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

Hey guys. Good afternoon. My name is Tejas Savant, and I'm the life science tools and diagnostics analyst here at Morgan Stanley. It's my pleasure this afternoon to host Natera. And from the company, we have Steve Chapman, CEO; and Mike Brophy, CFO. Thanks, guys, for doing this. Before we get started, just got to rattle off the disclosures here. Please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your sales rep.

So with that, Steve, maybe just to set the stage, it's been quite a year for Natera. You are in the headlines for all the wrong reasons earlier in the year. But through it all, you've continued to execute really well on the base business and on the pipeline. And recently, you've got the United decision as well on the PLN. As you look back on a pretty eventful 12 months, what are the accomplishments you're most proud of? And where are you most excited as you look to '23?

Yes. Thanks. So I think we're looking at the business as a whole. I mean, we're still at the very early stages in 3 very large market opportunities that largely are very underpenetrated. And I think continuing to execute on the launch in organ health and the launch in oncology, while we're gaining market share in NIPT, combined with generating a lot of great clinical data, I think it fits really well, and we've done a great job.

Got it. On Signatera, I mean, clearly, CRC represents a vast majority of the volumes today. Can you provide your best estimate for what penetration looks like in the CRC setting? And within that, is it new adjuvant, adjuvant or recurrence monitoring that represents the greatest volume?

Yes. So I would say, overall, when we look at our business, we're getting -- I would say the majority of volume is CRC, but it's not the vast majority. It's sort of slightly maybe kind of in the 65%, 70% range, something in there, maybe 60%. And then we have IO monitoring. And then we have a business that is sort of outside CRC, and we're seeing that pick up. So definitely, a lot of different use cases within CRC. As far as penetration is concerned, we're seeing about 25% of all oncologists today are using Signatera. And we think that's really just an incredible number at this stage in the launch and shows the level of interest broadly in the product. What we've always said is when you look at launching a new molecular test, the first year you'll have very low single-digit penetration. The second year, you'll have sort of mid-level single-digit penetration, the third year high single digit and then the fourth sort of lower double digits. And that's kind of where we are right now. I mean we're tracking really nicely on that trend. And we're definitely starting to see good uptick in penetration into the broader market. Lastly, when you look at what the use cases are, what the indications are, we are seeing a shift to recurrence monitoring. So if you were to look a couple of years ago, maybe 20% to 25% of the volume was in that recurrence monitoring setting, now it's more than 50%. So we are seeing that shift like we said we would to the recurrence monitoring setting.

Got it. You mentioned in the past NCCN guidelines. I think the committee meeting was in late August. When can we expect to hear an update on whether MRD monitoring needed or not? And importantly, how do you think about, sort of, private payer coverage and the other side of that? Are there instances where the private payers may begin to reimburse even prior to guidelines?

Yes. So from our understanding, the NCCN Guideline Committee did meet in August. We're not really in a position to interact with them. And so feedback takes about 4 months coming out of the committee meeting. So I think by the end of this year, we should have some information on how the meeting went. The CIRCULATE-Japan study that we were hoping to have published by the time the meeting took place, unfortunately it wasn't published. But we do think that, that will be published probably the next month or so. So I think it's exciting to get that data out formally in a peer-reviewed publication, and that can be included in the December committee meeting. And the other thing I'll just note about that data is at ASCO when we read it out, when there was a lot of excitement around it, there was about 11.5, kind of 12-month median follow-up time. So now in the publication, there's 18 months of follow-up, which I think makes it even more compelling, and I think will generate a lot more usage from physicians when they see the strength of the data with such significant follow-up.

Got it. One of your peers also announced reimbursement for that MRD assay recently. Although that coverage appears to be limited to at least for now to that 3-month window within curative intent surgery. You guys don't seem to have a similar limitation. Why is that? And over what time frame do you expect others to sort of get as broad coverage decision as you guys?

Yes. So in colorectal, we've covered for both adjuvant decision-making, and then separately for recurrence monitoring. Now when you look at muscle invasive bladder, we're covered in neoadjuvant, we're covered in adjuvant and we're covered in recurrence monitoring. And then you look at immunotherapy monitoring and we're covered for that window of time where the patient is on immunotherapy. So largely, it depends on where you have peer-reviewed published data. And I think the CMS requirements and the MolDX program need to see that performance data in the indications that they're covering, and that really tracks closely to where we've seen coverage.

Got it. Turning to MIBC. I mean, you recently announced coverage there. I think you've talked about a 400,000 test opportunity across 35,000 patients or so, pretty significant in size. Do you expect meaningful revenue from MIBC in '23? And the second part of my question is, is there a biomarker that clinicians often use to monitor recurrence in MIBC today, sort of like CA in colorectal? And does the presence or absence of the biomarker impact uptake for MRD in that setting?

Yes. Mike, do you want to talk about sort of revenue opportunities?

Yes. I mean, look, for MIBC specifically, Tejas, do you want me to talk about that? Yes. I mean, look, there's -- we estimate that there's several hundred thousand tests that could be potentially run in the muscle-invasive bladder cancer setting. I'd anticipate that the pricing that we end up receiving from MolDX would be roughly similar to that, which we've attained previously for other indications. So, look, this is something that's only very early stages in terms of our volume penetration. It's a very small percentage of our volume. We have not yet had a chance to get out there and really demonstrate that data to the community oncologists. But we've got an established team. We've got excellent data. We've got coverage in what is a very large unmet need. But that's just incredibly rare. If you think of how you compare the size of that opportunity to the size of the transplant opportunity, I mean, they're actually comparable or perhaps MIBC is actually larger. I think that goes underappreciated today. So I think there's a really significant opportunity to meet a serious unmet need for these patients with Signatera with the existing assay.

Got it. And what about the part about the presence or absence of a biomarker?

Yes. So I would say when you look across like muscle-invasive bladder, I mean there's different indications. And what the doctors are using today to kind of monitor things in their standard of care, it depends on which indications that you're looking at. So in many cases, in fact, it's imaging. So if you're in the neoadjuvant setting and you're trying to determine whether the patient is going to have cystectomy and have their bladder removed. You're largely looking at whether that tumor is shrinking in significantly on imaging. But there are other standard biomarkers. And I think when we've run studies, we've largely listed out kind of how the performance compares against these other modalities.

And does that help accelerate your uptick?

I think that -- what we're seeing is that the doctors and patients are really yearning for a better tool in the setting, particularly when you're looking at doing such a radical surgery like removing the bladder. I think you really -- if there's an opportunity to not have to do that surgery, that's something that patients really desire.

Got it. In terms of expanding into other cancers, you've talked about 5-plus indications through the end of next year. What are the near-term opportunities that you're sort of focused on? Is lung on that list? And as we think about what proportion of lung cancer cases do have access to tissue, i.e., how many patients get surgery. What does that number look like as far as your upfront exome requirement?

So as a reminder, to get coverage through Medicare, you have to have peer-reviewed data. And that's an area that we think Natera has done exceptionally well. Now we have more than 15 peer-reviewed papers, but we're not stopping there. Like we have 1 in 100 clinical trials in biobanks and studies that we're going to be reading out on. And in fact, over the next 6 months, we're going to be submitting or publishing studies across 7 different papers that have more than 500 time points. So these aren't small studies. Basically, the fact that we're able to do that in the next 6 months, I think, it is pretty impressive. And we're moving into some new tumor types as well that we have never before published on like gastroesophageal, pancreatic melanoma, et cetera. So I think these are all creating opportunities for us to submit to the MolDX program. So of course, we have a ton of data in breast. We have good data in lung. We're going to have publish pancreatic, gastroesophageal melanoma and ovarian. All of those are going to create opportunities for us to submit to expand coverage. And I think largely, where we're pushing for coverage is going to track to where we have good peer-reviewed evidence.

Got it. Turning to IO response monitoring, Steve, what cancer types do you typically see pseudoprogression in? And what fraction of cases does this represent? Basically, what we're trying to get at is what's included in that 800 million plus sort of test opportunity?

Yes. So pseudoprogression ranges depending on the tumor type. But I think largely -- just a reminder, pseudoprogression is only one of the reasons why it would be important for a doctor to use ctDNA to monitor their patients on immunotherapy. The doctors are trained to treat beyond progression because of this pseudoprogression phenomenon, but they also just don't have a good quantitative biomarker or a measurement tool to tell whether the patient is responding or not. So it ranges -- pseudoprogression ranges from about 2% to 10% depending on the tumor type. I think it's more common in melanoma than it is in some of the other tumor types. But simply just determining whether the patient is responding with a quantitative measurement can help doctors take the patient off immunotherapy sooner or maybe switch them to another second-line therapy that might be more appropriate for them. And then an exciting area actually where there's a lot of interest now from physicians is making a determination about whether the patient can come off of immunotherapy after they've had a sort of excellent response. So generally, the doctors will sort of stop immunotherapy after 1 to 2 years. But there's a lot of patients that want to stay on, and there's some uncertainty about what happens when you take patients off or whether you should take patients off. And so in our study that we published with Princess Margaret Cancer Centre, we showed that once the ctDNA goes down to 0, those patients had an exceptionally high overall survival. So the idea is the sort of maintenance immunotherapy monitoring potentially -- or maintenance immunotherapy could potentially go away and it removes some of that uncertainty for the doctor and the patient.

Got it. One for you, Mike, on [ Signature ASPs. ] You've got the ADLT pricing at 3,900. I think ASPs at the moment is north of 7. So how are you -- what's a reasonable way to think about the glide path for ASPs over the next couple of years here?

Yes. I think -- so what I always start with is on the subset of claims where we're reimbursed today, what are we getting paid. And that is in the 2,500 to 2,700 range into that ZIP Code, and that's just a mix of the reimbursement we're getting for the bundle in the adjuvant treatment window. And then it's also having some contribution, although small today, growing in the future from getting reimbursed the ADLT rate in the recurrence monitoring setting, okay? So if you think about that as your -- if you got paid 100% of the time, you'd be at kind of 2,700 then what's a reasonable place to wind up for an ASP or an average selling price and reasonable people can disagree about this. I mean I think that a kind of a middle case scenario could have you easily glide into kind of a $1,500 to $1,800 kind of ASP for Signatera. If you got there, that would imply something other -- less than heroic percent paid performance. And it also gives some room for pricing to come down in return for millions of tests being performed and yet you can still be at this level, which allows for significant gross margin contribution of the business.

Got it. On the operational front, Steve, on Signatera, I mean, is there any work that's underway on just reducing that upfront TAT, I think it was around 19 days, including exome and subsequent tests that I think it was about 6 days. And then the second part of that question is, as you expand into some of these indications, say, lung, for example, where access to tissue is more limited. Could we sort of see you bring that biopharma liquid exome into the clinic?

Yes. So on the operational side, there's always improvements you can make to kind of, I think, scale the business better. And when you're running at the scale that we are now hundred thousand-plus Signatera test being done. I mean, you have to have a well-oiled machine. But we're always looking at ways that we can do better. The good thing about the tumor-informed testing is that the doctor can run the exome at the time that they do the initial diagnostic biopsy or at the time that they do surgery. So we don't have to wait until day 30 to start the process. So we can deliver a result back to the doctor basically 5 days after the time that they can do the blood draw, if they do the exome upfront. And we actually see a large portion of doctors doing that. So there's lots we can do, not just on operations, but also on reducing the COGS. I think that's an area of improvement, which I'm sure we'll talk about in a minute, as we talk about our path to cash flow breakeven. When you look at areas where there's no tissue, certainly, we have a lot of capabilities at Natera, and we have to decide how to kind of best use those resources. And we think the tumor uninformed work that we're doing largely meshes with our early cancer detection work. And so when you look at kind of fixed DNA panels and methylation work, I think that generally would be able to be used in either a tumor naive setting or in an early cancer detection setting. But at this stage, it does look like tumor informed is the choice -- the test of choice for physicians. And I think that's where we're putting most of our energy.

Got it. Switching to Prospera, Steve. I mean, can you remind us about sort of how important is that quantification ability for you? Is it starting to resonate with your customers? And walk us through the differentiation versus your closest peer there?

Right. Yes. So initially, when we launched Prospera and what had generally being done in the industry as you look at the donor-derived percentage of cell-free DNA in a background of total cell-free DNA. And that percentage is what you use to determine whether the patient is positive or negative. The challenge with that is that the total cell-free DNA can increase significantly for factors that have nothing to do with rejection, and it can mask rejection. So for example, infectious disease, obesity, treatment with chemotherapy, these are all things that can like really spike the background DNA. So what we said is, look, what if there's a way to kind of remove that from the calculation, what if you just quantify the amount of donor-derived cell-free DNA rather than looking at it as a percentage, and you can basically remove these fluctuations from the background or total cell-free DNA. So we developed that capability and then we tested it in the largest multisite prospective, fully biopsy-matched study that's ever been done in the field of kidney rejection monitoring and that's the trifecta study. And the results of the study showed that combining quantification with percentage gives you a statistically significant improvement over looking at donor-derived percentage alone. And that's why we've gone ahead and launched that test commercially, and that's what we're now running in the laboratory, and we're reporting back to physicians. Physicians really like it. I think they've largely read the paper and understand that it does have a statistical significant improvement when compared to looking at donor-derived cell-free DNA percentage alone. And there's lots of great examples in the literature of where patients simply would have been missed had they not been looking at quantification.

Got it. What in your view needs to happen to increase penetration from the roughly 10% or so today? What's holding back physicians from, I guess, replacing serum creatinine or some of these other approaches? And what is the real world sort of frequency of testing that you see?

Yes. So I do think we have seen increases in penetration. And if you look back even when we launched, I think the overall market was about 3% penetrated. And now here, we're kind of in the 10-plus percent range. It's sort of following on that same trajectory that you would expect. Of course, there's 2 things -- really 3 things that improve the penetration. The first is significant peer review data and the second thing is society guidelines. And then the third is just time. And when you look at significant peer-reviewed data, there's multiple companies in the space, including Natera that have big prospective trials that are ongoing, looking at the impact of longitudinal monitoring. And I think as the data from those trials start to read out, that's going to be something that physicians are watching in order to kind of unlock protocols in their practice. Then you look at society guidelines, obviously, we don't control that, but that's something that I think is a long-term opportunity. And then time, as I said, we're already on this, increased trajectory where the market penetration has been improving over time.

Got it. And see, beyond quantification, is that work to be done on -- we keep hearing every once in a while about these urine-based approaches. Techne is now partnered beds with Thermo. Is that something you're exploring in-house and potentially moving beyond cell-free DNA to protein markers, et cetera?

Yes. So improving the performance of the test is something that we're definitely working on. And we think there are some opportunities. We've looked at a lot of different approaches and kind of narrowing in on one in particular that we think does have some performance improvements. So I think stay tuned there. But of course, there's different ways to run the test and different collection methods. But I think there also is more to it than just kind of the performance improvement. It's the operations, it's having the distribution and being able to reach the customers. And from our standpoint, like we're in a really good place right now with a fully staffed commercial and medical affairs team, multiple new excellent data sets coming out, reimbursement in place, additional submissions for reimbursement in heart and lung and chronic kidney disease germline testing. So I think we're hitting all of our milestones and in a great spot.

Got it. You talked about renasight, I'll ask you one there on CKD. Clearly, I think you flagged it as a pretty meaningful opportunity. And I think 750,000 patients, 10% of whom have a genetic basis for disease. It was a small contributor of your revenue last year. I think if I remember right, Mike, it was around $5 million or $35 million or so, give or take. How do you see that number trending in '23 and '24? Could this be much more meaningful than sort of investors realize?

Yes, I think so. I think the biggest determining factor is going to be the readout of the RenaCARE study, which is going to read out in the beginning or the first quarter probably of 2023. So this is the first large-scale prospective multisite real-world study that's been done in this field. And I think there's been some good retrospective analyses that were published in the New England Journal of Medicine that established sort of the baseline frequencies. But what we did is we went out and partnered with Columbia, Yale, all the top centers. And these PIs designed the study, they run the study. It's actually completed enrollment now, and the results are being analyzed and it's going to be submitted soon, I think, this year. So when that comes out, if the data is positive, which we expect it to be, that's going to have a big impact on, I think, utilization and potentially guidelines. So this is a huge market. It's very, very underpenetrated at this point. But I mean there's 750,000 newly diagnosed patients per year, but there's about 40 million patients that are living with chronic kidney disease. And as the test starts to get utilized, you're not just testing the newly diagnosed patients, you're also testing those that have already been diagnosed.

Got it. I want to touch upon the reproductive health side of things as well. What -- have you started seeing any shift in market dynamics post Roe v. Wade? You've mentioned that as a potential driver for microdeletion guideline updates or -- maybe you can talk about the base business, what are you seeing on NIPT post the decision and some of these states are updating their policies as well. And just your latest thinking on time lines for microdel guidelines.

Yes. Mike, do you want to comment on that?

Yes, sure. I mean I think in terms of just the market dynamics, I don't think that there's been a massive shift in market dynamics in response to any kind of recent kind of policy announcements per se. I mean, I think what we've seen is noninvasive prenatal testing, first establish firmly as the standard of care via the ACOG guidelines a couple of years ago. And then you've seen a really significant ramp and adoption NIPT from 800,000 tests to 1.3 million tests. So this year, it will be probably for the industry, something like 2 million tests will be run. And so I think we're just kind of really in that adoption curve. Not surprising just given that prenatal screening has been part of the standard of care now for 40 years, and NIPT has now been clearly delineated as the leading technology there. So...

Got it. Steve, one for you on the United PLM inclusion. Clearly, a big deal, it's a good housekeeping seal of approval as far as the quality of your testing and your billing processes, probably more important for you this year than it otherwise would have been. But as you think about the long-term implications of that, do you see this becoming a broader trend maybe over the next 5 years? And is there a world in which payers start directing volumes to PLN? And where are physicians headed as far as that goes?

Yes. I do think so. I mean, especially as you start to look at like consolidation with group practices and sort of private equity firms coming in and managing some of the bigger group practices. I think there's -- there is an opportunity for payers to kind of have a bigger say in things. And I think that, that helps Natera because we're on great terms with all the payers. We're broadly in network. I think for somebody coming in now with something new, or sort of a new start-up that's not in network, they may have a more challenging time than maybe what was happening 10 years ago when some of today's companies were coming in. But we have great relationship with United, and we're proud to be included in the network and with all the other top payers as well.

Got it. Average risk penetration, I mean, you've talked about getting to 80% to 90%. Over what time frame do you see that as realistic? And how should we, I guess, on the one hand, you have something like vaccine uptake for COVID is 40% to 50% in the best case, well for the boosters, but ultrasound is obviously ubiquitous. So where is that sort of -- for average risk NIPT, where does it fall on that spectrum?

Yes. So we think today, average risk NIPT is about 50% penetrated. And the -- or maybe -- sorry, about 45% penetrated, and the overall market is about 50% penetrated roughly. So when you think about what the maximum penetration is, we've estimated that you can get to about 90% of all pregnancies. Probably, I would say, like in kind of before like, I would say, toward the end of 2025 is when you might be hitting that like kind of 3 years out, roughly. And that's based on 2 things. I think one is the historical data on prenatal screening adoption shows that about 80% of all pregnancies except prenatal screening. There's 20% historically that have said, wait a minute, like I don't even want testing, I don't want to be offered testing. Now a lot of those patients that deny testing are doing it because their historical tests like maternal serum screening had extremely high false positive rates. And the patients didn't want to deal with the stress or anxiety of a false positive, but with NIPT because they're generally lower false positive rates, particularly on the more common disorders. I think patients are more inclined to get the testing.

Got it. Mike, quickly on the COGS, you've talked about sort of 160-ish today with a path down to under 125 over time. What's the glide path? And what are some of the step function drivers of that improvement?

Yes. I mean I think there's a clear path just in terms of scale efficiencies in the lab, more automation. We've launched, as many of you know, the lab in Austin, Texas, which is now a much bigger volume lab than our original lab in San Carlos, which is amazing because I feel like we cut the ribbon on that place just like a couple of years ago, and here we are. Lots of efficiencies come with that scale in place. And then I think there's continued efficiencies that we'd expect on the sequencing side as well. And that can come in the form of just simply going, for example, from NextSeq to NovaSeqs with Panorama would be one very obvious example. And the -- if you can look out -- you open your aperture up a little bit wider, there's more savings to be had as sequencing becomes more and more efficient over time.

Got it. You've talked in the past about -- at this point, you're better than cash flow breakeven, I'm assuming on the reproductive health side of things. Are you profitable in that business and if not...

Yes.

You are. Great. And then on the last earnings call, you talked about cash flow breakeven in the mid '24 time frame. Is it fair to assume that SG&A essentially stays flattish, while the improvement comes on the R&D side because you're done running a lot of these clinical trials...

Yes. I mean the kind of the basic framework for that model is not completely flat OpEx, kind of single digit to 10% kind of OpEx growth, continued revenue growth and then steady but unspectacular gross margin improvement. So look, it's possible that we could do better than that. But that's kind of what's implied in that forecast. The reason why we're comfortable giving that forecast now is we've built the infrastructure largely. We've built the commercial teams. We've got the lab infrastructure. And so we've got a clear line of sight to what expenses are required to support this much bigger base of volumes that we're now seeing come in the door. So the kind of the corny example that many of you often hear me give is, we've built this lemonade stand. I now know what it costs to maintain the lemonade stand, and I see people lining up around the corner to order the product, and so it's easier to forecast when that -- when you break even on that kind of upfront investment.

Got it. We're out of time, but this was a great overview, guys. So thank you both for joining us. Thanks for the time.

We appreciate it.