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

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All right. Thank you. And thank you, everybody, for joining the Natera fireside chat today. We're lucky to have with us Steve Chapman, CEO and Mike Brophy, CFO from Natera. This will be a fireside chat format. So if you have questions, please e-mail them to me at [email protected], or you can use the question to have on your conference portal. So with that, welcome, Steve. Welcome, Mike.

Good day, and thanks for having us.

Thanks for having us, Dan.

So to kick it right off, let's talk about the business environment. Can you update us on how the environment is trending vis-a-vis the assumptions you've laid out in your recent guidance?

Yeah. So look, I think, we're obviously on a great track this year. Things have been accelerating across all of our business units. We've been performing ahead of plan. We've raised guidance twice, and we're in a very solid position. We're seeing that the trend of growth and outperformance continue. And I think we're on track.

Okay. So no, I mean, one thing that's come up from some of your peers during this conference has been restricted office access to the delta variant surge. Nothing to see on that front when it comes to Natera?

I mean there -- it's possible that maybe there's some restricted access, but I don't think it -- we haven't seen anything that would indicate that there's a kind of a change in the trajectory. Certainly, we probably could have always done better than we did. But we did -- I think we're doing really well. And where we are blocked out of offices, we're just relying back on that remote education, but absolutely no pullback of any sort.

Okay. Crystal clear. So let's pivot to talking about your businesses, and we'll address them one at a time. First off, on reproductive health. Can you remind us where you think the market is today from a penetration standpoint? And what's the path to get to 90% penetration over time?

Yes. So we think today, overall, the market is about 35% penetrated. And in the next 3 years, we'll get up to that 90% penetration point. And if you look at predicate testing in the market, serum screening reached a peak of probably 80% penetration. We think NIPT can reach about 90% because we've removed some of the issues with false positives and so forth. So I think from here, what has to happen, I think we needed ACOG guidelines. We got that. We needed the big commercial payers to implement policy changes. We've got that. There's still a lot of state Medicaids that are slowly changing their policies. So it's just at this point, it's about physicians changing their ordering patterns. And it's a linear ramp from here. And every quarter, we see more and more and more of our business moving towards average risk, which we would expect as more OB practices and institutions start adopting average risk coverage.

Okay. How do you expect ASP trends over time in NIPT?

I can take that. Yes. So we're -- we continue to see it just kind of grow as the fraction of paid claims grows in the business. We've said for a long time that we thought that 3.75% to 4.25% is the right rough range for ASPs in this business over the long term. I still think that's right. Contracted rates have remained largely stable since we got the new guidelines that came out, the coverage expanded quite rapidly there. I think the -- we're in the lower 300s right now in terms of ASP. And I think the path to getting to that kind of 400 range is just this linear path of getting reimbursed by the range of state Medicaid plans that are out there and the management of Medicaid plans out there. Medicaid is important because something like half the birth in the U.S. are Medicaid births. So we've already seen excellent traction there and expect that to continue. So I think like if you think about that business over time, I mean, this is just NIPT alone, leaving aside carrier screening, importantly, leaving aside the microdeletions potential upside. This can be something like a $400 ASP business and a circa $100 COGS business on very, very high volumes. So just that business alone is a pretty good business. And then we've got some really meaningful upside drivers. One is just amplifying the volumes by also driving care, screening volume as an IPT volume grows. And then the biggest single driver in terms of upside would be the potential microdeletions reimbursement. So we've got some good upside drivers to what it can be a very good base business.

So I want to touch on that in a moment, but just to close the loop, so you wouldn't expect lower ASP is required to hit that 90% market penetration? You would actually get a higher ASP and still march towards 90% market penetration?

Yes. I wouldn't tell you that, hey, like as volumes grow, we're going to increase pricing. That's not what would happen. But the reality is that the contracted rates have already gotten to kind of a very stable level. And now what can happen is even giving effect for fairly significant reductions in contracted rates from here, if you can get the fraction of the time you can get paid, if that can get to what it ought to be, it ought to be something like 90% of the time you get paid, then what we care about, the ASP, which is the combination of the 2 can actually -- there's [ reflect ] to go up even with contracted rates going down from here.

Okay. And Mike, I probably went 3 months without any questions from investors on microdeletions. And then in the past week, I've gotten 2. So remind me what you're telling folks on microdeletions.

Yes. I mean microdeletions continues to be a very popular product for us. We do not report the units separately for microdeletions. It just -- it comes embedded in the -- in our Panorama NIPT volumes. But roughly speaking, I mean, for every 100 NIPTs to get ordered, we get about a 80 or so microdeletions orders. Those are -- that's a separate reimbursement for us, separate code. That code is largely priced in most of our in-network contracts. It's something like $600. Right now, the fraction of time we get paid is single digits. So the ASP is quite low. Why is it so low? Well, the current status of the guidelines characterize microdeletions as saying, "Hey, this is experimental. We don't know what the incidence of microdeletions is in the population. So it's experimental for now." The point of the SMART trial, 5-year 20,000 patient SMART trial was to establish how common are microdeletions in the population. The best -- the most knowledgeable specialists in the field, I think we're estimating that perhaps it's 1 in 2,500, something like that, which should be good enough to get a reimbursement for screening for microdose. We found the study, it was more like 1 in 1,570. So it's surprisingly common disorder. That data has been presented this past January at the top conference in the space at the SMFM conference and is now in the hands of the PIs. It's in kind of submission mode with high-impact journals. Expect to get that data -- that paper accepted this year and publish likely first half next year. Once the paper is published, then that's the point which the -- perhaps the guideline committee can reconvene and review what was previously said there. There's a range of outcomes from there, obviously, but even kind of a middle of the road update from the committee, I think it allow you to significantly increase the fraction of time we get paid on that test, which is immediately high-volume and quite accretive to margins and cash flows.

Okay. So you're framing this as a potentially 2022 event?

Look, it can be. What we've always said is that this should be considered something that's upside because we don't -- as you can kind of infer from those steps that I just walked through, we don't actually control the steps from here. We've done what we can do. We've published excellent data, and we don't control the timing or the outcome. So I think it's still safe to appropriate to think of it as upside, but it's not insane to think that we could be looking at this next summer with some feedback from the committee. But let me pause there and let Steve comment. Steve, what do you think?

Yes. I mean, I think as soon as the paper is out, which will definitely be in the beginning part of 2022, the committee is going to be. And I think we're going to know pretty quickly what their plans are coming out of there. So how long that takes to get implemented into payers could be -- it's really going to depend on the recommendation.

And the commercial payers move pretty quickly after the ACOG recommendation on average risk NIPT. Do you expect there's any reason to think that they can move as quickly, more slowly or faster when it comes to microdeletion reimbursement following an ACOG decision?

I mean if ACOG makes a decision, they're going to change immediately. I think what -- like the 3 options are -- you have 4 options. You hear nothing in which case, we can take the published paper, go to payers, but we probably won't get very much change. There's another option where there's a negative guideline or a restatement of a negative guideline. That's not going to help us at all. Then there's kind of a vague guideline, which is positive, but it can be interpreted differently. I think that would still be a plus for us because we'll probably still be able to get some of the payers to cover. If you remember, Anthem and Cigna both started covering average risk NIPT in 2015 based on the kind of vague guideline that ACOG put out. So that would still be a win. And then there is the outright recommendation. If you get the outright recommendation, that's it, payers will change within 3 months.

Okay. Like we saw with average risk NIPT?

Right. Yes. I mean that's it. It could be recommendation out immediately, you see changes.

Okay. So then before we move on from your reproductive health business, could you opine and offer your thinking on the decentralized versus centralized testing model?

Yes. So we offer a decentralized solution through our software, we call Constellation. And we've done a lot of deals with that around the world. I think we have something like 20 different installed customers. And we've done a partnership with BGI, where they're going to be distributing NIPT on their NGI seek ex-U.S., ex-China. And that's, I think now completed development work. So it's a good opportunity. It's mostly ex-U.S. I think in the U.S., the vast, vast majority of customers are ordering through our centralized laboratory. And I think things with technology are just moving fast, such that if you want the cutting-edge test, sometimes it's hard to get that kind of decentralized solution because the centralized CLIA version is always going to be a couple of steps ahead.

Okay. Okay. Moving on to oncology. Start off with Signatera. First off, you had a press release earlier in this week to talk about CIRCULATE-US. It's been a busy week. Could you refresh everybody what the import of that announcement was?

Yes. So the CIRCULATE-US is a large consortium led trial that is led by NRG and NSABP, and they've selected Natera after a competitive process. And the study is 2,000 patients where they're going to be stage II and III colorectal patients is looking at chemotherapy escalation and de-escalation is going to enroll and monitor and track patients for up to 6 years. It's going to be a readout after 3 years. And we really think that this combined with CIRCULATE-Japan are the definitive data in this space. And these types of studies are never going to be done before. And this is similar to, I think, the TAILORx study, where it's just a level of evidence that is unquestionable, definitive gold standard and really sets up a massive competitive moat. The good thing is Japan is very far along. There's over 2,000 patients that are rolled out and the first unblinding of the de-escalation arm is going to be outlined at we believe, at ASCO GI in January. And I think it's going to be very positive. So that -- I guess, it's just continuing to build that extreme competitive moat that will help us perform better from a volume standpoint, but also secure long-term NCCN guidelines in commercial payer coverage unlocking that additional ASP.

Okay. And you would flag this as an incremental competitive win for you as well, if you're saying it was a competitive process to be included in this study?

Absolutely. I mean, this is probably the most significant competitive factor when you look at who wins in the next 3 to 5 years. It's going to be the largest colorectal trial done in the United States, answering any questions that haven't been answered with the most significant key opinion layers and accounts, and it's going to be generating the level 1 evidence. So this will unlock volume. It will unlock [Audio Gap], and it will build a massive competitive moat. And the other thing that's exciting in the near term, this is very short-term opportunity. NSABP and the NRG through their national clinical trial network, they have more than 700 sites that can immediately turn on. So that's something that is really unique about working with these consortium groups since, it's the data -- you sign the contract, you don't have to go site by site by site by site and doing IRB with every single center. Once you did a paperwork, any one of their network sites can start enrolling patients into the trial. So immediately, we're setting up shop in these 700 accounts if they choose to participate in a trial.

Okay. And for folks that haven't looked at the trial design recently, remind us all what the indication is. Is there a residual testing indication as part of this trial where you're testing some frequency post cancer? Or is it a point in time, post-surgery, you want to make a decision about escalation or de-escalation? Which or both is built into the trial?

This is actually the way I think the test is going to be used in clinical practice long-term is you get tested at 30 days pro surgery. If you're negative, then you get randomized into standard of care treatment versus observation. If later you screen positive, then you get enrolled into the escalation arm. So it's sort of extended adjuvant or real-time adjuvant treatment for patients that start off negative and then later become positive. We're treating on the molecular recurrence, I guess, it's at another care that people are using. So if you're negative, you get randomized the standard of care versus observation. If you're positive, you get randomized to a more significant chemotherapy regimen versus the standard of care chemotherapy regimen.

Okay. Understood. So this is a trial that could establish the utility of changing therapy 9 months post a stage II colorectal cancer surgery?

Yes. Well, it's essentially immediately after colorectal cancer surgery. Today, let me just step back for a second. Today, all stage III patients in colorectal cancer getting adjuvant chemotherapy. Okay. The vast majority of those people do not need adjuvant chemo. So what we're going to show is that if you're Signatera negative, you can avoid adjuvant chemo. You can get deescalated, okay? So that's the first thing is you don't need adjuvant chemo if you're Signatera negative. The second thing is, instead of giving adjuvant immediately after surgery, we can surveil on you. And if you become positive, you can get your adjuvant treatment at that time of recurrence, so treatment on molecular recurrence. That's the second thing that is going to show. And then the third thing is that patients that are Signatera positive whether they're stage II or III should definitively get treatment. So today, not all stage II patients get adjuvant chemo. So sometimes the doctor is not sure whether to give adjuvant chemo or not. And with our -- in the study, if you're positive, you get escalated or you get randomized and they get escalated, and we think that patients that are positive will benefit significantly from chemo.

Okay. Crystal clear. Can you remind us the significance of your ADLT status for Signatera?

Yes. So the ADLT infrastructure is a framework that rewards innovation and first-mover advantage with complex diagnostic tests. And so the main thing is that you get paid a significantly higher rate for being the first company to get approved. And in the recurrence monitoring setting, the initial rate was around $800 per time point, and that rate is now $3,500 per time point. So it's a very significant increase versus where we were at 4.5x increase. We're going to be getting paid at that rate now as part of a recurrence monitoring schema. Competitors cannot get this rate and it cannot participate in the ADLT. As far as the statute is concerned, it's only rewarded to one company that is delivering a particular clinical result back. Yes. So of course, there's always a person at the other end of these things making a decision. But according to the statute, we're the only ones that are able to get this ongoing rate, whereas others would get a rate that's closer to the $800 price point.

Got it. So I have a couple more questions on oncology, but I already have questions from the audience to pivot to transplant. So we might come back to oncology in a minute, but let's move to transplant.

Sure. Yes. No problem.

So here is a question from the audience. Can you talk about your progress in the kidney transplant market? What is your strategy to take share from the incumbent? Do you go more after the nephrology market given more green space? And then how do you think about the opportunity to expand into other organs post the hard announcement? So 3 questions in one.

Yes. So in kidney, we're doing very well. We're taking a lot of business in the transplant setting. We're closing new customers, customers that weren't yet really doing cell-free DNA monitoring, but we're also taking business. So our volume there is accelerating. And we're doing really well. The proactive trial is enrolling very nicely. There's over a 1,000 patients now enrolled in the study. So we're doing a good job. We're doing all the things that we said we were going to do. One of the ways that we're taking share is by innovating. And so just yesterday, we announced a new launch in kidney for a product called Prospera with quantification. And so what this product does is rather than only report out the donor-derived cell-free DNA percentage like everyone else does, we now tell you the absolute quantity of donor-derived cell-free DNA in copies per milliliter of plasma. We tell you the donor-derived percentage, and we took the total amount of cell-free DNA or a bit background cell-free DNA. And what we've shown is that with the new algorithm for Prospera with quantification, we can actually improve sensitivity. We had a publication in JASN, which is a premier transplant journal that showed an increase in sensitivity. This was in partnership with UCLA. And we've now backed that up in 6 different independent cohorts where we've seen increases in sensitivity as a result of using this quantitative algorithm. Now the most significant example is going to come from the Trifecta study, which is an international multisite prospective study which has more biopsy match rejections than any other study that's ever been done. And we look forward to the results of that coming out later this year or in early 2022. The manuscript is in preparation now. So basically, bottom line, when you use this new Prospera quantification algorithm, it improves sensitivity compared to donor-derived percentage alone. So that's now commercially available. We look forward to more data coming out. In other organs, so we just launched in heart, we completed a prospective trial that was set up just for the purposes of heart transplant validation of about 250 samples, and we combine that with a retrospective study of 100 samples. So we had greater than 350 samples in our validation study. And that's in submission right now to be published. And the performance was very strong. We had a AUC of 8.44, which in context is excellent performance. In addition, the product does not require to be spun down and shipped on dry Ice. It doesn't need any special processing, and it's half the price of our competitive assay. So if you look at our competitive test on the market, heart care, they're charging the health care system $6,000 for each test. And I think we're seeing very excellent performance for half the price with no special handling. So we think we're in a good competitive position. We think we'll do well there, and we're happy being bringing that to patients and physicians. We're looking forward to other organs as well. I think heart is the first demonstration, we've shown the technology works. But certainly, there's going to be a path in other organs as well.

Okay. So 4 minutes left. I've got another question, shifting back to oncology. Are you working on a tissue agnostic version of Signatera?

Yes. I think the first thing that's important is we're doing exceptionally well. We're seeing volume grow rapidly. Doctors really are bought into the tumor informed technique. And I think that has been published in 16 different peer-reviewed publications. It's covered by Medicare. It's on market. We have a pipeline of an additional 50 clinical trials that are coming. And we think we stacked up very, very well against any of the assays that are out there. So I think, of course, we always have a road map of products and research that we're doing, and we're looking at all options. But what the market is telling us right now is that the tumor informed version is what they want. And we're really excited to be out ahead so far from a competitive standpoint in tumor informed, which we think is going to be the winning approach.

Okay. And then speaking of pipeline, how are you thinking about the early screening market opportunity?

Yes. So we've talked about that before, and it's an area where we have a program. I think we haven't outlined the exact details of what we're doing yet. But I think we look forward to sharing some more of that in the future. Essentially, we're leveraging the strength of what we have, which is 10s of 1000s of early-stage cancer exomes, and we're mining that data for DNA signatures that we can bring to bear in an early cancer detection setting. We've gotten access to an exceptional database of early cancer detection patient samples that we're going to be able to tap into, I think, to lessen the burden on the validation. So we're going to share some details in the near future. We're just not at that point yet, and we're still working on the assay, I think working on our exact plans.

Is that database from a biobank you've gotten access to? Or is that from your own work on Signatera?

Yes. I think we're going to outline the details of what we've gotten access to and where we are in the development process, probably in the near future. So I would say stay tuned for more specific details there.

Okay. How are you framing the opportunity with Altera for investors?

Yes. So if you look at comprehensive genomic profiling therapy selection, this is a big market. It's pretty well penetrated with -- I think competitors that have done exceptionally well. I think for us, we're mostly focused on how comprehensive genomic profiling interacts with Signatera. And we're seeing that many of this metastatic patients that want to get the therapy monitoring or they want to get immunotherapy monitoring, they want to use that same tissue to get comprehensive genomic profiling. So yes, I think for us, it's less of an independent promotion now where we're going out and trying to be in market here in comprehensive genomic profiling. That's not necessarily our approach. Our approach is to say, do you want to order Signatera to monitor your metastatic patients and monitor the effectiveness of the therapy. If you do, when you set us the tissue, we can also run comprehensive genomic profiling. Now the other application of Signatera combined with comprehensive genomic profiling is going to be felt with the launch of FoundationOne tracker. And we're seeing some incredible data there. We've worked really well with the Foundation team. And I mean, they really do think very, very, very thoroughly. And the product that watches is going to be exceptionally well-validated and have a great user experience when that comes out. So it's already available today in pharma. We're seeing a lot of interest, and we look forward to bringing them into the clinical market in the future as well.

Okay. With that, we're out of time. Steve, Mike, really appreciate the update. Thanks for coming.

All right. Thanks, Dan.

Thanks, Dan.