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

Hi. Welcome to the 41st Annual Canaccord Genuity Global Growth Conference. I'm Kyle Mikson, from Life Science Tools & Diagnostics at Canaccord. And we're pleased to have Natera here with us today. Natera is a pioneer and global leader in cell-free DNA testing from a simple blood draw. The mission of company is to change the management of disease worldwide with focus on women's health, oncology and organ health. Representing the company, we have Mike Brophy, CFO. Great to have you here, Mike. Thanks for joining us today.

Thanks for having me, Kyle. Great to be here.

Sure. So Mike, just set the stage. So let's start with the 2Q results. So Natera announced last week results ahead of your preliminary numbers announced July 19, and you increased your revenue guidance to $620 million, which is impressive given you started 2021 with guidance of $500 million to $525 million. So I guess what drove the broad-based success in the second quarter? And then looking forward, what are the company's expectations regarding volume, patient flow and self-access in the second half of the year?

Yes. I mean, thanks for the question. So the -- yes, both the Q2 results, I think, and the revised guide for the year really come from the -- just strengthen the volume growth. We've had a tremendous amount of success across each of the businesses. In the women's health business, we're, I think, in the early stages of a secular trend where there's something like 1 million to 1.25 million NIPTs being run in the United States today, and there's something like 4 million to 5 million eligible pregnancies in the United States. So that's a huge gap. And just last fall, the two relevant professional societies, The Society for Maternal-Fetal Medicine specialists and the American Congress of Obstetricians and Gynecologists put out a joint practice bulletin recommending NIPT as effectively the standard of care for pregnant women in the U.S. So now you have this huge gap between the number of NIPTs being run and the number of NIPTs that probably will be getting run in the next few years. And we're starting to see that growth. We're just starting to see that market penetration. As a market leader, we feel like we're very well positioned to get more than our fair share that just natural increase in the NIPT testing market. When we grow the NIPT business, that gets amplified in our business by the fact that we very often also get a carrier screening test ordered at the same time as the NIPT. And we also get a microdeletion test ordered very frequently along with the NIPT. So for every 100 NIPTs, there's something like a little more than 40 carrier screening tests that get ordered for every 100 NIPT users, something like 75 microdeletion tests that get ordered. So we're very well positioned to take this one kind of macro trend and see it really amplified in our business. So that's kind of about the women's health business. Transplant and oncology, I think they're really kind of in the same zone, which is -- we're launching these products. I mean we launched our transplant business about a year ago. We launched the oncology business really in Q3, Q4, but it's really only into Q1 where we had a commercial presence calling on the community oncologists. And so Q2 is really the kind of the first full quarter where everyone's kind of been in their seat and know where to go and have their interests and things like that. And we've seen the -- we see we've been very pleased with the way that the volumes have really ramped there. I mean, there's a tremendous amount of demand and excitement for Signatera and Prospera. And so that we've never ramped our volume guide in that way in previous years. I mean we take the guidance very, very seriously. We set what we think is accurate guidance. It's not a layup. It's going to require good execution, but it's something that we feel -- we take very seriously. It's not aspirational either. We feel very -- we take it very seriously that we hit it. We've never set a guide in March. Totally re-rated that guide in May and then come back in August and had to completely re-rate upwards again in August, and that's just a function of where we are as a business, just as good a time as we've ever been -- ever seen in NIPT and then launching these wonderful new products.

Got it. Yes. And I'm glad you went over all the businesses. It's clearly a broad-based strength in the quarter. And then can we talk about kind of the macro trends with NIPT? You are the market leader, entered the space in 2013 and the impressive with -- Panorama has been impressive. It's been a really strong performance, right? And I think that's driven by the kind of the quality of performance of the test itself as well as the commercial structure and performance of your sales team. So can you just talk about other factors that driven the kind of unique commercial success of the product and whether that's the actual technology itself? Or like I said, just your investments to kind of beef up the infrastructure?

Yes, there's two things. I mean there's the core technology itself and then there's the commercial execution. So on the technology itself, I think it's worth understanding that while nominally, there's a lot of competition within the NIPT space. There's a much different labs that will offer you NIPT. In terms of the technologies, for almost the last decade, there's really only been two technologies effectively. There's been a shotgun sequencing approach that was innovated by kind of the first mover in the space, which was acquired by LabCorp, more than, I think, like 6 years ago now. And that IP from that first company is now kind of jointly owned between LabCorp and Illumina. So all these other labs essentially they have their own branding, their own sales reps, but the back-end technology is paying the license into LabCorp and Illumina for the recipe, and they're just using a shotgun sequencing approach, where they're just kind of quantitating the amount of cell-free DNA they find on the sample. If the amount of data they find exceeds the certain reference quantity, then they call that aneuploidies. reasonably well for Down syndrome. It doesn't work as well for some of the other disorders that you want to track in a pregnancy. Compare that to Panorama, where we take the time to actually separate maternal DNA, some fetal DNA that we get out of the tube of blood, then we use a set of PCR primers that we can multiplex at a massive scale that we continue to work on for the last 10 years to continue to optimize. Instead of just kind of randomly kind of amplifying in the genome, we actually go and we amplify a specific regions of genome called call SNPs, okay? So you and I have almost the exact same genome file. I mean it's shocking, and you can put us next to a rack to them. It's amazing how common chromosome varies. And obviously, we've got some significant differences in terms of our phenotypes and what we look like and things like that. If you want to go looking for the differences between people, the most productive places they look are the areas in the genome where there is no wild type or the variability of the human population exceeds 1%. Those are the SNPs or single-nucleotide polymorphisms. So we just go and we selectively amplify just those SNPs for mother and separately for baby. And then we use informatics approach to basically build up billions of hypotheses of what the fetus should look like based on what we've seen on the other. Then we compare all these hypotheses to what we've actually seen on the child, because we've separated mom from baby. And inevitably, there's a match. And so this -- there is kind of 2-step process allows you to apply basic statistics, allows you to have a confidence statistic in your call, and it leads to a very accurate result, very sensitive result. So hopefully, just from that, you didn't have to understand every single thing I just said. I just -- at a high level, just understanding the differences between the two technologies cover certain performance advantages on the test. So when we launched the test in 2013, we were fourth to market. We're up against some very deep popular players. Natera's basically a startup. And yet by 2015, we're clearly the market leader. I think that was really on the strength of the technology itself. We've now paired that effectively over the last decade or so with a very effective commercial operation. So our CEO, Steve Chapman, was the first commercial employee that was ever hired here in 2010. So prior to Natera, Steve was a very successful sales rep in Genzyme Genetics, which was kind of the first molecular diagnostics company in the world. So he really grew up in the space. And since he's been here, he's built a commercial operation. So particularly within the women's health business, and it's also true for our new businesses, any person who's -- any sales rep who has any level of responsibility, who's been here a while, is probably hired by Steve seeing those efforts. We've kind of built up a team, a cadre of people who know how to execute on the commercial side. You don't have to take my word for that. You can just look at the historical volumes and look at the progress we've made. Quarter in, quarter out, we've been able to grow the volumes. So being able to combine this very flexible and sensitive technology for cell -- for detecting cell-free DNA in plasma with a very effective commercial operation has been the kind of core to our success. The strategy is really just to leverage that in the same exact chemistries, same commercial ethos and operations in the new businesses as well.

Okay. And I appreciate the deep dive on the technology. That's helpful. I appreciate it. And then like moving to just the economics on that business. We've had pretty solid margins, ASPs of like $300, $400 and COGS per test. So they seem like the economics, the margins will improve over time. I guess what are you doing? What will happen? What drivers will cause that margin to kind of increase over time? Where you see margins kind of getting to, I guess, on the business?

Yes. I mean, there's no reason why this can't be a 70%-plus gross margin kind of business. I mean, maybe it's worth kind of just taking a tour through the unit economics in each of the businesses and in NIPT, in particular, within women's health, we still feel like long run average selling prices can be around $400. And I think the contracted rates today are in the $600 range. So that getting to $400 allows for significant kind of contracted price erosion, but it also allows for just the fact that we're going to be getting paid on a higher percentage of our test volumes now than what we were getting previously. So let's just say about $400 in ASP on the NIPT business. At the same time, the cost of goods sold have just continued to come down. Again, the COGS -- a few years ago, the COGS for NIPT were above $300, $350. They're now $160. So we've got clear line of sight based on projects that people are actively working on in our R&D operation to get the cost of goods sold down below $125. And there's other slightly longer run projects that would get you down considerably below $100. So if you think over like a 3- to 5-year time horizon, just NIPT is something like $375 to $425 on the average selling price per unit and the cost of goods sold is something like $100 per unit, where you're already kind of above that kind of 70% gross margin range. That's just the NIPT business. That completely ignores the opportunity that we have in microdeletions where, as I mentioned, it's a very high attachment rate to NIPT today. We get paid on that very rarely, even though the contractor rates are similar to NIPT as a stand-alone test. I mean just for microdeletions, the contractor rates are also within the $600 range. The ASPs are very low. We get paid a single-digit percentage of the time when we submitted the claims to that test. That's because we just don't have coverage policies in place. We don't have a guideline from ACOG and SMFM. So we've run a 5-year 20,000-patient prospective clinical trials to try and trying to address that, which is now -- the data has been presented and now it's submission for publication. So that's still kind of a call option, I think, but if you could get -- and I'm making these numbers up, but I mean like you can get another $100, $200 in ASP from the microdeletion test, now you're really talking. This is a business with ramping towards above 1 million tests a year at $500 to $600 ASP and $100 cost. So that becomes an amazing business. But even the base case, I think it is quite powerful. On the -- in the transplant business, maybe long-run ASPs, I mean, it's largely a Medicare reimbursed business. Medicare rate is 20, 21 per test in transplant. The COGS are quite manageable there, because we leverage the same workflows in chemistries as we've been optimizing for NIPT. So COGS are in the 300 range, 400 range right now. And there's room for those to go down as well. So obviously, that's a very high-margin product. I think ASPs in transplant are probably in the over time. They're probably in the 1,500 to 1,700 range just to be conservative about where pricing can go. Even at that rate, I mean, that's -- it's an incredibly high margin business. And then finally, oncology. The oncology, we have had so many reimbursement successes, which I'm happy to talk about it more detail. But just to quickly summarize, I mean I don't think it's unreasonable to think about Signatera ASPs 1,500 to 2,500. I know there's -- that's a big range, but I mean that's kind of a function of where we are in terms of commercialization. There a couple of blended cost of goods sold there. The repeat monitoring tests also leverage the same chemistries that have similar COGS profile as the transplant test and given upfront exome, which over time will cost you $700 kind of upfront, $600 upfront. So maybe blended cost of $400 to $500. You can kind of see where the margins here and each of the businesses are much, much higher above where we are currently. And that just differentiates where we are in growth phase.

Got it. Okay. That was great. And let's move on to some of the other, I guess, businesses other than NIPT in a second, but I just want to stick on kind of expanding the market opportunity. And then recently, with the results last week kind of expanded the TAM a little bit, and you talked about like expansion there. So it does sound crazy though to kind of think about expanding the number of pregnancies that could have NIPT done, right? Because I guess the growth has been standing over the past few years. What are the factors that are really driving that going forward? Whether that's coverage or just awareness or accepting sort of the guidelines. And just given some of the recent progress in those areas over the years, what are the company's expectations in terms of how large accessible market you get to currently and is today and could get to over time?

Is that specifically for NIPT, Kyle? Or do you want to talk about oncology there? I wasn't sure which...

Yes, NIPT, because there's a lot of kind of moving pieces there.