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

Welcome, everybody. Thanks for joining us at the Raymond James Institutional Investor Conference. I'm Andrew Cooper. I'm happy to be joined by Natera. We have CFO Mike Brophy here, who's going to talk to us a little bit first about just Natera in general, and then we're going to dive into some Q&A as well. So with that, I will just pass it straight to Mike.

Great. Thanks, Andrew. Appreciate the time and being here today. So I'm just going to do a couple of basic kind of intro slides here. So Natera is a leader in cell-free DNA technology. The first major product launch that we initiated was back in 2013. We launched our Panorama noninvasive prenatal diagnostic test -- noninvasive prenatal test. That was a purpose-built test that utilized a very flexible and sensitive PCR-based chemistry paired with a suite of algorithms that delivered really excellent performance in screening for fetal [ antibodies ] for NIPT. When we launched that product, we actually were fourth to market, and we're -- it was like a little startup, and it was up against some very large deep-pocketed competitors. Fast forward to 2015, we kind of rocketed to the #1 position in that market with about 1/3 of the market share and probably 600,000 or 700,000 women in the United States getting an NIPT at that point. And fast forward to today, there's probably something like 2 million pregnant women that get an NIPT out of about 4 million pregnancies in the U.S. every day. And we estimate that we've got about 55% market share, despite the fact that this has been an incredibly competitive area of molecular diagnostics, as many of you know. We've now kind of taken that core technology, and we've continued to hone and improve it in the pursuit of an ever better noninvasive prenatal test. And now we've been able to leverage that same exact core technology in a couple of different other unmet needs within healthcare. So in 2020, you see we've kind of branched out and we launched in a couple of completely new areas. One in organ health. So we offer a test called Prospera, which is a kidney transplant rejection screening test. So the concept there with Prospera is kidney transplant recipient receives a kidney. The #1 thing that you're worried about with a kidney transplant recipient is that their immune system is going to reject that kidney, okay? And sometimes it's hard to tell if the patient post-transplant is just feeling green because they've just got a kidney transplant, or if they're experiencing an acute rejection. Historically, the standard of care there has been to intervene, including and up to a biopsy. So you get like a large-bore needle, stick into the kidney that you just transplanted. This is precious tissue, pull some out and you biopsy that tissue to see how the organ is faring. Now what's available is a very sensitive and flexible plasma test that can give you a readout on the graft health noninvasively. So a lot of overlap technologically between what we built for NIPT and then we're able to leverage that in organ health. The next product that we launched was in oncology. We created an entirely new category of cancer care in minimum residual disease and recurrence monitoring of cancer with our Signatera product. The next slide is just like a snapshot of kind of the core products here in the first column here, Panorama, Signatera and Prospera, and then you'll see a range of additional products that we've been able to launch that kind of wrap around that core product. They are offered in the same call point and often offered to the patient at the same time as they're kind of getting this offering here on the left-hand side. That makes a huge difference for patients to be able to get additional information about their healthcare situation, whether they be in the prenatal space, oncology or the transplant setting. For example, in the prenatal health setting, at the same time that you go in and you get a blood draw for the Panorama test, we can also take some tubes of blood, and we can run this Horizon carrier screening panel that screens Mom to see if Mom is a carrier for a range of inherited disorders. Like for example, cystic fibrosis or Duchenne's (sic) [ Duchenne ] muscular dystrophy or so on and so forth. We offer kind of single gene carrier screening panels all the way up to 270 gene carrier screening panels. We launched that test as an ancillary offering to the NIPT. And now fast forward 8 years later, for every 100 NIPTs that we offer, we also get orders back in for about 45 or 50 carrier screening tests as well. So as the NIPT market continues to penetrate, so too does our opportunity to serve patients with this carrier screening test. It's a similar kind of model as you -- as we've kind of replicated across these different call points. Okay. So this is just a snapshot of kind of the recent progress in the business from '17 to now in terms of total volumes. You've seen that things have really, really accelerated here. The revenue slide looks very similar to this. This has been very much kind of up and to the right, as we've experienced rapid growth in all 3 of these areas. So I mentioned kind of the trajectory that we've seen in the women's health space. And that's now been added to by both the organ health space and especially Signatera in the cancer space. It's not just the kind of -- this kind of core technology that's driven all that success. So one, we have had this kind of leading-edge technology and a constant focus on innovation in these products. And we've just been able to stay in the lead in terms of our technology. We've been able to prove that out by having a very, very centered focus on delivering what we perceive as best-in-class clinical trial data. I'll give you 1 example in the women's health space. Last year, we read out a 5-year 20,000-patient prospective clinical trial to demonstrate our performance in detecting the 22q microdeletion with pregnant women. This is a test that is very broadly ordered within our prenatal health clients. No one had ever kind of prospectively characterized the incidence of 22q in the population, and we were able to kind of really break new ground there. And I think that data puts us in good standing for potential guideline inclusion for screening of 22q, just as an example. I think the other 2 pieces I'll take kind of together. One is the broad and talented commercial teams and the other is just an extreme focus on user experience and the customers' experience, both patient and physician. So our CEO, Steve Chapman, was actually the first commercial employee that was ever hired here at Natera back in 2013. So he joined Natera after a very successful run at one of the first molecular diagnostics companies to ever exist, in Genzyme Genetics. And some of you guys [ may ] remember Henri Termeer kind of setting the stage with Genzyme Genetics and Genzyme more generally. Steve joined the company when this was an IVF, in vitro fertilization diagnostics business, led the launch of the Panorama product, and over the last 10 to 12 years, has built up a cadre of commercial leaders that have just demonstrated over time this type of commercial execution quarter-on-quarter, year-over-year. We've kind of developed a way of going to market where we really focus first on the customer and then we really kind of drive excellence in our responsiveness to what the customers need. Okay. Good. So I previewed this in terms of just our extreme focus on data generation. We're very proud of this study. This is the smart publication that came out last year. Partially in response to that study, you see new guideline inclusions happening already. So more recently, within the last couple of months, we saw the American College of Medical Genetics and Genomics come out with a very fulsome recommendation in favor of 22q11.2 deletion syndrome screening for all patients. It's a very strong recommendation and we're hopeful that we may be able to get an ACOG recommendation, American Congress of Obstetricians and Gynecologists recommendation as well. Similarly, we've been able to generate data in our carrier screening business. We saw over the last kind of 5 years over the life of that product, we've seen a continued drumbeat in favor of coverage for broad panel carrier screening. So this is in addition to the cystic fibrosis and things like that, you can get a screen for up to 274 disorders in our case. And there's been a lot of clinical evidence, a lot of support that's been voiced for those broader panel carrier screening tests, really valuable tests to patients. And we just recently got this endorsement from the NSGC. Again, this is something that's a potential catalyst for the business going forward to get a broader guideline inclusion for broad panel carrier screening. Okay. Just a quick plug on transplant, just to kind of level set you on the market. I think the summary here on the left-hand side, you see the transplant test market. You see it's very underpenetrated today, really just launching into this space here in the last couple of years. And we've seen a lot of good kind of sequential traction in the business and been able to help a lot of patients here. On the right-hand side, this is an example of adding these additional products to our call points when we launch kind of the core technology. We've got a test called Renasight that's similar to carrier screening in the women's health space, will screen people who are suffering from CKD to see if they have the pathogenic mutation that's actually causing their CKD. A significant percentage of those patients who suffer from chronic kidney disease actually suffer from it because they have a pathogenic mutation. And knowing that has implications for how those patients are cared for. We've developed this panel. We're going to be reading out a large prospective data set supporting the clinical utility of this panel in clinical practice later this year. So just another, hopefully another case study, an example of our core strategy. Okay. Good. I'm going to spend a couple of slides on oncology. This is just the trajectory in the volumes of our Signatera business since we launched back in 2019. You see now we're -- 2022, we recently announced that we did almost 200,000 Signatera tests in 2022. Obviously, very, very rapid trajectory here. We now estimate that more than 30% of oncologists in the United States are ordering Signatera, up from 0 just a few years ago. This was a -- this is a technology and a market that we created here at Natera. And so I think over time, we've demonstrated 1, that the test works kind of on a technical basis; 2, that there's enormous clinical utility; 3, that payors want to reimburse for this test. And then finally, and most importantly, doctors and patients desperately need this test. There's a large unmet need, and you can see the trajectory there. A recent example of a big win we saw on the data side was we just got the 18-month prospective readout of our CIRCULATE study in colorectal cancer. So I'm just going to give you just an example of just how Signatera works, and I'm going to use colorectal cancer as the example. But this example, I think, pertains pretty broadly to most solid tumor types. So if you have colorectal cancer, it's a very dangerous disease. You go in like that afternoon or as quickly as you can, and you have a surgery to have the tumor removed. That surgery is quite good. Something like 2/3 of people are cured by the surgery. You had a colon in your tumor (sic) [ tumor in your colon ], you had the tumor removed and you've now -- you're now cancer-free. The remaining 1/3 of patients are going to have a remission of their cancer -- or relapse of their cancer post surgery. And it's very hard to tell who is who immediately post surgery, okay? So the standard of care is, if your tumor is graded out in kind of mid stage 2 or stage 3 or higher, then you're indicated for chemotherapy post surgery, okay? Even though payors, patients and physicians all know that a large majority of those patients have been effectively treated by the surgery, they're still going on to chemotherapy, okay? What ends up happening is a very inefficient triaging of these patients. So you have like a large set of patients who are indicated for the chemotherapy, the physician would prefer that they go on and do their chemotherapy, but the patient has kids or a job or they're not tolerating their chemotherapy, they know the odds are in their favor because the surgery is quite good, and they drop out of chemotherapy. Physician would prefer to keep them on, but it's hard to keep everyone on. It's hard to give chemotherapy as a doctor. And so if people want to watch and wait -- you have people that kind of against the physician's preferences end up kind of deescalating and watching and waiting. This is where Signatera comes in. So go have your surgery like you normally would, go home and rest for a month like you normally would, post surgery. In that intervening time period, we're going to take a slide of the tumor tissue from your path lab. We're going to run an exome on that tumor, which is just a survey of the 20,000 genes or so that actually code for proteins in your genome. It's kind of like flying like a small airplane over a small town and kind of mapping that small town. What we're mapping are the variants in that tumor, okay? As a general matter, tumor DNA is highly aberrant relative to healthy tissue DNA. The variants that are the most common in my tumor are going to be different than the variants that are most common in Andrew's tumor, okay? It's a little bit like a thumbprint. And what we do is we just get the list of those most common variants and using this same cell-free DNA technology that we've been honing for the last decade plus, we build for each individual patient a blood test, DNA based, that is tailored to track the variants in their tumor, specifically tailored to their tumor, okay? So come on back a month later, like you normally would, get us a blood test. FedEx that blood to us in our lab in Austin, Texas. And then we'll run a plasma test on that blood that you gave us. If a month after your surgery, using this sensitive assay, we're able to detect cell-free DNA from your tumor still in your bloodstream, those folks are relapsing an overwhelmingly high percentage of the time. Even though the tumor may or may not be, still be visible, usually it's not so visible, you still have plasma -- you saw tumor DNA still in your bloodstream, and so you're very likely to have a relapse. The reverse has also been largely true, that if using this assay that's been tailored for your tumor, we can't find any evidence of cell-free DNA from the tumor, you're -- most likely you're in the category where you can at least afford to watch and wait. This data is very important because this is 18-month prospective data off of the strength of 1 plasma time point post surgery, okay? So these patients came in, they got their surgery, as I described. Some were positive, some were negative. The positive patients is roughly 50-50 in this arm, went on to chemotherapy and the other half didn't. For the patients that were positive for Signatera saying, we think they're going to relapse, Signatera says they really need to get their chemotherapy. Those people had a statistically significant benefit from chemotherapy. The reverse was also true where there was basically no DFS. There was no significant disease-free survival benefit for Signatera negative patients to go on and get their chemotherapy. So this prospective data reinforces the data that we've been able to show in different tumor types over time. We've been able to really have a significant triaging of these patients between those who are going to have a relapse and those who are not. Okay. So this data was on the cover of Nature Medicine here this year, which we're very excited about. And this plus other data sets that we've been producing, we think will ultimately support guideline inclusion in the NCCN guidelines for colorectal cancer treatment. Okay. Good. Another recent win that we had is Medicare decided to award a coverage decision in favor of Signatera for breast cancer. So this is breast cancer patients in the adjuvant setting Phase (sic) [ Phase ] II B and higher are now covered by Medicare. Within our mix of our Signatera volumes, about 15% of our volumes are breast cancer patients, okay? This kind of speaks to the pan-cancer nature of Signatera, in that even though our focus in terms of the education to physicians has been in these GI cancers like CRC, because breast cancer is such a common cancer, we're seeing these breast cancer patients come in for Signatera. And the test works perfectly well for breast cancer as well as any other tumor type. Because again, I'm agnostic to the tumor type, what I'm focused on are the specific variants in that individual's tumor, okay? So even without a significant push from us, we already have a significant minority of our volume is breast cancer volume. And so this is an enormous win for us, important beachhead for reimbursement in breast cancer. Okay. Good. I'm just going to give you a couple of more financial slides, and I swear I'll quit talking and I'll let Andrew talk. He's a handsome guy and we want to get him up here. On the revenue line, we guided $980 million to $1 billion in revenues this year. This implies roughly 20% growth year-on-year versus last year. On the bottom line, we're guiding to burn about $300 million to $325 million in cash, which is about $150 million less than what we burned last year. So we're kind of on that trajectory to getting to cash flow breakeven. And then this is the last slide I'll show you. This is just operating expenses on an absolute dollars basis, 2022 versus our '23 guidance. You see on an absolute basis, operating expenses are actually going to decline. And that's because we've kind of -- we've reached a solid base where we've got established products in each of these 3 key areas. We've got established commercial teams in each of these areas. And now we can continue to drive volume with those established products and teams, and actually get a little bit leaner as R&D projects roll off, as clinical trials roll off and as we get more efficient with our commercial offering. We've actually run this playbook once before, specifically in the women's health call point, where late 2019, I laid out a similar slide for just the women's health effort. And we said, "Hey, look, by the middle of '21, we think the women's health effort will be cash flow generative based on this same kind of math." It's, hey, you've got a very established product, you've got the clinical trial set and we're getting increasingly more efficient on sales and marketing, while volumes continue to grow. And we met that time line. By middle of '21, we were kind of cash flow breakeven in the women's health business. So now it's time to just replicate that same playbook for the overall company, which now incorporates a very large investment in organ health and oncology. So that's the strategy: continue to execute with these core products and the core technology and continue to get operating leverage with these commercial teams that we've built. That's it.

Despite your compliment, I promise, nobody wants to see or hear me, but happy to be up here. Maybe just first, thinking about that 30% of oncologists ordering is a really impressive number given sort of how fast it's all happened, but as we think about the path forward there, is there something that is a bigger inflection point? Is there, hey, the first time you're in NCCN guidelines for something that's it, what drives kind of that hockey stick that I think is still potentially on the come?

Yes. These things are hard to predict. I mean, I would never have predicted that we'd be at this scale this quickly post the launch. Not because I didn't think that we could do it, just because one doesn't predict that type of a trajectory. So, so far, things have really progressed really rapidly. I think there are a couple of data sets, catalysts that can drive significantly broader adoption. I think you hit on one. I think footnote inclusion in the NCCN guidelines for colorectal cancer would be a good example of that. I think just getting this data published, this 18-month prospective clinical trial data published in colorectal cancer is absolutely critical, and it's early days, but I'm encouraged about the response we've seen from the field here. Breast cancer is maybe the third 1 that comes to mind where -- and we really haven't -- we really haven't put our shoulder behind an education drive around the data that we do have in breast cancer. But now that we have this important kind of reimbursed area within Medicare, we feel more comfortable doing that. And so I think there's an opportunity to really drive growth there as well.

Okay. Helpful. And you mentioned the sort of 15% or so of volume that's breast cancer. You said in the past 60 to 65 were sort of the previously covered by Medicare indications. So about 80% of the total. How does that trend? And how do we think about that in context of coverage begetting other testing, right? So whether it's an indication that's not covered within breast, or it's a different cancer type that's not covered, how do you plan for that as well in sort of the guidance and the P&L?

Yes. Well, in the guide, it's really simple. I mean, I don't -- we don't -- we try not to do aspirational guidance as it relates to like additional coverage decisions. I mean, I think there's kind of an organic way for average selling prices within oncology to just to increase over time as your mix evolves towards some of these reimbursed indications. But in terms of just getting reimbursement in additional tumor types, I really -- I still think about that as very specific to the data in that tumor type. And we're very committed to just producing data in a given tumor type, in a given indication, submitting that data, getting it published in the top-tier journals, taking it to Medicare, taking it to the commercial payors. And it's just -- there's no way to replicate just kind of going down that path, and we've done that now in a very broad range of tumor types.

Great. And we only have a few minutes. So maybe I'll make sure we hit on kind of the reproductive health side, the women's health side of the business as well. If we wake up tomorrow and there's a headline, ACOG has changed guidelines for, let's start with carrier screening, expanded carrier screening. How do you think about the impact there on, not just the ASP side, because I think that's pretty clear of, hey, if there's coverage, there's coverage, but potentially the volume and the mix side and what that does to the business?

Yes. I mean I think the first thing that comes to mind is I think it's just incredibly important for prenatal care. I mean I think the rank and file physicians appreciate the utility of those tests. And so I think it would just be kind of matching up with the reality that you're seeing in the field for the use of those tests. I really think about -- I really think about carrier screening tests as coming alongside like in lockstep with the noninvasive prenatal test. So that's -- you might think that you'd go get a carrier screening test before conceiving, but as a practical matter, most people are like me, I got -- my wife and I got our carrier screening tests when we were expecting 1 of our kids, because that's kind of when you're thinking about these things. And so what I've seen over -- since we've launched that product in 2015, is a ramp that's really been driven by the adoption of NIPT, also begets this kind of adoption of carrier screening as well.

Okay. Helpful. And maybe kind of a similar question on micro deletions, when we think about the potential for coverage there. And when you think about those 2 in conjunction with each other, how should we be thinking about the cash flow that, that women's health business can actually generate?

I mean I think it can generate a significant amount of cash, just based on the fact that -- based on just the leadership position that we're in there. And that's important because if you can't generate cash, you cannot care for patients. You've got to have a path to delivering that. And again, I mean, it's kind of the same answer. I mean, amazingly, if there's 4 million plus pregnancies in the United States, only 2 million women are getting an NIPT despite the clear and obvious data benefits that have been demonstrated in NIPT versus older technologies that have been around since the 1980s. So there's just a lot of room to run in terms of improving prenatal care in the United States, and we're excited to be part of that.

And maybe tagging on to the back end of that, thinking about that NIPT penetration. I think you've commented in the past, 80% to 90% is sort of realistically the goal over some period of time. I think you said about 50% just now. So what's the -- maybe what's the mix of folks who aren't doing it, meaning are they doing legacy? Are they doing nothing? And how do we make that push?

Yes. A lot of people are doing the quad screen, which is -- I think there's -- sometimes there's a misunderstanding that NIPT has kind of heralded this new era of noninvasive prenatal testing or screening. And that's not at all what has happened. Noninvasive prenatal screening has been standard of care in the United States since the 1980s. It's just that people who have used this older test that has a 5% positive predictive value, meaning that for 20 positives using the quad screen, there's 1 true positive. So what that meant was that there's a huge amount of volume of follow-up like amniocenteses being run in the U.S. that have -- that volume has really been cut down with the advent of NIPT. And so it's hard to explain exactly like, how do you get to 50%. It's not like 90% the next day. But you see this in other areas. It's just -- it's a grind, and it takes time. And you've seen kind of steady evolution toward that kind of broader penetration.

Doctors are stubborn and don't change their practice.

Well, I don't even know if it's about physician -- it's just 1 of those things. It's -- it can be clinical practices in certain ways. It can be access to care is critically important. That's something that we try and spend a lot of time on. But the #1 thing that we try to do is just offer the test very broadly and deliver the data necessary to get people comfortable that the test is safe and effective, and we've tried to do that.

Okay. Helpful. And we've got just a couple of minutes so maybe transition a little bit to the P&L. Gross margins, I think, is a big topic that's been kind of present, especially in the guide. Maybe talk about kind of the mix perspective and how you plan for kind of this transition and maybe the breakout of margins as best you can between the 3 segments?

Yes. I mean -- so the gross margins this year are lower than they have been in years past, and yet the EBIT line was a little better than it has been in years past, and that was on purpose, okay? So we intentionally have taken on a couple of opportunities that are volume-based bets, if you will, or opportunities, where the reimbursement is not where it can be in, what we think in the relative near term. But we think that's going to change. And so we're going to take on some lower margin volume here in '23, and we think that can turn into something better in '24 and '25. So top of mind for me are the California program for noninvasive prenatal testing. I'm sorry, for those who are new, I didn't have time to kind of get into that. Many labs opted to actually leave the State of California when that program was first launched. Despite the fact that the margins were quite poor initially, Natera and, I believe, Quest opted to stay in California. We felt like that was 1, very consistent with our mission to care for those patients. We're originally a California company, and we care a lot about those physicians and those patients. And 2, we felt like there is a way forward there to get the program working in a way that companies can economically continue to serve these patients. Well down the path now with the preliminary injunction on the program. So that's Step 1. [ Bet ] number two, Signatera. Those gross margins are still dilutive to corporate gross margins. So as we've talked about in the past, ASPs 18 months ago were in the 500s. Now they're in the mid-700s for Signatera clinical. Cost of goods sold exiting '22 were in the mid- to low 500s. Exiting '23 would like to see them in the mid to low 400s and that's on scale, and that's on some lab operations projects that we have launching this year. So you kind of see that gross margin kind of getting to the right place. So in the interim, we want to continue driving volume, because we've got a ton of momentum, even though that's a little bit dilutive to gross margins this year. And the final 1 was around carrier screening, given some of the reimbursement challenges that have been seen in this space, we saw a number of players actually go out of business, okay? Very high quality labs going out of business because of that. We wanted to take on that volume. Again, consistent with our mission, we feel like there's great clinical utility for these offerings. We feel like a guideline can come that will help clarify things in terms of reimbursement, in which case, that would be very positive for us. These are all things that we did intentionally. And so in return for that, in order to cover that, we engaged on some tough, but I think important, kind of cost cutting to kind of get back to neutral on the EBIT line.

And I was going to ask about that cost cutting, but we are unfortunately at the end of time. So we'll save it for the breakout down in Amarante 1, I believe.

Thanks for the time.