HEALTH CARE CALL REPLAY & NOTES | FIRESIDE CHAT WITH NATERA'S CFO YIELDS GREATER CONVICTION

OVERVIEW

On January 22, 2021, Tom interviewed NTRA’s CFO, Michael Brophy. We thoroughly enjoyed being able to bring a call with management of a Best Idea Long to you and look forward to more such events as opportunities arise. CLICK HERE for the replay (includes video and audio replay links) and please see below for the call notes.*

Highlights

1. Non-invasive prenatal testing (NIPT) is an underappreciated growth driver. Not only is there room for volume upside and further share gain for NTRA, the market leader, but there could be ASP lift as well due to a favorable mix shift (Horizon grows with Panorama). The SMART study data should cement NTRA’s leadership.
2. Signatera is starting in CRC where 2/3 of the patients are covered by Medicare and expanding as data are published across additional cancers and the new sales team pushes/builds relationships (bladder cancer, breast, ovarian, etc. all make sense). Signatera is being evaluated in 10+ cancers and could end up the standard of care with attractive pricing (~$1,800 per Signatera time point).
3. In Women’s Health, there’s the potential for further reduction in COGS (from ~$200/unit); and for Signatera, the exomes can be run more cheaply. There’s room for margin expansion.
4. The competition is lagging in terms of data and COGS. The faster Natera can move, the better.

CALL NOTES

*Edited lightly for clarity and length; emphasis added.

What were your top takeaways from JPM21 – your presentation, the questions you heard, and presentations by the competition?

• It’s an exciting time, specifically for NIPT. Last fall, after a long wait - many years – we saw a definitive practice bulletin put out by SMFM and ACOG that memorialized NIPT as standard of care for pregnant women, ~4.2MM pregnancies, maybe 1.5MM NIPTs being run.
• With the strength of that statement, 1) we quickly got broad payer coverage (UNH, AET, and HUM are three large examples); and a real opportunity to go from 1.5MM to more like 2.5MM-3MM NIPTs being done per year. A lot of the questions were around the ramp and reimbursement. 2, Just recently, we were able to read out data from the SMART trial – a 5-year, 19k patient trial. It’s the largest validation ever for NIPT and microdeletions; it is very timely to have that data in hand as the market ramps.

It looks like a good chunk of average risk volume is passing through NIPT. Can you touch on what the mix is and the cash price vs. insurance?

• The mix of NIPT average and high risk has been remarkably stable for the last 3-4 years: 60% avg. risk, 40% high risk. In 2020, it inched up to ~62/38, but is stable overall. We’ve been able to grow both segments – it’s not a consequence of focusing on average-risk NIPT now that we have broad coverage (we already have in-network contracts with large payers for NIPT).
• There isn’t a different CPT code for avg. risk or high risk – it’s all at the same rate (no additional contracting step). [There’s] not a lot of cash pay – Natera does have a program to help/collect, but it’s not a significant driver.

50% of births are Medicaid – where are you with that?

• It [varies] state-by-state and is incredibly tricky. Medicaid is ~30% of volume. That ratio has been stable over 4 years as well. There’s a tailwind to getting more broad coverage – across a broader range of states. There are 15-20 states that have coverage policies and pay consistently. The other ones are may or may not have a policy – it’s “balkanized” and could be a linear thing in the background.
• What happened for us with private payers happened quickly. I thought it’d take a year to get the big payers on board and it happened within a couple of months. We have great momentum here. On the Medicaid side, having Humana on board is important because of its large government plan exposure.
• It will be a linear process with some uplift in 2021 – it’ll be gradual, in the background quarter-by-quarter over the next 1-2 years. There is no one state or managed Medicaid plan that’s binary like UNH on the private side.

One area of speculation – if volume ramps from 1.5MM to 3MM NIPTs, what happens to pricing and share? What is it about 50%+ share and growing? Is service the key ingredient?

1. First, it’s the tech itself. The rest of the field is using “shotgun sequencing” – they license that “recipe” from Illumina. There’s different branding, sales reps, etc., but that’s the whole field. The approach at Natera is unique and yields fewer false positive and negatives.
2. We’re armed with the largest validations study, ever – it’s the gold standard validation study.
3. Commercial channel – we have the longest tenured channel in the field. The competition has seen reps come and go. Natera’s team has been stable. I think we have the best sales reps and continued commitment to improving user experience (mobile ordering, simple understanding of bills, communication via text, etc.).
4. Our ability to push content through the channel – 8-9 weeks into a pregnancy, one requisition form and blood draw for best-in-class NIPT + screen for microdeletions? Nobody else is near the quality level of NTRA. We also have the best carrier test for mom. That combination of sales rep trust, the right user experience, great tech, and comprehensive genomic screening equals an attractive offering.

Will people piggyback on the microdeletion data?

• Competitors will try, but I think the problem is using a different approach to deliver the data (SNIP-based method to amplify areas of genome vs. others with a shotgun – they don’t’ have the quality of data). This will be a standard commercial argument, and we’re armed with the right data.

OK, what’s the impact on Horizon (carrier screening)?

• As NIPT grows, carrier screening grows right with it. People thought that carrier screening would be down because it’s perceived as ‘not mission critical’ and likely to decline with non-time sensitive electives being down, but that didn’t happen. The timing lines up with NIPT though, so as NIPT ramps, microdeletions and carrier screening grow too.

We’ve been tracking the return of in-person care and downward trend for birth rates, which has been steady. What are your thoughts on the pandemic and comp – easy, hard? Care avoidance, pregnancies?

• We had a very strong year in 2020 - hard to know how good it could have been. It’s just my opinion, but I think we would have done better if our sales reps could have gotten out there. It’s hard to win new accounts without a sales rep in the office making sure that things happen, holding hands, etc. We had to shift on the fly and going back to normal must be a good thing.
• The pregnancy data is interesting. Those trends haven’t shown up in volumes. Maybe we’ve been able to power through it. I would imagine it’s a headwind, but you wouldn’t know it based on the numbers.

Have you seen any impact from preferred lab networks (PLN) or validation agencies?

• PLNs have not been drivers of market share in NIPT. That was part of the thesis for going in-network in 2015 and 2016 with several payers (in return for lower rates). Payers would be influential in steering to in-network labs, but it never panned out. There was no volume benefit.
• 3P validation hasn’t had a big impact on the space. What is helpful is when 3P tech evaluators come out with reviews in general. For example, the Blues have an internal tech arm, Evidence Street – that did a review of expanded carrier screening last fall. They walked through the utility of it for 20+ inherited disorders and made a positive recommendation.

Do you have a sense for the trajectory of [NIPT] pricing? Do microdeletions help?

• The microdeletion pricing discussion is separate from NIPT because the AMA recognizes a separate set of disorders, which is appropriate. Separate CPT code that bills for microdeletions. We ran the massive trial to demonstrate the importance of microdeletions, show performance, improve the fraction of the time that we’re reimbursed. We do more than 400k of them per year and often aren’t paid despite contracted rates in the $600-$800 range among commercial payers. Driving guideline improvements could make a huge impact on realized revenue per test.
• There’s no bundling.

On the trajectory of pricing?

• NIPT first – when we get paid on microdeletions, the contracted rates are $700-$800 in general, and the ASP is much lower (as mentioned before, in the low $300s). So, ASP – revenue per-test – could rise meaningfully since coverage has expanded. That’s a potential tailwind.
• The offset/headwind could be if the volumes ramp from 1.5MM – 3MM NIPTs it’s a big increase in volume and payers might want rate reductions to compensate. There’s room there to “cut” so I’m sanguine on that. If we got paid $600 85% of the time, it’d be good for realized revenue per test and a win/win (for labs like NTRA and the payers).

So there could be volume growth and mix higher on ASP. How about Signatera – can we start with the patent suit?

• There’s a reason we started in NIPT and branched to transplant rejection and MRD/recurrence monitoring. We’re leveraging a core tech. When we got into MRD, for example, we didn’t hire a consultant. We took a hard look at the unmet needs of cancer and where the existing tech could be a nice fit to solve a problem.
• A couple of years ago, nobody was talking about MRD – we had to interrupt people to talk about it. Now, it’s MRD is a requirement for large liquid biopsy company, and we are way out in the lead.
• Patents are part of that core tech and relevant here – we’re obligated to defend the patents.

There are lots of new shiny objects – big panels, big data – and a lot of capital backing them. Signatera sounds “old school” and lower tech… how defensible is your moat and what are the few reasons?

• It’s important to realize that people are pursuing different diseases. When you hear “liquid biopsy” tossed around, the technical requirements can vary greatly. Looking at Guardant or Foundation – those big panels can be helpful for therapy selection. If the point is to serve stage 4 metastatic patients, you need a broad panel and can focus on driver mutations to match the patient and therapy. There’s lots of tumor burden, so it’s not important that it’s sensitive (broad and expensive are OK).
• It’s hard to get highly sensitive and targeted. It’s totally different than #1, but that’s what we do at Natera - we do custom panels for individual patients.
• Example: With CRC, patients come out of surgery and 2/3 are cured. However, outcomes are poor for the 1/3 that’ll relapse. If you can use a cfDNA test in that cohort to predict who will relapse, you can catch it earlier than via CT scan. Study data suggests we can do that w/ 90% sensitivity 9 months before the cancer would otherwise be caught.
• Once the tumor is resected, we run a full exome on it to get a very broad overview of the variants that can be seen. We have a set of proprietary algorithms to select the most relevant clonal mutations for that patient, not necessarily drivers, and the 16 will differ from patient to patient. Sometimes they can be passenger mutations that aren’t even targeted by drugs. Leveraging 10+ years of PCR experience, we can pull up the right primers to track those variants. Each is a thumbprint and highly sensitive. It’s fundamentally a pan-cancer solution.
• No, this isn’t an off-the-shelf thing – we’re not manufacturing individual probes. There’s a specific assay for each patient. There can be overlap, but many patients have zero overlap. The key is to track those 16 for each patient – it’s incredibly important, and other methods aren’t as sensitive.
• The frequency varies per patient – a rough guide is like the timing of CT scans – at least 4x in each of the first two years (quarterly), and then maybe 2x each year thereafter. For CRC, monitoring can go on for up to 10 years… but what we’re seeing in clinical practice is 4, 4, 2, 2.

Is there clonal drift? Are the 16 stable?

• That’s right – they are stable. Beyond that, we see diminishing returns. 16 seems to be the right number, and while there can be some drift, many aren’t under therapeutic pressure.

How is Signatera being paid for? Medicare, commercial payers?

• Medicare has 4 bundles, and it depends on where the patient is in his/her journey. If they just had surgery and the exome is done, the expectation is for 2 Signatera tests in the first six (6) months. The discussions with Medicare – those bundles – are the result of proprietary negotiation that relied on data and represent a fair price. Cutting through all that, for modeling, you can think about it like: on average Natera gets ~$1,800 per Signatera time point (inclusive of the exome).

Did you incorporate a cost component in the discussions? And now does COGS influence competitive dynamics?

• COGS is a component of it – Medicare wants to keep the dynamics of decision making internal, so we don’t know exactly what parts they focus on. They are very thoughtful about clinical utility. It’s a holistic approach.
• Regarding the competition, we’ll just have to see what they’re able to negotiate and where they end up. It isn’t practical to run broad on a repeat basis for this. It’s not sensitive enough and would be very low margin.

It sounds like you have a stark cost advantage. Is anyone cost competitive? Academic labs?

• It’s hard for me to comment. There’s hardly any data on this out there. One paper highlighted using four different exomes, but you can’t do that in a clinical setting.
• Academic labs have not been an issue – they are more active in other areas of cancer (treatment selection, for example). Lots of academic labs run tests for their own patients, but it doesn’t seem to bother Guardant or Foundation.

How has traction been with payers on Signatera?

• With Medicare, we focused on the indications where there’s coverage of the tests, or where coverage is imminent. 2/3 of CRC patients are covered by Medicare, for example. So, we must zero in on those first. The strategy with private is to go to them over the next couple of years with prospective and health economic data. Getting into NCCN guidelines would help too (we’d like to get into NCCN guidelines over the next 2-3 years – hope it’d be faster in some areas).

Could you move into screening?

• Yes, we absolutely want to move to stage 1 patients where the utility and use case makes sense. We think CRC is one of those areas, and there are several very large indications that are similar. There’s lots of room to expand into in bigger markets.

Talk about sale team in oncology – dovetail to how you grow outside of CRC, sales team expansion?

• We hired 25 reps in Dec 2019 with a plan to build up the team by mid-year to be comparable to GH’s and Foundations’ teams – roughly 100 reps plus or minus. The pandemic hit and we paused to see how the new reps could do, and they did extremely well. We were incredibly pleased by the volume they were able to generate, centers signed, etc. We finished hiring in December, which is quicker than I imagined.
• The initial focus is CRC, but you can track it based on data presented publicly – immunotherapy monitoring (MVigor data before Christmas) and neoadjuvant breast cancer are two recent ones.
• Signatera is being evaluated in 10+ cancer types – it’s a pan cancer assay. We’ll ramp as Medicare wants to cover them. We have a clear line of sight to pan-cancer reimbursement.
• The goal is to push our first mover advantage in recurrence monitoring. We want Signatera to be the standard of care. These markets are so big that incremental investments [in sales, if needed] are worth it.

Audience Q&A

What resources and supplies do you need, and do you see costs coming down?

• We have a good track record of reducing COGS per unit. For example, COGS per unit was a little under $400 in 2015, and as of 3Q20 it was around $200 in Women’s Health. There’s a clear line to drive it lower.
• In cancer, we could be running exomes at a cheaper rate. I think we can do that in the relative near term as we scale. It just hasn’t been a focus, yet. There’s lots of low hanging fruit.

Competition coming into MRD – it looks like there’s a lot of it?

• Yes, but data leadership is very important. There are lots of comps over the history of diagnostics where a 1^st mover with a commercial push and data leadership maintained a meaningful chunk of the market. Competition is great because it was hard being the only player trying to convince people of the concept. Having multiple voices can move the conventional wisdom in clinical practice in favor of using cfDNA tools, and that’s good for all of us.

ABOUT THE SPEAKER

Mike Brophy has served as Natera’s senior vice president of Finance and Investor Relations since September 2016, and served as the Company’s vice president of Corporate Development and Investor Relations since September 2015. Prior to joining Natera, he served as an executive director and as a vice president in the investment banking division of Morgan Stanley, where he focused on advising corporate clients in the life science tools and diagnostics sector. Mr. Brophy holds a master’s degree in business administration from the University of California, Los Angeles and a Bachelor of Science degree in economics from the United States Air Force Academy. His military career included leading a multi-agency, 10-person team on a $1.4 billion contract to modernize 10 remote satellite tracking stations worldwide.

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