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

All right, everybody. Thank you very much for joining this afternoon. I'm Matt Sykes, the Life Science Tools and Diagnostics Analyst at Goldman Sachs. I have the pleasure welcoming the management team from Natera today, Steve Chapman, CEO; and Mike Brophy, CFO. Steve, Mike, thanks very much for joining us today.

Thanks, Matt.

Thanks for having us.

Maybe -- if you could maybe help set the stage first, talk about the most recent results, kind of some of the trends you're seeing in the business, what to expect for '23? And maybe sort of -- for those who might be new to the story, just a brief summary of the business model and some of the main areas where you're involved in?

Yes. So I guess, first, I'll just comment on like recent results. So we had a really strong Q1. We accessioned 626,000 tests, which represented a significant year-on-year growth and a sequential quarter-on-quarter growth for us. We delivered revenue of about $245 million, which was a strong beat and that led us to raising our revenue guidance for the year by about $15 million at the midpoint. In addition to those operational beats, we actually continued to publish very strong peer review data and increase our data leadership. For example, in oncology, we published the I-SPY2 study, which was received very well and we continue to achieve critical milestones along the path of getting additional Medicare and commercial reimbursement coverage. For example, we got coverage for Prospera Heart for Medicare, and we got coverage from Blue Shield of California for Signatera in addition to publishing additional peer-reviewed papers that would put us in a strong position. So great quarter overall, and the momentum continues. I think we're at very early stages of some very big market opportunities, and that's a great place to be because there's a lot of room for growth going forward.

Great. And as you kind of look out sort of towards the end of this year and then into next year, what do you think are some of the more sustainable drivers of that growth? You obviously had some really good news on the coverage side, was significantly helpful, obviously, for ASPs and broader commercial coverage. But as you kind of highlight -- I want to highlight like a couple of the key drivers over the course of this year, next year, what would you kind of want to highlight?

Yes. So I think you have to look at like volume growth and then the kind of ASP and revenue growth upside and then maybe even like COGS opportunities, which we could throw in. On the volume side, it really comes down to the fact that we're at these very early stages and very big underpenetrated markets. I mean in women's health today, NIPT, despite now being launched initially like in the 2012 time frame, 10 years later, we're still only 50% penetrated. So there's a lot of room to grow there as we get up to the kind of 70% to 90% penetrated over the next 3 years. So just that market penetration alone is going to result in significant volume growth as we help more patients. And that generally comes along with additional growth in carrier screening testing, which we see many times it ordered alongside with Panorama testing. And then in organ health and oncology, I mean we're really at low single digits when it comes to penetration rates overall. Oncology, we think, is a $20 billion opportunity for MRD and recurrence monitoring, testing, and we're really at the very, very early stages. So I think volume growth, there's a long way to go. When it comes to revenue upside and opportunity, you have to deliver a super high-quality, peer-reviewed published data in order to get coverage from Medicare and from commercial plans. And that's exactly what we're doing. So we're continuing to publish data, continuing to get coverage from Medicare. And I think that's going to continue to drive the ASP as we move forward in Signatera. And then on the COGS side, we actually have a lot of opportunities to reduce our COGS as we're moving on our path to cash flow breakeven in a particular quarter in 2024. That includes versioning to new sequencers, that includes scaling up our tissue capabilities, and I think we're on track to meet our goals.

Maybe starting on the women's health business. You had mentioned that the market share that you have, the penetration, it's consolidated market, too. It's been consolidating just because of the competitive landscape. Can you maybe address where you see further opportunities for penetration and market share growth given that it's a consolidated market and in terms of like maybe people are underestimating the potential growth that you can achieve from higher levels of penetration?

Yes. So I think for -- what we've seen is generally the private practice OB-GYN offices have been maybe early adopters of moving to average risk NIPT testing and moving away from maternal serum screening. But many of the hospital systems are still implementing material serum screening. And we think that, that's an opportunity as we go forward is to further penetrate some of the larger hospital systems. It's also an opportunity, I think, for us for continued competitive wins. Because we were fourth to market. Despite now being the market leader, we were fourth to market, and many of the large academic centers had already set up shop with somebody else by the time we came to market. But now as we've published more peer-reviewed data, for example, like the SMART study, which is the largest prospective NIPT study that's ever been done in the United States, and as we've gained market share, I think it's given us an opportunity to further penetrate some of these initial accounts that went with a competitor or some of the hospital systems that maybe started out with serum screening and are now considering shifting over. So I think that's probably the biggest opportunity.

And maybe you can give us an update on the California contract. I know that there's been injunctions quite a while ago that allows you to kind of resell, maybe give us any update on that progress that you've seen there and what that kind of represents for the business.

Yes. So I think in California, it was sort of a very unique situation where they have a state screening program and I think they really are the only state in the country that has this type of program in place. And so the idea was that you can increase the total number of patients that are getting access to screening by participating in the state program. And so we offered a different product in California Vasistera, which is a very limited version of NIPT, it looks at chromosomes 13, 18 and 21 only. I think that initially in October of last year, was rolled out broadly as part of the state program. Recently, there's been a court decision that allows a non-state program testing to be offered. And so I think that's given the opportunity for labs that initially weren't offering NIPT to come back in. For us, I think the Vasistera test is a very low-margin product line. And so of course, if there's an opportunity, I think, for us to better serve patients, giving additional content I think that makes sense as well as improving the margin for the business.

What was the feedback from the doctors? I mean it seems like they would be in favor of a broader panel versus narrow panel. And has that been sort of a tailwind for you to kind of resell the broader panel?

Yes, I would say there's been a lot of confusion in the marketplace. I think any time there's sort of an abrupt change with, hey, you've got to do this thing. Now you don't have to, now you do, now you can do these different options. I think there's a little bit of just fatigue on behalf of the physicians with regards to what they can and can offer. But we've developed a very strong reputation for quality with Panorama, and we've supported that with strong peer-reviewed publications like the SMART study and I think physicians want access to a test like Panorama. And so we're happy to be able to serve them with that test.

And then just moving to Signatera. Obviously, given the low level of reimbursement today, it's a lower average margin profile. But you've talked about lowering that delta-v lowering COGS, which you addressed earlier. Could you maybe talk about sort of -- the ASP is going to come from some of the commercial coverage from the COGS side, some of the things that you're doing. You mentioned sequencing costs, but maybe dig a little bit deeper on Signatera specifically about how you can move those COGS to improve those margins.

Yes. I mean there's a lot of different opportunities. When you look at the upfront sequencing and sort of what instrument is being used and what the scale of that capability is, I think that's definitely an opportunity. And that's one that we've sort of spoken about before. There's opportunities just to sort of work closer with vendors that are supplying various reagents. And we've done a lot of that already. And then when you look at like the logistics and the ability to collect the blood and things of that nature, I think there's some opportunities. So generally, over time, I would expect -- we are expecting it's built into our models a fairly significant step down in the Signatera COGS to occur over the remaining course of 2023 and then into '24.

And then on the commercial coverage side, you've had a couple of good announcements, and it seems like you're building momentum there. Can you maybe talk about what we could expect in terms of coverage moving forward? And maybe some commentary on the biomarker bills and whether that's a tailwind for coverage.

Yes. So I think as far as coverage goes for Signatera, there's sort of Medicare coverage where today about 75% of the tests that we receive that our Medicare are under one of the covered indications of Medicare's issued coverage. And we think there's an opportunity to continue to expand that. We either have submitted or planning on submitting 7 new LCDs throughout the course of 2023. And so things like lung or neoadjuvant breast or gastroesophageal, ovarian or later when we publish our pancreatic data. I mean we intend to submit all those. And I think that will put us in a position to have what is really nearing a pan-cancer coverage from Medicare. Now of course, there's a lot of work to do with each of those submissions, but I think we're in a great place because we've done the hard work and we delivered the data. A lot of the studies that you're seeing come out now, these are studies that we started 5 years ago, 6 years ago. Some of the studies, even the ovarian cancer study we put out, we started working on that in 2015, 8 years ago. So it's not like we just kind of at the last minute, put all this data together. Like this is the result of a significant amount of work over time. And when you look on the commercial side, which represents about half of our volume, we've now seen Blue Shield of California issue a positive coverage policy pan-cancer in addition to coverage in certain indications like colorectal and bladder from Blue Shield -- or excuse me, Blue Cross of Louisiana. And we think that's a step in the right direction. And we think that really kind of sets the path for broadening commercial coverage over time. I think the biomarker bill could be a positive, but really remains to be seen how much of an impact that's going to make over time.

Got it. And then we're talking about sort of the debate of tumor-informed versus tumor-naive. Where do you see the early adoption of MRD happening, and already seeing it really with your test? And are doctors more comfortable initially with a tumor-informed approach? And do you expect over time the market would be best served by both approaches? I mean the way I kind of think about it is if you're asking doctors to adopt a brand-new technology and liquid biopsy for MRD, tumor-informed seems to be the next sort of logical step. But at some point, later on, there's going to be mutations that might develop. You might need to have a tumor-naive approach to pick those up. But as you think about sort of your MRD franchise, do you feel like over time you'll need both? And do you think the tumor-naive is really sort of where the early adoption is going to take place -- tumor-informed, sorry.

Yes. I think we -- look, we obviously are in the tumor-informed camp. And I think the good news is that we're seeing a very positive response from physicians, in response to the data that we generated. We've now published 40 peer-reviewed publications that support the quality of the test and the performance specifications to the test across a broad range of tumor types. And I think that's resonating with the physicians. I think there's very rare circumstances where the doctors from, what we're seeing, are opting for a tumor-naive product. And I think it's in line with our expectations that doctors want to see outcomes data. They want to see strong peer-reviewed evidence. And I think we're in a great position. Now with that said, I think, surely, there's going to be multiple competitors in the space. And whether they're tumor-informed or tumor-naive, I think we've shown that we can compete in an environment that is highly competitive. And the way you do that is have a good product, back it with strong peer-reviewed evidence and have a good customer and user experience.

One thing -- I think I've asked you guys in the past about one thing I always wonder is, you kind of touched on it earlier, where with women's health, you were the fourth player and you became a leading player. With MRD, you're the leading player. How does your approach -- particularly as sort of the CEO overseeing the everything, how does your approach change being a leader versus sort of being a fast follower trying to gain market share?

Yes. I think there's -- I think having lived through this experience of being the fourth to market and having to sort of fight for every inch and come from behind and figure out how to get reimbursement, how to get in network, how to grow our volume, how to build our a sales team, the same, I think, principles and same kind of blueprint that we use to now get to the leadership position are being applied as we deploy Signatera. Certainly, I think there's more work to figure out exactly what the clinical indications are that are going to resonate with physicians, what types of studies we need to do, what the path is going to be for guidelines, what the path is going to be for Medicare commercial reimbursement, how we spend our time in the field. But I think we've largely figured those things out now and I would tell you the biggest lesson that we learned from NIPT is that data drives everything. And that's why in 2015 and 2016, when we started to move forward with Signatera we realized that we have to spend a lot of energy developing strong clinical trials. And now the reason why we have 40 peer-reviewed papers is because we hired an entire team of people in 2015 and '16 to go set up these trials and go find biobanks and generate prospective studies. Now we're seeing the results of that where every month or every quarter, returning to crank on new data that's coming out, and it's exciting. Even things like big, randomized prospective clinical trials in colorectal cancer like the Altera study. We started that 5 years ago. And now it's great to see like the NCCN guideline committee come out and say that they want to see the randomized data in colorectal cancer because we have it. It's coming. And the Altera trial is going to be completed with enrollment very soon. And the results we think could be shared at ASCO next year. So I mean, to be in a position where we're 12 months away from a definitive readout from a large-scale, prospective randomized study of our product, I think, is a really incredible spot to be in. So we're feeling good about it.

Just turning to the last point about NIPT and those 40 peer-reviewed publications that you've had. How do you continue to grow those publications? And how important is that to continue to drive this publication, even though you've got leading market share, high-level penetration? How important is that to continue to drive those peer publication -- peer-reviewed publications?

Yes. So shifting now to NIPT and our peer-reviewed data there, where I think we actually also have 40 peer-reviewed publications. So what's really cool actually is we have 3 large publications that are sort of coming out right now or were either just published or are about to be published. One was on maternal findings, which I think is important, although it's very rare. We can identify certain patients that have a risk for maternal cancers. I think the second was on adverse outcomes, and this came out of the SMART study. We can identify a very small subset of patients that hasn't significantly increased risk of pre-eclampsia or pre-term birth. And then the, I think, paper that is the most meaningful out of the 3 is a large-scale multisite prospective validation of sex chromosome aneuploidies. And nobody has published on this at the same level. And so this is a test that largely has already been adopted by many physicians that are doing NIPT. But most companies have not done a thorough validation in the way that we have with sex chromosome aneuploidies. So it would be great to publish that. The data makes a difference. And the remaining top-tier academic centers that are very discerning about which product they use, they want to see data. And we're lucky that we're in a position to show that to them.

Got it. And then any update on the timing for potential ACOG guideline inclusion for 22q? And I think it's something that the market is very focused on, that I know you addressed a lot of questions on it. But any kind of update on that?

Yes. So the good thing on recent or future guideline inclusions is that we don't build these into our operating plan. So when we say we're going to get cash flow breakeven in a particular quarter in '24, we give you our revenue guidance for the year and we talked about the very positive outlook, that doesn't include us getting a 22q guideline or a new carrier guideline or an NCCN guideline for Signatera. That includes us executing our operating plan and we don't need those things in order for us to go grow the business and get it cash flow-breakeven and have a very good gross margin. You can see our gross margin targets for the year remain intact. Now when those things hit, of course, that will be an opportunity for the company that could be very large. And I think we'll largely match the amount of effort that we put in to generate the data to get to the point that we're in, but it's not that we need it. But specifically, we understand that the guidelines committees have met on various topics in the pre-natal space. We don't know the results of those meetings. I think we'll see, as information comes out. But I suspect we'll hear something sort of later this year, one way or the other. And I think what we have to focus on is delivering the right data and making sure that we've done a thorough study. And when you look at the fundamentals across things like 22q, is it a common disorder? Is there a screening test that has a high sensitivity and high specificity in a good positive predictive value? Is there an intervention that can take place? I mean it really checks all the boxes. And that's why we were pleased to see the American College of Medical Genetics issue a guidelines supporting the use of 22q testing. And we'll have to see where ACOG comes out on it.

Got it. Shifting back to oncology for a minute. Could you give me any update on where you stand on the development of the blood-only early cancer detection assays for colorectal? And I think last quarter, you mentioned you expect to read out by the end of the year, but any kind of helpful time lines that we should be looking out for?

Yes. So we have a very kind of limited investment at this stage on early cancer detection, but the good news is that we can make a lot of progress with a relatively limited investment. And we've got some of the world's leading scientists, the folks that sort of invented Signatera, for example, Panorama, I mean, they're working on technologies like early cancer detection. And we've looked internally at the results of an initial proof-of-concept study on about 100 samples. And we've said later this year or early in Q1, we're going to read out the results publicly of 1,000 sample case controlled study. And based on that and based on the reception of those results, we're going to decide whether it makes sense to invest more significantly into the next phase of development there. But we want to do that from a sort of position of being open with the data and getting feedback and making sure that it makes sense for us to put our foot on the gas.

Got it. And then just on organ health, there's obviously been a lot of changes in that market recently. Maybe talk about some of the changes that have happened and how that impacts your business and how you see that business moving forward.

Yes. So there's been a handful of changes. I think the -- probably the largest one which didn't impact Natera was that Medicare has sort of come out and said that they're not going to pay for RNA testing when cell-free DNA testing is done. So you sort of have to choose whether you're going to do cell-free DNA testing or RNA testing. And because Natera largely or I guess was only doing donor-derived cell-free DNA testing, we weren't impacted by that. Now I think separately, they've sort of further clarified their existing local coverage decision, which is largely in line with how physicians were using Natera's product anyway. So again, not much of an impact to Natera. We did see some disruption in volume, I think we've said that probably volume is down by like 15% or something in that range and that's just from doctors sort of being confused about like what the new policy means, how they implement it in their practice and so forth. But as things have started to settle and we've had a chance to have discussions with the physicians, we've actually seen that volume starting to come back up a little bit. And then also, simultaneously with that happening, we got coverage for heart donor-derived cell-free DNA testing. And as a reminder, our data looks very strong there. So I think that the volume has been increasing there. Now we're able to get reimbursed for it, which I think is a benefit. And then the bigger item here, it's hard to kind of not focus on what's happening in the short-term. But in the background, over the last 4, 5 months, we've actually seen 4 society guidelines come out in support of heart and or kidney testing using donor-derived cell-free DNA in the setting of a transplant. And that's actually incredible because that can unlock significant volume within the space. But it can also allow commercial payers to now come in and start paying us. Today, we're not really getting paid by either commercial payers when we run donor-derived, cell-free testing. So I think there's an opportunity here. If you -- we're taking the right approach of sort of having a relatively low operating expenses, keeping focused on just running the operation and I think growing the margin profile of the business. The other exciting thing in the organ health business is our work in chronic kidney disease. And we look at the Renasight test, which will accept genetic conditions for patients that have been previously diagnosed with chronic kidney disease. So we expect the RenaCare study, which was a multisite prospective study with about 25 of the top academic centers across the United States was collecting samples and monitoring physician behavior as a result -- of the results and looking at whether there's a change in care. We think that's going to be published some point later this year. And that can have a pretty meaningful impact on what could be a very large opportunity over time in the chronic kidney disease setting.

Got it. And Mike, you're not getting off the hook. You guys mentioned the 2024 cash flow breakeven guidance and cash management, obviously, given the current macro environment is top of mind. And you also impressively lowered your cash burn, in Q1 versus year-over-year, pretty significantly. Maybe just talk us through sort of the cash burn dynamics and cadence of cash burn expectations for folks over the course of this year and maybe further out, just so we can get kind of an idea of that path towards cash flow breakeven in '24.

Yes. Look, I mean I think the main drivers are -- Steve has kind of done a nice job to summarize them already in this chat, but it's basically continued revenue and volume growth on a stable OpEx base, supplemented by some gross margin improvements as reimbursement kind of gradually gets better, but nothing really heroic baked into that assumption in terms of new guidelines being required. So that's basically what we've done. We had to make an upfront investment to build the commercial channel for Signatera, but the right sales reps and support personnel in the field in order to offer kind of a first-class service. And then once that's in place, the strategy was to be able to kind of drive volumes with this commercial channel. That's exactly what you've seen over the last year. I mean you see the volumes sequentially quarter-on-quarter continuing to ramp, and we continue to get leverage on that investment. I would just remind people that we've done this once before. Back in 2019, we actually got to a place where the Women's Health channel was kind of at the right size for kind of just continued growth. We held that channel constant in terms of the level of spend that we have and yet the volumes continue to ramp. We had set a goal previously middle of 2019 to get the Women's Health business to cash flow breakeven and we got there. Okay, just on this exact same idea. Build the commercial channel, get into a leadership position with the data, drive volumes and get leverage on the channel. So we're just repeating that again here. And arguably, a much, much bigger market with much stronger competitive moats with the data that we've generated and quite encouraging reimbursement traction so far. So that's really the plan is just to kind of hold those OpEx lines relatively stable as we continue to just ramp this business.

Yes. And maybe just on OpEx. I mean can you talk about -- can you talk a little bit about how you manage the spend levels while simultaneously supporting growth and innovating through R&D? Because I think we've been -- there's been some level of confusion over the past couple of years because the funding environment was very different than it is today. And I think there's a confusion as to whether do you continue to need to spend more and more on SG&A to support growth? Or like you said, with women's health, once you build the brand, create awareness and get to a certain penetration level of market share, can you then drop that spend and let the volumes kind of recover? And can that be repeated in the different types of businesses that you're in?

Yes. It's not a matter of necessarily dropping the spend. It's just a matter of having a critical mass of commercial infrastructure in place. And so that just requires an upfront investment to kind of build that commercial infrastructure. And then once that's in place, those -- that infrastructure can support a huge amount of volume, okay? But it's got to be in place first. And so that creates that kind of cash investment time as you're building that infrastructure and figuring out exactly like what level of intensity you need in terms of number of people per site, for example. And we've gotten to that level now. We've basically held the oncology commercial infrastructure flat for the past year and yet you see volumes just continue to ramp. So it's absolutely the case that you've got to build a channel and then you can -- that channel is set up to then support a very, very large market.

And then maybe just shifting to gross margins. You had the target of 41% to 44%. You've already mentioned before on the call that you don't necessarily need guideline inclusion to meet that. Could you talk a little bit about, to the extent you can, in terms of the path beyond 41% to 44%, and what that kind of cadence looks like? Because I think that's probably the most common question I get from investors on the financials. There seems to be this belief that you need to get to sort of above 60% given the level of OpEx that needs to be spent. I don't know if that's the right number, but I do feel like people want to see that path beyond and what that actually looks like. So maybe help us frame that a little bit.

Well, I think the path to getting to like a cash flow-breakeven quarter need not be kind of a 60% gross margin. I mean I think there is a path when you're in the mid- to high 40s where you're getting to this cash flow breakeven point or very close to. And so I think the path from here to there is achievable based on a couple of factors that I think are achievable. One is just getting reimbursed on our reimbursed indications at a higher percentage. So a myriad of Medicare Advantage plans out there, gradually kind of just understanding like what are their specific requirements to get the coverage that they've already signed up to provide to their patients and make sure that we're getting paid and winning percentage of time. When we submit claims in colorectal cancer to Medicare Advantage plans, a lot of opportunity to continue to improve that. Increasing the percentage of time we can get reimbursed from traditional Medicare is another important driver. A third one that I think can happen relatively organically is just the mix shift as the launch of Signatera matures toward more and more people kind of graduating, if you will, to the recurrence monitoring setting from getting the initial bundle, where we've got a lot of cost concentrated in the kind of the initial kind of exome setup. So the higher the percentage of the volume that's coming from people that are getting recu monitoring, naturally, that's a higher gross margin part of the curve for us. So those 3 things combined with kind of steady but unspectacular improvement in women's health ASPs can get you to that kind of mid- to high-40s gross margin. I think the path to the 60-plus, and we had laid out kind of a path to kind of getting to 70-plus, I think roughly this time last year, I think that would require some incremental reimbursement from like one of these three guideline decisions that we've been talking about here in this chat. So one of them might be a stronger statement on expanded carrier screening, one of them might be a statement on 22q screening or one of it might be perhaps maybe a footnote inclusion from NCCN guidelines in colorectal cancer. I think one of those three would kind of get you -- then that's like -- that would give you broader commercial coverage and getting line of sight to 60% gross margins and beyond.

Got it. Maybe as we close here, just sort of a high-level question for you, Steve, is something that we've also fielded from investors just on the MRD market overall. It's a large market. I think there's a perception that it's getting crowded, but I think the size of the market could support a lot of different types, and there's obviously increasing awareness, more and more people come in. But I think there was a belief previously that being a fast follower allowed Natera to blaze the trail and create the data. I'm not so sure that, that is as easy path as it's been before. So maybe could you talk about where you see sort of the opportunity MRD market? How many companies do you think that could support? And do you see being the leader as being a significant advantage in that market as you kind of continue to grow that?

Yes. I mean look, it's a very large market. So obviously, there's a lot of room for competitors to come in. But I think the reality is, is that you hear a lot in the investment community about MRD entrants, but we really don't hear about these companies in the field speaking with physicians. I mean, I think certainly, there's some presence from Guardant Health. But I think largely, they're really the only company that we've seen actually in the field from a standpoint of MRD testing. And I think there's definitely different ways to do the technology, whether it's tumor-naive or tumor-informed. And I think some companies are talking about more variants and so forth. But I think our data, when we look at kind of what comes out at ASCO and so forth is very, very strong. And we think our sensitivity is coming out in a very, very strong position. So we're really proud of what we built. And we welcome others to come in but they have to launch their product and come in and compete with us. So we'll see how it pans out.

Got it. Why don't we leave it there. Steve, Mike, thank you very much.

I appreciate the time. Yes.