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

All right. So it's good to see a stack house on day 3 of TD Cowen 43rd Annual Healthcare Conference. Pleased to be joined by Natera, we got CFO, Mike Brophy; CEO, Steve Chapman. And so I figured because we have a decent list of questions, we could just dive right in. But maybe before, what do you consider the key highlights of '22? Let's keep it to maybe 1 or 2 each.

Okay. Key highlights '22, well, I mean, look, we continue to have incredible volume and revenue growth in addition to hitting major milestones for Signatera. So muscle invasive bladder coverage, I think continuing to grow the volume in Signatera, getting the CIRCULATE study done and submitted -- allowed us to put ourselves to the position that we're in right now.

Yes. So we've been covering the stock since in 2017. You were the first salesperson hired, I believe at Natera, is it correct?

For the most part, yes.

Yes. And so we've launched the evolution of Natera, and there's been little to know management turnover, particularly in oncology, which is, I would say, a bit unique in today's market environment. So I just wanted to start off with the conversation and ask, given that, that team is still in place, do you feel like the cohesiveness and the chemistry of having that oncology leadership being in place has been a competitive advantage and a reason why you've been able to sort of leapfrog a bit in MRD?

Yes. I mean, I do think the cohesiveness of the team has been super important. So for myself, I mean, I've been in genetic diagnostics and lab diagnostics for now 20 years. I worked as a sales rep for 10 years out knocking on doors. So I know what it takes to sell a product. And as we built our team and brought people into the company, we've gotten a great group of people, many of which have been here now for 7, 8, 9, 10 plus years at Natera. And so it's great to have GM Solomon Moshkevich, she's been with the company now 11 years. Our Chief Medical Officer, Alex Aleshin, who joined in 2017, he's been on since the very beginning. Our senior R&D leadership that has been with the company for a long-time, they've been in from the very beginning. Our Chief Commercial Officer, Head of Sales, has been with the company since 2013. So we know how to go out and execute. And I think that's why you're seeing the track record interestingly.

Yes. So from 1 to 40 cumulative Signatera publications over that period since we started covering.

Yes. And I actually just mention on that, too. So we learned our lesson very on and very early on in NIPT, where in 2011, 2012, 2013, when we launched our product, we had a relatively limited set of data. We had good data, but it wasn't these multi-site prospective studies that you needed. So when we went to launch Signatera in 2015, 8 years ago, we started going out, putting the data strategy together, and we hired an entire team of folks that all they did was go around the world meeting with academic, setting up studies and finding big cohorts and big previously collected bio-bank. So all the data that you're seeing now these 40 studies, most of this work happened 7, 8 years ago, while we went out and did this. So I think that's a big advantage for us. And that's why we've been able to now get to 40 clinical trials that have been published for Signatera.

And also beyond the SMART study in NIPT, likely and a reason why you were the fourth entrant into that market, quickly became the market leader in volumes. All right, one more big picture question before we sort of dive into the detail, just because it's a unique market environment, so Natera despite the operational execution and whatnot, it seems to be considered somewhat of a more controversial stock at least in our coverage. And so you've built a great body of evidence in all 3 of your segments. So given where the company stands today, what would you view as the most credible bear thesis?

You want to take that one?

Yes. I mean, look, I think some most credible bear thesis, this is fun. The -- I think -- so Steve kind of gave you a quick summary of some of the progress we've made over the last decade. And the volume growth, the execution on clinical data, the leveraging of the core technology from first women's health now to these other very exciting areas of healthcare, where we're serving really massive unmet needs has been pretty unprecedented, I think, in the kind of the evolution of the molecular diagnostics space. So I think there's a -- there's always a consideration, always something that we're very focused on is, can that continue? I mean, we've gone, for example, in the launch of Signatera. We launched it in 2019. I think we offer -- this is a brand-new category that we created basically. And when we launched the test, there was a lot of skepticism. I think, we did like 3,000 tests at the end of 2019. Fast forward to '22, we processed 200,000 Signatera tests in the year and about 30% or so of oncologists are now ordering the test. So I think kind of the standard bear thesis they are like, well, that was successful, but how can that continue on that kind of a run. And I think the -- that's always a reasonable position to have. The things that we've built here, I think Steve touched on, but I think that they have shown to be pretty sustainable sources of success for us. So one is the core technology has been getting honed for the last 10 years, and we've seen how well it performs in these different areas of care. To focus on publishing large prospective data sets is with professional societies, payers, and physicians want to see to -- in order to fully adopt the product. And then you've got to supplement that with a really first-class focus on commercial execution and user experience. And so I think the question of, can we continue to have the success we've had historically comes down to, can we stay focused on those kind of 3 core attributes. And I think we think that we can.

That's great. And so maybe just given the body of clinical evidence in oncology at this point, you do have a slide, where there's a couple highlighted areas. If you were to pick, say, 3 major readouts over the next, call it, 12 to 18 months? Which one would you be focused on?

Right. So in addition to publishing, I think, 40 peer-reviewed papers to date in the next 6 months, I think we have another 8 -- 7 or 8 publications that are coming out that have more than 500 plasma time points per study. Now comparatively speaking, those are big studies, and they're some with multiple thousands of patients. So when you look at the publications coming pancreatic, melanoma, gastroesophageal, additional large-scale studies in colorectal cancer, breast cancer. We have additional studies coming. So there's opportunities where we're generating more data for tumor types, where we already have coverage, and this will help to, I think, grow the commercial usage in those tumor types. But then there's opportunities, we're expanding to new categories that we're not in today like melanoma, for example, recurrence monitoring or pancreatic or gastroesophageal. So I would actually estimate when we look at our schedule of MolDX submissions, it's possible we could have up to 8 additional submissions that are going in the next 12 months.

That's fantastic. And you started accepting samples outside of CRC, I think, in mid-2021. At that point, did you open it up to all other solid tumor cancer types? Or was it just a subset?

Yes. So we opened it up to all other solid tumor types because we think that every patient should have access to Signatera, and we're getting that demand from patients and physicians. But what tends to happen is, doctors tend to order the test in the areas, where you generated more data and in the areas, where the use cases are more established. So we actually saw breast cancer being one of the areas, where we saw more increased utilization. And that's why I think this breast cancer coverage is meaningful because about 15% of our volume today is in breast cancer, and that's really without even having coverage because we opened the door, and we said, look, where would you like to use the test? The doctors organically came in and started ordering in certain indications in breast cancer. Now we previously published really good data in the neoadjuvant setting and the adjuvant and the recurrence monitoring setting. I think that predated that usage. But it is great to see the kind of leading indicators such as the growth that we've seen in breast cancer and now to come get that coverage in place. I think we said on the call, about 80% of our usage is within colorectal, muscle invasive bladder immunotherapy monitoring and breast and the remaining 20% is outside of that.

Yes. Okay. The reason why I asked the question was, I was curious, if there were different start dates when you started accepting samples for say, breast versus other solid tumor types. Yes, I mean, 15% of clinical Signatera volumes that was in -- basically exiting the year, right? That's a pretty high number. And obviously, it's kind of the largest newly diagnosed cancer indication each year. And so how are you framing the Signatera breast volume ramp? And I guess how could you compare to what you saw in colorectal?

So I think from upside opportunity, if it is similar to colorectal, that would be incredible upside opportunity for us. I mean, we're not -- we're generally pretty conservative with our growth estimates and like we haven't included that level of growth in our modeling. But when you just think about like what this can mean from a kind of number of test standpoint, so we got coverage for all histologies, hormone receptor positive or HER2-positive triple-negative breast cancer. So it's basically across all of those indications, Stage IIb and higher, we think that, that could be about 1 million tests per year when it's fully penetrated. So that's very similar to the Stage II and III colorectal opportunity. Now we still have an opportunity to expand that further as we look at additional submissions that we'll be doing for breast cancer that go beyond just adjuvant and recurrence monitoring for Stage IIb being higher. But even without that expansion opportunity, just going after this 1 million tests per year is an incredible upside opportunity from where we are today. And the momentum is with us here as we said, even pre-coverage, we're seeing the usage increase because there's an organic demand coming from patients and coming from physicians.

Yes. Do you think -- it seems like clinicians were sort of primed and ready to go on us?

Yes. I mean, look, I think one of the advantages of the tumor-informed approach is that, it's the same protocol and the same workflow. And generally, it's the same clinical results across all different tumor types. It's the exact same process for the doctor to kind of order breast cancer as it is for colorectal. And when you look at the recurrence results and the adjuvant results and what's coming out of the clinical trials, generally the results are the same. If you're MRD-positive with this tumor-informed assay you're going to recur and in longitudinal monitoring, if you're negative and you turn positive, you're going to recur. And so the doctors have become kind of familiar with the use case in colorectal and in the community setting, doctors see all different types of patients. So it's easy for them to say, okay, we're already set up and doing it in colorectal. Now you generated good data in breast cancer, we're comfortable now turning it on in that setting.

Okay. And we had a great panelist this morning on our MRD panel that's supporting the LEADER study. And she has practiced in a variety of settings, including rural, suburban, right? So she has experience beyond just in advanced cancer centers. And she was speaking to on the surveillance side of patient anxiety as it relates to breath. And if you guys remember, you offered my mom in the part of the friends and family program about a few years ago before the data was where it is now. And she actually declined because she simply said, she was just happy to be here right now. So I'm curious of that 1 million per year test opportunity, is that based on newly diagnosed patients? Or does that assume capture the 3.8 million living?

Yes. So what we've assumed is, when you sort of look at the indications that are covered, it's in that range of like getting close to like 100,000 patients a year roughly of newly diagnosed. And then if you assume that they're monitored for 5 years with 2 blood draws a year, generally kind of mapping over to what was in the [ EVLOS ] study. And we just used the ELVIS study as the kind of framework for how we would sort of work out the TAM. And that gets you to that sort of 1 million tests per year. Now there's always really different ways to bottle it. Maybe there's going to be more test than 2 per year, maybe the testing is extended beyond the fifth year and so forth. So I think there are ways to increase the TAM, but I think that's kind of the sweet spot right now or 2 million higher adjuvant and recurrence monitoring, year 0 through 5, and then we kind of go from there.

Yes. And then obviously, some unique risk of recurrent characteristics for breast versus CRC, which people are most familiar with and so -- and also availability and pipeline of therapeutics -- interventional strategies, so I mean, do you expect overtime in breast as they look at reimbursement for the surveillance opportunity to be looking at it by subtype, right? Just given that it can vary or just because CRC sort of standard and pegged that CEA, I know, you are familiar with?

Yes. I mean -- I do think we were -- what we're seeing with Medicare, which makes sense is that they're focusing their coverage, their coverage guidelines on areas where you have published data. And sorry, there's a little bit of an echo gets here and there. Where we publish data is across all histologies. And so it makes sense then that if the test works across the different histologies, that's where we get coverage. I think the ultimate treatment of those patients downstream once they're positive is going to vary based on histology. But one of the areas that we're really excited about that we've invested in is, this idea of treatment on molecular recurrence. And so I think today, we're talking about like excitement around coverage in the adjuvant and the recurrence monitoring setting. But in the future, we're going to be talking about the excitement around treating patients on molecular recurrence. So you don't have to necessarily wait until the patient has clinical recurrence, where the tumor has grown and now can be seen on a scan. In the future, we want to be able -- we want pharma companies to be able to treat patients based on just an increase in the ctDNA level as measured by Signatera. And so as you mentioned, the DARE or the LEADER study, these are studies that are sort of Phase II trials that are starting to look at that dynamic. And then we have a Phase III trial that's ongoing with one of the top pharma companies. It's looking exactly at that, which is treating patients on molecular recurrence. And I think that's really the big opportunity in breast in the future, and that's an area that we've invested heavily.

Yes. And this SERENA-6 trials probably want to take a look at for those that are interested in that aspect as well, right? Treatment switching strategies, in addition. Okay. All right. So we're -- we've still got some time here, because we can talk about MRD all day. But why don't we move to some other segments. So the expanded carrier screening ASP sort of situation, just curious open-ended question, the recent NSGC update, what does that mean for potential official recommendation for expanded carrier screening? And it sounds like they're excluding anything from the guide, but based on period?

I mean, look, I think what we started -- what we've been seeing is more and more of a trend over the years, and this is back now for us, multiple years is -- the certain payers are not covering the expanded panels. And I think for -- generally a large part of our business doesn't fall into that category. But as we've seen groups like Sema4 exit out of the IVF business, for example, we've seen more of that lower margin expanded panel business come over to Signatera. And I think we did capture a very large portion of that it's basically 0 margin for us. But we thought it makes sense to take on that additional business because the guidelines are shifting in a direction towards expanded carrier screening. So we now see ACMG put out a positive guidelines supporting expanded carrier screening. We've just seen the National Society of Genetic Counselors, put out a guideline towards expanded carrier screening. And frankly, the American College of Obstetrics and Gynecology guideline is actually pretty positive. It says expanded carrier screening is an acceptable strategy and any doctor that chooses to implement that should implement it routinely in their practice. And so I think what you're starting to see off the back of these guidelines is payer policies evolving. Now there's already many payers who are kind of designating coverage for expanded screening. And then just 3 weeks ago now, we saw one of the largest benefit managers issue a new policy that covers expanded screening, and that covers about 15% of covered lives. So a lot of the Blues plans are now covered under that policy. So I think we're in a good position. I think the -- we've been, again, conservative kind of in implementing this into our guidance. But I think there's definitely a desire from physicians for this type of testing. We're seeing a mix shift that is temporarily kind of hurting the margins, but we think it's worth taking that bet because we think the guidelines are evolving.

Yes. And then just on microdeletions, just curious with some of the recent updates and mean for a potential official recommendation for 22q testing from ACOG and then, is that 765 in change rate still intact? Or if there is a positive recommendation, would you expect that rate to be sort of adjusted?

Yes. So I mean, the good news is, when you do an 8-year multi-site prospective study with 20 centers, leading academic centers around the world, you collect full genetic outcomes on 18,000 roughly live birth and the results show that the sensitivity is exceptional that the disease incidence is much more common than thought the positive predicted value is very high, 10x higher than traditionally accepted methods of screening. When you do that type of study and you generate that type of data, the guideline committees look at that and they take that into account. And that's what we saw with the ACMG guideline. Now that the rigorous study has been done, the results are out. They're published. They're strong. The guideline committee is in a position where they can say, okay, we're going to take that data and we're going to incorporate it into the guidelines. So we were really pleased to see ACMG do that, as far as kind of the next steps there with other societies. We have to see -- we don't necessarily have insight into exactly what their plans are. But again, I would just go back to the data. Does -- is the data strong? Was the right trial done? What is the performance, what it needed to be? Was it disease incidence, what it needed to be? And I think all the fundamentals stack up. And generally, when you're in that position, the end result tends to be positive. Now if we were able to get coverage in the future for microdeletion testing, I think the impact can be significant, but we have to kind of wait and see how everything plays out.

Yes. So nothing material included in the guidance. All right. Maybe I'll wrap with a couple of questions together for you, Mike. If you did see improvements in reimbursement for expanded carrier screening from that 0% margin level, hypothetically. And then let's marry that alongside maybe a potentially faster new Signatera breast enrollment pace, is that contemplated in the 41% to 44% I think that's the gross margin?

Gross margin is no. None of those types of things are really contemplated in the guide. I mean, our philosophy when we guided to release annual guidance on our Q4 call, and we try to set that up as what we think as a base case. So it requires good execution from us, but does not include things that are beyond our control, such as guideline inclusion, significant changes in payer coverage and things like that. And so what you see there is in our guide is kind of the base case.

Okay. I want to see if anybody has in the crowd has any questions.

[indiscernible]

Yes. So our default, what we've said for a long time is, we don't think that the next version of the guidelines are going to include Signatera, and that's because the CIRCULATE study wasn't published when the guidelines committing that in last August. So I wouldn't expect, and I don't think anybody expects now for the guideline to come out and kind of say, Signatera in -- there is a footnote. I think now that the CIRCULATE study is published in nature medicine and the data looks very strong. I would imagine the guideline committee is going to incorporate that the next time they meet into their overall decision-making. It's not a guarantee they're going to cover it, but it means they're going to be talking about it. Now if -- in the event that there's no coverage put in place -- we have 3 other large-scale multi-site perspective, registrational level randomized studies that are going to push the bar forward. We have the CIRCULATE-US trial where we've gone to the FDA. We've got the investigational device exemption. It has the same setup as the Japan study. We've got the VEGA and Altera, which are the randomized arms of the CIRCULATE-Japan study. So we've got the studies going. It's just a matter of time. Now the real reason why guidelines matter for 2 reasons, one is commercial usage and the other is for commercial coverage because we already have Medicare coverage. For usage, we're already seeing doctors use the test. And so of course, guidelines will really bump that up to another level, but we're already on a good pace right now that I think is a comfortable pace. And from a commercial coverage standpoint, I think everyone saw, we're starting to get commercial coverage even without guideline. So we had Blue Shield announcement. We had the Blue Cross Blue Shield Louisiana announcement. And there's others in the pipeline that we think are going to issue commercial coverage even without a guideline. They are right now, yes. Well, I mean, as of now, it's Blue Shield of California, which is a pan tumor coverage and then Blue Cross Blue Shield of Louisiana. We know that there's probably 3 to 4 others that are kind of getting close. But I think it's possible you could see more in '23 and then significantly more in '24, even in the event of not having a guideline. Now some of this depends on, I think, the success of the sort of biomarker bill strategy that we've described previously. But so we'll have to see how things pan out.

Great. Well, that's it on time. I appreciate the detailed response as always. And thanks, everybody for joining.

Yes. Thank you and thanks guys. Appreciate it.