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

All right. Great. We're going to go ahead and get started. I'm Catherine Schulte. I cover life sciences and diagnostics here at Baird. Very excited to have Natera here presenting today. From the company, we have the CEO, Steve Chapman; and the CFO, Mike Brophy. So we're going to dive right into Q&A. But if you have a question for the team, you can send it to [email protected], and I will pass the one. So Steve, Mike, thanks for joining us.

Thanks for having us.

Thanks for having us.

Maybe starting off on the women's health business and NIPT. Maybe just give us a picture of where we are today in terms of market penetration and how you envision that playing out over the next couple of years?

Yes. So today, we think there's around 4 million births in the United States, maybe slightly more -- excuse me, slightly less. And we think the market is about 50% penetrated today in the NIPT sector. So that's a mix of high risk pregnancies and now average risk pregnancies. We think over the next 3 years, that can get up to 80%, potentially even 90% if more women opt in for aneuploidies screening. So we think there's a long way to go to continue to better serve patients and we're excited about the growth opportunity there.

You guys have put up really robust growth in your women's health business over the last several years, probably the only name to keep beating and raising throughout COVID. But as we think about what's driven the penetration, whether it's better reimbursement in average-risk market share gains. I guess how would you parse out the biggest driver over the last couple of years.

Yes. I mean it's really a mix of things. Largely, I think the underpenetrated market giving us a long runway, combined with continued innovation and continued focus on generating meaningful clinical data, for example, what we did with the SMART study which is the largest prospective NIPT study that's been done with genetic outcomes of more than 17,000 pregnancies. So we think it's a mix of things, combined with expanding reimbursement and access. But -- the good news is there's a long way to go. And we want to continue to focus on helping patients and expanding access to care.

And maybe on SMART study and implications for microdeletions, I guess any updated thought on ACOG guidelines? I know they're having 2 working sessions this year. So have you heard anything? I think the first 1 has already happened, at least -- any expectations for when we could potentially see more supportive guidelines?

Yes. So I think when you look at the sort of basic fundamentals of what the requirements are for a genetic test to be covered by a major medical society, it has to be a common condition. There has to be a screening test that has a high sensitivity, high specificity, good positive predicted value. There has to be an intervention that can be taken. And the disease has to be well understood and well characterized. And when you go through that list, I mean, we think that 22q testing, particularly I think, meets all of the basic criteria. It's exceptionally common, 1 in 1,500 pregnancies, which is, in fact, more common than cystic fibrosis and SMA combined, which are 2 of the disorders that are routinely tested today in pregnant women and recommended by ACOG. So we think it really sets up nice for potential guideline inclusion. I think the missing link here over the past 10 years, and why it's not already part of guidelines is that there was limited data available on the performance of tests and on the utility of screening. But with the SMART study, which was a 7-year multisite prospective study that we started back in 2015 that was published in 2022, we showed that we could detect 22q disorder with a very high sensitivity and specificity and a very solid positive predictive value. And I think that's really the last missing link. So we're feeling positive about things. But of course, we don't control the outcome of the medical decision-making at the various societies. We would hope that they would want to enable access for this important screening and we'll await updates.

As we think about what we saw for ACOG with average-risk, the kind of first inclusion was maybe a moderately positive inclusion. We saw maybe 1/3 of payers update their policies, then full inclusion and more payers adopted. I guess, what do you view for microdeletions, do you think it's kind of a step function like that where there might be multiple iterations or do you think you could get a full recommendation after that?

Well, the good thing is the American Congress or College of Medical Genetics has come out with a very strong recommendation. And I think that, that is a good sign. And I think that now with the frequent usage of the testing and the advancements of circulating cell-free DNA over the past maybe 15 years. I think we're in a different place than we were when average-risk guidelines first came out. But today, this is a test that's largely unreimbursed. And so I think even if 30% of payers came out and covered, that would be a benefit for us in being able to continue to provide this type of testing to patients. So -- we'll have to just wait and see what comes out and then go from there.

And Mike, maybe 1 for you. On the women's health business, I can't get too comfortable over there. This is a business that's been cash flow breakeven or positive for quite some time now. But obviously, a lot of market penetration to go, potential upside for microdeletions. I guess how should we think about the profitability of this business going forward? I don't think you need a lot from an OpEx investment standpoint, but how should gross margins unfold for the women's health business?

Yes. Well, I mean, I think it's a good point. I mean I think the women's health business is a good case study for Natera as a whole. If many of you in the audience will recall that we had set a cash flow breakeven target for the women's health business back in 2019, and we said, "Hey, we'll get there by 2020, and we actually hit that target. And the way that we did that was we -- first, we built what we think is a best-in-class commercial and laboratory operation. And then we grew the volumes. We went from something like 25% market share to now more than 55% market share by investing in the product, having great data, having a great commercial team and then basically holding that investment constant as the volumes grew and maintaining strong levels of reimbursement for the test, and we hit that goal. So now the goal that -- we're basically replaying that for the business as a whole with the standard now being the -- this investment that we've made in the oncology business, and we're way down the path for that target for the business overall. In terms of women's health gross margins itself, I mean, I think the gross margin in women's health to think about that as a business stand-alone would be circa 50%, 55%, something like that today. I think over time, I think it's both the women's health business and Natera as a whole, it's not reasonable to think about this as something 70% plus kind of gross margin business. A meaningful component of that can come from just organic improvement in the average selling prices. As we continue to match up the stated coverage policies, which are quite ubiquitous in favor of average-risk NIPT, were there actual experience of getting paid for this test when we actually submit the claim. There remains a myriad set of administrative hurdles that kind of getting paid the way that we think that we should. So we're getting paid something like 70%, 75% of the time, for example, in NIPT, and that really should be 95% of the time with the benefit of a couple of more years. So I think that's -- it's a similar story for carrier screening. So overall, I mean, I think that's a really interesting business, right? Because obviously, it serves a critical unmet need for a large patient population, and it's going to continue to be a strong source of growth for us and continue to generate cash flows.

All right. And we've got a question from the audience, maybe goes to your point earlier about market penetration. You said 50% today that maybe goes to 80% over the next several years. The question is, how do you get more women to opt into NIPT? So maybe what levers are you pulling to get that incremental penetration?

Yes. So I think, of course, getting screening is always a choice between the patient and the physician. But I think historically, we've seen rates that are kind of opt out in that kind of 20% to 30% range because the biomarker screening that was available had a very high false positive rate. And there was a concern by many families that if you get tested and you have a false positive, you're going to get an unnecessary amnio or CVS procedure. And so actually, 19 out of 20 women that previously would get tested actually didn't need to go get that additional follow-up amniocentesis. And that sounds like a crazy high number. So today, with Natera's test, what we've shown is for Down syndrome, there's a positive predicted value of over 90%. So if we tell you that you're positive 9 out of 10 times, if you go get an amnio, you're actually going to have the disorder. And so I think that kind of higher level of positive predictive value remove some of the hesitancy for people to get screened. And so it's -- I think it's really education around what can be done there. The other thing that I think can increase the likelihood that people opt into screening is having more that you can do as a result of being positive and educating more about what you can do as a result of being positive. So 1 of the great things about 22q screening is that if you're positive, you can actually treat the baby immediately at birth with calcium supplements to prevent seizures and prevent hypocalcemia. So if you don't get tested, and the baby turns out to have 22Q birth, there's a possibility that won't get diagnosed in time and that will cause brain damage or potential issues with the opposed partum care. So I think educating more about interventions that can be taken to actually improve outcomes in that neonatal period is important.

Yes. Right. I want to shift over to Signatera in your oncology business. Oncology volumes grew almost 90% in the second quarter. I guess, what have been the main drivers of that momentum and how durable do you think those trends are over the medium term?

Yes. So we're at the very, very early stages of an incredibly large market. And I think for us, now having published 50 peer-reviewed papers on Signatera and being in the field, really since, I think, our initial publication in 2017, but then the launch in kind of 2019, 2020, we've been out there for a while now. And I think physicians are starting to get comfortable with the test. The logistics are working very smoothly. Patients are now getting recurrently monitored in many cases where their Signatera was set up a long time ago. They're coming back for their fourth or fifth or sixth blood draw now. And so it's really hitting on all cylinders. But it's having great operations delivering very strong peer-reviewed publications, having a large, well educated medical staff that's available to help physicians and help patients and then importantly, having coverage from Medicare. We've now received coverage in colorectal, breast, muscle-invasive bladder immunotherapy monitoring. So we've made access, I think, readily available for many patients. And it's all of these things together that have led to the success. And we think it's going to continue growing nicely.

And I guess what's resonating the most with oncologists? And are there any areas that they're pushing back on when it comes to MRD?

I think in many cases, oncologists are facing challenges where the tools that they have I think, provide important insights but not quite to the level of what they'd like to have. And so for us to be able to help the physician with additional information that is now published in peer-reviewed data -- studies to be predictive in addition to being prognostic. I think it's very helpful for them whether they're deciding to give chemo or potentially, in some cases, change treatments or change care for the patient. Of course, particularly in oncology, everybody would always like to see more peer-reviewed data, more studies, more randomized trials in CC and guidelines. And that's why we've invested heavily into those things. So a large part of our research and development budget has been on more peer-reviewed studies and randomized controlled trials. And we're excited because the first big randomized controlled study in MRD testing is going to read out, we think, at some point in 2024. We actually thought maybe mid-'24, but in fact, it might actually be sooner than that. And that's the ALTAIR study, which is a randomized controlled trial in colorectal cancer that is looking at treatment escalation for MRD-positive patients. But it's also looking at treatment on molecular relapse for MRD-negative patients. And so this will be the first large-scale prospective randomized controlled study that reads out, and we think it could be very impactful in the space.

Yes. And so from that data lens, I guess, to date, what do you think the most impactful study that you have is? And then over the next 12 to 18 months, there's ALTAIR, but any others that you would highlight as big data sets that we should be expecting from you?

Yes. So I would say the CIRCULATE GALAXY trial in colorectal cancer has been the biggest to date. We've reported out on the first 1,000 samples with 18 months follow-up, and we've shown that the test performance is excellent. And in fact, we were also able to show that the test is predictive of who's going to respond to chemotherapy and who's not. And that was a big insight, I think, that has enabled a lot of growth in utilization in the space. As we look forward, there's many studies that we'll be reading out. Some of them will lead to additional reimbursement. We talked before about our publication in gastroesophageal cancers. I think that's important. We've talked previously about our partnership with Foundation Medicine and the FoundationOne Tracker, which we think is a good test that will be used nicely for immunotherapy monitoring as that works its way through getting coverage. I think at San Antonio Breast -- and breast is an area that Natera has really become a leader. We generated a lot of data with the I-SPY consortium in neoadjuvant as well as adjuvant and recurrence monitoring. We think there's going to be some new data potentially on treatment on molecular recurrence which is, I think, a new paradigm that's going to change cancer treatment. And more and more over the next couple of years, you'll be hearing more and more about treatment on molecular relapse. And this is where the pharma companies can actually administer a drug on molecular relapse rather than waiting for clinical relapse. And I think it's possible you could see some of the first data coming out at the San Antonio Breast Conference and then again, in the ALTAIR study on treatment on molecular relapse. So we've got a full plate of the studies that we'll be reading out. We're excited about oncology.

And how would you characterize your competitive positioning in MRD? You have a few tests on the market now. I think more and more are going to come out with data over the next year or so. What should investors and analysts be looking for in these data sets to determine how high quality or how to compare them to your data?

Yes. I think -- what we see a lot is a company will come out with an analytical study, and they'll look at -- they'll take like a big cohort of positive patients and they say, look, how amazing our limited detection is. We can detect within this positive cohort of mixture samples, we can get a low limit of detection. But then when you actually look at the clinical validations and how the test performs in the clinical setting, the performance is really subpar. And so I think what you really need to look at is how these companies are performing in the clinical setting, in a peer-reviewed publication. And ultimately, that's going to determine I think the outcome and how competitors can do in the space. We've moved beyond looking at just kind of analytical performance specs sensitivity and specificity to now looking at overall survival and predictive claims. And so I think as others are starting to do initial validation studies or analytical validations, we're resulting out randomized controlled studies that are interventional in nature, where the doctors have actually used the test to make a determination to give treatment. And we've shown 2 years of follow-up and whether the patient had an increased or improved overall survival. So -- there's a lot that I think has changed that I think has created a strong leadership position for us when it comes to data generation. The other thing that I think is important is that this idea that you can just ride the reimbursement coattails of a company like Natera, that's proven actually to, in fact, not be true. And I think we've seen now a couple of companies that have gone and got Medicare reimbursement where they've actually only gotten a very limited reimbursement from Medicare. And I think that the paradigm that has set up is if you want to get reimbursement for Medicare, you have to go do it yourself and you have to go publish your own peer-reviewed study. and you have to show that your test works across all the different use cases. And so this notion that you can just ride coattails and get reimbursement -- rising tide helps all chips. That's just not the case. The other area on reimbursement is ADLT status, right? And I think Natera has uniquely gotten positioned for an ADLT for recurrence monitoring. We've now seen other formed companies that have been priced for recurrence monitoring at an $800 price point. And I think that shows that they're not going to get an ADLT and having that $800 price point is going to be challenging.

Yes. All right. That makes sense. You mentioned NCCN earlier. I think the CRC panel met back in late August. I guess when could we potentially hear an update there? And how do you feel you're positioned in this update round?

Yes. So -- last year, they came out -- they had the meeting in August, and I think the report read out in March. So I -- from what I understood, that was a little bit delayed from when they normally read out. So it's possible we could see something in Q4 or maybe earlier in the year. We don't know exactly what's going to happen, but I would say the good news is that we know the CIRCULATE study was reviewed this year. And in 2022, they just weren't able to review the CIRCULATE study because it was too early. The paper was -- the data had been read out, but it wasn't published, and so they weren't able to really include it in the vote. It's possible we could be included -- what I think would be a huge win for us actually is if we're included in the guidelines as a footnote, where they talk about prognostic factors leading to cancer recurrence. If we get that, that's a massive win. That's really the first step towards having a strong positioning with payers and in the community and being officially part of the guidelines, there as a footnote. In the future, as the randomized studies read out, I think that's where you can get into the formal grid where your required offering if -- then if the test is not offered, the doctor is potentially liable. But I think the first step is being a footnote. So if we get that this year, that would be a big win. And we'll just have to see how things kind of pan out.

And Mike, maybe Signatera ASPs that got into the mid-800s this last quarter. I guess, how do you see those trending into '24? How much of a lift is from getting more patients in the surveillance setting, getting additional Medicare coverage, getting some private payer adoption is what do you think will be the biggest driver over the next 12 months?

No. Yes, it's a good question. I mean, just for context, I mean, we're now, I guess, in year 2 or 2.5 into the launch, and we started this progression at $500 range ASPs and high $600 cost of goods sold per unit. It's tough to make it up on volume at those unit economics, and we've really changed that dramatically as we expected -- as we kind of ramped ramp the launch. So now, as you mentioned, fast forward to Q2, we were kind of in the mid-800s on ASPs and blended COGS per unit, we're now kind of below $600. When you unpack the trends for what is driving the ASPs higher for Signatera, I mean I'm actually pretty encouraged by the drivers. They seem pretty repeatable to me and sustainable. You've got a critical mass of reimbursed tumor types from CMS. And those tumor types are kind of driving the majority of our volume and our volume growth at this point, whether it's colorectal cancer or breast cancer, for example. So I think that mix is going to continue to improve for us. I think the fraction of our patients that are eligible for Medicare is continuing to kind of tick up gradually, which obviously is a plus. You mentioned the mix between kind of people getting their initial test and now you've got -- you've got kind of cohorts of patients who started their test in the last couple of years, you can think about them as kind of now moving on to this recurrence monitoring setting, which also further provides positive trends for ASPs. Looking forward, I think there's a clear path to have the ASPs into the $900s next year. We'd like to see that and potentially higher. One thing that gives me kind of some confidence on the trend continuing to improve is everything I just said, I think, is going to just continue to compound on itself. And in addition to that, when you look at kind of reimbursement from Medicare and Medicare Advantage in currently covered tumor types. There's a lot of room to run there to just improve the fraction of time we get reimbursed on tumor types where we should be getting reimbursed, okay? It's kind of similar to my prior comments about NIPT. There are a number of administrative hurdles that are kind of inevitable in diagnostics that you have to just unpack and solve separate from coverage policy to get reimbursed when you should. And there's a path, I think, to $1,000 just on kind of solving those challenges, leaving aside kind of potential uplift from footnote inclusion in the guidelines or additional reimbursement, all of which we're working on.

And how do you think about -- or how do payers think about cost effectiveness for MRD as you have those conversations, some of which have yielded coverage results for $3,000 a test in the surveillance setting and total cost per patient. I guess how have those cost effectiveness conversations gone with payers?

Look, the good news is that the cost effectiveness and the clinical utility math of Signatera, I think is immediately apparent to anyone who's want to engage on kind of like the population health dynamics here. And you've seen that, as you mentioned from some of the commercial coverage we've already received. I mean course of therapy for chemotherapy can be quite expensive. I mean this is -- estimates will range and they'll vary by patient, but this can be $30,000 to $70,000 kind of for a course of therapy for chemotherapy. To say nothing of the expense of what happens when a patient foregoes chemotherapy that they perhaps should have gotten and then they returned to the clinic with Stage III and IV disease, and now you're trying to get them on to like a targeted therapy, which are much, much more expensive. So even in the course of even a calendar year post diagnosis for Signatera patient, you don't have to change the course of treatment for a high percentage of patients before the cost of the Signatera testing is nominal compared to the savings. So we've seen that -- I mean that underlies the speed with which we've been able to secure Medicare reimbursement because obviously, they own the outcomes for these patients. And I think it's also an important harbinger for our ability to get commercial coverage here in the coming years.

Yes. All right. We've got 3 rapid-fire questions to cap things off, Michael, keep you on the clock and Steve can chime in if you have something to add. But as you think about the next 12 to 18 months, what are the 2 biggest opportunities that you see for the company?

You want me to go? Okay.

Go ahead.

Look, I'm very excited about the -- about data sets to come in Signatera. Steve mentioned this. We've got 24-month follow-up in the GALAXY arm. We've got randomized prospective data coming in the ALTAIR arm, continued kind of growth and the ramp of this new space that Signatera is plowing forward, we've got some important guideline updates coming. And just the continued progression and maturation of this business as we kind of progress through these product launches. Got it. That's the right answer. Steve checks me up on...

Free cash flow breakeven...

Yes. I mean, I think that's kind of comprehensive like when I'm talking about kind of the maturation of this business, I mean, I think that's like 1 of the metrics. I think there's a way to measure that kind of in the clinical data and the growth in the volumes. And also, I think the -- when you do the right things for patients, the business kind of tends to follow with that, and we're seeing that already. Yes.

On flip side, next 12 to 18 months, 2 biggest potential challenges for the business?

Yes. I mean I'll take that. I think 1 of the challenges we have is that society guidelines aren't always under our -- they're not under our control, right? And so we're -- in some ways, to really unlock that next leg of significant growth in getting to 80%, 90% penetration in some of these markets, you need to get support from the societies. The good news is that we've done the hard work, and we've done the studies that are required. I think we're doing the studies that are required to get into the guidelines in a definitive way. So I think we're in a great position there. But of course, we don't always control the outcomes.

And then last one, what's something that investors and/or analysts don't ask you very often, but you wish that they would.

Do I make a Japan pitch or do you want to do the...

Yes. Well, there are 2 things. I think Japan and Renasight and RenaCARE, so go ahead, Mike.

I'll do Japan. So it's I think the next -- 1 of the many opportunities we see on the horizon for Signatera is being able to bring Signatera in a major way to Japan. As many of you know, the volumes of people who suffer from colorectal cancer in Japan is actually quite similar to that of the United States because it's -- colorectal cancer is more common in Japan -- in the Japanese population than it is in the United States. These trials that we're talking about, the CIRCULATE trial, these readouts we've had have been -- these have been run in Japan, and these are landmark studies in Japan. So we feel like when we get more of these prospective readouts, ALTAIR and VEGA in particular, we believe that should put us in position for Japanese FDA approval, national health service reimbursement and a commercial launch in Japan, which will give us a chance to really help a lot of patients and it would be the next major leg of growth and have an international vector to that growth for Signatera. So I'm quite excited about that. That's probably a '26 or 2027 event. So it typically falls just outside the quarterly focus that we get from the analyst present company excluded. But I think that's worth knowing about, and I'm quite excited about that.

Do we have time?

Go for it.

I think another area that is underestimated right now is chronic kidney disease. And we're doing some things, looking at germline testing in the chronic kidney disease space. We have a product Renasight in a big study, RenaCARE, that's actually going to be reading out, we think potentially this year. This was a multisite prospective study with 22 of the top leading academic centers to look at the impact of genetic testing on patients with chronic kidney disease. This might be the single largest application of genetic testing. When you look at the patient population in the United States, 45 million patients are diagnosed currently with chronic kidney disease and about 1 million patients per year. So we think this could be in the future, big -- as big as hereditary cancer testing, for example. And it's -- we've actually done a lot to put ourselves in a leadership position here, and we're known nicely by brand name. So stay tuned this year, watch out for the RenaCARE trial. And when that comes out, we'll be doing a lot of announcements about it.

All right. Great. Thanks Mike, thanks so much. Thanks, everybody for joining.