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

Good afternoon, everybody. Thanks for joining us. My name is Andrew Cooper. I'm the diagnostics and tools analyst here at Raymond James. Happy to have Natera here with us, CFO, Mike Brophy. And we're going to do a little fireside chat this afternoon. So I'll maybe dive right into it. But Mike, just to start us off, maybe give us a little bit of the high-level overview, who's Natera, what do you do and kind of how you think about the markets you play in.

Yes. It's great to see you guys think so much for having us. So Natera is a diagnostics company. Maybe a little bit of background on me, will help you understand the company. So I'm the CFO. This is year 9 for me at the company. I'm the relative newcomer among the management team. When I first met this company back in like 2010, if you took a picture of us at that first meeting, if you took a picture of us at the Board meeting that we're going to have later this week, it's going to be all the same people. And the core technology and the strategy really is the same as it was back then and we basically have a core technology of chemistries and algorithms that allow us to take a tube of blood and make very, very sensitive measurements of cell-free DNA that's circulating freely in the plasma. That core technology has kind of sprouted a couple of major product verticals within the company. So the first major product was our Panorama noninvasive prenatal test, which when we launched it was kind of a niche concept, but now something like 65% of women in the United States, pregnant women will get an NIPT circa 10 weeks into their pregnancy. And more than half of them will get a Panorama NIPT, so that's kind of 10 years on. That's where we are. We have a second offering in kidney transplant rejection monitoring. So when a patient receives a kidney transplant, obviously, one of the primary concerns that we have is that the patient's immune system is going to reject the kidney. We have a plasma test that screens for cell-free DNA being secreted by the kidney into the patient's plasma and gives a really accurate result of the patient status, which makes a huge difference in the care for those patients. And then finally, and possibly kind of the largest market in terms of kind of TAM measurement is the most recent launch we had, which is now kind of a 2019 launch for a product called Signatera. Signatera is the category creator of the minimum residual disease in recurrence monitoring space. So the idea is that you find out you have cancer very oftentimes. The first intervention is to have the tumor removed surgically. Then what we do is we build for each patient a blood test that's personalized to the variants that were found in their tumor. And we use that blood test to track the patient's progress through their cancer journey. So this is rapidly changing the standard of care for solid tumors in the United States, and we've had a huge, huge volume ramp. So that's kind of the background for the business. The strategy from here is pretty simple. We've got this core technology. We've got these core indications, these core kind of commercial channels. And the plan from here is just to continue to validate the product in increasingly large and ambitious prospective clinical trials to continue to expand the areas in which we can care for patients. So that's it. In terms of financials, this is -- it's about a $10 billion market cap. We did $1.80 billion in revenue in '23. We just did the -- so that's about 40% growth off of '22. We just had our Q4 earnings call where we released guidance for the year in addition to resulting -- reading out some very strong Q4 results. And so the guide, I think, implies continued strong trajectory in the business. I'm happy to be here to talk about it. So thanks for having me.

Perfect. I want to start with kind of the historic bread and butter, like you started with in terms of that reproductive health segment. That's been pretty dang impressive just in terms of, let's call it, end market growth post average risk inclusion and guidelines. Where are we? You mentioned the 65%. But kind of how do we get here on penetration today? And I think the other kind of big piece is what happens to drive that remaining proportion who haven't quite adopted yet to start using NIPT, to start using carrier screening more broadly?

Yes. I think you're just going to see a continued kind of linear adoption would be my best guess. I mean, I think there's -- there are -- the data is really there in terms of NIPT, as you might expect for anything that has like that level of penetration. I think the interesting kind of historical precedent is the quad screen, which is a blood test that's been in the guidelines -- clinical practice guidelines for pregnant women since the 1980s. And prior to the advent of NIPT, the quad screen got to like 95% penetration despite the fact that it had a 5% positive predictive value. So what that means is that for every 20 positives on the quad screen, there'd be 1 true positive and 19 negatives that you would confirm on an amniocentesis. NIPTs are leaps and bounds better than that. I mean it's like high 90s kind of positive predictive value. But the quad screen history gives you some, I think, precedent for the level of penetration, what one could achieve in the market.

Perfect. That's helpful. And I was just commented to you as we sat down. This time last year, we were talking about some share shift in the market. We're talking about it again with a relatively good-sized player who's faced some challenges in Chapter 11 when we think about Invitae. You acquired their reproductive health business. Maybe just, first, what took you to that pathway of, hey, this is the right business to acquire the right time to acquire it as opposed to -- I think in the past, we were more used to you saying, "Hey, we're going to go compete this away from the rest of the space?"

Yes. I mean, all of our growth historically has really been organic growth. I wouldn't characterize this as a large acquisition. We had an ongoing dialogue with Invitae as a result of the -- some oncology litigation we have with them, wherein we were awarded a circa $20 million judgment. And so we were kind of -- we had a reason to be interacting with them back and forth on that topic. And obviously, they were kind of going through some strategic alternatives and discussions, and this kind of came up through those kind of natural discussions. There's a lot of overlap in the space in terms of like people know each other and things like that. So it was kind of a -- it was a topic that we had socialized with them, and we're very pleased with the outcome. I mean we were able to hire -- they had something like 30 sales reps in the space, and we were able to hire those folks. So that's great. We're able to kind of provide kind of continuous care to those clinics that were otherwise going to find out that Invitae was going to, I think, shut this down effectively, and then they'd be scrambling because they've got patients coming in the next day that need their blood tests. So it's great to kind of make that a smooth transition. And I think for us, I think it should pencil out reasonably well as we kind of discussed on our earnings call.

And I want to sort of dive into that. You talked about $20 million to $30 million of revenue in the guide. I think you also mentioned, hey, what you maybe last heard from Invitae, which was some time ago wasn't the right number. But they've historically priced pretty aggressively would be one way to put it in terms of trying to gain some share there. I guess the question here is when we think about what your retention can look like, is there anybody else out there who can offer them some of the pricing that Invitae maybe was? Or had they shut a lot of that down and let it go away? Just what's the competitive landscape as everybody else is going to go after this business on the shakeup as well?

Yes. It's interesting. I mean, I think a lot of the dynamic and discussion around pricing has really been more for kind of investors that it was really a reality. I mean, I think that commercial and network contracts in the space are -- the pricing is pretty similar across labs. And I think that was largely true of Invitae as well. So I think there historically was this perception that there's a lot of price elasticity in that -- in the NIPT space, and I didn't find that to be actually true just in my kind of daily experience of being in the space. So obviously, we're going -- we're well positioned to compete for the business. We're not going to keep it all because we're not going to the lengths to acquire their lab or acquire their assets or their products or their brands or anything like that. The pitch is basically we're here. We've got a market-leading platform, and we're inviting those customers to migrate to our platform and not everyone is going to do that, right? And so share will [ scatter ] as per -- as expected in a competitive space. We've got some large reference labs that are very competitive that are going to win some business. And of course, you've got some smaller labs out there as well. And so it'll -- I presume those customers are going to find a home.

Perfect. And thinking about that, I think one thing that's been important, and we'll get into it plenty from here is gross margins, right? And so when you think about this business coming in and what it looks like at, let's say, it is $20 million to $30 million or you've talked about, "Hey, there's a potential for keeping more." What's the impact in terms of gross margins of that acquired business relative to kind of your legacy or organic core, I mean?

Yes. Our expectation kind of consistent with my prior comments around pricing is that I actually feel like the majority of that business, I think that we would be able to take on would be roughly at parity with the gross margins that we're seeing in our existing women's health business. Again, because we're going to be expanding volumes here, we're going to be offering Panorama to all of these new customers. And of course, we've got our own network contracts and our own lab. And so all those things remain the exact same. Yes.

Okay. Perfect. And then shifting to another sort of big topic in reproductive health. I'm sure you're just thrilled to keep talking about ACOG. It's been very topical. It feels like it's a moving target, right? Nobody really knows when it's going to happen. But maybe just give us kind of your latest and greatest view on that in terms of when and why you think it's a when, not an if.

Yes. And just for background for folks in the audience, I mean, what Andrew is referring to is that there's 2 potential additions to clinical practice guidelines that have been evolving over the last couple of years. So in the -- on the topic of the 22q deletion syndrome screening assay, that's a test we've offered for a long time. We very extensively validated that assay. We answered some fundamental questions around performance of the assay and, importantly, just incidence of the disease in the population, interestingly, because the outcomes for these patients are so disparate, until you ran the human genome project and you're able to kind of get your arms around the underlying genetics, it's actually hard to know that all these kids were kind of affected by one underlying cause. And so that hasn't had the same level of decades of patient advocacy that you might have seen, for example, with like cystic fibrosis or other disorders, which very clear what the cause is. Nonetheless, that data, the SMART study, 7-year -- 6-, 7-year, 20,000-patient prospective clinical trial published in top journals, 5 papers have been published off of that study now presented to all the top conferences. And we've seen a very strong guideline evolution from the American College of Medical Genetics, for example, recommending screening for 22q. And it's possible you could see additional professional societies adopt guideline recommendations as well. But to your point, Andrew, it's something that you've got to see. It's not really something -- it would never be something that we would include in the guide. And obviously, not within our control, so we'll watch and wait. It's a similar summary, which I will go all the way back through again for -- potential for a guideline, perhaps more clearly defining expanded carrier screening role in the standard of care. The current guideline is actually quite supportive. And it's possible you may see some updates to that as well this year. But once again, nothing that we have any control over, not in the guide, and we'll have to wait and see.

Maybe just to start with 22q there, attachment rates, you've talked about sort of 75% or so of your NIPT having that included. So nice flow-through if or when it kind of turns on in terms of payment. But have you had some of those early conversations with the commercial payers on what they think about adding 22q and how that impacts sort of the ASP side and the payment side?

Well, there's just an ongoing dialogue that we have, and just given the fact that we're a high-volume lab and we have just ongoing conversations with payers on all kinds of topics and there's nothing in particular that I would call to your attention. I mean, I think the -- my base case is that if there's a further update to the guidelines, then that would be the catalyst to have further conversations.

Okay. So a little bit TBD on what that ends up looking like. And then on the carrier screening side, just -- I feel like we talk a lot about expanded carrier screening and the reality is it's not kind of a monolithic decision. There's bands of what could be included or what couldn't be included. So how do you think about that range of outcomes in terms of how big of an expansion and what that could mean in terms of, again, kind of the range of outcomes, if or when the guideline does change?

Yes. I mean, look, the guidelines right now are quite supportive of carrier screening, both kind of the narrower panels for like cystic fibrosis and SMA, for example, and also kind of broader panels that screen for a more comprehensive set of inherited disorders. And we've seen in our business, we've talked about this on our earnings calls, and we've actually -- the reimbursement for carrier screening has -- was very stable for a long time, took a dip in 2022 and then has -- the trends there have been much more positive in '23. And the guide implies kind of stable reimbursement kind of where we are. And there's a potential for further conversation if and when additional guidelines come.

Perfect. We could go into some of the profitability there on that side of the business, but I want to shift to oncology instead. You're approaching 400,000 sort of run rate, annual volume exiting '23. I think that's about 50% higher -- a little more than 50% higher than where you were entering the year, 40% of oncologists ordering. So if you look at sort of that mix of new orders first, maybe give us a sense like how penetrated do you think this is in terms of a new patient versus you do have kind of an ongoing recurring -- repeat orders that are part of that volume as well. So if a patient shows up with Stage I colorectal cancer, how many are getting Signatera?

Yes. I mean -- so what we've seen is when patients start Signatera, they really -- they stay on Signatera. They find it quite useful kind of through their cancer journey. So we're seeing very high compliance rates as patients. Maybe the most commonly, they'll start on Signatera to help them make decisions in the adjuvant treatment window. And then the choice will be to remain on Signatera once they're in remission. And we're seeing very, very high compliance rates with patients kind of -- and physicians kind of opting to stay on in that recurrence monitoring setting. So obviously, there's an element of momentum as you alluded to, Andrew, as you start new patients and you have this background of patients kind of getting repeat tests that started last year and so on and so forth. And I think that's going to continue to build because while that dynamic is certainly in play, what's also happening is just the new patient starts just continue to grow at pace. More data is published every day -- not every day, but almost there's more data presented at just about every major academic conference. We've got a range of posters and papers available for people. The adoption is happening kind of across new physicians and then physicians are expanding their usage within their practices. So sorry for the boring answer, but right now, it's kind of you have both a lot of new patient starts and you have just kind of building momentum of the repeat monitoring as well. I think that's what's contributing to some of the performance that you've seen.

No, that's helpful. And maybe I want to shift a little bit to new indication you announced, I don't know, 2 weeks ago, I think. Ovarian and then also neoadjuvant breast. I want to maybe start with neoadjuvant breast just in terms of sort of that ongoing portion you talk about. I think it's an important -- potentially competitive differentiator down the road when maybe there is a little bit more competition than you have today. But how important is it to span that full continuum of care with breast now having neoadjuvant recurrence monitoring as you think about tracking that patient through the full cancer journey?

I think it can make a huge difference to the patient. I mean just to give one example, about half of the breast cancer patients in the United States undergo a round of neoadjuvant treatment before they have their surgery. There's a long history in the treatment of breast cancer of there being as some drive toward fairly radical surgical interventions that cause a lot of comorbidities for the patients. And there's been a real move toward trying to shrink the tumor ahead of a surgical intervention or perhaps even get a complete response via chemotherapy. And right now, the protocol is to escalate the patient on a series of more and more stronger and stronger kind of regimens of chemotherapy, when it's largely understood that many patients respond great to maybe the front-line chemotherapy cocktail. And using Signatera, you can get some real-time feedback, much the way that you would see it used in an immunotherapy response monitoring setting where you can see the response, quantify the response in terms of accounts of mutated fragments per ml of plasma and really optimize neoadjuvant care for those patients. So it's an important use case for Signatera. And then yes, of course, as you mentioned, once a patient has been using Signatera, we see the physician and the patients find it to be quite useful, and they tend to stay with us. So that's also quite important as well.

Perfect. And thinking about ASPs, you hit about north of $1,000 for Signatera in 4Q of this year. I think your target before was 4Q -- sorry, 4Q of '23, you achieved it. Your target was 4Q of this year. So a full year ahead of plan. I think there's a lot of things kind of going in there. But maybe just give us a sense, what's the latest on mix in terms of covered indications, whether it's CRC, muscle invasive bladder, immunotherapy, breast, ovarian?

Yes. I mean the vast majority of our volume at this point at least has a Medicare reimbursement and so that's quite important in terms of just having sufficient unit economics to be able to offer the patient to as many patients as we want to offer it to, right? So -- you're just -- I think we've been able, just by dent of the fact that the test works extremely well, we've been able to get studies enrolled and data read out that has allowed us to make a successful case that Signatera should be reimbursed in this expanding suite of solid tumor types, I think that we can continue to do that. I mean we have a number of tumor types that are in submission right now. So that's part of the strategy is to continue to expand that set of reimbursed tumor types.

Great. And thinking about sort of the long-term what that business can be and thinking about ASPs today, Medicare is paying a pretty hefty chunk of change with ADLT rates at almost 4,000. And I don't think that's what you include in your TAM calculation, right? So how do we think about over -- I'm not talking 2 years, I'm talking 5, 10, 15 years, what the ASP journey sort of looks like and, frankly, what the margin journey looks like for Natera as that plays out?

Yes. I mean, I think like -- when I think about TAM, I really -- I start with kind of patients, and I think about the majority of patients that start Signatera are not people who've been in remission for a while and then they just come in the door, although that does happen. Very frequently, it's someone who's having a health emergency and they've been diagnosed with cancer and they start on Signatera oftentimes commensurate with their surgery to have the tumor removed. So I think about addressable patient populations as incidence rates basically and then apply some factor, acknowledging the fact that a lot of patients will stay on circa 10 tests over the course of their cancer journey. Any kind of long term, I think, prognostication about pricing, I think, has to start with clinical utility and savings to the cost system -- cost savings to the health care system. So if you think about the ability to spare people chemotherapy, I kind of gave an example of that in the neoadjuvant space or just get chemotherapy to the right people such that they don't show up with Stage III and IV disease. There is a very clean clinical utility and cost savings argument to be had that very, very supportive of the rates that we've established with Medicare. And that's not an accident. I mean Medicares don't have to do us any favors, right? Like they experience a lot of these costs, and they're very eager to find solutions for a lot of overtreatment and inefficient treatment, that's just a function of good attention people trying to deal with a very dangerous disease.

And I certainly didn't mean to imply that the dollar was too high. I think the value is something you're proving out, right? And it's all sort of -- all good signs so far. So it didn't mean to sound negative there. Maybe just shifting a little bit to margins, just given kind of the timing right now. Really, really impressive. I think on a normalized basis, it was something like 800 bps from where you came into the year to where you exited the year. A couple of one-timers in the 4Q, but still 800 bps normalized. How much of that do you sort of attribute to Signatera progressing the way you would have hoped or, frankly, better than you would have hoped versus blocking and tackling on some of the things you've done to really optimize the women's health franchise?

Well, a lot of the change is attributable to Signatera. I mean prior to the real launch and rapid uptake that we saw in Signatera, our gross margins were in this ZIP code. If you go back a little ways, and that's indicative of where the women's health business had been in terms of gross margins. And we had to make this multiyear investment to create this new category. And so I think you see that evolution in our gross margins. As have you made that investment and now thankfully turning the corner not a moment too soon for a number of longer-term shareholders I see in the audience. But we're -- we feel like we're clearly turning the corner on that, and that's working out wonderfully for the company and for patients.

And just on the kind of COGS side of Signatera. I think you've made a ton of progress already. You've talked about some of it. But there's still a lot, I think, that's on the -- in the playbook for you to continue driving there. As we think about that trajectory, how low can those COGS get? I know part of it is going to be mix of new patients versus repeat plasma testing, but part of it is also bringing more in-house or some of the kind of send out, just given -- where should we exit 2024, maybe is the best question to ask in terms of COGS.

Yes. I mean just for context, I mean, the COGS have been on a journey as well as the volumes have matured. And like any kind of operation, if you're able to run a lot of volumes through a lab, you're going to get some efficiencies as the volume grows and we've certainly seen that. In addition, the volumes have -- and the reimbursement has allowed us to justify significant investments in the infrastructure just to make the workflows lower cost, which is going to benefit mainly patients, but it will benefit shareholders as well. COGS were $600 a unit on a blended basis going back a couple of years. COGS in Q3 were $525, COGS in Q4 were a little above $500. We would like the COGS to be something like $450 in Q4 of '24, and that's going to require additional kind of workflow launches in our Austin lab with a significant amount of automation. But that's been a core strategy of our business is to kind of relentlessly invest in reducing the cost of goods sold and passing those savings on the patients. So we're going to keep doing that.

Great. And I think time for maybe 1 or 2 more. So aligned with that, cash flow breakeven, you pulled it forward on the most recent call to 3Q of this year, if not potentially sooner. Part of that, I think, is really the gross margin we talked about, but the OpEx pace where you're, call it, approaching $1 billion of total OpEx spend, but looking at 4% growth relative to much, much faster top line. Are you aware that's the pace of growth we should think about for OpEx going forward? Is there more investment as you get through this sort of breakeven point? Just how do you think about what their trajectory there should look like over there, let's call it, a couple of years?

Yes. I mean, all things equal, I mean we kind of expect operating expenses to grow kind of in that mid-single digit zone. And the cheesy example that I give is we had to build a large lemonade stand, particularly for Signatera. And now customers are kind of lining up around the corner and so you can kind of get some leverage on that initial investment. You don't have to build a brand new lemonade stand every year, right? You have to -- there's incremental upkeep to be had. There's additional sales reps to be hired, patient coordinators, nurse coordinators, support folks, but the -- it tends to be more incremental in nature. Our plant, for example, I mean, I think we can do something like 2x the volumes in our existing facilities than we're doing right now. And I think the sales reps can also handle quite a bit more volume. And then that's all by design. I mean we had to you have to make this initial investment in order to offer the product in a world-class way and now the volumes are coming through to kind of justify that.

Perfect. And I think we're basically at the end of time, so maybe I'll just pass it to you. What do you think is least appreciated or most underappreciated maybe from the story today and any other kind of parting message as we wrap it up?

Well, I think we've got a number of data sets coming in Signatera that I'm quite excited about in a range of tumor types. So I think investors are kind of on point as it relates to colorectal cancer. We tried to spend some time on the earnings call talking about the upcoming prospective randomized data sets we have coming in bladder cancer. For example, that I'm really excited about because it's such a dangerous and frustrating disease to treat. And I think we can make a huge difference there. And admittedly, it's not a huge number of patients every year, but if you can make a big difference for those patients, I think shareholders will also get rewarded for that. And I think they can make an impact to the business as well. So that's just like ONE example. But I think -- if -- to give you a homework assignment, if you go and look at our couple of earnings calls, we try and pick out 1 or 2 additional tumor types and give you a deeper dive on what data sets are coming and what we're excited about. So breast cancer, bladder cancer, we've done that for gastroesophageal, ovarian and we'll keep doing that.

I have plenty of questions on those that we'll save for the breakout, but we'll head down to [ Amarante 2 ]. Thank you, Mike. Really appreciate it.

Yes. Thanks for having me. Thank you.