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

Great. Sorry for the delay, everybody. I'm Andrew Cooper, diagnostics analyst here at Raymond James. Happy to be joined by Mike Brophy, CFO of Natera. Hi, guys. And without any further ado, let's jump right into it. I'll hand it over to Mike to give us just an overview of Natera and some of the moving parts in the landscapes you play in.

Yes, good. Thanks for the time. I appreciate seeing everyone in person. We're kind of back here a little bit. That's great. So Natera, as many of you know, has really one core technology that's fueled a couple of different businesses for us. The largest of which is the women's health business, which is powered by Panorama, our non-invasive prenatal monitoring test. That test -- the history of that test is that we were fourth to market when we launched that test back in 2013. We quickly got to the market-leading position with that test, and we just maintain that market-leading position over the last half decade or so. We really received an ACOG guideline kind of [ in striding ] NIPT as really the standard of care for all women, all pregnancies about 18 months ago. And since then, the market -- the end market has grown quite rapidly. And we've actually expanded our market share even as the market has grown. So historically, I used to say we have about a third of the market share in the NIPT space. And now we think we have about 40% share. And that's really a function of just commercial execution and just the depth of the data that we presented in the NIPT space. For example, recently, we published a 5-year 20,000-patient prospective clinical trial showing excellent results both for non-invasive prenatal testing to the fetal aneuploidies and also for 22q -- the 22q microdeletion, so that's the women's health business. Using really the same kind of core chemistries and technologies, we've since gone and looked for other areas of healthcare where we can solve unmet needs. And we found those in kidney transplant rejection screening and in Signatera recurrence monitoring in minimum residual disease in cancer. So the kidney transplant rejection test really follows a very similar technology and approach as the Panorama NIPT does. That is -- the story there is, even if you have a kidney transplanted, the #1 concern that you have is that the kidney will be rejected. And so we're using cell-free DNA to monitor cell-free DNA from the kidney that's being leaked into the patient's plasma. We can get a very accurate assessment of whether or not a patient is experiencing an acute rejection just from that simple blood test. So we launched that business now a couple of years ago in 2019. And we're just on our last Q4 call, we disclosed that the volumes have ramped enormously. So in the transplant business [ were ] large, we disclosed that we now have more than 42,000 units just in the calendar year of 2021, which I think was significantly above what most people's expectations were. Finally, the Signatera test. So minimum residual disease and recurrence monitoring is a category that we've really -- we're the first entrants. I would come to conferences like this years ago, and I would explain to people what is recurrence monitoring, what is minimal residual disease. And now fast forward just a couple of years, I think any company that has aspirations in oncology diagnostics has a product or has a plan for this category, where we have kind of a 4-year head start. We've published in a broad range of tumor types. We've shown that our assay works extremely well across tumor types, the same kind of core assay regardless of the solid tumor. The main focus in terms of tumor types is in colorectal cancer and now in immunotherapy response monitoring. In colorectal cancer, we just had really landmark data presented at ASCO GI, where kind of all of the -- all the ideas that we had in terms of what the test could do was really proven out in that data set. So just very quickly, what we showed and this is 1,000 patients, truly prospective study on 1 year of follow-up. Signatera positive patients had a significantly better disease-free survival if they got chemotherapy post surgery and Signatera negative patients at 1 year follow-up really showed no survival benefit whether or not they got chemotherapy. So that really kind of answers this core question of what do you do post surgery? Do you go -- you get chemotherapy, yes or no? And so we'll now be taking that data to get that to publication and we'd like to get that aspects of that result into the NCCN guidelines. Goal is to get that in by the end of '23, could be as soon as '22. I think the guide for the year was quite constructive at least relative to expectations. So we set out aggressive guide for this year, and we just continue to ramp. So the business model from here is really fairly simple. We've got these leading products in each of these 3 categories. We've got sales teams, commercial teams built in each of the 3 areas. We've got an R&D line that now can remain relatively stable. And so now we're just -- we're going to hold those operating expense lines relatively stable while we continue to ramp in these expanding markets. So that's a quick summary.

That's perfect. It touched on a lot of things I want to get into, but maybe starting to dive in where you guys started in women's health. The guideline change, obviously has been -- it feels like a long time coming. It's nice to have it. You're starting to see clearly the acceleration that you would expect from it. But -- maybe first, when you go to payers and you're starting to have those conversations, one question I get is, is there any pushback where, hey, there was 65% that was average risk. We weren't really paying for those, is the reimbursed rate when you're trying to contract coming down, because they're saying, hey, our volumes are going to be a heck of a lot higher with you. What's the negotiation like from that perspective?

Yes. So it's not really like a contracting step at this stage of the game. We're broadly in network with all of the large commercial players. And the product is the same, whether it's an average risk NIPT patient or someone who's considered high risk, they're getting the same assay. And so we're already contracted for that test with most of the payers. What we've seen, perhaps contrary to even my expectations is that the contracted rates have remained remarkably stable over time. And our ASPs have been able to improve since we've able to get kind of broader coverage for average risk patients.

Okay. Helpful. And you mentioned the SMART study, I think, obviously, excited about the potential for that to change guidelines for that to get at least 22q into more common -- not necessarily use but reimbursement. So maybe just give a flavor, I think you've said 80% or so attachment there. Has that changed at all as that study has been put out? And what's the timeline you think about for potential reimbursement after guideline inclusion, et cetera?

Yes. So the attachment rate is about 75%, and that's maybe ticked up modestly over the last couple of quarters, but it has remained remarkably stable over time. The -- the point of the SMART study was to identify just exactly how common is 22q in the population. We had spoken to members of the guideline committee back in 2014. Right now, there's a negative guideline in place that says, hey, look, this is experimental. It's not known how common 22q is in the population and a big study needs to be run. And so we ran that study. That's kind of a 5-year 20,000-patient prospective clinical trial. And the data was, I think, by any measure, was really compelling. I think previous estimates had the incidence of 22q. It's something like between 1 in 2,000 and 1 in 4,000. In this very large prospective trial, we showed that the incidence was more like 1 in 1,575. So, it's a very common disorder. One of the most common disorders after down syndrome. And because it arises independent maternal age, younger women, younger than, say 27 or so, likely more likely to be affected by a microdeletion, they would be affected by Down syndrome. So very compelling data. We've now -- that data has now been published in The Gray Journal, which is kind of the premier journal for this space. And from here, we'll see what happens. I mean I think, when you think about getting guideline inclusion for screening for a disease, you'd like it to meet certain criteria. You'd like the disease to be relatively common. It needs to be able to be screened for accurately. It needs to be a very serious disorder. And then ideally, there'd be some kind of intervention to be had, okay? And maybe one more is that it's not picked up by other modalities. This meets all of those criteria, and so we'll see where we go from here.

And maybe using kind of guidelines as the foray into oncology since you mentioned hoping to get into NCCN with Signatera. Maybe just on the guideline topic, I mean, how are there differences between those 2 markets and how they're going to respond to things going in the guidelines, how quickly the clinicians are going to take up new guideline adjustments and things like that. Is there anything to consider when we think about the reactions to guidelines between the 2 markets?

Yes. I mean, obviously, it's a different -- it's a totally different set of patients and physicians and totally different considerations. I mean I think like one theme though is that when a test or procedure is included in the guidelines, that ought to be an important consideration in patient care. It's like what do the guidelines say? So we think it would be impactful. We think it would have a big impact on patients. And certainly on the payer side for oncology, seem like it would as well.

Great. And sticking there, 76,000, I think it was Signatera and Altera tests combined, last year was another really healthy number that I wasn't sure we were going to get shared with us. Can you give a sense for sort of the pacing and mix, and I asked that because you started in CRC, you added IO monitoring. Can you give us a sense for sort of how quickly each of those has begun to ramp and to build up to that 76%?

Yes. I mean it's been a ramp through the year, right? So Q4 is a lot bigger than Q1 just because we're really kind of getting started here, when we started in '19 in a small way, but really 2020 was the initial launch year. And 2021 was the first kind of full year where we were fully rolling with the full deck as it were on the commercial side. So that -- there's been a very meaningful pickup between kind of Q1 and Q4, certainly. Yes.

And just from the payment side, obviously, Medicare, 2 indications right now, you've talked about adding 5 plus over time. I'm not going to ask you the question that I think you're not going to answer, which is which and when and exactly how many right now. But can you give a sense for sort of maybe long term, you talked about 5 over the next, call it, year plus -- what's the runway beyond that? Is it a couple of years? Is that the right expectation? How do we think about the expansion to eventually maybe a pan-cancer type test?

Yes. I mean I think what matters is if you think about the Signatera clinical business by volume, the 2 biggest indications right now by volume are colorectal cancer and immunotherapy response monitoring. And colorectal cancer has already been covered by Medicare. Immunotherapy response monitoring is covered by Medicare as of December 28. So Q1 will be the first quarter in which we're actually receiving reimbursement for that test. And then there is a long tail of additional tumor types. One of the things that surprised me about the business in terms of just forecasting this launch was the extent to which physicians were eager to use this test in these additional tumor types. So it's getting into their hands with the colorectal cancer indication in mind. They're using it for a few of their CRC patients. And then very often, what we're finding is that, these community oncologists that are kind of workhorse physicians in the space are then using Signatera to help them care for patients in a much broader range of tumor types. So we will have kind of a drumbeat of additional tumor times, so we're going to try to get reimbursed through the course of this year. And they're -- which ones they are is kind of would be no surprise relative to the data that we published, you kind of have to have a publication -- set of publications before you can even submit. So, yes.

To really think about that waterfall chart you guys presented.

Yes. Exactly. That's a good, that's a decent road map, yes.

Great. And maybe taking a step back and thinking a little bit about the financial side of it, it's early. It's not anywhere near a mature P&L at this point, let's just say. So when we think about the gross margin dynamics, one thing I kind of was thinking about recently is there's really an opportunity where not only do you get a heck of a lot more volumes, but obviously, the reimbursement starts coming in and the adoption probably follows you to get guidelines and all of that. So is this, from your perspective, the push to profitability on oncology, a hockey stick? Is it a steady slow climb? I guess, give me a sense for kind of where -- where are gross margins a year from now versus 5 years from now in that business?

Yes. Well, I think the long-term gross margins in this business overall for Natera can exceed 70%. And to get there, I'm using, I think, relatively conservative assumptions around ASPs in each of the businesses. We've done this before. When Steve Chapman first presented as the CEO at a J.P. Morgan conference, I think in '19, the #1 goal in the business that you put up on the board was to get the women's health business to cash flow of breakeven. And that was -- they were not -- understandably, there's kind of a lot of emphasis on getting cash flow breakeven now, but that wasn't particularly the focus then. And yes, that was our focus. That was one of the #1 goal in the company, okay? And the way that we got there was by building a commercial team and an R&D effort that kind of -- that was big enough to reach critical mass, okay? And then holding those lines relatively stable as the volumes continue to grow and we expanded reimbursement. And so it's really the same playbook here, particularly in oncology.

Okay. Great. Sorry, shuffling papers here for a second. Thinking about the cash flow dynamics there as well. And I think the big thing on Signatera is you are in the lead from a data generation perspective. You are the leader there. How do we think about that R&D expense moving forward in terms of starting to scale? You've got a lot more, I think you want to get published to maintain that lead. But how can you start shifting some of that dollars? And what's the sort of pacing we should think about?

Yes. I mean, so the -- I mean, I think what you're zeroing on is just clinical trials expenses, and so that's growing really rapidly. I mean that was -- that was $40 million. And in '22, we expect it to be roughly $80 million. We don't think that, that needs to go to $160 million. It doesn't just go like on a line. I think that can remain actually relatively stable as you go out into the future, because that's kind of a level where you're able to do -- I mean, like this year, we're loaded with a lot of pretty large randomized controlled trials. And so I think that can be relatively stable. The data that comes out of it generates more than stable revenue growth. And so I think that's a good -- I think clinical trials is a good example, a big ticket line item within the R&D spend that can remain stable in our assessment based on where it is sitting.

So a steady drumbeat of one trial backfilling for another as it rolls off.

Yes, roughly, roughly.

Great. And maybe shifting a little bit, I want to hit on the transplant business, at least quickly, you're newer to it versus the market leader who's been around for a little bit longer. But I guess at a high level, one thing I hear investors ask is -- we spend a lot of time on oncology. It's a massive market, a lot bigger, I think, than the transplant business. So talk about why that's a business that makes sense to be in. I think you touched on it in terms of the technology, but just why that's something that's worth the focus that you are putting on it?

Well, one, I mean it's a huge unmet need. This is a real problem for transplant patients. And as you mentioned and as I talked about, the solution dovetails really, really nicely with the technology that we've already built. The Prospera assay looks a lot like the Panorama assay in a lot of ways. And I feel like this is a -- we feel like this is a business that is -- it's smaller true in terms of the number of patients and kind of the absolute size of it relative to other markets. But it can be really impactful in terms of the impact on patients and it can also be quite accretive to our business, both in terms of gross margins, revenue growth and so on and so forth.

And I'm bouncing around a little bit here, but maybe starting with transplant and then circling back to the other segments. Salesforce kind of where you are today versus where long term you want to be? I think you've invested a lot. We've talked a little bit about it recently, but some sense for that. And then we've talked about labor markets with a lot of people here this week. And so the latest and greatest you're seeing there, I think, would be great in terms of the ability to find good new reps interesting.

Yes. So the rep hiring went much, much faster than I had anticipated. It's funny when you have a test that is the only test that's available on the market with the kind of data that we have in a category that has been long been a frustrating an unmet need that is now being met. There's lots of very experienced people that have been commercial teams in the field that recognize that and want to be a part of it like any person, any person who's worked in commercial teams can appreciate that. And so the recruiting has just went incredibly smoothly in terms of hiring that team. So I'm sure the general labor market conditions, I'm sure that we're not immune to those, but the same way that we've been able to attract customers and drive volume for patients, the same dynamics allow us to attract really high-quality reps, and we're really proud of that.

And can you give a sense just roughly for maybe some of the folks who are near the size of each of those forces?

Yes. So the women's health team and the oncology teams are in the triple digits. They're kind of similarly scaled to other competitive players in the space. So like in oncology, there's a number of these oncology diagnostics teams out there, and they're kind of -- they're north of 100 reps a piece. The transplant commercial team in terms of sales reps is smaller just because there's a fewer number of transplant centers and large nephrology centers. But the rep counts -- it's a little bit subjective like what you call a rep versus what you call the patient coordinator and things like that, right? So there's a -- there's 20 or so 20 to 35 or so kind of frontline sales reps and then there's a significant kind of patient support [ sale links ] behind them.

Okay. Perfect. And maybe shifting a little bit towards the guidance and some of what you're expecting for this year. The gross margins, there's a little bit of noise because you had a big one-timer in the comp. So I guess, remind folks of that kind of impact. And then I think one thing that's interesting is there's really an environment where your gross margins take a whack, but it's because you're doing really well in the business. So how do you balance, especially in an environment where people are a little more concerned about cash burn and how you think about that philosophically?

Well, yes, so I mean, just to rehash on the guide. I mean we -- in 2021, we had a onetime benefit of $28 million in revenue that was 100% gross margin. Well, what was that? Previously, we've been working with QIAGEN on a sequencing program in an attempt to generate some additional sequencers out there in the market. And then obviously, as you guys know QIAGEN ended up winding down that program and then the business was sold. And so they had paid us a bunch of upfront cash to work on that. And then that's got to go from deferred revenue to revenue when the program winds down. So that's not -- that happened in Q1 of '20. And so I've just been at pains to make sure people pro forma that because that's not really fundamental to the organic story. If you strip that out, then our guide implies 31% revenue growth year-on-year. If you had it in, it would be like high 20s, but I'm interested in getting all the credit. I can get on it, I guess. And the gross margins, basically, if you strip that out, gross margins are basically stable year-on-year. Now the reality is, is like there's a lot -- there's -- we're making significant gross margin progress in a lot of areas. And then one headwind to gross margins, as you mentioned, Andrew, is just the strength of the volume in these additional tumor types where we're not yet reimbursed has been -- I mean it's been -- I think it's a good thing for the business over any time -- a 2-year time horizon. It's a very, very good sign for the business. As I mentioned on the Q4 earnings call, it does pressure gross margins relative to what they would be here in the immediate term. And so that's just accounted for in the guide. But even with that impact, you're still kind of a stable gross margins, and there's room for margin expansion in the next couple of years just by getting the reimbursement that we've been talking about here.

Great. Well, there's plenty more I could ask. We're right at the end of time. So we'll move down to the breakout in Amarante 1, I believe. And thank you very much.

Okay. Thanks for the time. Thanks, guys.