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

Okay. Great. All right, welcome, everyone. I'm Puneet Souda, SVB Leerink tools and diagnostics analyst. Welcome to our healthcare conference. It's my pleasure to be hosting team Natera. Steve Chapman, CEO; and Mike Brophy, CFO joining us. Welcome, guys. Great to have you here.

Thanks for having us.

Yes. Thanks, for having us.

Okay, great. So just a quick housekeeping item, please submit your questions into the chat, and I'll cover them as we go through the conversation. Natera needs no introduction as a leading NIPT company in the diagnostic markets and has done a really great job of pivoting towards cancer diagnostics with their Signatera test and MRD and recurrence monitoring. And the company is also pushing into transplant diagnostics. So a lot to talk about.

Maybe just to kick off, Steve. At a high level, you've been at NIPT and women's health for what seems like a long time. Panorama is finally in the ACOG guidelines average risk. You completed a fairly large study here to prove more value for that test. A few years ago, you launched it to cancer diagnostics with MRD, and now Signatera is yielding early results, which we'll get into during the conversation. And transplant side, you mean you have a product that's also making inroads. So maybe looking at the business from a high level, I mean, do you have the legs that you desired in the business? And maybe just tell us what remains your #1 focus this year and for the team.

Yes. Thanks. So yes, as you described, we've deployed our powerful platform technology now across 3 different areas of health care: women's health, oncology and organ health. And in women's health, the driver of a lot of growth has been noninvasive prenatal testing. We think overall, that's about 35% to 45% -- or to 40% penetrated now. So there's still a lot of room to run there. And with us being the market leader and having the most patients studied in clinical trials, now 26 peer-reviewed publications with our large sales team, excellent user experience platform, we think we're in a good position to ride that wave of penetration for the next 3 years. In addition, we have other products in the market now, hereditary cancer testing, Horizon carrier screen that we're able to cross-sell to those customers. So there's a big opportunity ahead of us. We expect to see continued growth in the women's health business. Then when you look at oncology, we think there's a $50 billion TAM ahead of us. When we look at early cancer detection, MRD testing and therapy selection, and we're seeing excellent growth for Signatera initially focused on Stage 2 and 3 colorectal. But we've now expanded that to pan cancer opportunity with about 15 peer-reviewed publications in over 100 trials and data sets that we expect to be reading out and completing in the next coming years. So a lot of room to run there, both continuing to penetrate colorectal and then expanding to other tumor types. And then getting into the early cancer detection and therapy selection businesses. And then in organ health, we've done exceptionally well in kidney transplant. We're continuing to see growth penetration deep into some of the core large institutions around the country. We've now expanded into heart and into lung transplant monitoring. And we're also doing a germline testing in the field of chronic kidney disease. So we have a lot of growth drivers there. We have a lot of data that's going to be reading out in the first half of the year. But across the board, I would say these are 3 very large market opportunities that are significantly underpenetrated, where we have a leading position and a great opportunity to continue to grow.

Excellent overview. Maybe just in early January, you pointed out 1.5 million tests for 2021. I think the question is really, sort of, the impact of Omicron in the last sort of 2 weeks and any lingering effect in sort of January for that in diagnostics. I mean, that remains a primary question. So could you -- what can you provide there? It seems like NIPT has been resilient throughout the last 2 years as a test. But maybe just tell us what you're seeing in overall in NIPT and cancer and rep access.

Yes. Right. So generally, Natera has been very resilient, almost set up in a way to help in a kind of a shutdown situation like we saw with COVID, because a lot of our tests are noninvasive and can be accessed remotely rather than doing diagnostic procedures. So typically, we've kind of powered right through. I would say with Omicron, the overall impact of just kind of disruption was probably more than what we've seen previously. Just if you think about the number of cases, when we look at the accessioning team or kind of lab operations team getting hit, and we look at the sales team just being out. But luckily, we have a very resilient system and an infrastructure set up that can take those types of hits. And so we didn't really see any impact at all on the business. But -- certainly behind the scenes, the amount of fires we had to put out was much more significant than we had previously with kind of Delta or even with the original COVID impact in kind of that Spring of 2020. But luckily, it didn't really disrupt our business in any way or our volumes in any way. I think you're still muted.

Yes, thanks. So I want to shift to oncology and Signatera. Maybe at a high level, given sort of the early data sets that you have generated here, some early momentum you're seeing here. Is this more of a meaningful acceleration that you see in 2022? Or this is more of a 2023 acceleration for you? How are you thinking about it? Because obviously, there's data that gets clinicians excited and they are wanting to getting -- want to get involved. But I just want to see sort of from a cadence perspective, how are you thinking about pickup in the business?

Yes. So I think we -- in 2021, we saw a lot of acceleration in Signatera as we've described previously. And I think as we turn the corner here into '22, we're continuing to see strong momentum. I think physicians are interested in CRC, in using the test. The CIRCULATE Japan data that we came -- we brought out at ASCO GI has really opened a lot of doors. I mean we're getting very positive feedback from the sales team, that there's accounts that were sort of no-see accounts or where they were previously told no. Where now, the door is open. Doctors are sending their first samples ever, or we're at least able to set up a meeting to have that discussion. So I think it will accelerate the growth. But also beyond colorectal, we're seeing increased utilization in the I/O monitoring setting and in the pan-cancer setting.

Okay. Very helpful. And then on the CIRCULATE Japan data, if you could. How do you expect this data to impact volumes clinically and your conversations with the biopharma? It seemed like there was actionability to it. There is a new stratification that this -- Signatera is able to do in this adjuvant setting. Maybe just talk to us as to what's your -- how it changes your things volume-wise and discussions with biopharma?

Yes. I mean -- I think the question that most doctors have been asking and when our sales team goes out there, the #1 objection that we hear by far, it's not about another competitor or it's not about logistics it's really about, hey, show me the predictive data. That's what oncologists want to see. I want -- we've seen the prognostic data. We've seen the kind of validation data. We want to see outcomes data. We want to see is the test predictive of who will benefit from adjuvant chemotherapy. And now we've generated that data. So it's exactly what doctors were asking for, and that's why we're seeing acceleration in the number of meetings that we're able to schedule. We're seeing increased engagement from physicians that maybe previously were sort of turned off due to volume. And then in biopharma, again, we're continuing to see that CIRCULATE in tumor DNA is really a must-have for pharma companies now that are conducting MRD-type trials or looking at bringing their drug into the adjuvant setting or looking for that surrogate endpoint. And when I look at our pharma volume, just the number of tests that we're doing, and I compare that to other ctDNA companies and their pharma volumes that they've reported out, I mean we're doing exceptionally well. Very well.

Got it. Would you point to pharma and sort of something unique in the way you're -- the sales channel or business development teams are approaching them? What's sort of driving them?

Yes. I think it's the technology that's driving a lot of the success that we're having. And I think it's -- now, our peer review data having 15 papers on the market, multiple breakthrough device designations and having really increased or regulatory and quality capabilities and scaling capabilities and distribution channels to meet pharma's needs. I mean this has been a big part of our investment over the last 3 years has been getting to the point where we are now, where they're feeling very positive about engaging with us. And when I look at the volumes that we're processing on a quarterly basis from pharma and compare that with other ctDNA companies that are reporting out their quarterly volumes from pharma, we're in a good position.

Got it. Okay, very helpful. The NCCN guidelines ended up being discussed more on the CIRCULATE data call you hosted. I think there was a bit of a confusion on what will be included in NCCN and the timing of it. I think you said mid-2022, but could you maybe give us sort of the final word on that? And what -- how meaningful would NCCN guideline inclusion be here?

Yes. So I mean, look, the first thing is we don't control what NCCN does. Anything that we're saying is just kind of predicting what might happen. If we can get the CIRCULATE paper published before the NCCN meeting in August, we can submit it for consideration, and we can have an opportunity to have guidelines changed. Now we believe the escalation track is the first one that would get coverage, which would mean if you are Signatera-positive, you will get adjuvant chemotherapy, right? And I think it's clear now from the data that, that makes sense and that Signatera-positive patients benefit from adjuvant chemotherapy. I think what would be a longer road is de-escalation, which is sort of withholding chemo from patients that are Signatera-negative. Even though the data looks incredible there, we just found historically that, that sort of withholding something maybe is a little bit of a higher bar than adding something. Although I do think the data right now is actionable because physicians are using their best judgment. They're using other biomarkers, they're using clinical factors to try to determine who should get adjuvant chemo. And many of times, they're withholding chemo for patients that should get it. And many times, they're giving chemo for patients that really don't need it. And I think in the near term, the CIRCULATE data will be one among many clinical factors that can be used to determine who should or shouldn't get adjuvant chemo as part of that patient discussion. But I think as far as guidelines go, escalation is going to be first, followed by de-escalation. However, escalation enough -- escalation alone is enough for every colorectal patient in the country to get Signatera testing, because you have to know whether you're Signatera positive to know whether you should get escalated. So we don't need de-escalation in order to get deep, deep penetration into the market.

Got it. Okay, it makes a ton of sense. In terms of the ADLT reimbursement that you have, you obviously have an impressive ADLT payment that you received. With the finalized, sort of, LCD, can you tell us what indications are currently getting paid under that? And what -- can you maybe also walk us through indication expansion plans for Signatera this year?

Yes. So we initially got coverage for Stage 2 and 3 colorectal through Medicare. And then later, we published a paper on Stage 4 colorectal. I think that was kind of in the summer time frame. And we submitted that -- for summer '21, we submitted that for review and then MolDx added coverage for Stage 4, which we thought was a good expansion and a good win for us. And then later, we got immunotherapy monitoring covered in a pan-cancer setting. So when you look across the board now, that's kind of the sort of existing realm of coverage. We've already submitted additional tumor types for coverage, some in late '21 and some early '22 to be considered. And we published 15 peer-reviewed papers now roughly. I think that there's probably 7 or 8 kind of discrete tumor types that have been published on now beyond the IO monitoring setting, where I think we had about 20 different tumor types. And so our plan is to just go one by one and have a pre-submission meeting. And then things look positive with the MolDx pre-submission to submit the remaining indications. And then as we publish papers, submit further indications. We have now over 100 clinical trials underway, which includes probably 30 data sets that are now in the position of either being written up and submitted, being posters that have already been presented that are being accepted or submitted for publication. Or kind of at the late stages of being analyzed, where we think there's going to be a thick book of publications in '22 and in '23 coming out of that 100 peer-reviewed publications that will give us new indications to get coverage for. So when we talk about neo-adjuvant breast, we talk about lung, we talk about bladder, muscle basin bladder. We talked about esophageal, multiple myeloma, ovarian, pancreatic, anal, melanoma, et cetera. I think the list is going to go on. And in the future, this is going to be a pan-cancer offering that has broad coverage.

Got it. No, super helpful. Maybe a question for Mike as well. I mean when you look at the momentum you're seeing here for Signatera. I mean, street consensus, slightly over 22% in 2022, and then it's accelerating in 2023. Oncology is clearly a large opportunity here. But obviously, NIPT business, I mean, that continues to grow. So, should we expect it to show up this to be more of a -- oncology to be more of a 2023 driver? And -- or otherwise, should we think of the near-term growth as continuing to be sort of driven by NIPT with more penetration and average risk?

Well, I think maybe the one point to flag on the 2021 revenue number is that you did have kind of a onetime benefit from the wind down of the QIAGEN sequencing arrangement. And so if you back that out of the 2021 number, then the growth rates, I think, look a little bit more kind of in line '22 to '23 in the street models. There's not just like big acceleration. There's kind of more high 20%, low 30% kind of expectations out there. And look, without kind of getting into what I think about specific expectations, I mean, the trends that Steve has been describing on this call are all maturing in a good way. I mean we're getting more into the launches kind of year 2 of a full launch for rough transplant oncology, where we get the benefit of the sales team kind of being in place. As of January 1, they've already been there for a few quarters. They know where to go. They know where their customers are. We get the benefit of repeat monitoring from patients that started with us last year. That's a new dynamic for this business that's really never -- never benefited from before. Now on the IP front, we've got a lot of room to run. I mean there's something like 1.75 million NIPTs that were run in '21. And depending on the estimate, there's something north of 4 million NIPTs that could be run in the United States. And so given the strong kind of professional society support and the data we put out there, I think we're in a great position across all those areas.

Got it. Getting another question here. So are you seeing any early traction on the microdeletion reimbursement front with the data, the SMART data?

Yes. So we were very pleased to see the SMART data be published in one of the premier journals, and the results looked fantastic. So the sensitivity and specificity were both very high. The incidence of the disorder was about 1 in 1,500, making it probably the second most common genetic disorder that you can screen, far more common than trisomy 21 for women kind of -- not the lower risk women. And importantly, the positive predictive value, which is when we call you positive, do you actually have the disorder, was 50%. And so that's very high when you look at traditional screening tests are generally in the range of like 3% to 5%. And so we think -- when you look at the ACMG criteria or the ACOG criteria for routine screening, this checks all the boxes. Is it a high incidence condition? Is it a severe genetic disease? Is there actionability on the results? Do you have a screening test that can be done cost effectively with a high sensitivity and specificity and good positive predictive value? So it really does check all the boxes. And although we don't determine the exact outcome of what's going to happen, I think this is probably the best setup we could have when it comes to kind of having a screening test approved. And 22q is the focus. We're not focused on the broad panel of microdeletions. We're focused on 22q, which is a high incidence condition. It's a very severe disorder. It's the second leading cause of congenital heart defects. Leading cause of inherited schizophrenia, learning disabilities, and there's actionability at birth. So if you can catch these babies prenatally and identify them, you can treat them with calcium at birth and prevent seizures for many of the babies. And so I mean, it's a good setup and we're feeling good about it. But of course, having dealt with ACOG and SMFM, we just don't control these things. And it's -- there's nothing else that we could do other than what we've done. And the test worked brilliantly and the study performed exceptionally well, and it's out of our hands at this point.

Got it. Sorry if we're jumping around here, getting a few more questions. VEGA, ALTAIR, BESPOKE, sort of how should we think about the further data readouts this year going into ACR ASCO?

Yes. So I think BESPOKE actually is going along very well. We've now enrolled over 1,000 patients in the BESPOKE trial. And the doctors and the PIs are, I think especially after the CIRCULATE trial came out, I mean these guys are like really pressing to have an interim readout. And they like, there's a lot of chatter about it. They want to see it. And so I wouldn't be surprised to see an interim readout from BESPOKE maybe in late '22. That's kind of ideally what we're looking at. I think VEGA and ALTAIR are going to take longer. Obviously, VEGA being the randomized deescalation study that we're doing, and ALTAIR is the randomized escalation trial. I think ALTAIR could probably take 1.5 to 2 years to read out. VEGA, maybe 3 years to read out. But there also could be interim analyses there released, but that remains to be seen. It's not currently part of the plan, but there's a possibility. I also mentioned, we have another large commercial experience study that we're doing that is not under the BESPOKE umbrella, but it's just from real-world data that have been collected under the commercial experience platform that physicians -- when they're actually using a test, we can go in an IRB, and we can look at randomized data -- or sorry, identify data from these patients. And there's going to be another big study coming out in colorectal of that real-world usage probably in Q3.

Okay. And how -- I mean, given the size of the commercial volume that you've had, sort of how should we think about the size there?

Well, you're not able to get outcomes data follow-ups from everybody. And also that certain sites have to consent to join the IRB. And so it's not going to be like tens of thousands of patients, but I think it will be sizable.

Got it, okay. And then shifting gears again. Mike, a question here on ASP. How should one view the puts and takes to ASP now that you have a number of contracts on the NIPT end? What's the discussion at this point? And how should we think about the ASP sort of cadence going forward for NIPT?

Yes. I mean the ASP -- so the contracted rates for NIPT have remained remarkably stable over the last couple of years. I mean when we get paid, we get paid something like $575 to $600, and the ASPs are in the low 300s right now. And the major delta between those 2 numbers is just -- there's still a lot of state Medicaid plans that are not yet covering average-risk NIPT despite the guidelines. And we feel like that's going to continue to progress in a linear way. I mean that's the way it's gone here over the last 1 year, 1.5 years. So I think there's a good argument for there to be continued progress at least on the state Medicaid front here in the near term. And then there's always discussions around like where contract rates go and things like that. But so far, they've been quite stable, even as the volume has increased meaningfully.

Got it. Super helpful. In terms of COGS reduction for NIPT, correct me if I'm wrong, the target is close to 200. Maybe just talk to us where do you see room for improvement there?

Yes, we're in the mid-100s right now on NIPT and the -- I think just based on the projects we have funded and people working on the lab, there's a path to the kind of the low 100s over the next, call it, 18 months or so. And then beyond that, there's additional variables, like just kind of getting more and more leverage with scale that can probably drive you down closer to 100 over the relative near term.

Got it, yes. Thanks for correcting me on that. And on Prospera, maybe just talk to us what are the key drivers and key events, and any data sets that we ought to be looking out for this year? How should we think about that business in 2022?

Yes. So this is really going to be the main year for data readouts in the organ health business. There's 3 big readouts that we expect to -- the outcome. I think one is our prospective 1 study which is very strong, which was presented at a conference last fall. So that's going to be read out. The second is the results from the Trifecta study, which is the largest prospective multisite biopsy match study ever done in the field of kidney transplantation. So 2x the number of rejections -- greater than 2x as the DART study, for example. And we think that's going to be published in the near future. That looks at both the performance of donor-derived, cell-free DNA as a percentage, but also the new algorithm that we've launched, which looks at donor-derived, cell-free DNA as a percentage and then also its quantification. And that data is very, very strong. I think that's going to be very impactful. And then the last is the results of a large scale multi-site primarily prospective trial in heart that we think is going to also be very impactful. So stay tuned. This is really the year for data readouts in organ health.

Very interesting. Okay. Last one on CRC screening, you have shown some ambitions for that market. You talked about a 40,000 sample data set biobank that potentially you can utilize here and early conversations with FDA. Maybe just update us what's the latest there.

Yes. So things are going along as planned. It's not just a randomly collected biobank. This was a prospective IRB-approved study for early cancer detection. And we just simply been swapped in as the biomarker being used. So I mean this was a well-designed prospective clinical trial and now we're kind of swapped in. So -- we're going to take this, have a discussion with the FDA, see what they think and then go from there. But either way, regardless of what the FDA thinks about this trial, we're going to generate some proof-of-concept data later this year or early in '23 that we'll make publicly available. And then if we can use the prospective trial from Aarhus as our FDA submission, we will. And if we can't do that, we'll do a prospective trial ourselves. Now in colorectal alone, which is where we're focusing initially, prospective trials are about 10,000 samples, and so it's about $10 million or so to conduct that trial. It's not $100 million multi-cancer study that you have to do. So it's relatively cost efficient. It can be done quickly because colonoscopy is a diagnostic procedure and you don't have to wait for clinical outcomes. But nevertheless, we hope to not have to do that. But if we do, we will. And we think the product performance coming out of the proof of concept is going to drive the decision making on how much we're willing to invest.

Just want to get your follow-up thoughts on the size of these trials. I mean, we're seeing 2 other companies in this marketplace. Their trials are at 24,000, almost 28,000 with -- versus one being at 13,000 or so. And so how are you -- first of all, how do you see the competitive landscape of this market? And given the size of the trials that you're already seeing?

Yes, I think it really depends on kind of how the enrollment is going and kind of what you're seeing. I mean it's my understanding that at least in one case, that kind of 10,000, 13,000 range ended up being sufficient. But some of the other trials that are out there had to expand their cohorts just because of the kind of mix of patients that came in. And so you don't know exactly how that's going to go, and you would hope to be on the lower end. But look, our primary goal is to not have to pull that trigger. And that's why we were so excited about having this Aarhus prospectively collected trial and having access to that. Because this was a multi-site perspective, early-cancer screening study that was well curated and biobanked with significant amount of outcomes. And simply, we have just been swapped out as the biomarker that's being tested in the trial. So I think there's a chance that the FDA might accept it. But if they don't, it's fine, too, we'll -- if our proof-of-concept data looks good, we'll go do the study that we need to do. And this is such a big market. Being first to market or second to market is not going to be the determining factor. It's a huge market opportunity, and I think performance is going to differentiate as well as service and COGS. And we think on those aspects, we can do a good job.

Interesting. I appreciate the thoughts there. All right, guys, we're past the time. Thank you again for joining us. I appreciate it. Have a wonderful day.

Okay. Thanks.

Thanks.

Yes. Bye-bye.