OVERVIEW
NTRA was down ~30% yesterday on accusations made in a Hindenburg Research report published yesterday morning. It will take some time to sort out the impact to the company which means a protracted recovery for the stock, particularly in Quad 4.
The Hindenburg Research report can be read HERE
My Genome My Life website can be seen HERE
Natera's Response to Hindenburg HERE
Natera's response was published yesterday, but we were looking for more substantive information on the relationship between Natera and My Genome My Life. Regardless of Natera's comments, it will take time to see the impact of the additional scrutiny Hindenburg's accusations are likely to generate, first on weekly test volume, and then on quarterly results and estimates. There may be no impact at all, but we have to wait to find out while we and others work to verify the report. In Quad 1 or 2, waiting might be reasonable plan, but in Quad 4 we expect pressure will be persistent and a recovery hard to come by.
Depending on the veracity of the Hindenburg report, Panorama and Horizon volume may come under pressure which we will watch for in medical claims in the coming weeks. We'll be looking closely for any changes in existing patterns including repeat submissions.
Our initial thoughts on the Hindenburg report:
We'd like to know how much of Natera's volume is processed by My Genome My Life. If the accusations are true, almost half of Natera's volume flows through MGML although there is no mention of MGML in Natera filings. The magnitude of the suggested volume implies most tests need to be pre-authorized. Even MGML is not controlled by Natera, its seems material enough to disclose.
Natera's ASP does not suggest widespread billing fraud. When we've seen these types of schemes before in other companies they usually result in pricing well above market rates, which seems not to be the case here.
What percentage of Natera tests require pre-authorization? With ACOG expanding guidelines to include average risk pregnancies, pre-authorizations should be less of a headwind now and in the future. How many patient claims currently require pre-authorization?
Will regulators investigate? An investigation of some kind, either legal or regulatory, official or unofficial, seems likely.
Will physicians switch to other labs? Competitors will use the report to detail Natera customers, who in turn are likely to check on the tests they send to Natera/MGML. Physicians could shift away from Natera.
Will payors investigate? Payor claim editing systems are highly automated and Natera claims submitted by MGML are likely to now be checked. If the MGML submission is bypassing existing claims auditing systems, or defying guidelines, they are going to get flagged and denied. We have noticed a long lag between submission and payment dates in Natera's claims history which suggests and already lengthy review process.
MOVING TO LONG BENCH
With a lack of clarity we expect a recovery in the shares to be protracted, frustrated by an unfavorable Quad 4 environment, and separately by a lengthy discovery process. The company's press release response won't bring an end to the concerns. Based on the report, this is not going to resolve in the next few months, let alone the next few hours and days. Natera's factor exposure has been wrong for Quad 4, which we thought could be overcome by strength in Signatera and the current positive estimate momentum, currently MicroQuad 2 and above average and accelerating. We expect a series of beat and raise quarters and 2023 numbers to climb higher over 2022, but the possibility of fallout from the Hindenburg report will remain elevated, and the burden of proof will be on Natera.
By benching NTRA here, we're booking an already bad position, but leaving ourselves the flexibility to re-enter as either the Quads change or there is clarity on the fall out. The first signals we'll watching for is a change in the trajectory for Panorama and Horizon claims.
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Thomas Tobin
Managing Director
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