantly improves on the performance of currently available biomarkers. So we think this market, just kind of shifting to the right-hand part of the slide, this market, I think, can be very significant to our business over time. So right now, the market is less than 5% penetrated today. So the chart on the right gives you a sense of that revenue potential over time. So if you assume 20,000 new transplants per year in the United States, 7 tests per year in the first year and then quarterly for the next 2 years, you can see a range of estimated annual revenues that could be achieved at kind of pretty reasonable market penetration rates at single-digit market penetration rates. So even at these conservative penetration levels, the revenue has a very meaningful potential to make an impact on Natera's business. So just as a reminder, core business exiting '19 is about $300 million and about 42% gross margins. It's a very high gross margin product. Cost -- pricing we've received from Medicare is at $2,800 per test and the cost of the goods sold track the NIPT cost of goods sold, so good, high-margin type of tests. We plan to -- overwhelmingly, what we've learned is that this truly is a greenfield opportunity. There's a lot of transplant centers out there that are just dabbling using cell-free DNA right now, meaning they've kind of cleared the initial hurdle of whether or not they want to try and use cell-free DNA in their protocols. But they haven't kind of fully ramped up with a particular vendor. So we think there's a meaningful opportunity just to grow along with this market as it continues to penetrate. So on to Slide 9. This is just the same chart that if you follow us at all, we show this, I think, just about every single earnings call since we presented our validation data on the track towards getting reimbursement from Medicare. We've hit every milestone towards this commercial launch kind of on-time so far. And we've now made the necessary preparations for a full launch. And we're just -- we just have this Noridian final local coverage decision to receive. And we've already received the draft. We feel very good about our prospects there. And we now have final pricing. So on to Slide 10 here. Just a comment on the data as it relates to the first test that's on the market here. We feel like we're in a really good competitive position versus the competition here. So just as a reminder, our clinical validation data compared very favorably against that the competition across many aspects of performance, including the detection of T cell-mediated rejection, the ability to detect subclinical rejection, where generally subclinical means there are no other clinical signs. And the overall kind of area under the curve was the probability that your test result is accurate. Our study was about twice as large as the competition is now, has been evaluated by independent experts in Medicare, who rated our proof of evidence more favorably than the competition. So in the conversations we've had in the field, we find that the transplant physicians are responding very positively to that data. We've previously announced our planned ProActive registry study, which, to our knowledge, is going to be the largest prospective donor-derived cell-free DNA study ever performed. It's being led by Jonathan Bromberg from the University of Maryland. And a second study is being initiated by Dr. Phil Halloran of the University of Alberta. So we're super excited to be working with these key opinion leaders. And we're actually recruiting sites for these studies now. So we're really pleased to be in this position and the interest so far in the launch. And we look forward to giving more updates through the course of the year. Now let me just transition quickly over to our pharma business. This is a business that we run, where we offer Signatera, our cancer assay, as a tool to our pharma customers. So we made significant progress in 2019, as I mentioned, in our pharma business. Back in 2018, when we had about $9 million in contracted bookings with pharma customers, we set out this goal that we're going to get to $40 million to $50 million in booked contracts by the end of 2019. And we were able to get there. We got to $55 million by the end of the year. I think that really indicates really strong momentum, particularly in the second half of the year, as we've gotten more and more embedded with really the large biotech players. We've cleared a lot of kind of diligence hurdles that you have to clear in order to -- in order for customers within these biotech partners to sign you up for study. So we're really pleased with that progress. Moving on to just Slide 12. Just in addition to this kind of growing pipeline of pharma trials that we're driving, where we get paid, we generate revenue with the pharma customer and that data is ultimately quite valuable to us as well, we're really pleased to be extending our leadership in data and clinical development in this early-stage colorectal cancer indication that we're pursuing in our direct channel. One of the key wins there was our deal with AstraZeneca, which we have talked about previously and is available on our website in a separate presentation we've gone to very deep detail in. I'll spend a little bit of time on the deal that we recently signed with the National Cancer Center of Japan, which is running the Japanese arm of the CIRCULATE-IDEA trial in over 100 sites across Japan. So this was designed to be a practice-changing study. Probably, we'll never have another large prospective trial like this in Japan again. The objective is to show that stage III colorectal cancer patients, if they're negative for Signatera, meaning that we don't find any tumor DNA in their plasma after surgery, can just completely forgo adjuvant chemotherapy. Today, the guidelines are clear to see, 3 patients should receive chemotherapy. So the treatment duration has been an area of hot debate. But it just requires a randomized trial like this to change those guidelines. So this is a type of trial that can establish a new standard of care in Japan and really be an important source of competitive differentiation for us. So that's -- we're very excited about that. We've also locked the BESPOKE colorectal cancer registry study in the United States. The goal there is to collect data on 1,000-patient tests with Signatera as part of clinical practice. This is an important call to action as we launch this assay commercially. There's over 70 NCCN guideline centers and many of whom are very interested in being part of practice-changing or important prospective trials with lots of poster presentations, a lot of prospective data that comes off of this trial. So it's an important call to action for the GI oncologists that we're targeting for our launch in colorectal cancer. Okay. Just moving on to Slide 13. Just a quick reminder where we are with Medicare on the local coverage decision for colorectal cancer. So we have a very interesting draft coverage decision from them, which is stage II and stage III colorectal cancer and stage II rectal cancer. We think that just that one slice of this market is over 1 million tests annually, which is absolutely enormous. I mean after 10 years in NIPT, we think there's probably about 1 million NIPTs that are getting run right now. So to have this one slice of oncology being of a similar size gives you a sense of a scale of these markets. We've got another presentation on our website that goes again in deep detail on the use case here. But the quick summary is that if you have colorectal cancer, you go and you have surgery right away. The surgery is great. It cures something like 2/3 of the patients right away. The prognosis is poor for the remaining 1/3 of patients. And it's very hard to tell who is who immediately post surgery. So what flows from that is a lot of people go on to get chemotherapy post the surgery that -- that still need it, that didn't get totally cured by the surgery. And unfortunately, there's a lot of effort that goes into trying to monitor these patients and aggressively catch relapses when they occur. Unfortunately, by the time a -- surveillance is done with kind of routine CT scans. But unfortunately, by the time that cancer is -- advances up and actually show up on a CT scan, about 85% of patients have cancer that's too advanced for another surgery. So they've missed a chance to be cured just because the follow-up surveillance just wasn't accurate enough. The core of our data is, one, we're very, very accurate in determining who is likely to relapse and who's not, which informs who should get chemotherapy and who shouldn't. And then critically, we're able to flag who is going to relapse in about 9 months before it otherwise shows up on a CT scan. So that time window is gives you a chance to get a lot more people into surgery, which can be for curative intent, which is a huge deal here. And this is why Medicare, I think, was so focused on offering reimbursements for this particular area. Next slide, I'm now going on to Slide 14. Hopefully, you noticed the format is the exact same as the transplant format for path to commercialization. Here again, we've hit all the time lines that we've laid out. The next steps here is to kind of get the final LCD published in the second half of the year, final pricing in the second half of the year. And we're going to be launching roughly contemporaneous with those events. We've already begun hiring, and we're starting to drive a little bit of volume here as we start to get patients enrolled in a registry trial, the BESPOKE trial I spoke about previously. Key commercial channels here. So this is just a quick summary. So we have this direct channel in our clinical setting. And we also market directly to pharmaceutical customers. And we've also signed these deals with Foundation and BGI, which are totally parallel to our direct effort. Foundation Medicine obviously is a [ good ] player in the liquid biopsy field. It's wonderful to have them being able to just offer Signatera kind of on the back of the data that they've already generated with the FoundationOne panel, for example. We'd like to launch that with pharma customers later this year. And the Beijing Genomics Institute is going to be launching Signatera on their own sequencing platform in China. And we'd like to have them launch in 2020 as well. So a ton going on. That's really kind of the end of the prepared remarks I really want to go through, except for maybe Slide 18. We're making a lot of investments in 2020 to support the rapid growth. And you can see here on the slide what are we doing here. Effectively, what we're doing is we are going to continue to grow women's health volumes. We're making investments to continue to reduce the cost of goods sold there. And then on oncology and organ transplant, we are building the commercial channel and launching this year. So exciting times for us and a lot of good catalysts to come. So I think I'm right at my time. So I'll pause there.

Yes. Thank you, Mike, for all the thoughts, appreciate you participating. And if anyone has a follow-up, feel free to reach out to me or to Mike and the Natera team directly. But again, thanks for all the thoughts.

Okay. Thanks, Jack.