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

Hi, everyone. Thanks for joining us today on day 1 of our health care conference. I'm Tejas Savant, and I cover the life science tools and diagnostics sector here. Before we get started, I'd like to read a quick disclaimer. Please note that the webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. It is not for members of the press. And if you are with the press, please disconnect and reach out separately. For important disclosures, please see morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your sales representative. So with that, I'm delighted to have Natera join us today. And representing the company is Steve Chapman, CEO; and Mike Brophy, CFO. Thanks for joining us, guys.

Yes. Thanks for having us.

Of course, a lot of ground to cover, so I'm going to not ask you the gentle opener, and we're going to go straight into rapid fire on Signatera.

So Steve, maybe a good place to start is, were you surprised to see Noridian issue their final LCD for Signatera in colorectal so quickly after the Palmetto determination? And how should we think about upside in the near term here from that, given that they'll start paying in October?

Yes. So we thought that was actually fantastic that Noridian had issued last week. I think it was expected to come roughly in that range of sort of 45 to 60 days after Palmetto. I mean sometimes they can take up to several months as we saw with our other product, Prospera. So I think the fact that they issued their updated billing guidance so quickly is a very significant positive for us and something that we're excited about. As far as kind of the back half of the year, I mean, look, we're in the ramp phase now. We've started to build volume for the product, and we were really waiting for this final coverage decision to come in before we really put our foot on the accelerator. So I think that it's not going to make an enormous impact in 2020. But certainly, it removes another unknown from the launch, and sooner is better than later in this case.

Got it. And so a couple of quick follow-ups on just pricing bookends for the test. I mean obviously you've spoken about clonoSEQ and Guardant360 as being kind of like interesting compares. And then in terms of just the language in the LCD around the series of tests, how should we think about an appropriate number? I mean obviously it's different, right, whether it's adjuvant therapy selection or recurrence monitoring, in the latter setting, it could potentially be more than the magical 4 number that everyone seems to have settled on. What are your thoughts on both of those variables?

Yes. Absolutely. So yes, we like to think about it as a possibility of having 14 tests per individual over a roughly 5-year time period, and that's really 4 tests the first year, 4 tests the second year, and then 2, 2, 2 in the next 3 years. Now that's sort of on average for every patient. It's never going to work perfectly like that. But I think the easiest way to think about it is just what's the per test time point -- or sorry, what's the per time point fee. And we said before, we think $1,800 is a good comparator. That's sort of roughly where clonoSEQ is. It could be higher than that. There's some donor-derived cell-free DNA tests or circulating tumor DNA tests that are in that $3,500 range or high 2s. So if we get above $1,800, I think that would be upside for us. We expect to have pricing in, I would say, the next 2 to 3 weeks. So we're going through the process right now. So that's potentially another nice point that's going to come here in the next period of time.

Got it. And then in terms of the IO monitoring indication, I mean, obviously that adds another 800,000 tests to your addressable market, if you will. How do you think about reimbursement for that as well as for the oligometastatic stage IV colorectal cancer setting? I mean it looks like the colorectal piece of it should be covered potentially under the existing LCD, but what about -- can you confirm that? And then what about the IO indication?

Yes. What was really exciting about this new LCD is that it didn't really limit colorectal cancer to stage II and III. I think our specific coverage right now is for II and III, but the foundation for adding stage I and stage IV cancers is built into the LCD. So that's really exciting for us and actually frankly is upside to what we had expected. And I think it fits in line with our strategy because we're well down the process now of generating stage IV data that is very, very strong. And so next week, at ESMO, which is the largest European cancer conference, gets KOLs from all over the world, we've been awarded a podium presentation for some very, very strong prospective stage IV colorectal cancer data that's going to be published shortly after. So this is something that we're really excited about. There's going to be a lot of buzz about it coming out of the conference. And that data, we think, is strong enough to submit to Medicare and get coverage for this indication under the existing LCD. So that's going to be an immediate 10% expansion to the market that could happen very, very soon, I would say, as soon as the data is published. But we don't have to go generate the data. It looks great. You guys will see it at ESMO. And then for IO monitoring, that's something where we said in, I think, our last earnings call that we had already submitted a packet to Medicare, the formal dossier, and we've completed a draft meeting with them prior to that submission. So it's something that we feel very positive about. We've had a lot of conversations with Medicare. Certainly, there's a lot of patients that are being overtreated with immunotherapy. And there's a lot of cost in the health care system that I think Medicare and others are concerned about. So this is one that we're seeing a lot of enthusiasm from payers and Medicare with respect to the health economic opportunities, and it's one that we think can really help patients. So we expect to have a draft coverage decision either later this year or early in 2021 and then have coverage in that kind of 6 to 9-month time frame after that draft comes out. So there's 2 components to this IO monitoring. There's the comprehensive genomic profiling that you do on the exome, and then there's the ongoing monitoring. And both of those will have different pathways to get reimbursed. And then I'll also mention that this is an area where our partnership with Foundation Medicine is going to become extremely valuable because they're the market leader today in tissue profiling. They do more than 100,000 tests every year. They have a built-in backlog of patients that are on immunotherapy. So there's an opportunity for them to just flip the switch and start collecting blood to run plasma monitoring on those patients. And that's really, I think, the thing that we were the most excited about when we did the partnership, and now it's coming to fruition.

Got it. Got it. Makes sense. And then just to follow up on a couple of big picture questions, if you will, on Signatera. I mean a tumor-informed approach, I mean, obviously comes with better limit of detection, right? And that's been an important differentiator for you in terms of your positioning for the assay. On the other hand, there is a feeling that perhaps access to tissue can be a limiting factor and increased turnaround times. And towards that end, you had spoken of perhaps having a liquid exome that would be the backbone for the test. I mean is that still on the cards? And should we expect sort of that to be on the market, say, next year?

Yes. That's something that we've already made available to certain pharma customers in the RUO setting, and it's something that we do think is important. Now I want to just clarify, in the earlier-stage cancers in the adjuvant setting, you get tissue almost every time. So tissue is not a problem. In our colorectal business today, we're doing volumes that we've been collecting over the first half of the year during the pilot launch, there's never been a time where we haven't gotten the issue. I think where tissue becomes a challenge is in this metastatic setting when you're doing IO monitoring either because you can't get to the tumor or there's just not enough tissue to go around. And so I think in those settings, it is going to be beneficial to have a plasma test that can support the backbone and give us that input data to do the design of. But it's not really impacting the earlier-stage adjuvant stuff. So we think it's something that could be offered in the CLIA environment in the future, and it's something that we're looking at as we move into the IO monitoring space.

And is that something where you could leverage Foundation Medicine's liquid biopsy assay as well? I mean I know you're sort of endeavoring to do that on the tissue side. Is that a possibility?

Yes. Look, I think there are certain aspects of the partnership that we haven't talked about publicly that we really can't disclose right now. But our goal with Foundation is to be long-term collaborative partners in both research and development and commercialization. And I think the first order business is to launch the tissue product into pharma, where the early access program is opening up now, and that will be fully commercialized in the near future. And then we're going to be rolling out the clinical assay. But certainly, there will be future developments that we can keep the group informed on as they arise.

Got it. And then over what time frame do you see Signatera evolving into a pan-cancer test in the clinical setting? And would you ever consider adding more than 16 genes if you need to enhance the sensitivity of the test in other cancers?

Yes. So first, I want to just talk about what you said, 16 genes. So I just want to be clear. We test 20,000 genes with the exome, and we find about 200 variants, and then we cherry-pick the best 16 variants. So it's not necessarily 16 genes, it's 16 variants. And you can think about it as you're running your fantasy football draft, for example. If you have the opportunity to pick the best 16 players to fill out a team, that's what we're able to do because we start with 200 variants that comes from 20,000 genes. So that's quite a bit different from groups that are doing a panel-based assay where they start off with 73 genes, and they only get 3 variants. So imagine if you -- here's your 3 players for your team. That's all you get. You don't get to pick the best people. That's sort of one of the kind of base differences in the panel approach versus the personalized approach. Now there are some groups out there that are trying sort of copycat versions of the personalized approach. And they're saying that they can do 50 variants or 48 variants. If you remember, Natera has done 30,000 variants in a single reaction. So that's kind of our core test for our women's health business, we routinely do thousands of multiplex PCR reactions together at a high throughput scale. So doing more is something that we can do. But you have to look at the trade-offs between sensitivity and specificity, and you also have to look at really what benefit are you getting. So there's recently been some data out at ASCO from ARCHER where they had an 85% sensitivity for detection of lung cancer recurrence. And you compare that to Natera's 93% detection of lung cancer recurrence that was published back in of 2017 in Nature. Now that version that we were using in 2017, those samples were actually run in 2015, and that was our sort of off-the-shelf first version. And we've now made significant strides in performance improvement since then. So it was actually pretty compelling to see that even using our old version of our assay that we were still outperforming the latest newcomer into the marketplace when it comes to recurrence detection of lung cancer, and that's with the 16 variants. Now that also included significantly better specificity using our test, which reduces the number of false positives and gives you a higher positive predictive value, which is important for pharma if they're using the test as an enrichment criteria in clinical trials to determine who's going to get the drug and who's not. Because when you have a low specificity, it just doubles the number of patients that you have to treat, and it increases the cost of the trial significantly. So in many ways, we don't think that you need to really expand and do a lot more variants to get better detection. But with that said, it's something that we already do with pharma. We have multiple trials where we're doing multiple variants. It's not hard for us to do. And at some point, if we think it makes sense, we may look at launching that as a CLIA version or even a regulated version.

Got it. Got it. Makes sense. And then switching gears to Prospera. I mean obviously you have the final LCD in place. You're getting paid on your submissions. Can you share some color on commercial traction in the midst of the pandemic in terms of access to transplant centers and so on? And then secondly, over what time frame do you expect to launch the quantification ability, which you recently sort of highlighted to warn folks who is at risk of false negatives? And how does that position you competitively?

Yes. So I appreciate you asking about that. So Prospera, we've launched commercially now. We announced the launch earlier this summer. It's really gone well. We're seeing good traction. We've said before that we're seeing a lot of the top key opinion leaders come in and use the product. If you think about this market overall, it's only about 5% penetrated. So there's a lot of greenfield opportunity. There's a lot of customers that aren't fully committed one way or the other to any competitor, or they really are just getting started with cell-free DNA, and that's given us an opportunity. So things are going as planned. What's really awesome is we have this very significant research and development team that has become experts in multiplex PCR, SNP testing and cell-free DNA. So we're able to iterate our processes and protocols quickly. So we started off with Prospera, what you see in our peer-reviewed publication, the [ Starwall ] study, that was our off-the-shelf version. So we didn't even try on that version. We just took the off-the-shelf assay, ran it, and it generated performance data that was better than what was on the market from the competitors. So now that we get a chance to actually have our R&D team go sink their teeth into improving the assay, there's lots of stuff that we can do. And that's our focus. Well, I think others focus on ancillary businesses or buying different things. What we want to do is make cell-free DNA the best that it can possibly be. And I think there's a lot of room there to make improvements. So one of the improvements that we've launched is what we call quantification. And that enables us to look at the background cell-free DNA. Now a lot of groups that are trying to do this, they have to run a separate assay, and it's costly, and it takes additional turnaround time. We've built into our assay an automatic quantification technique that doesn't cost anything extra. It doesn't delay turnaround time. It doesn't require any additional workflows. So we basically flip the switch, turn that on. And now every time you run a commercial test, we look at the background DNA. And what happens is because you're looking at the donor-derived percentage of cell-free DNA versus total cell-free DNA, so if the background DNA is off the charts, that's the denominator for the percentage equation. And if it's off the charts, it can make it look like the donor-derived cell-free DNA is low when in fact it isn't. And so we've already seen examples where we flagged patients that were at risk of false negatives. And I think it's important for physicians. The other thing that we're seeing, there's going to be data coming out soon, is that there are certain patients that may have COVID, for example, that have astronomical spikes in their background DNA. And so especially in this period of time where COVID is rampant and out there in the community, being able to discern a true rejection from nonrejection and filter out patients who have high background is even more important.