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

Perfect. Good afternoon, everyone. This is Rachel Vatnsdal with the Life Science Tools and Diagnostics team here at JPMorgan. Thank you so much for joining us today. I'm joined by the Natera management team. So this is going to be a 40-minute session, roughly 20, 25 minutes of a presentation followed by Q&A. If any of you in the room have a question, feel free to submit it via the portal or you can ping me directly. And with that, I will hand it over to Steve.

Great. Thank you. Thanks for coming. I'm Steve Chapman, I'm the CEO of Natera. We've got Solomon Moshkevich, President of Clinical Diagnostics and Mike Brophy, our Chief Financial Officer. So this is the standard safe harbor statement. Natera today is the leader in cell-free DNA technology. We're addressing 3 very large underpenetrated markets. We performed more than 10 million tests across 12 different products. We have approximately 175 peer-reviewed publications. We have more than 400 patents issued or pending. We have slightly more than 3,000 employees. We launched our first cell-free DNA test in 2013 Panorama in cell-free fetal DNA testing. And when we launched, we were the fourth company to market. Today, we have about 50% market share, and we're very clearly the market leader based on the strength of our technology. In 2019, we took that same technology and we expanded it into oncology and organ health, which I'll talk about in a minute. So what was it that made us successful. We think it is the focus on these 4 critical areas. We take leading-edge technology but we don't stop there. We constantly innovate. We're on version 7 or 8 now on Panorama. We're launching new versions of Signatera. This constant focus on innovation that sits alongside a platform of leading technology. We have broad and talented commercial teams. We have extreme focus on excellent customer and patient experience, and we're a leader in peer-reviewed published data. So I'm excited today, this morning, I guess we wrote this out largely already, but excited to tell you about our results for Q4 and for 2023. We had an incredible quarter and an incredible year. We finished 2023 about $20 million above the top end of our revenue guide. And as a reminder, throughout the course of last year, we already raised revenue guidance 3 times throughout the course of the year. So we had a very strong Q4. Revenue growth was approximately 38% year-on-year, and this is driven from a strong ramp in Signatera, significant ASP momentum across the business and very strong gross margin performance in Q4, and we're going to be reading out our gross margin performance on our earnings call in early February, but again, very strong gross margin performance. Also to say for all of these numbers that we're reading out, units, revenue, we're giving conservative estimates. The final numbers will be read out on our earnings call. On the volume side, we had very strong and continued volume momentum. This was driven largely by Signatera volume continuing to grow. We had an excellent sequential growth quarter, actually near peak levels in our Signatera growth, which was excellent and in line with our expectations. When you look at the remainder of the business, we came in roughly similar to where we were in Q3. And that's basically expected when you look back historically at the performance of the business over time. In years where we're not having a competitor like Sema4 for GeneDx go out of business, you see Q4 is pretty similar to Q3, and that's sort of where we ended up this year. Now we also have at the same time a strategy to move away from some unprofitable accounts or accounts where we don't see a path to profitability. And if you look at our revenue growth and you look at our improving gross margin and you look at our rapid path to cash flow breakeven, I would say that, that strategy is working very well. Before we leave volume, I want to say, particularly in women's health, in December, we had a record level of volume per receiving days. So again, we're really pleased with how things finished up and the trajectory that we have going into 2024. Now I want to spend a little bit on cash burn. So we are on a rapid path to hitting cash flow breakeven. Our goal for a long time has been to hit a cash flow breakeven quarter in 2024, and I'm pleased to say that we're actually accelerating that time line. When you look at our cash burn for Q4, the total number was $60 million, but that includes $27 million of prepayments where we were able to negotiate deals to bring CapEx spending from 2024 into December of 2023 roughly, and get an additional 20% discount on top of our already discounted supply agreements. So we thought that was a good trade-off. But netting that out, the cash burn would have been in the range of $33 million. So again, we're on an accelerated path. We're seeing things go faster than we expected, and we're reinforcing the fact that we're going to hit a cash flow breakeven quarter in 2024. I want to spend a minute on oncology. Natera is today the market leader in MRD testing. We think this is about a $20 billion TAM opportunity. We have more than 60 peer-reviewed publications covering our MRD technology. Last quarter, in Q4, more than 35% of oncologists in the United States ordered an MRD test from Natera. We performed more than 300,000 tests last year. And again, remember, these are conservative numbers. We have more than 150,000 patients in our clinical genomic database, and we have more than 400 dedicated sales, customer service, patient service and medical affairs employees that are just dedicated to the oncology force alone. Now I want to take a step back and just talk for a second about what is Signatera. So with Signatera, we do tissue sequencing and then we make a personalized test that is just for you, just for the patient. And we use this test to look at positive or negative results to inform adjuvant treatment decision-making to detect cancer recurrence, is your cancer coming back, and then also to look at whether your therapy is working or not. The test is available in a pan-cancer setting and has been validated across the pan-cancer setting. And we have significant first-mover advantages in Signatera. The first is in innovation. We have more than 220 oncology-specific patents that support our MRD test. The second is in clinical data. Today, we have more than 60 peer-reviewed papers covering Signatera, and we have multiple randomized trials underway. Some of these were started more than 5 years ago and are now getting ready to read out. In fact, we expect to have the first results of our colorectal randomized trial, the ALTAIR study in 2024, which we're really excited about. We've been very successful in market access and reimbursement. We've gotten broad Medicare coverage now across colorectal, bladder, breast and pan-cancer immunotherapy monitoring. That's actually become even more valuable now with these biomarker laws that have gone in place in states now that are covering more than 50% of the population in the United States. Those laws that are now in place or have been voted on and been approved state that if you have Medicare coverage that commercial payers are obligated to pay. So the fact that we have this broad Medicare coverage puts us at a significant advantage going forward. We also have a unique status, which is the advanced diagnostic laboratory test designation. And that's allowed us to get pricing on the clinical lab fee schedule of $3,500 per recurrence monitoring Signatera test. Now there's 1 other competitor that has a tumor-informed test that's been priced on the clinical lab fee schedule and their rate is $795. So this ADLT is a very big differentiator, and in fact, the price point for 2025 has already been determined as well and the price will be back at $3,900 in 2025. Final area where we think we have a significant first mover advantage is all the infrastructure and the experience that we've built since 2019. We now have a very fast turnaround time. We have an extensive network of mobile phlebotomist. We have patient portals that we've launched. We have physician portals. We have EMR connectivity with Epic and many other EMR systems, and we have a large team of folks that collects the tissue in a very, very fast manner so that we can run the test and deliver the results back to the patient. We scaled up our labs, and we've also built out an extensive commercial team, which is very expensive to build out. We prebuilt the commercial and medical affairs and customer service team so that we could service the future volume. And now we're in a position where we can take on more volume without rapidly increasing our operating expenses as we scale up. In women's health, we are the market leader in cell-free DNA and broadly, the market leader in women's health genetic testing. We have a suite of products on the market. We think the TAM here is about $10 billion. We have more than 85 peer-reviewed publications that have studied more than 2 million patients. We performed more than 5 million NIPT tests today in the United States. When someone orders an NIPT, 1 out of 2 of those tests is performed by Natera. I want to take a second to talk about 22q because that's 1 of the hot areas right now in this space, and that's an area that we've talked a lot about. Natera's 22q test is highly differentiated. And as 22q is studied more, and in the future, as this goes into societal guidelines and becomes commonplace, the unique differentiation that Natera has in its 22q test is going to become more and more and more valuable. So when we run our test, we're using a SNP-based technology that allows us to target this very small region of the genome, which is around 2.5 to 3 megabases. So for companies that are doing massively paralleled sequencing, they have to sequence the entire genome multiple times in order to get the correct depth of read. So we think when we're doing targeted sequencing, we can actually get more than 25x the read count at the particular region of interest that companies that are doing massively parallel sequencing can. And this is a very significant advantage that translates into excellent clinical performance. So from a clinical performance standpoint, we studied our test in the SMART trial, which was a 7-year multisite prospective study that enrolled more than 20,000 patients. 87.6% of those patients had a complete genetic outcome, which is not where we just observed the baby at birth or we asked the doctor, well, did you think they were positive. We actually did a genetic microarray on newborn babies or on an amnio or CVS to confirm for all positives and negatives or 87% of the positives and negatives, what the actual genetic outcome was for that child. And so what we saw was striking. The incidence of the disorder was very high, about 1 in 1,500 pregnancies, which is in line with Down syndrome for women under the age of 28. We also saw that we had an extremely high sensitivity. So overall, our sensitivity was 83%, but that included the small deletions that are less than 2.5 megabases. So when most companies report out their sensitivity, a lot of the massively parallel sequencing companies, they're only talking about the 2.5 megabase deletion and bigger. They're completely ignoring the lesions that are below 2.5 megabases, and that makes up 41% of the disease load. So imagine if you're doing a screening test where your total available opportunity, even if you had 100% sensitivity is to detect 59% of the affected patient population. We don't think that, that's a good test. So in this study, we showed 83% sensitivity overall for any 22q deletion, but we showed 95% sensitivity for the deletions above 2.5 megabases. We had an excellent positive predicted value of greater than 50%, which we think is really stellar. Now recently, you've heard some of the other laboratories talk about how they have a 100% positive predictive value or they come out and they put out slides and they say, "Well, we're better than Natera. We have 100% positive predictive value." Well, you'll notice that they don't report out their sensitivity. So you have to wonder, well, why are they only talking about their positive predictive value, but they're not talking about their sensitivity. That would raise a red flag for me. And what we've seen in some of the papers that are out is that the massively paralleled sequencing companies, we believe, have a sensitivity that's in the range of around 25%. So just keep that in mind when you see other companies talking about how great their positive predictive value is. So finally, on clinical utility, we think screening for 22q is very important. Early intervention can improve outcomes. We can detect cardiac anomalies. We can try to treat hypocalcemia at birth. And this has now been validated the actionability of screening in a prenatal diagnosis article. And in fact, this has already recommended screening by ACMG. And we look forward to ACOG recommending 22q in the future if that's something that they choose to do. So now I want to move to organ health for a minute. Across the organ health business, we have our cell-free DNA product line, which is Prospera for kidney, heart and lung. And there, we have more than 50% of transplant centers working with Natera, and we've published now more than 30 peer-reviewed publications across those different products. Then we also have our chronic kidney disease testing line, which is our genetic screening product, Renasight. Incredibly, one in 7 U.S. adults has chronic kidney disease are somewhere in the range of 35 million to 40 million patients in the United States. Already, about 55% of nephrologists in the United States have ordered the Renasight product. So we think this is potentially a very big opportunity in the future. Now when we first identified this opportunity in 2019, we decided like we normally do, we would set up a prospective multisite study to determine what the incidence of the disorder was -- or of these genetic disorders were in the chronic kidney disease population. And also whether there was clinical utility of screening, whether if the doctor got a result back and they showed their chronic kidney disease patient was positive, would they make an intervention? Well, incredibly, what we found is that 1 in 5 chronic kidney disease patients had a positive genetic finding. That's 1 of the highest incidences of positivity in any population cohort. But incredibly, 1 out of 2 of those positives received a new diagnosis or reclassified diagnosis as a result of their screening test with Renasight. And 1 in 3 of the patients that were positive actually had a change to the physical therapy and treatment that they were receiving. So this is extremely high clinical utility, this is roughly in line or maybe better than what's observed generally for hereditary cancer testing, which is now mainstream. And we think this is going to be a very large opportunity in the future. So I'll just finish up before we open up Q&A, talking about potential catalysts. So Natera today has very strong revenue growth driven by strong and improving average selling prices. We're on track for cash flow breakeven in a particular quarter in 2024 without any additional catalysts, just running the core strategy of the business. Now we think that's important because we're getting the cash flow breakeven the right way. So we didn't have to cut in mortgage the future of the company, cut back our R&D efforts, really trim back our commercial or lab footprint, so we have, right now, peak R&D spending and peak commercial footprint out in the field that's going to go support our core product lines over the next several years. And this significant historical investment in innovation is actually coming to fruition. Now we're starting to see the results of all the investments that we've made in R&D and building this commercial infrastructure. And so we have these big catalysts now that are going to start to hit in 2024 in areas where we've made significant investments over the last several years. So the first is guideline inclusion in women's health. We think it's possible. We could see a 22q guideline. In addition, we think we could see some carrier screening guidelines, I know that's been talked about. So we're excited about that opportunity. We're well positioned to, I think, to help patients in those 2 areas. We also expect to have the first readout of our randomized trial in colorectal cancer. This is the ALTAIR study, which we think will read out in the first half of 2024. We're also excited about the opportunity to get commercial coverage for Signatera and Prospera with these new biomarker bills, there's a state mandate that covers 50% of the U.S. population, that if Medicare covers the test that it has to be covered by commercial payers today, that's not in our model at all. That should be coming in soon, and we think that that's an opportunity. We're starting on that right now. And in addition, as we mentioned on our last call, we have exciting product launches coming, things that we've been working on for a long time across the core business in women's health, in oncology and organ health and in new areas beyond. So with that, we'll open it up for Q&A.

Perfect. Thank you, Steve. So I wanted to just start it off here by talking about the 4Q preannouncement. Obviously, another healthy beat relative to expectations. I was curious, could you kind of walk us through what drove the strength in the quarter? When we look a bit closer, it looks like volume was sequentially down quarter-over-quarter in 4Q versus that typical 4Q seasonality that you see where it's typically higher. So can you talk about some of that spread between the volume growth versus the revenue growth? Was there any onetimers that kind of played into that dynamic as well?

Yes. I mean, first, volume wasn't down, just to clarify. So as we said, we report out conservative numbers. And so what's on the slide versus the reality is, we actually did really well. I think we did see volume improvements in ASP, strong Signatera growth. I think it's just that core execution of the business is what's driving the revenue beat. We've been saying for a long time that we think there's some improvements in the average selling price that we can hit just by turning the crank and improving the billing operations. I've personally been working on that along with Mike and others for now over a year. And so we're starting to see just in the core business, without new guidelines coming in, without new Medicare coverage, without going and getting new commercial coverage, we're just getting more. We're getting paid a higher percent of the time because we're operating better. Then with that, we're seeing improvements in Medicare Advantage, and I think all this is leading to increased revenue. Mike, do you want to add anything to that?

No, I think that's [indiscernible].

Perfect. And then maybe just digging into some of the volume by quarter, can you kind of help us think about how was Signatera versus women's health contributing in the quarter? And then specifically within Signatera, how much of that contribution was from the clinical side on volumes there? You noted some of that strong sequential quarterly growth in Signatera, but any color there would be helpful.

Look, on Signatera volumes, I think kind of across the board, I think we had a very healthy quarter, and we'll give kind of the full detail on the Q4 call. But that includes good strong sequential volume growth on the clinical side. And we also had a kind of a healthy quarter on the pharma side, as you might expect for Q4 year as well.

Perfect. And then just looking at 2024 and potential range of outcomes there, you had noted that -- for this year, volume growth came in at around 20%. During 3Q, you had noted that you could see a potential similar volume unit growth number for this year. So does that still hold true in terms of your outlook for 2024? And then walk us through just given that comp dynamic, how that plays out as well.

Yes. I mean I'll just say we're in like 3 very large opportunities that -- at least 2 of the 3 are largely underpenetrated. And in women's health, there's still a long way to go. So I think there's a big opportunity ahead of us. And like I said in the presentation, we're seeing very strong quarter-on-quarter sequential growth in Signatera. I think it was near record levels of sequential growth. And then in women's health and the remainder of the business, I think a record December when it comes to units per receiving days. So we have a lot of good momentum going into 2024. In addition to that, I think we got a lot to look forward to. As these guidelines come into place, our differentiation gets more -- gets larger and larger in women's health. Our 22q product is highly unique and that's something that we're going to be focusing on. In addition to that, we have multiple suite of product launches that are going to be coming this year and that we're excited about, and we're continuing to build on our moat in Signatera.

Perfect. Then maybe just on new products. So today you didn't share a ton on new products, but you did mentioned at the end there that we can expect some exciting update in the future kind of teasing that we could see some in the core business but also beyond. So curious what could that mean? Any other details there right now would be helpful.

Yes. I mean when you look across our portfolio, 1 of the things that we've done really well is continue to innovate. And I think we plan to do that same thing across women's health. We're excited about new launches that are coming. Across organ health, we have great opportunities there. And then in particularly in oncology, supporting Signatera and surrounding Signatera, we expect to have exciting new launches.

Perfect. And then just talking about some of the screening and some of the data here further, you said that you were expecting some of the screening data based on your prior commentary. So when could we expect that? And then maybe walk us through some of the other data readouts that you're excited for this year outside of [ ALTAIR ].

Yes. So we're excited about actually reading out the performance data from our early cancer detection strategy. What we said is, we're going to spend around maybe $10 million to $15 million this year. And then based on the data readouts, we'll look at kicking off an FDA enabling trial in 2025 and 2026. So we have 2 data sets, advanced adenoma in colorectal cancer. And I think we've run 1 of those, and we're in the process of running and analyzing the second one, and then we'll be doing the initial readout, which I think will be followed by some additional readouts later this year, and then we'll make a decision of what we want to do there.

Helpful. And maybe just looking at ASP improvement across the portfolio, that's been a key theme not only in Signatera but also in women's health, just given -- which is impressive given the maturity of the market there. So you've talked about some of your investments in billing operation improvement being a key factor there. But can you -- can you elaborate on exactly what that's entailed? And then how much further runway is there on that front to improve that ASP growth?

Yes. So I mean I'll just give you an example. I think 1 of the areas where it's difficult to -- even if you have a covered service, sometimes you don't get paid by the insurance company. And I think everybody in diagnostics deals with this, maybe the insurance company asked for medical records and that process of going back to the doctor and getting a copy of the chart or getting the medical records, something along that way ends up dropping or not getting executed. And then they say, look, hey, it's clear, it's a covered service. We have an NIPT policy for low risk, this patient with low risk, but we're not going to pay you because you never went and return back the medical record. Yes. I think there's different things like that where we can do a better job. And we spent the last 12 months really looking at what those are and how we can make improvements on those. And we're starting now to put some of those in place, and we're seeing improvements.

Helpful. Then maybe shifting over to cash burn and some areas on the P&L. So obviously, you've had the top line expansion, but you've also done pretty nice on the gross margin line improvement as well. So can you elaborate on some of those improvements you've made on gross margin, some of the workflow adjustments and new platform migrations as well? And then what's left to do on that gross margin line to help you achieve that cash flow breakeven?

So we're improving the average selling price and we've seen that now across all the different areas of the business. The ASP is going up. So that's the #1 thing. Then second, we're reducing the cost of goods sold. And that comes from a suite of activities. Some of it is our R&D budget being applied towards versioning sequencers or moving to new sequencing platforms or automating aspects of workflows that weren't previously automated, running certain tests like the tissue in our new laboratory versus using other means. And so a portion of the cost savings comes from that. Another portion comes from just doing better on vendor negotiations. And it's something we've put a lot of energy on in the vast majority cases, there's multiple suppliers that provide the similar type of tool that we're using. And so I think we've gotten a lot of ground from that as well. We do have, I would say, very significant COGS -- projects that are going to be hitting in Q1 -- or sorry, at the end of Q1 in the women's health business and then sort of in Q3 and spread throughout the second half of the year. These are our R&D projects that are going to be hitting.

Got it. That's helpful. And then maybe I just want to touch on some of the recent litigations. You've had a few wins in terms of patent litigation, especially on the oncology side. So I wanted to ask, how do you think about this when it comes to your competitive mode given some of the preliminary injunctions that you've received?

Yes. So it's obviously very challenging to get a preliminary injunction or a permanent injunction. And so we think this speaks a lot to the strength of our intellectual property. We have more than 220 pending or issued patents just in the field of oncology. And so we think this puts us in a great position.

Perfect. Helpful. Maybe shifting over to oncology, then just on ASPs for Signatera. On the ramp to get over $1,000 on ASPs by the end of 2024, can you talk about how much does that really hinge on some of the additional Medicare coverage that you've talked about today? Last time you spoke, you said that there was additional submissions coming in 2024, so how should we think about the puts and takes there?

Yes. So I would say it doesn't really hinge on that at all, and we can get over $1,000 just by turning the crank on the operations, but we have a lot of opportunity to actually do even better than that. And maybe Solomon, or Mike, you guys want to comment on that further?