NTRA - Natera Is There For A Long Game (Technical Analysis)

Summary

• Cutting the cash burn and other operational expenses should bring back Natera, Inc. financial health.
• Natera produced in 2022 loads of peer-reviewed ammunition for winning more and more market share in women's health, oncology, and organ transplant.
• Recent and upcoming studies results and endorsements are building the launching pad for Natera's profitability for the mid and long term.

Investment thesis

Despite being still a loss-producing company, Natera, Inc. ( NTRA ) seems to be on the cusp of a great turnaround, with multiple tailwinds helping its growth to be captured in the financial results.

The biggest tailwinds for Natera lie in the data lead. The company has established its moat in the area of women’s health, oncology, and organs transplants markets. According to me, Natera is a strong buy on both fundamental and technical dimensions.

2022 results

Natera, Inc. revenues for the whole of 2022 were $820.2 million, a growth rate of 37% over the very strong 2021 results. They performed 196,000 oncology tests in 2022, representing a growth of 158%, with 64,000 tests performed in Q4.

The operational expenses are due to decrease and major cost reduction projects are underway to lower the COGS.

Natera management guidance for 2023 is in the range of $980 – $1,000 million, based on continued volume growth, conservative women’s health Average Selling Prices (ASPs), and strong oncology contribution. Although the gross margin is due to remain in the low 40s for 2023, the management foresees the margin to reach the mid-50s by 2024, irrespective of the influence of the implementation of guidelines (see below in Growth Drivers). The investments in big studies have finished for now (tapered to $5 million per year) and the company is expecting to enter the period of reaping the benefits of the finalized and already started trials, having produced over 40 peer-reviewed publications covering 25 different cancers, that support Natera’s submissions to Medicare and private reimbursement plans coverages. The best financial news presented by the management during the full 2022/ Q4 earnings call is that the cash burn is expected to decline by nearly $150 million, to the range of $300-325 million, and the company is to become Cash-Flow positive by 2024.

Growth Drivers

Signatera, a circulating tumor DNA technology that screens for a generic set of mutations independent of an individual’s tumor, has received Medicare coverage for the breast cancer tumor, opening an enormous market to Natera, Inc. It’s already the 5th fifth Medicare coverage decision for Signatera, after, among others, colorectal cancer. Natera announced the publication of other 2 large-scale breast cancer studies this year, each with approximately 1,000 plasma samples. Screening for breast cancer stage IIb or higher (across all types) could mean roughly a total addressable market ("TAM") of 1 million tests per year.

Natera estimates that more than 30% of oncologists in the United States are ordering Signatera, which plays strongly into the “switch cost” moat for the company since it can be expected that once a patient enters the monitoring database, the practitioner remains with the same platform.

The multi-site CIRCULATE study was featured on the cover and as the lead publication in the January 2023 issue of Nature Medicine. The study demonstrated Signatera’s ability to predict chemotherapy benefits in colorectal cancer with 18 months of clinical follow-up. The key distinction is the prospective nature of the study with physicians and patients receiving results in real-time and also the predictive element, which takes the evidence beyond sensitivity and specificity into improved outcomes. This raises the evidence bar for the whole field, and it strengthens the utility of Signatera in colorectal cancer. Last but not least, it helps to make treatment decisions, especially related to chemotherapy. The related National Comprehensive Cancer Network ((NCCN)) guidelines are yet to be published.

The new American College of Medical Genetics ((ACMG)) guideline supports screening for 22q deletion syndrome, which is a leading cause of congenital heart defects, palate issues, immunodeficiencies, endocrine dysfunction, and neurological issues. The key features differentiating Natera’s test from the competitors are its sensitivity, specificity, and volume of data that has been collected over 7 years. Natera expects that the implementation of guidelines will translate into physicians starting to prescribe this test to pregnant women more routinely.

The National Society of Genetic Counselors ((NSGC)) guideline recommends that expanded carrier screening be made available to all individuals considering reproduction and all pregnant pairs. This guideline has been followed by a huge boost for Natera's market share after the recent announcement of a major commercial health benefits manager to cover the ESC costs. That decision supports the business model of Natera which is based on picking up the unserved need (agreeing willfully to low-margin results for a while), delivering a huge multi-site, multi-partner study, producing quality peer-reviewed publications, submitting applications for coverage with health plans, and opening the pipeline for a huge volume of testing to start flowing in over a long time. This is not an overnight operation - it is a long game.

Additionally, Natera expects to publish in the first half of 2023 a RenaCARE study, which evaluated Renasight (a genetic test for patients that have been previously diagnosed with chronic kidney disease) in chronic kidney disease patients. As management approaches the U.S. TAM for CKD:

“We think there are more than 1 million newly diagnosed patients per year and about 37 million patients living with chronic kidney disease. With more than 10% of the population in the United States having CKD and being eligible for testing, we think this is one of the largest areas of health care that can be improved with genetic testing.[...] hereditary cancer is an instructive comparison. In a large study of nearly 3,000 cancer patients published in JAMA Oncology, 13.3% of patients had a pathogenic germline variant indicating hereditary cancer. And of those patients with a high variant, 28.2% had resulting treatment modifications.

As RenaCARE read out, we will be looking at the same metrics, what fraction of the study participants have a pathogenic variant associated with their CKD and what fraction of the positive patients treatment was modified after the pathogenic variant was discovered with the Renasight panel. We think the RenaCARE study could position us for guideline inclusion in the future. This is a very large opportunity, and we already have a distribution channel in place through our existing nephrology call point.”

In the area of organs transplants and based on Prospera Heart study, the updated International Society for Heart and Lung Transplantation ((ISHLT)) guidelines for heart transplant recommends covering the components for ongoing rejection monitoring in heart transplant recipients: the recommendation proposes monitoring for rejection (with noninvasive biomarkers or biopsy) monthly during the first six months post-transplant, as well as testing in the 9th and 12th months post-transplant.

All in all, the recent coverage decisions expand Natera’s reimbursed addressable market to approximately 3.5 million tests per year. In 2023, Natera will be focusing on growth in colorectal and breast cancer as well as bladder cancer and immunotherapy monitoring, publishing new evidence and translating it into expanded coverage and adoption.

The Risks

The biggest risks lie in a slower-than-expected adoption of guidelines by doctors and the adoption of coverage by plan providers. However, with a strong foot on the brake when it comes to big investments as well as other cost-cutting projects, Natera, Inc. management is confident about raising the revenue projections and expecting profitability within the next 1-2 years independently from the guidelines' adoption.

Technical Analysis

Explanation of My Technical Analysis Toolbox

I will analyze Natera from a perspective of a number of technical analysis tools and show the screenshots on the monthly and weekly Heikin Ashi candles charts - each timeframe presented through two separate sets of indicators - which I will complement with a simplified daily Renko chart to reflect the short-term price momentum

The first chart setup (I will call it Chart 1) uses Bill William's Alligator indicator and Awesome Oscillator, as well as Ichimoku Clouds and On Balance Volume indicator line. For fundamentals, I show the quarterly revenue trend which I use for quick visual triage.

The Alligator technical analysis tool uses three smoothed moving averages that are based on thirteen, eight, and five periods, called also Jaw (blue line), Teeth (red line), and Lips (green line), respectively. Due to the smoothing of each moving average, the Jaw makes the slowest turns and the Lips make the fastest turns. The Lips crossing down through the other lines signals a short opportunity while crossing upward signals a buying opportunity.

William's Awesome Oscillator ((AO)) is a market momentum tool that visualizes a histogram of two moving averages, calculated on median prices of a recent number of periods compared to the momentum of a larger number of previous periods. If the AO histogram is crossing above the zero line, that's indicative of bullish momentum. Conversely, when it crosses below zero, it may indicate bearish momentum.

As for the Ichimoku Cloud - I am not using a full set of lines of Ichimoku lines, only the Leading Spans A and B, whose crosses dictates the color of the cloud and whose individual lines provide levels of the strongest support and resistance lines. Ichimoku averages are plotted into the future which in its own right provides a clearer picture but have no predictive powers.

On-Balance-Volume ((OBV)) indicator is a volume-based tool and is supposed to indicate the crowd sentiment about the price. OBV provides a running total of an asset's trading volume and indicates whether this volume is flowing in or out, especially when viewed in divergence with the price action.

The second chart setting (Chart 2) uses 2 moving averages (10- and 50-period), volume, and volume's 20-period average. On the screenshot from top to bottom, you will see the Composite Index Divergence Indicator ((CIDI)), which I learned from the book of Constance Brown, as well as J. Welles Wilder's Directional Movement Indicator ((DMI)). I also use MACD (Moving Average Convergence Divergence) which is well known to everybody: I seek crossovers of MACD and signal, as well as above/below the zero level.

CIDI comes from a combination of RSI with the Momentum indicator. For more literature, see Brown's paper or read her book. CIDI has been developed to solve the problem of RSI not being able to show divergence. I personally use the CIDI's crossover above and below its slow and fast-moving averages, as well as the position of the averages against each other.

As for DMI, I skip the ADX line because it doesn't give me anything. Instead, I focus on the crossovers of the Positive Direction Indicator DI+ and Negative Direction Indicator DI-. When the DI+ is above DI-, the current price momentum is upwards. When the DI- is above DI+, the current price momentum is downwards.

On the use of Heikin Ashi candles and Renko boxes, I use them as tools for trend reversal and continuation identification. Renko charts do not have a time scale and they are built on price movements that must be big enough to create a new box or brick. Similar to Heikin Ashi, Renko charts filter the noise.

The Long-Term Trend

For the long-term trend analysis, I use monthly charts. As we see in Chart 1, the Ichimoku Cloud in red color is lifting its lower edge, possibly leading to a positive switch. The Alligator’s lines are still in a negative setting but seem to be flattening. We notice that the March candle is a strong green Heikin Ashi candle with a wick already above the levels of January. The AO bars, although still under zero, are getting green. OBV has picked up as well.

On Chart 2, I am paying attention to rounding of the 10-month Moving Average (blue line) which still has to cross the 50-month AM from below. CIDI is the most positive indicator on this setup: it has crossed both slow and fast averages, and the fast (green line) one has bounced and is trending up. The monthly MACD aims at crossing its signal from below, although they are both under the zero level. The distance between DI+ and DI- has narrowed, but the DI+ still needs to cross above the DI- to mark the long-term strong uptrend.

The Mid-Term Trend

For the mid-term trend analysis, I use weekly charts. Chart 1 presents turnaround signals on each indicator. The Cloud has narrowed very significantly and is on its way to switching to green. All the Alligator’s lines have performed the positive crossovers: green above red and blue, red above blue. AO has crossed above the zero level, weakly but still. And the OBV has reached levels almost identical to those from 12 months ago and the highest on a 12-month trailing basis.

Chart 2 on the weekly timeframe presents an even more positive reading. The 10-week MA has crossed over the 50-week MA. CIDI has shot over both averages and the fast one crossed above the slow one as well. The sharp slope of CIDI could, however, indicate an upcoming weakening and profit-taking. The weekly MACD has crossed the zero level and its signal is (probably) on its way to doing the same. The weekly DI+ has been above the DI- for nearly a month now. I would expect the level of $46 to become the near-term S/R line.

Price Momentum

The daily Renko chart presents a picture of strong momentum. The 10-box fast average has just crossed above the 50-box average and the MACD has just crossed above the zero line. The setup is reminiscent of the situation from the period between April-June 2020 when the stock started its 200+% rally.

Conclusions

Natera, Inc. has received some of the most covetable endorsements for a biotech company. It has gone through a period of hate and distrust in its financial survival. However, it has produced a pipeline of strong and trusted products, backed by data and institutions. You might want to initiate the Natera, Inc. position in the area between $46-50, but remember that it is a long game. Lots of positive developments need to take place for Natera, Inc., but once they start rolling in, they might have a massive volume and longevity.

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