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

I'm Tom Peterson. I'm an associate on our life science tools and diagnostics team. We're excited to have Natera presenting today and representing the company, we have CEO, Steve Chapman; and CFO, Mike Brophy. Steve, Mike, welcome.

Hey, thanks.

Thanks for having us.

Great. Well, I think in terms of the agenda, we're just going to hop right into Q&A. Steve, I thought it might be helpful to just kind of get a 2Q recap and just speak to the strength of the business. I think it's going back and looking like 9 straight beating race quarters. But just kind of give us an update on where we sit today.

Yes. So I think we're just continuing to have a great run here with excellent volume growth and strong revenue growth across all the business units. I think we had record volume, record revenue. So we're in a position of strength here. And I think the new thing that we really announced on the call as well was our path to cash flow breakeven now, which is very clear by sort of mid '24. And I think that puts us in a great position without having to make any significant changes.

Great. We're going to get into probability. I'm sure, but let's start on women's health side of the business. You had flagged on the 2Q call that you thought you had of about 50% market share. Clearly, that's well ahead of where you were 5 years ago. Can you just speak to what you're seeing, why you're winning is kind of where you're at today.

Yes. So we do a lot of really detailed surveys to kind of understand usage. And what we've seen is that Natera's share has increased from about 35% 3 or 4 years ago now to -- up to 50%. And that's due to a lot of different things. I think one is the strength of our clinical data. We've now published more than 26 peer-reviewed papers in the field of noninvasive prenatal testing, and that includes the largest multisite prospective study that's ever been done, which is a SMART trial. And that's very meaningful, especially for a lot of the top KOLs and academic centers, they're really looking for that super high-quality data, and we've now delivered that, and I think that's helping us get into centers. Second, our tests and our menu are differentiated. Today, we're still the only laboratory that's offering a SNP-based NIPT in the United States. And there's a lot of things with that SNP-based test that you can't simply -- that you can't see with other types of technologies. And then last, the strength of our commercial and clinical teams and our distribution channel is really unmatched in the industry.

Great. And maybe give us an update in terms of where you think average risk penetration is. I think last year, we're kind of talking maybe 30%, maybe 35%. And also if there's any differences in Natera's share with an average risk versus high risk.

Yes. So we think average risk is now close to kind of 45% penetrated. And overall -- or maybe average risk is kind of 45% overall, the market is about 50% penetrated. So we think over the next 3 years, you're going to get up to about 90% penetration, so like by the end of '25, for example. So effectively, the market is going to double between now and 2025. And so Natera is in a really strong position to capitalize on, I think, the increased usage over the next several years. Historically, Natera had, had a strength in the average risk market. And I think because we were the fourth company to come to market, we generally built a stronger presence in the community of the offices. But now as big hospital systems and academic centers have started to expand and roll out average risk testing, we've gained more and more of that share. So we're seeing a lot of wins in hospital systems and state programs. I think as many people know, we've been selected as one of the main providers in the California state program, which I think is going to be a great opportunity for Natera.

Great. And then, Mike, I think the women's health business has been running cash flow breakeven now for a little over a year. I think -- can you just give us like the latest outlook and drivers? It seems like, obviously, there's room to run just from a volume standpoint, but any other things that you'd point to from a cash perspective?

Yes. I mean it's a significant cash generator for the business now, those women's health products. The thing that I think we're really excited about is that we've -- particularly with the advent of the SMART trial data getting published and our kind of current kind of commercial position, we're in a great spot where this market, as Steve alluded to, is still in real growth phase. I mean, there's a significant amount of additional volume to be run in the United States with the data, with the commercial infrastructure in place, we feel like we're in a great position to just continue to ramp that business at very high margin.

Great. You mentioned the SMART trial, just maybe latest thoughts on microdeletions, impact in the market so far, what you're hearing from KOLs and guideline groups.

Yes. So I think when -- the main thing you have to look at is, is there a good strong validation data and is there a high clinical utility. And when we look at the data on 22q that we published in the SMART trial, we think it really meets the clinical evidence bar that's required for an offering to be approved. So as a reminder, this was a multisite prospective study of 20,000 patients where we did complete genetic outcomes. And we saw that the 22q assay is highly sensitive, highly specific, has a positive predicted value of roughly 50% and that the condition is common around 100 to 1,500 patients in the population. So when you have those type of test performance statistics, relatively high incidence tests and high clinical utility that's been established, it tends to kind of meet the bar for approval. So just to give you an example of the clinical utility, if you diagnose a child that's going to be born with 22q disorder, you can treat them at birth with calcium and prevent hypocalcemia, which is one of the leading causes of seizures and brain damage at birth. So simply just by knowing prior to the child being born, you can do an intervention that's going to improve their outcomes. And it's that type of utility that I think is important and meaningful as we go forward.

Great. That's helpful. Let's move to Signatera in oncology. I think one of the things that gets us folks excited. And maybe we'll just start on Signatera and CRC. I mean -- can you just give us kind of like a status update on what you're seeing? Obviously, your first movers here in CRC, but how do you kind of view the competitive environment today and over the next, call it, 12, 18 months?

Yes. So Signatera is doing absolutely incredible. I mean we are seeing, I think, record volume levels on a pace that I think is really even outpacing our own internal forecast. So in CRC, we think roughly about 25% of all oncologists today are using Signatera already in just a very short period of time. And we think overall, kind of getting close to like 10% penetration roughly in the main CRC indications. So I think things are going really well. What we're really focused on is delivering good clinical data and we've continued to do that because again, that's what differentiates you, particularly in oncology, where the physicians want to see that high-quality outcomes data. And so we published now more than 16 peer-reviewed papers covering Signatera, including many in colorectal cancer. And just in the next 6 months, we're going to have an additional 7 peer-reviewed papers that have more than 500 samples per time point. And I think -- excuse me, more than the 500 time points in the study. And that's important because when you look at the landscape, there really have been a pretty limited amount of papers out there published in MRD as a whole. And the fact that we have an additional 7 papers with more than 500 time points each coming out just in the next 6 months is a big deal. Now those are going to cover some on colorectal, but also some new indications, gastroesophageal, melanoma, pancreatic and ovarian, those are 4 places that we've never published before. And so this allows us to now bring those indications for MolDx reimbursement through Medicare. I mean it creates additional opportunity.

On the new data, I think you're out with the press release. I don't know if earlier this week or last week on ESMO abstract and some data presented there. Any particular data sets from ESMO that you wanted to highlight here?

Yes. So we had some great data at ESMO in breast, in colorectal cancer. I think one in colorectal, which looked at clinical usage in about 16,000 patients confirmed what we've seen in other prospective trials, which is that patients that are MRD positive are more likely to progress and have disease recurrence in patients that are MRD negative are less likely to benefit from adjuvant chemotherapy and less likely to progress. So I do think the big data set that's going to be coming out soon is going to be the publication of the Circulate Japan study. Now if you remember, this is a large-scale multisite prospective study that was presented at ASCO earlier this year, and I think received a lot of incredible feedback and support from physicians. And what we showed in that study is that if you're MRD positive, you will benefit from adjuvant chemotherapy. Actually MRD status is predictive of your response to adjuvant chemotherapy. And if you're MRD-negative, you simply don't benefit from adjuvant chemotherapy at all. And so that concept would be a huge shift in the treatment paradigm. So we submitted that paper. And actually, we think it's going to be published in the next month or so which is going to be great. Not only was it submitted, but the data set was actually expanded. So we originally, at ASCO had 11 months follow-up roughly. We now have 18 months median follow-up, which is going to be very meaningful for physicians when they're looking at the data.

Do you have any updated thoughts around NCCN, I think they had their meeting in late August. I guess, I think communication there is maybe a little bit limited, but any -- I mean it seems like CIRCULATE is going to be a big data set ahead of potential guideline update. But any other data you want to point?

Yes. So they meet a couple of times a year. And I think, unfortunately, the CIRCULATE study wasn't able to get published before the August meeting, and there will be additional meeting, I think, in December. And we -- there's no real way for us to interact. So we just -- we don't have feedback. But it takes about 4 months after the committee meetings for them to sort of put out their formal report. But again, we think the CIRCULATE data is very strong, but we have many other definitive trials in colorectal cancer that will be sort of backing up the initial readout of the CIRCULATE study. That includes the CIRCULATE-US trial that and includes the 2 randomized arms of the CIRCULATE-Japan study and that includes the bespoke trial, where we've now really nearly completed enrollment and additional probably 3 other large-scale multisite prospective studies that we haven't yet announced, but we expect too soon.

Great. And then, Mike, I think in the quarter, you spoke to some incremental improvements on the private payer side. Independent of any sort of guideline inclusion. Can you just give us sort of a status update on where you are from a private reimbursement standpoint?

Yes. Well, I mean, as Steve alluded to, I mean, the clinical utility for Signatera in a lot of indications, but particularly in this colorectal cancer indication, I think, is really clear. And the guideline inclusion, I think, will be something that can drive a broad payer coverage. But ahead of that guideline, it wouldn't surprise us if we got a couple of commercial payers to proactively cover colorectal cancer because they've been willing to go and do their own work and their own utility math that this can be really important, both for the patient and for the system.

Great. Let's switch on muscle-invasive bladder cancer a little bit, most recent indication. First of all, maybe just remind us sort of the patient mix, testing interval that you expect to achieve through that. And also just sort of what's the commercialization focus? I think there's maybe a shift now that you have Medicare coverage in place?

Yes. So there's really 3 different indications in muscle invasive bladder. We think there'll be about 35,000 patients a year to target. When you count up the sort of cumulative number of tests, it will be somewhere in the range of like kind of 400,000 tests per year. So that by itself although comparison to colorectal, it sounds small, it's actually a big opportunity. If you compare that historically to some of the most successful oncology tests like comprehensive genomic profiling, for example, the total available number of test there is about 400,000 a year, something in that range. So this is by itself a very big market opportunity. It also has a very high Medicare mix. So about 80% of patients are Medicare. So the kind of need to go out and get commercial coverage is significantly reduced in this cohort of patients. There's really 3 use cases. You're looking at neoadjuvant usage where you're tracking whether or not the physician has reduced the tumor size enough or got rid of the tumor, so they don't have to do a cystectomy and remove the bladder. And then the second is in the adjuvant stage for the patients that do go through with that surgery is MRD present? And what we've shown is that in the IMvigor010 study, we did with Genentech and is now rolled into the IMvigor011 Phase III clinical trial. What we showed was if you're MRD positive, you will benefit from adjuvant treatment. And I think the use case is simply do you intervene if the patient is positive? And I think what the data has shown so far is positive patients are more likely to benefit. And then, of course, there's recurrence monitoring which I think is pretty self-explanatory. But if you can identify the patient early, you can take an intervention. So overall, we think this is a great market opportunity. To my knowledge, the amount of -- I think -- I believe we're the only ones who produced significant data in this field. And so we've got a great head start. We have a big commercial team and a big medical team that are out meeting with physicians and talking about the data. And what we really try to lead with is focusing on the peer-reviewed data because that's what is the most meaningful for physicians and for patients, and the data speaks for itself, and we're seeing nice uptake so far.

Great. And on that recurrence monitoring setting, is ADLT pricing something you think is still applicable as it is in CRC?

Yes. So we've met with MolDx and the program asked them how they wanted to be built for the test and so forth. And what they've instructed us is to use a sort of bundled code for the neoadjuvant setting in the first 6 months, and then after that, to use the established ADLT code.

Great. NIBC was also the first indication that you submitted under sort of the foundational or umbrella LCD for Medicare. What did you learn about that process going through it? And how does it informed Natera's going 4 plus additional indications by 2023?

Right. Yes. I mean we're feeling like we're feeling good about that. We now -- we currently have 4 submissions pending with MolDX across our portfolio of products, not just in oncology but sort of more broadly speaking. And I think the thing that we've learned is that you have to have high-quality data. And I think that benefits Natera because we spent the last 6 years scouring the earth looking for big prospective studies that have been done and biobanks of studies, and that's where we're generating this massive amount of data. But if you try to come and start now and generate data, this is day 1 for you, it's going to be challenging to, I think, catch up to the point where you have data to get reimbursement because I think as we've seen with some of the competitors in the space, Medicare will give limited coverage if you don't have a sort of more thorough validation. And so I think in our position, we have very strong data. We already have 16 papers published covering both the MRD time point, but also longitudinal monitoring. And we've been able to get multiple indications within each tumor type covered, not just one narrow indication.

Great. Let's back up just to sort of Signatera more broadly on the ASP side of things. Mike, I think you moved from 650 ballpark in 1Q to a little over 700. Can you just describe the improvements that you're seeing so far and kind of what's embedded in the back half for Signatera's piece?

Yes. I mean, so the raise in the guide on the Q2 call was not really driven by significant expectations for large changes in the ASP in our favor. I mean that was overwhelmingly just volume-driven based on where we were in the year and the number of new accounts that we've won at the time of the August call is just kind of doing the math for the rest of the year. So ASP improvements above and beyond that, I think, would be upside to our guide. Now having said that, the trajectory, as you mentioned, for the Signatera ASP has been quite positive. And if you go back even 18 months or so, ASP was in the 500s and now it's kind of quickly ramped to 700, still very immature. The cost of goods sold per unit is still kind of in that mid-400s range. And so a lot of room to improve there. I think the -- in the near term, the path for improvement is really just the -- as the launch progresses, we think the fraction of patients that are Medicare eligible will just kind of naturally increase as you kind of get broader penetration out into the community. And then second, the fraction of patients that are coming back for a recurrence monitoring test will also improve kind of naturally as you get deeper into the launch. So those are 2, I think, really kind of sustainable drivers to continued kind of steady ASP improvement for Signatera.

Great. One of the things we've seen in Natera really across the business is consistent improvements on the R&D side to drive COGS lower -- you could women's health Signatera, it doesn't matter. But can you talk specifically to any efforts on the whole exome side of the business? Obviously, that's sort of the upfront cost and workflow for Signatera. So any improvements or R&D programs you can point to?

Yes. So one of the things I think in our kind of strive to move quickly toward cash flow breakeven, we've had to really assess a lot of different areas of the business. And I think the good news is that we're already doing all the right things, and it's not like we have to make big strategic changes in order to kind of hit that path. And one of those is R&D projects. And I think that not just in oncology, but in women's health as well. There's fairly straightforward projects that can help us reduce COGS. Like, for example, on NIPT just moving from one sequencer to another, which is a project that we have underway, I think will enable us to save a good amount of money per sample that we run. Building out the oncology operations is something that has been a work in progress for a long time as we scale up. We obviously need to have kind of excess capacity and redundancy. And I think we've put ourselves in a good position to continue to lower COGS, while we also maintain capacity and the ability to scale up.

Great. So Mike, maybe you just saw on Signatera and the path to cash flow breakeven in that business. I mean, obviously, I think one of the questions to consider the balance it's such early days in terms of where we are in MRD and oncology. So how do you think about balancing sort of growth investments versus the path to profitability in that business?

It's not -- the strategy really isn't that challenging. I mean the basic tenants are, we knew that we needed to build a world-class commercial infrastructure in order to launch the test in a way that would really support the patients and the physicians. And now we've built that. I mean we're at scale commercially. And we -- now that we've built that infrastructure, we can see the volumes coming in. We can see the volumes ramping. So from here, it's relatively straightforward to understand, hey, what are the costs required just to kind of maintain that infrastructure as it supports more and more volumes? Right now, I think this is also true the transplant part of the set of products. That commercial infrastructure is significantly underleveraged. As you would expect at this point in the launch, they can do -- they can support 10, 20x the volume that they're generating right now with the current team. So the path to cash flow breakeven. This is true for the overall business. It just to follow the same case study that we provided with women's health, which is build a world-class team, world-class product, best-in-class data and then ramp the volumes with that kind of stable headcount. And that's exactly what we're -- we've done in women's hub and exactly what's happening right now in oncology and transplant.

Great. I thought another thing that was interesting on the call, you mentioned some penetration and uptake amongst community oncologists outside of sort of the KOL, academic health centers. What are you seeing specifically with community oncologists in terms of Signatera utilization?

Yes. So I think in the very early days, some of the utilization was sort of limited to some of the top-tier academic sites or sort of more forward-thinking leading community oncologists, but we've seen that change rapidly over the last couple of years. I mean now in any kind of, I guess, in the most recent month, there's 2,500 oncologists that are using Signatera out of sort of 10,000 roughly. So I mean the fact that this soon into the launch, 25% of oncologists are using the product is -- that's really unheard of. And I think that just shows sort of the desire for this type of tool. And I think the pan-cancer nature of the test allows us to without -- as we deliver new data with the same sales rep at the same call point and the same medical liaison, we can open up additional usage from the same call point, which is exciting.

Great. Let's spend a little bit of time on transplant and Prospera. I guess just what's been the response to the Trifecta study? Maybe give us some background for those who might not be familiar and just sort of where you're at inning.

Yes. So when we went into the transplant space, we had good validation data, but one of the criticisms was we didn't have these big large multisite prospective studies that we're doing. And so we went and did those studies basically in the Trifecta study that was just published earlier this year is now the largest multisite prospective fully biopsy match study that's ever been done in the field of kidney rejection monitoring. So I think this is really remarkable from the size and quality of the study, but also what the data showed. And so in this study, we were really testing a new technique where you not only provide a result based on the percentage of donor-derived cell-free DNA, but you also look at the absolute quantity of donor-derived cell-free DNA and basically in copies per milliliter of plasma. And what we found is combining those 2 results together, the percent in the quality was statistically significant, significantly better than just doing donor-derived percentage alone. So the results have been received very well. This new novel approach, I think, is generating a lot of interest, and we're continuing to see volume scale up in a nice sort of linear way as we've expected in the business.

Great. I think kidney probably get the most attention, but you also have offerings in heart and lung. So maybe just give us an update on where you are there? And is there any meaningful difference in how you think about sort of that market and the concentration in KOL?

Yes. So in heart and lung, it's obviously earlier days, but heart is already an established market. So we're coming in there into an area that's been built, and we're seeing some good competitive wins. We had a great study out that had about -- excuse me, 800 plasma samples. So that was a high-quality study with very strong performance. But we have 2 follow-on studies that I think are really going to be market moving. One is the DTRT study. So this was an NIH-funded study that was started about 6 years ago that's collected around 3,000 plasma samples and done longitudinal monitoring and clinical follow-up on all of these patients over an extended period of time. So this is, I believe, one of the most significant studies that's ever been done in the field, and that's going to be publishing the first half of 2023. And we acquired the company that had designed that study and we're able to swap in Prospera for the previous biomarker that was going to be used, and that's how we were able to leapfrog this sort of 5-year period that it would have taken -- and then second, we're doing a big randomized controlled trial in heart as well that we think is going to be sort of defining guidelines as it reads out. Then in lung, that's a little bit of a different market because it's not established yet. Nobody yet has reimbursement. And we're trying to do the right studies there to provide the evidence needed to make that into a significant market over time.

Great. Let's really move to early detection. It's been such a topic following ESMO over the last week or so. You do have an agreement with our house around a bank to biobank of sample. So maybe just early thoughts or current thoughts on like CRC screening in general? And then maybe just any appetite on the multi-cancer side.

Yes. So we generated some good internal proof-of-concept data using our D&A only assay, and then we're augmenting that with methylation technique. So we licensed a methylation assay from our house that had performed very well in their peer-reviewed paper, but we've now augmented that further with our own methylation discovery work. So if you remember, we have access to tens of thousands of early-stage tumor exomes and we can uniquely use that information to find new novel DNA and methylation signatures. So I think the plan is to sort of finish the product development over the kind of rest of this year and early part of next year and then generate some external proof-of-concept data where we can basically show our performance to the world. In the meantime, we're preparing to run the 40,000 sample prospective trial that was collected and started by our house. We think that's going to be very strong data. And it's possible that, that could be used for FDA coverage in the future, but we submitted a q-sub. We got feedback from the FDA, and we're sort of now following and digesting what they've said and preparing our plans.

Great. Well, we've got about 30 seconds left. So maybe I'll just wrap with what's the most underappreciated aspect in Natera that you think maybe investors don't focus on enough?

I mean, look, I would just say we're in very large markets that are very underpenetrated. And I think we've built the infrastructure and the technology that's going to enable us to grow for many years to come in a profitable way.

Fantastic. I think we'll wrap it there. But Steve, Mike, thank you so much for joining us.

Great, thank you.

Thanks for the time.

Appreciate it.