Overview
Tom interviewed NTRA’s CFO, Michael Brophy, this morning (May 7, 2021). We thoroughly enjoyed being able to bring a call with management of a Best Idea Long to you the day after earnings and look forward to more such events as opportunities arise. The replay link and notes from the call are below.
Highlights
- The NIPT opportunity looks bigger than what consensus is modelling. It seems likely that NTRA's data advantage expands their market share position. Growth in Panorama seems capable of driving the topline ahead of 2023 consensus on its own.
- Signatera seems underappreciated to us. Mike provided us with the details we need to model out the adoption curve, which even at the low end can meaningfully drive revenue even further above consensus. NTRA makes some convincing arguments about the advantages of tumor-informed test design vs. panels in terms of sensitivity and specificity, as well a cost.
- We need to do more work on the companion diagnostic (CDx) opportunity. It sounds like there are multiple opportunities coming in beyond what's already in motion with Genentech and its phase 3 Tecentriq (atezolizumab) trial.
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Post-Earnings Q&A with Mike Brophy, CFO of Natera Subscribers: CLICK HERE for event replay (includes video and materials link) |
Call Notes
Edited lightly for clarity and length.
Mike, congrats on a really good-looking quarter, we thought, in and around a lot of the capital destruction we’ve seen (factor exposure, high multiple, growth rates coming in, inflation scare). Let’s start with Signatera - compare/contrast w/ panel-based tests, please. Also, one thing we’d love - the difference between sensitivity and longitudinal sensitivity (LS) and why that matters?
- LS is the hallmark sensitivity measurement for ongoing/monitoring tests where there are multiple times through the course of treatment.
- With colorectal cancer (CRC), you get the initial blood test quickly after surgery (after the whole exome is run using tissue), and then quarterly, sometimes more frequently, to see if cancer has returned.
- LS is the ability to detect relapses using the cumulative approach vs. a single time point. It’s serial monitoring over time. The denominator is the patient - they got tested X number of times and did you catch it, yes or no. If the sequence is negative, negative, negative, and then clinical relapse, it counts against you.
What’s the right [sensitivity] number there? Where are you?
- The published data (JCO Reinart 2019) showed LS at 88%, specificity at 100%, so when Signatera said +, the patient was + 100% of the time.
- We just released an update/interim data on the earnings call from the first prospective study (Circulate-IDEA Japan) w/ 1500 patients - thus far 93.5% sensitivity (caught 29 out of 31 relapses).
Adoption of Signatera - we can see the claims data and that it’s been mostly colon but some others are growing. On the TAM slide, can you walk us up to the 3.1 million?
- There have been a couple of landmark changes for the effort in oncology over the past year. One, being able to produce strong data across a range of cancer types using the same test (ovarian, multiple myeloma, CRC, etc.). We see very, very strong results with consistently high sensitivity and 100% specificity. Signatera has lots of utility across cancer types and when you stack up the patient populations it’s a big addressable market.
- Plus, our competitors must revalidate tests for different cancer types. If we want to push for ovarian cancer, we’re already down that path (it’s the same test).
- On the reimbursement side, the largest payer is Medicare, and there’s been a lot of progress over the last year+. We are currently getting reimbursed for CRC in stage 2 or 3.
- There’s a draft coverage decision posted that will go live 2H21 specifically for using Signatara to monitor response to immunotherapy. The language is much broader than one indication, and it looks like a clear pathway to reimbursement for a broader set of cancer types. From here, we publish data on a given cancer type, submit the dossier to Medicare for review, and they opt to cover the test under the new coverage decision.
Aetna and others (Anthem, UNH) list Signatera as experimental (or it’s not listed). How’s the commercial side going?
- They’ll lag Medicare - probably by 2 years. It could be sooner or a bit longer, but the path to getting paid by commercial is: generate data, get Signatera entrenched in guidelines (NCCN), and then talk about it. When you’re in guidelines, it’s difficult for payers not to reimburse. We’re actively generating data and having those discussions.
What’s the cycle there?
- There’s no magical cycle for submission. For cancer, the expectation is for oncologists to remain on the cutting edge and adopt new technology. The guidelines change when data are available.
In the meantime, do you do a bunch of testing for free for commercially reimbursed patients?
- The fact that the majority of patients happen to be Medicare is incredibly important (60% of CRC stage 2 and 3 are >65 - MedAdvantage included). We’ll be driving volume where there’s an unmet need, engaging w/ payers to get reimbursed. It’ll be choppy until we’re in the guidelines.
Is that ASP accretive?
- Yes. Benefit overall. When we get paid by Medicare today, it’s an average of $1,800 per time point. Street models have the ASP at like $700 - which is not terrible.
- The first time point is in the $5k range (get more for the whole exome), and then the lowest payment is in the $700 range [for subsequent].
The FDA is at a control point - how are you thinking about breakthrough device designation and the value of LDT vs. FDA approval for a test?
- Lab Developed Test - LDT - is the primary strategy for driving volumes in clinical - we can make the test available to patients right away. The Medicare pathway followed by commercial is tried and true.
- At the same time, we’re pursuing lots of opportunities with pharma - enrollment for clinical trials. When studies read out, FDA-level prospective phase 3 data - we’re the CDx in there and the approval has Signatera in/on the label. The use case is covered.
- We have multiple breakthrough device designations for different cancer types. Genentech is launching a 2nd phase 3 trial for muscle invasive bladder cancer and we’re written in.
Is the TAM inclusive of CDx use?
- No, so that’s another leg of the story.
- Natera can get reimbursed for that assay and we get paid even if no drug is prescribed. It absolutely opens up a call to action for a broader set of oncologists to add Signatera to their workflow(s).
Circling back on the discussion between panel and tumor informed tests… there are a few competitors, but do you have a cost advantage, particularly on the back end?
- The Signatera assay’s upfront cost is over $1k (COGS) - that should come down; however, the individual time points are highly optimized and already below $300 per time point. That’s very important for repeat tests.
- The COGS for the panel tests vary widely… I can’t quote a number. It’s fair to assume that it’s more expensive. They must cover more genes.
Is there a point where a patient-specific database is large enough to say, “We’ve seen it all and have a catch-all panel.” Or is it so variable that we never get there?
- What you’re getting at is a one-size-fits-all to track all because mutations are different - that varies from cancer to cancer. With some cancer types, 30% or more of patients have drivers or something else going on that you wouldn’t think to track. If it’s tumor naive, you can’t catch those - need tumor-informed.
- Oncology is an area where data matters. So far, the differences in data are stark. We’re pushing our first-mover advantage.
- I am open to the idea that panels can get better or might work for certain cancer types, but there’s a big difference.
- Our core technology is working beautifully (it’s a flywheel).
- The count of doctors ordering is getting large as a result - there’s broad dispersal of [our] tech out there.
Can MSK or another leading cancer center do this?
- It’s not about smarts. There’s IP and 10+ years of know-how/experience. 10+ years of working with PCR primers. We were pursuing the best-ever NIPT and that work has served us well to offer Signatera out there.
- We launched the new approach to NIPT in 2013. We’ve prevented others from copying it, and 7-8 years later still nobody has copied it because it’s hard to do.
- We talked about the personalized approach to cancer testing for years - two years ago, nobody would listen. They didn’t believe it could work.
Layer on CDx in the model - Multiple Myeloma / Bone Marrow has huge upside for patients - are there any other situations like that I need to think about?
- With multiple myeloma, that marrow core - need anesthesia and grinding into the hip hurts. It’d be great to do that one with a plasma draw. There are certain blood cancers where it’s becoming more feasible, and nobody is at scale today.
- If you go down the list for Signatera, we are focusing on unmet needs for better patient stratification, response to immunotherapy, relapse risk, etc. Every indication on that slide has some element of that [unmet need] story.
NIPT - Panorama data - it looks like you have a permanent advantage vs. anyone that might exhibit price-seeking behavior?
- The NIPT space has been competitive for a long time. The idea that a marginal entrant can change price dynamics is a misunderstanding. The history of the space - 5+ well-capitalized players over 5-7 years. Where we are now is a result of all that. Incremental entrants/exits have a muted effect.
Who is ordering the NIPT? The MD or payer?
- Overwhelmingly the MD makes a choice about which NIPT to use.
- Doctors are sensitive to things like out of pocket costs for patients. We are at the point where we can compliantly message a doctor and say, “Most patients don’t owe anything, when they owe a copay it’s between zero and $200.”
Market share and penetration of NIPT if NIPT goes from 30% penetrated to 90% over a few years?
- Have more than 50% average risk, 25-30% high risk, 900k. If there are 4-5 million pregnancies each year, even if we bake in healthy erosion, there’s still meaningful growth.
- We have a track record of retaining share, and now our team has the 20k-patient, prospective, five-year study to talk about. It’s not just passive, we’re winning business.
- We did ~350k processed tests in the quarter overall - blended volume. The Street has NIPT at over 200k or so (that’s not terrible).
Medicaid reimbursement?
- Something like 50% of births are Medicaid, which has historically been about ⅓ of NIPT volume. It’s incredibly important. We care about those patients and just run the tests.
- Reimbursement - the fraction of time we’re paid has trended “nicely” over the last 2-3 quarters. Was a depressing fact of the business, but we’re getting to the point where most states are reimbursing for average-risk. Over the next year, we can probably say that. Commercial is already there.
- Regarding preferred lab networks, Natera is broadly in-network and participates, but they don't drive volume.
Natera 5 years from now - what’s your view on growing via M&A vs. in-house development (which has been successful)? And are there any good proxies for Signatera?
- We’ve taken the core tech and applied it to multiple areas. Transplant - there’s an unmet need (Prospera is accretive). Oncology is huge. We are sensitive to valuations in the market, but small deals/tuck-ins might make sense.
- One proxy might be CT scans. They are commonly used to monitor cancer and are pretty penetrated. Penetration varies by cancer type, but as oncologists get more comfortable with RMD there’s a clear advantage over CT scans.
What can you tell us about the Panorama AI?
- Panorama - the AI / new algo was validated in the huge prospective study, boosts performance in microdeletions, etc. We are constantly working to improve NIPT testing and there’s more to come there (new offering(s)). That’s how you stay ahead of the big box labs - innovate.
About the Speaker
Mike Brophy has served as Natera’s senior vice president of Finance and Investor Relations since September 2016, and 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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Thomas Tobin
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