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

All right. Good morning. I'm Julia Qin, lead analyst covering life science tools and diagnostics at JPMorgan, and it's my great pleasure to introduce you to our next company presentation by Natera. And with that, let me turn it over to Steve.

Great. Thank you very much. So this is the standard safe harbor information. Many of you know Natera, but we are today the market leader in cell-free DNA technology. We launched our first test, Panorama, in 2013, which is a noninvasive prenatal test. We were the fourth company to market. And today, we believe we have more than 50% market share. In 2020, we expanded, use the same technology to move into the field of oncology and also into Organ Health. Looking across the portfolio, in women's health, we now have a full suite of services that we offer to physicians. Panorama noninvasive prenatal testing, Horizon screening and the Empower hereditary cancer testing. In oncology, we have our Signatera MRD test; Altera, solid tumor comprehensive genomic profiling; and as you know, we're working on early cancer detection product. In addition, the oncology sales team is now also selling the Empower hereditary cancer test to breast surgeons and oncologists. In Organ Health, we initially launched our Prospera donor-derived cell-free DNA test for kidney transplant recipients. We've now added that to heart and lung. We also have a germline test that looks at patients with chronic kidney disease that we're distributing to the general nephrology practices. And I'll talk a little bit more about each of those as we go on. Now one of the core drivers of our success is that our products are supported and driven by strong real-world peer-reviewed evidence. Today, in the women's health space, we have more than 77 peer-reviewed papers. In oncology, in support of the Signatera technology. We now have 39 peer-reviewed papers. And in Organ Health in support of our donor-derived cell-free DNA and chronic kidney disease products, we have 24 peer-reviewed papers. Cumulatively, we've studied more than 1.3 million patients. Now when we look back at 2022, we had a great year. We processed more than 2 million tests, which is year-on-year growth of 30% and we performed greater than 190,000 oncology tests, which was growth of greater than 150% year-on-year. Now in fact, these numbers would have been better. But because of the flooding that occurred right at the end of the year, we, in fact, had to not a session samples for a day or so, and that sort of delayed things. But again, we're usually conservative with these estimates. So we came in above these numbers, but we just wanted to give you a sort of a benchmark to work from. We saw a strong oncology momentum, greater than 25% of oncologists use Signatera in the fourth quarter. We now have 39 peer-reviewed publications. We got Medicare coverage for muscle-invasive bladder cancer this year -- or in 2022. That was the fourth coverage decision for Signatera. We published a landmark SMART 22q deletion study, and we got ACMG guidelines for 22q We published 12 papers in health last year, including the heart and lung validation studies and including Trifecta, which is the largest prospective fully match study ever performed in the field of donor-derived cell-free DNA testing in kidney. And now we're in a great position to scale and we have big potential catalysts that will provide a lot of momentum as we move forward. So looking at volume, as I mentioned, we've seen excellent growth in volume. And this is coming across all areas of the business. We're seeing record volumes in each of the business units, but the growth is now being particularly driven by oncology and the rapid uptake of Signatera. So we were really pleased to come in significantly above 190,000 units. As I mentioned, we did have that flood impacting our operations at the end of the year. We were pleased to see significantly more than 25% of oncologists using Signatera in the fourth quarter. And interestingly, we're seeing very strong support in the academic centers as well. So in Q4, greater than 90% of the NCCN academic centers in greater than 87% of the NCI academic centers use Signatera in their practice. So we think that's pretty impressive as well as the uptick now significantly above 25% of oncologists using Signatera. Q4, again, was particularly strong. We saw the highest number ever of new patients coming in using Signatera, the highest number ever of record of recurrent patients and the most physicians using Signatera that we've ever seen in the quarter. So again, very strong momentum. Now I want to take a step back to look at women's health. One of the great news stories at the end of the year was ACMG coverage of 22q. Now 22q is a very common condition that has a very significant clinical utility behind screening. When you compare the incidence of the disease to other diseases that ACOG recommends, it's actually exceptionally common. So short -- or just second behind trisomy 21, 22q is the most common genetic disease that's recommended by ACOT. It's more common than cystic fibrosis. It's more from the trisomy 13 and 18, and it's more common than SMA testing. When you look at the clinical utility, this is the leading -- one of the leading causes of congenital heart defects. It's also one of the leading causes of inherited schizophrenia, patients that are born with this disease are very difficult to diagnose. In fact, the average diagnosis time is about 4.7 years. And interestingly, treatment with calcium at birth can prevent seizures and brain damage caused from hypocalcemia. So there's a very strong intervention that can take place to help improve the lives of these children. It's for those reasons in addition to the performance of the test in the SMART study that ACMG has come out and issued a positive guideline. You can see their recommendation. ACMG suggests that noninvasive prenatal script for 22q deletion be offered to all pregnant patients. So we think this is a great move in the right direction by the societies and we were very pleased with the performance of the test in the SMART study. We saw high incidence, about 1 in 1,500. We saw very high sensitivity, 83% overall clinical sensitivity, and that's for all 22q microdeletions, including those that are below 2.5 megabases. So when a lot of groups talk about the performance data, they're talking about only those microdeletions above 2.5 megabases. Now we're including all microdeletions -- all 22q microdeletions in that 83%. When you look at those just above 2.5 megabases, our sensitivity was actually greater than 99%. Specificity was also very high, leading to a positive predicted value of greater than 50%. Now if you look at historical screening tests like the screen or first trimester screening, the biochemical screens for Down's syndrome, they generally have a positive predicted value in the range of 3% to 5%. So we're talking about orders of magnitude better than the historically accepted positive predicted values for screening tests. We look forward to seeing what happens as the year goes on with other societies. Now I'm going to move into Organ Health. So we -- there's a significant opportunity in both the transplant setting and the chronic kidney disease setting. When you look in the transplantation and donor-derived cell for DNA, we think there's about 1.2 million tests per year as the total available opportunity. We think that's only about 10% to 15% penetrated. We have validated tests that performed very well on market today across all 3 of these indications. When you look on the right-hand side, screening in the chronic kidney disease setting, this is a very underpenetrated opportunity. And we think as time goes on, this could end up being one of the biggest opportunities out there. About 10% of the population today in the United States is diagnosed with chronic kidney disease. There's been studies in the New England Journal of Medicine that show roughly around 10% or more of those patients actually have a genetic etiology. And it's been suggested that when a patient is diagnosed with a genetic etiology that more than 50% of the time, there's an intervention that can be taken. So these are the types of statistics that I think set up nicely for very high clinical utility and very positive use case for genetic screening. Now a couple of key happenings in Organ Health. The first is Prospera Heart has now -- or the category of testing donor-derived cell-free DNA testing has now been included in the guidelines with a Class 1 Level B recommendation. So we think this could pave the way for us to get both Medicare coverage and commercial payer coverage and see an increase in the TAM. A couple of things to look out for in 2023 are 2 big studies that are coming out that are already completed enrollment. The first is the DTRT study. This was an NIH-funded 7-year multisite prospective trial in the field of donor-derived heart testing that has more than 2,000 plasma time points. So the results are in. They're being looked at by an independent third party right now, who's leading the publication. We expect that to be out in the first half of 2023. This will be one of the most significant papers that's ever been published in the field. Next, if you look on the right, I talked about chronic kidney disease testing, the RenaCARE study, which was a multi-site perspective study that looks like the nice utility of testing patients with chronic kidney disease using a multi-gene panel. The results for that are also in the papers being written and is going to be submitted in Q1. We think this could be a very impactful study as well that could open up that opportunity that I shared previously. Okay. Now moving on to oncology. So a lot of our growth is coming from colorectal cancer. And if you recall we think an estimated opportunity there of greater than 1 million tests per year. There's 2 primary indications. The first is adjuvant treatment decision-making. So is the patient MRD positive, yes or no? Should we treat that patient with adjuvant chemotherapy? And then the second is recurrence monitoring. So today, the doctors may use CT scans or but unfortunately, 85% of patients that recur are diagnosed too late for the physician to do a surgical intervention. We think with Signatera in doing longitudinal monitoring, we can identify these patients early and allow the physician to intervene and potentially save the patient's life. So we've supported the use in Signatera in colorectal cancer with multiple peer review papers. But one of the most exciting is the CIRCULATE study that was presented at ASCO in GI in early 2022, about a year ago now. Now that was the first 1,000 patients enrolled in the study with 12 months of follow-up. And what we saw was excellent prognostic data. So very high disease-free survival rates for patients that were MRD negative, disease-free survival rates in the 50s for patients that were MRD positive. So a good distribution there between the 2 cohorts of patients. Very high hazard ratio of 13.3, and then the sensitivity from a single time point taken 30 days post surgery, was 67%. So we were able to identify from 1 time point, patients that would later go on to recur. Now if you do longitudinal monitoring in multiple time points, the sensitivity gets up above 90%, but this is just from that 1 single time point after surgery. Now what was even more exciting was not just the prognostic data, but it was the predictive data. And this was really the first time the predictive data had been shown. If you're positive, what does that mean for your care? Should you get chemotherapy or not? If you're negative, what does that mean? Will you benefit from chemotherapy. And what we were able to show is that patients that were MRD positive benefit from adjuvant chemotherapy and patients that are MRD negative, in fact, don't benefit from adjuvant chemotherapy. We also were able to show that clearance of ctDNA was predictive of treatment efficacy. Now these are big findings. And what we're really excited about is that the study has continued to advance -- and now the 18-month follow-up on these patients has been packaged and submitted for peer review, and it's now been accepted by Nature Medicine. And we think that will be published shortly, potentially as soon as this month, and that could be a key opportunity to open up the next leg of growth in colorectal cancer testing and potentially an opportunity to submit that paper to the NCCN guideline committees and to commercial payers. So we've seen the consistent results across all different tumor types now at this stage, colorectal, breast, bladder, lung, but we've continued to validate. Now you can see on the right-hand side, multiple different tumor types that we've tested Signatera in melanoma, multiple myeloma, gastrointestinal, head and neck, pancreatic, ovarian, and they're all showing the same things. If you're MRD positive, your destiny recur with a very high positive predicted value. And if you're MRD negative, your disease-free survival is going to be much better than it is if you're MRD positive. Our peer reviewed publications continue to go along at a very high clip. We now have 39 peer review publications. And one of the things that we're most excited about, and we showed this slide, I think, on the Q3 earnings call, at that time, we said in the next 6 months, we're going to have 7 additional peer-reviewed papers that have more than 500 plasma time points. To my knowledge, no other company has published even 1 paper that has 500 plasma time points in the MRD setting. We're going to have 7 that are published at that time, we said in the next publisher accepted in the next 6 months. Now we're executing on that. We've now had gastroesophageal, which is the fifth largest cancer type in the United States, accepted and published with 940 plasma time points. We just had our anal cancer paper published with more than 800 plasma time points. We've had the circulate study with 7,000-plus time points accepted. We've had our melanoma study with greater than 500 time points accepted. And we still have 4 additional studies across colorectal, breast and pancreatic that we're waiting to have accepted. So this level of data really has served to build I think a very strong foundation for us to go get Medicare coverage and to get support from physicians and committees. So when you look at our current coverage position, we have coverage from Medicare for what we believe represents about 2.3 million tests per year. But you can see the expanded future opportunity is up to about 13 million tests per year. So as we start to submit for gastroesophageal for breast, for lung, for some of these other indications like melanoma, we're going to start to be able to tap into that additional opportunity as we further penetrate colorectal and get more than the current share that we have there today. We're also expanding the opportunity. We can do that without validating a new test every time we go into a new indication. It's the same test, it's the same protocol. It's validated now in the pan cancer opportunity. And we just run the same test, it doesn't matter what your tumor type is. So I want to just take a step back in oncology and kind of summarize what we think are the key strengths, but also the key investments that we've made. We've invested an enormous amount to get to where we are today, and we've built a huge moat around the product and around the opportunity. So the first is on the commercial side. We have a very large pan cancer sales team, customer service team and medical affairs team. In fact, more than 350 people across across those departments are dedicated in oncology, and that's already built into our operating expense, calling on community oncologists and academia. We're now accepting pan cancer testing coming in ahead of reimbursement. Now that's costly for us to do because, generally, the insurance companies aren't paying for those tests, but we think it's important to generate evidence to help move the market forward. We've done excellent in executing our market access and reimbursement strategy now with 4 different coverage decisions. We think this year, we're going to submit additional 4 tumor types to Medicare, and we're going to see the first commercial reimbursement decisions for Signatera. We've executed a very strong user experience, and we built scale. So we have phlebotomy capabilities, physician portals we're integrated, preinstalled on all of the Epic systems when people upgrade to the new software. We put extensive investments into COGS into scaling up and building the lab. As I mentioned, we now have more than 75 customer service people that are dedicated to the field of oncology. So the type of scale investment that we made is very significant, and I think hard to replicate for somebody new coming in. Now most importantly, our data leadership, 39 peer-reviewed publications now for Signatera is unprecedented, but that's just the beginning. We have more than 100 clinical trials and data sets that we're working through that we're going to be reading out over the next couple of years, including some of the most significant trials ever to be done in the field. Now we're not stopping just where we are today. We're working on improvements to the Signatera technology, and we're also working on a portfolio of tests that are going to surround Signatera. So that when we put our big commercial team to work, they're not just selling Signatera, they're selling the additional content as well that surrounds that. Now 2 quick things. As I know, I'm 1 minute over here. In addition to our investments that we've made in our direct team, we're also pleased to announce our partnership with Foundation Medicine. We think this is a great opportunity. As many of you know, they're building a FoundationOne tracker off of the FoundationOne CDx. So there's no need to really do the whole exome sequencing. They're just building it off the comprehensive genomic profiling that they're already running today. They have a significant base of installed patients that as soon as we move into full launch, we're in pilot launch right now in the clinical setting, we can just flip the switch and run Foundation tracker for any patient that has historically gotten FoundationOne CDx or that prospectively gets FoundationOne CDx. It's now fully available. It's no longer in pilot mode in the IUO setting. So of our prospective pharma studies. So we're looking forward to continuing this partnership. They've been a great partnership. We submitted to MolDx off the strength of 2 peer review papers that have already been published, and there's a lot more data coming. Now finally, just want to summarize today, we have established products with strong market position. Unmet clinical needs are being met with our products. We have strong volumes, excellent ramp coming out of '22. We have a leadership position in peer-reviewed data. We built and made a major investment to the commercial team. So now we're at peak levels of spending in R&D and commercial and operating expenses. We don't have to increase that in order to meet the goals. We can keep our operating expenses flat and go out and grow the volume on top of this on our path to getting to cash flow breakeven. So in the future, we have big catalysts coming. Microdeletion guidelines, NCCN guidelines, commercial payer coverage, additional MolDX coverage opportunities. We're investing in COGS and scalability, while we keep our operating expenses flat, so we can get on a path to cash flow breakeven in the range that we described previously. So with that, I'll open it up for Q&A. Thank you.

Thank you, Steve, for the great overview. Definitely a lot to look forward to in '23. So perhaps we can start with 4Q volume trends. You obviously announced very solid numbers. And very robust trends for Signatera volume as well. Maybe talk about what surprised you to the upside and give us an update on the current mix between covered and noncovered indications and any notable pieces to call out?

Yes. I mean, look, I think to be where we are in the launch and to be seeing this level of support from both community and academic physicians in the ordering patterns, I think, is really unprecedented. As we mentioned now in Q4, significantly more than 25% of oncologists use Signatera. 90% of NCCN academic sensors use Signatera and more than 87% of NCI academic centers use Signatera. So that, I think, bodes very well for where the technology is going, both from a utilization standpoint and from a guideline standpoint in the future. Colorectal is just the beginning, though, as you saw on the slide. It's only making up slightly less than 1/10 of the overall opportunity long term. And so we think we're just getting started, and we're going to continue to see very strong momentum.

And how much of your current signature volume today is covered versus noncovered? And within kind of covered, how much is -- noncovered, how much is colorectal and...

Yes. So today, we have coverage in colorectal from Medicare. We have coverage from muscle invasive bladder cancer, and we have coverage for immunotherapy monitoring. We're seeing utilization in other tumor types outside of those, and we're also seeing utilization from commercially insured patients. So when you look at -- if you consider those as sort of covered, I think together, those make up probably in the range of 75% of the orders or something like that in that range.

Got you. Now you recently noted the trend that Signatera volume growth in noncovered indications is kind of outpacing the growth in colorectal. Maybe help us understand some of the dynamics that's going on there because theoretically, we could think that it should be relatively easier push your CRC utilization volume because it is the beachhead indication, the most established in terms of data and reimbursement, et cetera. So like how much of that is driven by your intentional strategic choice to establish a footprint with as many accounts as possible and then you can cultivate these physicians over time versus how much of that is purely driven by end market demand?

Yes. So I would say now at this stage right now, we're seeing consistent growth in colorectal and covered indications as well as noncovered indications. I think when we first enabled the kind of broader pan cancer offering, we saw an uptick, but that's now normalized, and we're seeing solid increases in colorectal, record quarters every quarter basically, along with now muscle invasive bladder really starting to tick up and continued success in IO. In fact, I would say we're rather than focusing on the noncovered indications, we're actually going the other way. So we're -- we've -- I think we've established ordering patterns for some of these noncovered indications, but we're putting our sales team's effort on the covered indications. And we think that's the right -- we think that's the right path forward. As things get covered by Medicare, we're going to open those up. We're not rejecting samples, but we're not incentivizing our sales reps to go out and kind of focus on noncovered indications.

Got you. So between the sales force focus and your expanding indications, we should see the mix of coverage...

Yes. The mix will be, I think, relatively stable. And as things open up, so -- for example, if we got breast coverage, we'll start to see that kind of increase relatively speaking, with respect to the broader book.

Got you. Can you remind us when the next NCCN guideline meeting is taking place?

Yes. So we're waiting for the '23 schedule to come out. In fact, we still don't have the results of the 2022 meeting that took place in August. Like we said before, we think it's pretty unlikely that they've included Signatera into that guideline just based on the fact that the CIRCULATE study wasn't published at the time that they held the meeting. But we still think the CIRCULATE publication could be a big upside opportunity for us and look forward to that coming. I think it's possible that could get published this month. We're going to have to wait and see. And then we look forward to seeing the NCCN calendar as it's released for '23.

And you're pretty confident that with what you have, by now, it's -- it should happen with pretty high certainty.

I mean, look, when you look at the paper when it comes out, it's a very strong paper. And that, combined with the DYNAMIC study, which was the randomized trial out of Australia, I think is a very strong position for MRD testing.

And is it still your expectation that when the guideline comes, it all endorse MRD testing in adjuvant therapy escalation only or will we see guideline for both escalation and deescalation? And then how much of the addressable volume falls into each category?

So I think the when you look across our data, I think it's been very strong in adjuvant for both escalation, de-escalation and then also in the institutional monitoring, where we're looking at early detection of -- or detection of cancer recurrence. I think the -- from what we found, historically, physicians making a decision to not do something that they're used to doing is always a little bit of a higher bar versus them maybe making a decision to do something when they're otherwise uncertain. And so I do think that there's a higher bar for de-escalation. But I mean, the results that we've seen have been really solid across all different indications. And I think we just have to kind of wait and see how things pan out. We'll go from there.

Great. I'll pause briefly to see if any questions from the audience. All right. Let's continue on with Signatera. So you recently discussed potential plans to develop IVD kits for Signatera. In the meantime, one of your peers recently decided to exit the IVD strategy. So help us think through the rationale there? Do you think the market is ready to embrace a more decentralized model? And like, are you ready to lock down the technology in terms of performance and everything despite the evolving competitive landscape?

Yes. So I think this was an area of confusion actually. When we said IVD, we didn't necessarily mean distributed kits. And so in order to run interventional trials like the CIRCULATE U.S. study, for example, you have to have a certain regulatory threshold in order to do companion diagnostic partnerships and do some of the bigger trials, the Phase III clinical studies that we've announced in breast cancer that will open up that opportunity to treat patients on molecular recurrence. You have to have a CDx level regulatory status. And so when we said, look, we're going for IBD, that's no different than Guardant 360 being FDA approved or FoundationOne CDx being FDA approved. It's that same regulatory status that we're going with Signatera. We're not planning on doing a kitted strategy to bring Signatera around the world at this time, although that's something that we are open to in the future. But I think for right now, we're focusing on driving the CLIA lab volume in addition to this sort of IVD level regulatory volume out of our existing lab.