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

Got it. And then, Steve, on the last earnings call, you talked about the launch of FoundationOne Tracker. Can you describe how this solution is distinct from Signatera? And while the focus for that currently is biopharma, could this eventually sort of move into the clinic as well?

Yes. So really, the main difference between the product is that FoundationOne Tracker is built off of the FoundationOne CDx assay, which is a targeted comprehensive genomic panel. It's FDA approved. So there's a lot of advantages for pharma that want to use the FDA-approved product that's proven, market-leading comprehensive profile that integrated in studies. And ultimately -- yes, I think Signatera personal monitoring of solid tumor sequencing. The data on FoundationOne Tracker was very strong. The pharma companies love it. They have a very thick pipeline. We think that it's going to be a very good product. And then after a period of time going through the pharma pipeline, we're going to make it available in the clinical setting. We think Foundation has a very great opportunity to be successful in the clinical space, given their large footprint and given the loyalty of their customers.

Got it. And with your tissue biopsy test, Altera now available to clinicians as well when they order Signatera, do you see -- what fraction of physicians are opting to tag that on as well?

Yes. So the way that we're offering that right now, we're not going and trying to compete with like Foundation. What we're saying is, if you want immunotherapy monitoring and that patient also needs comprehensive genomic profiling, we'll do it for you. And so it's really -- you can think about it as kind of a percentage of the immunotherapy business. And we're definitely seeing people order the product there when they want it. But at some point, we'll put our foot on the accelerator and say, look, we're going to make this available broadly as a stand-alone product. But right now, we want to keep laser focused on Signatera because the interest is just so high. And the -- I think the amount of physician inquiries that we're getting, the amount of discussions that we're having, the sales meetings that are occurring, it's just -- it's escalating, and we don't want to do anything that distracts from that. So we want to keep focused on that right now.

Got it. Switching gears to Panorama and NIPT. You've announced that the women's health business at cash flow breakeven in the second quarter, quite an achievement. With reimbursement improving, it's inevitable that you're going to get more market entry in the space. How do you plan to stay ahead of the competition? And how do you keep the reproductive health franchise more broadly from being commoditized?

Yes. Well, what we're actually seeing is the opposite is that competitors are leaving the space as reimbursement has improved. And I think part of it is just maybe the dominance that we've had. I mean, we think we now have more than 40% market share. So we do these very detailed surveys where we can look at a lot of information that comes in. And we're seeing that Natera is gaining share in the marketplace while the market is also expanding. So that's why our growth is really rapidly advancing. And that's because we have the premier technology that's highly differentiated from what anybody else has. We have a great distribution channel through our sales team. We have a great user experience. But we have 26 peer review papers. We have way more data than what anybody has. And we've published -- now the cherry on top is the SMART study results, which is the largest prospective NIPT study that's ever been done. So we're not stopping there though. We're always innovating. We have advancements that we're launching right now, Panorama AI, Panorama with Artificial Intelligence, where we've lowered our no-call rate from about 5% or 6% down to 1% and also improved the sensitivity on 22q11.2 microdeletion to greater than 95%. And we're the first company, we believe, to publicly enable or to routinely enable access to microdeletions below 2 megabases. So most microlesions are -- or 41% of all the microdeletions are below 2 megabases, according to the SMART study. So when you look at the shotgun sequencing companies that are out there, when they say that they have a certain sensitivity for microdeletions, they're just excluding anything below 2 megabases. They're not even counting it in their calculation. So right off the top, they're missing 41% of the disease load. So we think that's an advantage. But stay tuned because later this year, there's going to be some other innovations coming out on Panorama that we think are going to enable even more growth.

Got it. Interesting. And Mike, on the point that Steve just mentioned around the exit of certain competitors, I mean, Progenity is out of the market. Are you also potentially -- in the middle of a change in ownership, which may or may not impact sort of their market share there. What are you proactively doing at Natera to make sure that you maximize those opportunities?

Well, I mean, I think there's an obvious kind of set of kind of blocking-and-tackling execution that comes up when a specific competitor exits the field. And we feel good about the way we've been able to do that relative to the Progenity exit just for example, I mean, I think that was a -- turned out to be a tailwind for us in Q2, and it's likely a tailwind, a modest tailwind here in the second half of the year that we were able to contemplate in the guide that we put up in August. But I think more generally, I think the theme that Steve is hitting on is the fact that, look, we've consolidated market share here because the technology is differentiated and our commercial execution has been good for quite a long period of time. So I mean, if you look back now, I mean we now have far and away the most tenured field force in the space, whereas all the other players have kind of turned through the washing machine of M&A and it makes it tougher to stay consistent with your call point. We've been able to stay consistent, stay focused on user experience. And then most recently, I mean, published far and away, the most thorough validation study that will ever be running in NIPT, I mean a 5-year 20,000-patient prospective clinical trial, demonstrating the SNP method that we created here really has excellent performance. So we're really in a fantastic position and now is the time because right now, there's about 1.5 million NIPT is being run in the United States and now that it's kind of -- NIPT is kind of clearly recommended as the standard of care for pregnant women, there's a clear pathway to get that to more like 3.5 NIPTs or more over the next couple of years, but we're in an excellent position there.

Got it. You've talked about optimizing COGS in the NIPT business with a path to below $125 per test over time. What are some of the initiatives underway to get you there? And what are the key levers you plan to pull?

Yes. So right now, we're kind of in that sort of mid-$160 range roughly on NIPT. And so if you remember for a while, we were in the $300s and we were coming down, and our goal was $200. I mean we've really done a great job. I think we're -- I think we've probably done better than almost anybody else at this point lowering COGS. There's some easy things like, for example, switching to the note. So if you -- I mean, as big as our volume is right now, we're still running everything on the NextSeq. And so that's a pretty easy switch for us to make. We just haven't had time, frankly. We've been focused on other things. But that right out of the gate is going to save a good chunk of money, like that's a big step down. The second thing is it was important for us was launching in Austin. Our Austin lab is now running more than 50% of our volume. And that's important because there is quite a differential between the COGS of the products that we run in Austin versus the COGS of the products that we run in California. And so as that grows, it becomes 80%, 90% of our volume, just simply because our expanding volume is going to be run there. We're never shutting down our lab here, but just more and more of the volume will be run there. That's going to give us a pretty significant cost savings. And then there's simply just the scale. So as we hit volume tiers with our outside vendors really across all of our supply network. And in addition, we're able to spread the overhead that's associated with each test of more and more tests. So there's no real novel magic bullet other than kind of the standard blocking and tackling that's going to lower COGS that we have like on the immediate road map. There are some things like getting rid of the library prep and so forth that we could do if we wanted to. But I think we have a path to get down to that $125 with just the standard blocking and tackling.

Got it. One quick one on Horizon, which doesn't get much attention in the portfolio, but it's quite a big revenue driver for you. Do you still think a fair way to model Horizon is as an attach rate sort of assumption to Panorama? And with volumes ramping significantly on the NIPT side on the average risk front, should we expect that attach rate to decline in some sense? Or do you think it hangs in there in that sort of mid to high 40s range?

No, I think that's right. I mean I think that's the way that I model it for our Board because that's the way that the test comes in the door. I mean the reason -- one of the key reasons why Horizon gets ordered at the rate that it does is that it's quite convenient to order Horizon at the same time on the same requisition form, on the same needle stick for the patient. So that's very tightly integrated within NIPT. And even as NIPT has really ramped in volumes over the last couple of years, we've seen that attach rate stay remarkably consistent. So I think this is maybe one kind of less well understood aspect of the women's health story for Natera is that there's kind of this one macro trend, which is there's 1.5 million NIPTs getting run today, there ought to be 3.5-plus million NIPTs getting run in the future. But when that -- as NIPTs penetrate, we have a couple of different ways to magnify the impact of that penetration in our business. One is for every 100 NIPTs that get run, something like 40 to 43 carrier screen test get run. The other is that for every 100 NIPTs that get run, something like 80 microdeletions test gets run. So 1 trend 3 different products that can really drive a lot of outsized performance for us.

Got it. And then on the distribution agreement with BGI, how big do you envision that opportunity be?

Yes. So BGI distribution is a couple of different things. So there's Signatera, which is pharma-driven, running in China. So any global national pharma company that wants to run a clinical trial that has an arm in China, you have to have an on-the-ground lab running the technology in China. So the issue is if you don't have a lab up and running, you simply can't participate in these trials, and you can't launch the drug in China. So we have an advantage there with biopharma. The second thing is we're going to be launching -- or we have launched now in the clinical sector Signatera into the Chinese market. Now that's going to take a while to develop because they're going initially to the top-tier academic centers. Eventually, the technology is going to be put in each of the hospital systems as kind of a decentralized model in China. They can go through to get the Chinese FDA approval. So there's this kind of CLIA environment now with top-tier academics, but it's going to roll out broadly once you get this FDA approval. So I think that's going to take longer to develop. And then there's NIPT distribution, which is ex-China, ex-U.S. And I think that, that's maybe less exciting than the Signatera opportunity, which is here and now the biopharma is right now hot followed by, I think, the clinical rollout.

Yes. Got it. And then, Steve, on -- not Signatera, but on sort of a similar vein, I mean, screening is the one market that has brought up most often as one where you've not officially announced your entry. The assumption seems to be that it's a matter of when, not if. But when you do announce that entry, should we essentially expect sort of proof-of-concept data in a smallish cohort starting with colorectal as beachhead along with plans to launch a large clinical trial? Is that the right way to think about it?

Yes. I think what we're going to do is first outline what we've done and what the road map is for us to target. So I think there's a couple of areas where we have some unique opportunities. I think one is we have tens of thousands of early-stage cancer exomes. And so we're mining that data to build panels that we think can be used for early cancer detection. And then we're -- we've also gained access to an extremely large cohort of early-stage cancer detection patients that is proprietary now unique to us that's going to enable us to validate much faster. So now we're going to outline like how do these pieces come together? What have we in-licensed? What is the time line to where you're going to see some proof of concept and feasibility data? We're going to walk through that in the near future. I wouldn't expect to -- for us to suddenly announce new data that's out and the completion of a validation study because we're just not at that point yet. But I think what we're going to do is we're going to show you the puzzle pieces and how they're going to fit together so that you understand what the time line is going to be for us to generate some data.

Got it. This was a fantastic overview guys. So very much appreciate you joining us this afternoon, and I hope you enjoy the rest of the conference.

Great. Thanks for having us.

Good talking to you.

Thank you. Appreciate it.