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

Good afternoon. I'm Max Masucci, one of the life science and diagnostic tools analyst here at Cowen. It's my pleasure to welcome Natera to our conference this year. Natera is a company that I've been following since 2017, a market leader in NIPT, a major participant in MRD monitoring and also blood-based organ transplant rejection testing. So we're joined by Natera's CEO, Steve Chapman; and CFO, Mike Brophy. Great to see you guys.

Thanks, Max.

Awesome. So let's jump in on Signatera first. You provided a snapshot of the cumulative Signatera plus Altera volumes at the time of the Q4 call. There's a [ 4x-ing ] over the past year from [ 18,000 to north of 76,000 ]. So I guess to start, is there any way for us to think about what percentage of that [ 76,000 ] number includes tests that are used to guide decisions about adjuvant chemo versus tests that are used for recurrence monitoring and surveillance for patients in remission?

Yes. Maybe I'll just give a quick comment and Steve, you can comment if you want. I mean the majority of these patients are just starting Signatera in the last year or so. So just by definition, they're getting their exome and they're kind of in that adjuvant treatment window. And then you'd expect as the business matures a little bit, many of those patients will stay on with Signatera and then kind of evolves to the recurrence monitoring time point.

Yes. Thanks, Mike. Yes. I mean look, we're seeing usage in both indications of adjuvant treatment and recurrence monitoring. But as Mike said, it's more weighted toward the adjuvant use case and over time, that's going to shift.

Yes, makes sense. So we've seen some metrics around Signatera volumes. Wondering if there's any detail you can provide around the number of clinicians that are ordering Signatera or any dynamics you're seeing for new oncologist wins versus the scaling of Signatera ordering for existing customers?

Yes. I think there's a lot of different metrics that our sales team looks at. And I think at this point, we've become I think experts on how to think about the success of the sales team. And obviously, the number of accounts is one way, account retention rates, the number of new physicians ordering within a particular account, sometimes one doctor will start and then more physicians will expand the percentage of patients that need a certain criteria that the test is being prescribed to and then even moving beyond CRC or seeing the account trend beyond CRC. Then there's other questions around like the ordering patterns, specifically like are they ordering single time point orders or placing recurrent orders upfront, when they get a patient on recurrent order, are they staying on generally or they tend to drop off, and the majority of the time of patients continue on when the physician [ read out ] the order. So we look at all these different things. And I think in general, the trajectory across everything looks very, very strong right now.

That's great. And then just, Mike, on your first comment, just to confirm, does the [ 76,000 ] exclude the upfront tissue design test or is that include that test?

Yes. The only thing that we're counting in terms of volumes are the actual Signatera tests. So usually, you would do the upfront exome and then deliver the first plasma test, but it's not like we're double counting like the exome step and then counting separately the first. My point is, just whatever the relevant kind of patient report -- if the patient receives a report that we're counting that as a unit because that's what we get reimbursed by for Medicare.

Yes. Yes, makes sense. Mike, another one for you. Just curious how we should think about the evolution of the COGS for the upfront whole exome sequencing? And then if there's any explicit assumption in how that COGS item trends throughout 2022 in the guidance, that would be helpful?

Yes, good. So the upfront exome as we mentioned on our earnings call, right now is pretty expensive just because we are in this kind of startup phase and we're getting scale on that process. I think there can be some evolution on that on the COGS of that exome here in the second half of the year. It will be reasonably modest in terms of the impact on the P&L for the calendar year '22. And hence wasn't like it's not an existential component or assumption embedded in the guide and there's some really bullish move there. Probably what I'd like to see is more progress than what we've guided to there, but we'll see.

Yes. For the Signatera gross margins, I mean is it a situation where you're really actively trying to get that upfront whole exome sequencing COGS down or look, eventually, over time, that upfront COGS will be absorbed by the amount of subsequent blood tests?

Well, it's both. I mean absolutely. I mean if you did nothing, then the blended average COGS would go down just as the mix of the business shifts toward the repeat monitoring. But obviously, I mean those who have followed the Natera story for a period of time know very well that we love a good R&D project that reduces cost of goods sold on a high volume tests, nice and clean ROICs on that type of a project. And so we're happy to invest in those types of things, and those are the types of things we're doing. So reducing the COGS on the exome is something that makes perfect sense.

Yes. So as reimbursement comes through for other cancer types for Signatera, if you just take a longer-term view, I'm just curious how you're thinking about the longer-term Signatera gross margins compared to the overall business right now? I guess at what point do the Signatera gross margins become additive to the total company gross margins?

Yes. So we talked about on the earnings call is that the P&L for Signatera is really immature right now because we are in the process of getting reimbursement across a range of tumor types that were going to be drive big volumes ahead of reimbursement. So that kind of -- that artificially impairs in my mind, the average selling price per test for Signatera, and we've got a couple of plans in place there to drive the ASP higher. Those at a very high level, those include reimbursement, additional tumor types via the umbrella LCD from MolDX, that includes the mix within our colorectal cancer business continue to evolve in favor of more and more Medicare patients as we kind of inevitably kind of penetrate that market. And then what we mentioned on the call is that our goal between here and the end of 2023 is to try and get mentioned in the NCCN Guidelines for colorectal cancer, which would then we think would influence commercial coverage as well. So lots of things on the reimbursement front there. We talked a little bit about the COGS trajectory. I think both of those things can be moving in the right direction this year and then certainly next year. So the question of what, when do the gross margins actually become accretive to the overall business, I think it can start to be accretive in '23 and '24. And part of that is because the gross margin for the other 2 areas of Natera are really performing extremely well. So we continue to have gross margin traction in both the women's health products and the transplant products. And so it's a bit of a -- you're chasing a target that's moving in the right direction.

Yes. So a couple of years ago, you did have some work around using blood-based whole exome sequencing and the upfront design, but you weren't really seeing any pushback on the upfront requirement for tissue. So -- and I believe that was for CRC. But I'm just curious if you do have any efforts ongoing for a blood-only fixed panel approach or how you're thinking about over the -- as you expand beyond CRC...

Yes. I mean, look, I think we're basically only in on tumor-informed, and we think that, that really is the right approach. And I think when you look at our volumes, I think it's clear that the physicians also believe the tumor-informed approach is the right approach. We've been pleased with the uptake. I think that adds a lot of value. Now with that said, of course, we want to look at whether we can design Signatera from a liquid whole exome or a plasma-based whole exome or whether we can also design like tumor-naive tests. And so we do have programs there. I think it's something that we're making progress on. And I think a lot of that work is also being leveraged for our early cancer detection program as well. So I think we see some benefit there, where there's synergies across R&D for some of the work that we're doing.

Yes. Makes sense. So if we're -- here in '22, if we see faster growth in the reimbursed Signatera indications, that would allow the ASPs to march higher, but you're also taking in a lot of volumes for non-reimbursed cancer types. So I would just be curious to hear how you see that growth playing out for the reimbursed portion of the Signatera test versus the non-reimbursed?

Yes. I mean I think colorectal is the vast majority of the volume that we're doing now. We're seeing increased utilization beyond colorectal, like particularly in the immunotherapy monitoring use case, which is also reimbursed and then in the pan-cancer environment of just additional tumor types. So I would say like we expect colorectal continue to grow, but it's very underpenetrated now. We said there's an opportunity for like over 1 million tests, excuse me, per year just in Stage 2 and 3 alone. And I think what -- now there's 70,000 or something tests that were being done. And not all of those were CRC. So obviously, there's an opportunity to expand the penetration within CRC for many years to come. So just growing CRC will be a driver for many, many years now. And we're doing the right studies, I think to help us drive that additional growth. We've got the sales team in place, the operations are working well, we've got Medicare coverage, we've got multiple studies that are underway or that have already read out. And I think all of that supports like significant growth in colorectal, eventually getting commercial guidelines in place as well, commercial reimbursement in place. I think then you start to look at the pan-cancer opportunity. And there, we published, I think 16 different peer-reviewed papers. We said we think we can publish another 20 or more in 2022. So we're going to have a lot of published data, we're going to be able to submit for Medicare reimbursement. I think pan-cancer growth, we think you can get up to, what, 15 million tests per year, something like that being run. So orders of magnitude bigger than where we are today, and I think cumulatively, that's a lot of growth.

Yes. All right. Last question on Signatera and then we'll move on to NIPT. I have to give Matt Rabinowitz a shout out during an MDR in 2018 before Signatera was launched. He made a comment along the lines that don't be surprised if our oncology revenues are bigger than NIPT over the next 5 to 10 years. So as you track the Signatera volume ramp and the reimbursement wins that you might see over the next few years, is there a certain point in time when you think Signatera will overtake women's health in terms of revenues? And I know that, that's dependent on microdeletions. So let's assume that, that doesn't happen.

Yes. I mean if you just look at the TAM, obviously, oncology has a much bigger total available opportunity. And I think a couple of years ago that, that seemed like a really like a reach for us to be penetrating into that. But now we're on track for tens of thousands of Signatera tests were getting reimbursement. The revenue is growing fast. I think there's a real opportunity for us to penetrate what we think is probably the largest liquid biopsy opportunity that's sort of directly reimbursed and right in front of us right now. And we've got a significant head start on anybody else.

Yes. All right. Let's move to NIPT. Can we just -- I just want to confirm -- we had a question come in, confirm that microdeletions guideline, 22q guideline inclusion is not included in the guide, correct?

That's right. We did not guide to it.

All right. Do those guideline updates you have for ACOG usually come at the same time each year in that August time frame when we saw the average risk update or could we see an update more sporadically?

Yes. When there's a major publication that comes out, generally, the update will follow that publication because I think they have to need -- discuss the paper, discuss what they want to do. And we haven't heard anything from the guideline committee. The paper was published, I think in the end of January, roughly, maybe kind of mid-January, and so we'll see. We're looking forward to the meeting and then us hearing back.

Yes. So I think the latest metric was 80% or so Panorama tests were including add-on microdeletions testing. I think you were getting paid on somewhere between 5% and 10% of those microdeletions tests. So is the 81422 CPT Code still in place with that [ $759 ] rate?

Yes. Yes. Yes. Yes. So we were pleased to have been awarded this code from the AMA and then to have it priced favorably by CMS. And I think the key right now is really just getting coverage because we're seeing doctors order the test, we're seeing them continue their usage of the product. And I think now that the paper is out and they can see the performance was very strong, I think that bodes well for kind of the trajectory that we're on, and it's really just about getting coverage.

Yes. And based on how the frequency of payment change for average risk volumes after the ACOG update a couple of years ago, is there a -- does that inform how you think about the ASP bump that you could see and how that plays out, the cadence over time if you do see inclusion for microdels?

Yes. I mean it could happen very quickly. If the guideline came out and said micro -- I think it's probably not going to be on microdel, it will be 22q, which is the most common. If you remember, it's about [ 1 in 1,500 ] pregnancy is -- the sensitivity was very high, and they're like 85-plus percent range depending on what you're including, the positive predicted value was high about 53%. So I think the -- I think 22q particularly will be included. If the guidelines change, you'll see a very rapid change in commercial payers. And I think about 50% of the payers will change within a couple of months, 3 months. And then from there, it's a little bit of a grind to get the remainder on board, but they will change. If the guidelines are kind of vague or negative, then obviously, it will be much, much harder and we might not see a change.

Yes. Makes sense. So if I look at the total Panorama volumes that we had in our model for 2021, I know you're not breaking them out anymore. But if I look at what we have in there for Panorama in 2021 and what we have for 2025 from a volume perspective and just ballpark, divide that by [ 4.4 million ] pregnancies to get kind of market penetration number for Natera. In NIPT, we have, I think it's 21% in 2021 going to 36% in 2020 -- yes, 36% in 2025. I think it -- it sounds like you expect the pace of the market penetration in NIPT to be faster going forward compared to the pre ACOG days guideline inclusion for average risk days. So where do you see the NIPT market penetration going over the next 3 years if you include Natera and other vendors and what steps can you take to carve out the largest amount of that remaining share?

Yes. I mean, I think within 3 years, you can kind of see an 80% range, maybe 80-plus percentage, and that's based on if you just look at maternal serum screening. So maternal serum screening has generally been offered for the past 40 years down to about 80% of all pregnancies. So I think there's no reason to believe that like NIPT wouldn't be able to get up to that same level as it gets further and further integrated into hospital systems and medical practice. So I don't know if there's an acceleration from what we saw from 2020 to 2021, which I think was very strong growth. And that was probably the fastest growth year we've ever seen for NIPT. So -- but I do think we're going to have to see a pretty high growth rate in order to get up to that 80%. We think our share is accelerating. So a couple of years ago, we had probably 30% share, maybe 30% -- 35% share. I think now we're probably closer to like 42%, 43% share. So as competitors exit the space or as they focus other areas, we continue to focus, we're increasing our share.

That's great. So we need to spend some time on transplant.

Okay.

There's a lot going on, but let's carve out some time for transplant. So the combined Prospera and Renasight volumes also nearly 4x in 2021. And I believe the ASPs are above the company average. So I think, generally speaking, it seems like transplant gets less attention maybe because the only comp for the business is another [ niche mid-cap ] transplant pure-play. But if you look at the volume ramp, even with conservative ASP assumptions, it seems like it could be -- it's already likely a contributor. But how should we frame our expectations for how much of a contributor transplant could be to revenues in the near term to also the gross margins, and then maybe over the next 12 to 24 months?

Do you want to comment on that, Mike? If you're looking at some...

Yes. I will give quick summary -- I will give quick summary from the top. I mean, I think first is just start with the market. I mean we mentioned on the call that we think this market is now something like 10% penetrated today overall, and so that implies a lot of room to run on this business. So I think that the market is poised to keep expanding because I think there's kind of a growing conventional wisdom within the space that the use of cell-free DNA. Cell-free DNA is kind of a pretty durable and linear biomarker for estimating graft health. And so I think that means that as that market continues to penetrate that our business should be able to grow. So more and more patients are going to be getting this test over time clearly. I think on the gross margin side for this business, I mean, this is -- ASPs in this business are [ $1,300 ] plus, the COGS for the business are in the [ $300 ] range. So it's a gross margin accretive product. And as I mentioned, you can see from the trajectory on the slides from Q4, we're on quite rampant and it's -- it's in a business -- it's in a market that's rapidly expanding.

Yes. So if we look across kidney, lung and heart, what should we be keeping an eye out for in 2022? And then I'm just curious to hear how that -- any success in any of those 3 areas would impact the ASPs?

Yes. So I think there's going to be a lot of catalysts this year in the business, I think largely driven around us reading out the results of these 3 large prospective studies. So in lung, we're planning on reading out the largest prospective trial that's ever been done by a commercial laboratory. We think that's going to read out soon in heart. We have a multi-site prospective study that's going to be reading out, and we think that data is going to be very strong. And then in kidney, we have the largest fully biopsy match trial that's ever been done, that actually has 3x more biopsy match rejections than the DART study, which I think was previously one of the larger studies that had ever been done. So I think that's going to be the most meaningful driver this year. Of course, there's technology development that we're working on always improving the tests. But I think as far as sales goes, and I think [ action items ], it's sort of really waiting for this data to hit and then educating physicians about the difference in the products.

Yes. Makes sense. A couple, we've got about 7 minutes here. I'd like to flip back to Signatera and just ask a question, it stems from our panel yesterday. There are different factors in play in terms of community oncologists' decision about which MRD monitoring vendor to choose, I mean, performance is critical, but we also need to take into account logistics paperwork, administrative support and whatnot. So it would be great to hear for Signatera, some of the initiatives you have to reduce the latency and friction and ease of ordering for that particular setting?

Yes. So we spent a lot of time on this, and I think that's one of the reasons why our NIPT business has grown significantly over time as we try to make it easy for the doctor to use the product now. I think with Signatera, obviously, there's some logistics involved. That's just the reality of any recurrence monitoring test, it's going to have a lot of logistic work. But we have physician portals, patient portals. We're now connected with EMR systems, where Signatera is going to pre-built in on the system. We have patient coordinator and kind of physician coordinator that can help make things more streamlined. So I think we put a lot of energy around it. I think that's going to be one of the differentiators over time. It's -- you probably will hear about companies coming out and saying, well, we've got this new tumor-informed version, it's got a lot of different bells and whistles. But I think it's harder than that to go implement it, and you have to have a sales team, you have to have a big support staff, you have to have all these electronic medical records and EMR and portal connectivity, and we spend a lot of energy on that.

Great. And if we just take into account the longitudinal testing protocol, I guess, for transplant and Signatera and making sure you have comparable data over multiple time points. How sticky do you expect your relationships to be with oncologists on the Signatera side?

Yes. I mean we're doing the work right now to put ourselves in a position to be very strong. I mean, we're generating peer-reviewed data, which I think is the biggest differentiator. We're doing a registry study. We're working with many physicians now. We've got about a 2-year read on competitors coming in. We're getting coverage in place. We're setting up the logistics and the ordering protocols. So I think all those things matter, but nothing matters more than generating solid prospective peer-reviewed data, and particularly in oncology showing that the product is predictive of treatment benefit. And then I think that's where we've really differentiated ourselves. It's relatively easy to put out analytical performance data, but to show that the test is predictive of treatment benefit in a real-world study is difficult. And I think that's why -- one of the main reasons why we're going to remain differentiated.

Yes. So we've got a couple of questions here that people have submitted. The first one is just your thoughts on the path to cash flow breakeven. There's some pretty binary catalysts with 22q Signatera reimbursement. But if you kind of -- if you look at those -- the different scenarios that might play out, how do you think about the path to cash flow breakeven just given the market environment?

Well, I certainly think it's true that there's a set of catalysts that would rapidly accelerate our revenues and margin trajectory. But even if you leave those to one time, you take a more careful forecast on those. I think the path to cash flow breakeven is really clear. And that is basically repeating the same playbook that we've executed in the women's health business across these new products as well. And so what that is, is just getting to a certain level of scale in R&D and sales and marketing and then holding those lines relatively stable, while the revenues grow rapidly. They grow rapidly from volume growth as the big market expands and also by delivering data that expands reimbursement. That playbook is probably easier to execute in these areas where you have a repeat monitoring modality and the reimbursement is frequently quite a bit higher than it was -- than it has been in the women's health space, and yet we were able to execute that playbook in the women's health space. So that's the path to cash flow breakeven. It's just continue to let these markets penetrate, grow volumes, expand the reimbursement and hold the operating expenses relatively stable from where we are today.

Just given the magnitude of the volume ramp for Signatera, the reimbursement wins when they do come through, should -- there should be a pretty dramatic impact over a relatively quick period of time, right? Is that kind of how you're thinking about it? We talked about that time line earlier. I think you said what, 2023, 2024 range it starts being accretive, but how does that factor -- how should we take into account the timing of reimbursement for Signatera in terms of getting that -- getting closer to breakeven?

Well, I think -- yes. Yes. So I think that we can have a fairly linear progression in improved reimbursement for Signatera from both additional tumor types getting reimbursed from MolDX and then breaking into guidelines in colorectal cancer, both of which would be significant drivers to the business. I think -- as I mentioned, I think just kind of making kind of regular way progress on those fronts still gets you to a place where you can be cash flow breakeven in roughly in that time zone that you alluded to, Max, just because the volumes are going to be scaling, operating expenses can remain relatively stable and then reimbursement will improve. And it could -- to your point, it could improve very quickly and very rapidly. Even if it doesn't do that, that's consistent with our plan and the way that we've guided.

Yes. A final quick one, is there any expectation -- it's a question from an investor. Any expectation for Signatera reimbursement in non-CRC indications in the '22 guide?

In the guide, we've been cautious with it. And we do expect there to be some kind of modest progress in terms of submissions through the MolDX program to Medicare. But we don't expect some kind of broad kind of commercial reimbursement at all.

Got it. Appreciate it. Great discussion. Always great to see you guys.

Great. Thanks a lot.

Thanks, Max. Yes.

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