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

Good morning, everyone, to the 42nd Annual Canaccord Genuity Global Growth Conference. I'm Kyle Mikson, Life Sciences and Diagnostics at Canaccord, and we are pleased to present Natera here today. Natera is a leader in cell-free DNA-based testing across women's health, oncology and organ health. And with us from the company we have Steve Chapman, CEO; Mike Brophy, CFO. Thanks, guys, for joining us today.

Sure. Thanks for having us.

Yes. Thank you.

Awesome. So you reported the second quarter results last Thursday, I believe. Great results, I think, almost $200 billion of revenue, solid results across the board. Can you talk about the performance for volume and maybe even ASV across given kind of segments?

Yes. So from a volume standpoint, we had an excellent quarter, performing nearly 500,000 tests, hitting record levels across each of the different areas that we do business, women's health, oncology and organ health. And what was really great to see as well is that normally in Q2, we actually see our volume go down compared to Q1 just because of seasonality in the business, particularly in the prenatal business. But because of the excellent growth that we've seen in Q2 of 2022, we actually grew versus Q1 of '21 -- or excuse me, versus Q1 of '22, which was unique. Do you want to comment on the ASPs a little bit, Mike?

Yes. Another good quarter for us. Really on the ASP front, I think the 2 points that were of interest that we highlighted on the call. One was Panorama NIPT ASPs were up modestly sequentially yet again this quarter, which is good to see. And then I was quite encouraged by the progress we continue to make with the Signatera clinical ASPs. We said on the call that that's now a little north of $700 for the clinical ASPs. That's still very immature. That's -- there's a lot of room to run there, we think. And it's still dilutive to kind of corporate gross margins, but you got to show that progress, in my view, and I'm pleased we're able to continue to do that.

And then maybe, Steve, talk about the market share for prenatal. I know it's like 50%. I think what you said, I mean, it's pretty amazing. And where does that stand in like the overall penetration of NIPT?

Yes. So we think NIPT overall is probably in the range of 40% to 50% penetrated. I think high risk these days is up close to probably 80% penetrated and then average risk is in that sort of 40% to 45% range. And what we've seen over the last couple of years is that Natera's market share has increased from the mid-30s now to -- no up to where we think we are today around 50%. And that's because we've continued to generate excellent high-quality clinical data and because our product is unique and highly differentiated. Over the next several years, we think the penetration overall the market is going to continue to expand. We think there's another probably roughly 2 million pregnancies that could receive NIPT. And we'd like to increase our share as the market expands and we think we're poised to do that.

Okay. Just wanted to kind of touch on that because it's important for like the quarter work where you're going to stand, I guess, but going to oncology though. So there's a lot kind of going on with Signatera. There's a lot of reimbursement tailwinds that you should have a from. Maybe talk about starting [indiscernible] kind of data and like the guideline potentially? Like what are we expecting now for guidelines, [ NGCN ], et cetera, maybe in the next few months?

Yes. So we had a great data readout at the ASCO GI conference earlier in 2022, and that was from the CIRCULATE study, which is a large real-world prospective multisite study, looking at the performance of our Signatera MRD test in colorectal cancer patients. And what the data showed is that if you're MRD positive, you're likely to benefit from receiving adjuvant chemotherapy. And if you're MRD-negative, your likelihood of benefiting is basically similar to someone that didn't receive adjuvant chemotherapy at all. So that was really big news at the time. I'm pleased to say that, that paper has now been submitted for peer review publication to one of the top journals. And we think that it can be published later this year. The other thing that's really exciting is that the follow-up from that study is now at a median of 18 months. So when we presented the data at ASCO GI, it was roughly 12 months. So having now 18 months of follow-up, I think, just strengthens the data and puts us in a better position. From a guideline standpoint, the guideline committee will be meeting later this summer. We don't think the publication of the CIRCULATE data is required for guidelines to change -- but certainly, it will be helpful, but there's a lot of evidence at this stage showing the strength and the clinical utility of MRD testing in colorectal cancer that we think will help with the guidelines.

Okay. That was great. And then maybe on reimbursement. So right now reimbursed for CRC stages 1 to 4 basically as well as immunotherapy monitoring. And then this new one, MIBC, which is muscle invasive bladder cancer. So exciting, all that's exciting. Why is MIBC meaningful? If you like, it's the newest one, we're not really like SES2 hearing about it [indiscernible].

Yes. So this is really brand new. We just got Medicare coverage for muscle invasive bladder cancer, which we think opens up about 400,000 additional Signatera tests per year. The clinical utility is very high in this setting. In neoadjuvant, adjuvant and recurrence monitoring settings. We have multiple peer-reviewed papers, and we have an ongoing Phase III clinical trial as well in this muscle invasive bladder setting. So we think it's a great opportunity to help a lot of patients, but it's also an area where Natera, again, through the strength of its peer review data has distinguished itself from other companies that are entering the space.

And then what's the goal this year with new reimbursed indications? What do you have to do there? I think at least 4 is the goal, right?

Yes. So I think what we said is we were going to get about 5 new indications before the end of 2023 and muscle invasive bladder is a start. We have 4 more, I guess, to meet our goal, but we did say before the end of '23, so we have a little bit of time. Now the key thing to unlocking those additional coverage decisions is publishing data. And we've already published great data in lung cancer, and in breast cancer, where we don't yet have coverage. But in the next 3 months, we're also submitting 7 additional peer-reviewed publications that have more than 500 follow-up time points each. Now that's -- those are really big studies in the context of historical MRD study. So to have 7 additional studies that are being submitted in the next 3 months is a big deal. Excitingly, 4 of those are in indications that we've never published in before: melanoma, pancreatic cancer, esophageal cancer, et cetera. So when you publish new data in a new indication that enables you to go apply for Medicare coverage, you can't apply without a peer-reviewed paper. So we think we're on the right track, and we still think that we can get coverage for 4 additional indications now before the end of '23.

Awesome. Okay. And then Mike talk about the ASPs and basically, like how these reimbursement -- this rate flows through to ASP and help the P&L more or less. And then when can we really see that like occur?

Yes. Look, I think there's a natural progression for average selling prices in the Signatera clinical setting, and it's driven by a couple of factors. One is we think as we get further out on the launch and more and more community oncologists are ordering Signatera. A higher proportion of the patients will be Medicare patients and we're very pleased to serve the entire community. The second component is what you just mentioned, Kyle, and that is, we've got a pan-cancer technology, it's a workhorse assay that's applicable to a broad range of tumor types. The community oncologist is seeing patients from several different tumor types oftentimes in the same day. So this fits in really nicely with their workflow and their practice and their clinical needs. And so as you get more and more tumor types reimbursed by Medicare, obviously, that just increases the percentage of time you can get reimbursed as a fraction of the clinical customers' volumes. And then third, possibly most important is just the mix in terms of our volumes. We are still very much in this launch phase, where a lot of people are adopting Signatera for the first time doing that first time point, getting an exome run and they're in that adjuvant treatment window. Once they go into remission, okay -- in a CMS reimbursed indication, then we anticipate we will continue to serve those patients via recurrence monitoring with Signatera, which is well reimbursed. We were able to secure ADLT pricing in that recurrence monitoring indication. So there's just kind of a natural progression that I think is favorable to ASPs as we just do what we do, which is fundamentally serving this -- fundamentally serving cancer community.

And obviously right now, clinical ASPs are 700, there's the biopharma aspect, too, which kind of, I guess, will inflate maybe overall APSs. But where could clinical ASPs get to over time that can we expect like 1,500 or something like that maybe kind of average out.

Yes. I don't think that -- I mean, I don't think that's a terrible estimate. I mean the ADOT pricing has been established at 3,900 per time point. The adjuvant treatment window pricing on average is going to be in that 2,000 to 3,000 range, depending on the frequency of the testing in that window. So that's kind of your anchor as kind of when reimbursed like what is the price point. And then the other part of the equation is, well, what fraction of the time can you get reimbursed for the test? And Steve touched on some of the clinical utility that we see in Signatera across tumor types. That's really the key. I mean the more benefit you can have, what taking costs out of the system, the more quickly you can get reimbursed. And so that kind of gives you kind of, I think, a strong rationale to if you wanted to think about 1,500 as a long-term ASP or 2,000 or something like that, I think that's imminently achievable based on the utility that we're generating today.

All right. And then last 1 for you on these economics of Signatera. So the COGS, the CAG we decreased COGS over time. Well, tell us about the front the upfront SMC within that?

Yes. So there's 2 components to the Signatera assay. For the first time point, we run an exome on the tissue in our lab. And then every repeat test is simply a plasma test once we've generated that personalized profile for each cancer patient. The repeat testing leverages a lot of the cost of goods sold per unit savings that we've been working on for the last 10-plus years in this business in terms of the workflow, the chemistry and the algorithms. And so that will kind of continue to go down, but that's only a few hundred bucks today. The upfront exome is something that is a really obvious place for us to get more efficient, and we're rapidly getting more efficient with that as volume scale. So COGS, I think it's another place where we can get more and more efficient.

Great. And Steve on just saying with Signatera. So talk about like what the mix is right now between the test and the current sponsoring setting versus the agreement window because obviously, it has those price implications, ASP implications and got more chance there as well or so for stating that.

Yes. So if you just look at like population dynamics, I think sort of roughly like 10% of the total population that will be -- that will be living with cancer will be diagnosed in any given year, something like that. So over time you should see the shift to where like 90% or so of the business is in its recurrence monitoring setting. But what's happening right now is there's so many new patients that are coming in where the mix of patients that are entering the system for the first time are in that adjuvant window is, I think, much higher than it will be long term. So over the past year, we've actually already seen the shift to have more and more of the business in the recurrence monitoring setting. And I think that, that's going to continue as patients come in and then they get the test, they stay on the test and they're long-term users in the recurrence monitoring setting.