NTRA - Natera: Squeezing The Last Drop From NIPT Growth Engine

2023-12-27 19:55:36 ET

Summary

• Natera is a leading company in the field of molecular diagnostics, capitalizing on the growing potential and widespread application in modern healthcare.
• The company has a proven track record and established trust in the technology, offering investors an opportunity to monetize population cancer screening and diagnostics.
• Natera stands at the forefront of the transformative shift in non-invasive prenatal screening and has the potential to tap into its growing potential.

Executive Summary

The journey to bring molecular non-invasive prenatal screening/testing 'NIPT' to mainstream healthcare standards hasn't been easy. The sector faced and overcame the challenges of proving the accuracy and reliability of this tech. Natera ( NTRA ) offers an opportunity to capitalize on the considerable groundwork already laid as we enter an era of widespread acceptance for all pregnant women, regardless of age, leveraging the established trust and recognition in the technology to tap into its growing potential and widespread application in modern healthcare.

Rationale Behind the Upgraded Rating

It's been over a year since we assigned a 'Hold' rating to NTRA, a decision influenced by the company's strategic divergence from its peers amidst the economic turmoil and unconventional monetary tightening in response to inflation. This economic landscape led to a deflation in the equity market, exacerbating the dilutive impact of equity financing, a crucial source of growth capital for the emerging molecular diagnostic industry.

The challenging market conditions pushed the sector to walk a thin line. Molecular lab companies needed to invest in R&D and marketing to lay the groundwork for broader adoption of their tests and establish relations with stakeholders, from physicians to patients, professional bodies, and insurers, both public and private. This is essential for creating a compelling narrative and a scientific platform for their technologies in light of the absence of FDA regulatory approval process. On the other hand, there was a pressing need to manage costs effectively, especially as access to equity funding became increasingly constrained.

Initially, NTRA chose (or was compelled) to intensify its spending, in contrast to its peers, who appeared to opt for a different strategy, at least initially. While NTRA was ramping up its spending, others in the industry shifted their focus toward enhancing profitability. This involved streamlining their operations, which often meant scaling back on R&D and marketing expenditure.

While NTRA significantly increased its expenses, leading to a rise in losses to $141 million in December 2022, up from $119 million in the previous quarter, the company has made notable strides toward profitability in the subsequent months. By reducing its operating loss to $111 million, a 21% decrease, without compromising on growth, NTRA has bolstered confidence in its potential to pivot toward profitability by 2025. In contrast, some peers who initially opted for aggressive cost-cutting strategies have encountered setbacks. For instance, Myriad Genetics ( MYGN ), despite early success in reducing expenses, saw its operating losses deepen, doubling in the September quarter on a YoY basis. Oncocyte, a smaller player in molecular diagnostics, has struggled to achieve revenue growth and now faces looming bankruptcy concerns. Adaptive ( ADPT ), which recently hired a renowned JPMorgan ( JPM ) industry analyst as its CFO, has also failed to either maintain revenue or manage costs.

NTRA's unexpected turnaround has surpassed our initial predictions, shifting our analysis back to the company's growth potential and market positioning. In this article, we'll delve deeper into these aspects, reassessing NTRA's prospects and strategic standing in the industry.

Investment Thesis

In the past ten years, NTRA's growth has hinged almost entirely on the Panorama Screening, a genomic test used during pregnancies to detect genetic anomalies in unborn children. This product has been the cornerstone of NTRA's impressive growth trajectory, culminating in the company securing a dominant position in the market. However, as we cross the ten-year mark of remarkable expansion, there are emerging questions about the sustainability of this growth. With the number of pregnancies in the US standing at 3.6 million annually, the potential for market expansion is not limitless. As NTRA, currently the market leader, continues to increase its test volumes, the industry is poised at a juncture where growth may begin to plateau.

Since 2019, NTRA has ceased reporting volume data, hindering investors' and analysts' ability to gauge the ongoing growth potential of its NIPT segment. A clear understanding of NTRA's flagship product's current market position is vital for making sound investment decisions. This is compounded by the uncertainty surrounding the company's capabilities to replicate its past success with new products, notably Signatura, compared to its achievements with Panorama and Horizon.

This analysis uses a statistical linear regression approach to estimate NTRA's current market share. Our findings point to a substantial, untapped growth potential with NTRA's NIPT product line.

One Trick Pony?

NTRA's success in the NIPT market is rooted in its initial clear strategic focus, zeroing in on women's health in its early years, allowing it to build strong ties with obstetricians and gynecologists and efficiently use its R&D and marketing resources in a narrow but growing niche. NTRA's initial product, Spectrum Test, a preimplantation genetic test introduced in 2009, laid the foundation for the company's growth in the Women's health sector. Following this, NTRA expanded its sector's portfolio with the Anora miscarriage test in 2010 and the Horizon carrier screening in 2012. This expansion culminated in the launch of the Panorama NIPT test in 2013, cementing NTRA's strong position despite being the fourth entrant.

NTRA's recent expansion into new medical fields marks a significant shift from its previously focused strategy that was instrumental to its initial success, casting a shadow over its ability to repeat its success in Panorama in other tests. Moreover, with the introduction of products like the Empower cancer risk assessment in 2020, the Prospera Transplant rejection test in 2019, and Signatura in 2017, the company is now stepping outside its core strength of women's health. This transition has placed NTRA in direct competition with established companies that possess deep technological expertise in these new fields in a relatively mature market that is different than when the company started.

This move into territories beyond women's health raises questions over NTRA's ability to replicate the success of Panorama in its new ventures, leaving Panorama NIPT test as the sole engine for growth, at least in the short run, especially given that sales from these new ventures are too small to move the needle on a consolidated level, despite their high growth rates.

The Sales Growth Linearity

The advancement of the NIPT market, and in particular, NTRA's Panorama test sales, has been marked by a consistent and linear progression. This trend is a direct consequence of the unique aspects of the market. Notably, genomic diagnostic tests, including NIPT, don't require FDA approval. While this might seem advantageous, it actually complicated the commercialization process, necessitating a blend of perseverance, negotiations, convincing, and a lot of clinical trials. A significant hurdle in this journey is the inherent conservatism of physicians, who often rely on tried-and-tested methods they understand and are comfortable with. Persuading them to shift to new technologies like NIPT requires a gradual and strategic approach. This starts with laying a strong foundation of scientific evidence, a role fulfilled by NTRA's initiation of the SMART study in 2015. This landmark study, the largest of its kind, examining Trisomy and microdeletions in over 20,000 pregnancies, played a pivotal role in building the necessary scientific literature.

As this literature expanded, it is beginning to influence key opinion leaders responsible for drafting Standard of Care Guidelines, gradually making NIPT more palatable to the wider physician community. However, the path to widespread adoption has more hurdles. Insurance companies, incentivized by policies like the Affordable Care Act to cut costs, have been generally reluctant to cover new tests unless they contribute to overall cost reduction. Moreover, insurance companies hesitate to cover tests without significant physician support, and physicians are wary of recommending tests that aren't covered by insurance, creating a chicken-and-egg problem.

These dynamics, alongside the inherent conservatism in medical practice and the complex interplay between various stakeholders, have shaped the linear growth pattern of the NIPT market and, by extension, the sales trajectory of NTRA's Panorama test.

Market Size

In the US, approximately 3.6 babies are born annually, providing a reliable metric for the number of pregnancies, given the relatively small number of twins, triplets, etc. International sales account for only 3% of total sales, so we'll ignore international pricing dynamics and only point out that some outlets in the UK sell Panorama at around £540 ($670) for the basic aneuploidies (Trisomy 21, 18, and 13) tests, and £790 ($1000) with microdeletions, giving us a relative picture of the Average Selling Price 'ASP' of Panorama internationally.

In the USA, prices differ among regions, providers, and payors. Some outlets sell Panorama for about $550 for the basic panel and $795 for the extended panel, which includes microdeletion screening. Medicaid pricing varies by state due to different regulations. For instance, Texas lists an adjusted price of NIPT tests (both basic and microdeletions) under CPT code 81507 at $667 per test. Florida Medicaid pays $430, while Illinois pays $477. Since insurance companies often base their reimbursements on Medicaid pricing, this data provides a realistic gauge of NTRA's earnings from Panorama.

Considering these prices and the fact that aneuploidies are the focus of Professional Bodies' recommendations and public and private payors' coverage, we estimate NTRA's Panorama ASP in the US to be around $550 per test. This leads to an estimated market size of about $1.9 billion ($550 per test x 3.6 million pregnancies per year.)

NTRA's last test volume breakdown in 2019 indicated 515,520 units sold, representing 15% of all pregnancies at the time. A linear regression based on historical sales data suggests current sales are around 765,000, or about 20% of total pregnancies.

This estimate indicates that Panorama contributes approximately $430 million annually to NTRA's revenue, accounting for 43% of the company's total sales on a Trailing Twelve Months 'TTM' basis. The rest of the sales are primarily driven by other tests, with Horizon being the predominant contributor among these. These figures align with the directional guidance of NTRA's management during earning calls, describing Horizon and Panorama as the primary sources of revenue but also highlighting the increasing contribution of its other ventures to growth.

Risks

Our optimistic outlook for NTRA going into 2024 hinges on its ability to continue gaining market share and deepen market penetration. Nonetheless, this perspective doesn't overlook the challenges inherent in wresting market share from competitors. In the realm of NIPT tests, the efficacy and predictive accuracy for aneuploidies, the most commonly screened genetic anomaly, are nearly identical across all major players. NTRA's edge lies in detecting other, less common genetic irregularities. These are often not covered by insurance, as their detectability through NIPT is less established.

NTRA is actively advancing the field, working to bolster the scientific literature and thereby enhance confidence in the broader applications of its Panorama test, particularly for microdeletions. However, it's important to recognize that there are no guarantees of success in these endeavors. The company's efforts to expand the recognized uses of its test are ambitious, but the outcome remains uncertain.

Summary

Although concerns about the market saturation for NTRA's Panorama NIPT test are valid, especially given its decade-long position as the primary growth engine and spectacular growth since its launch in 2013, our analysis suggests a significant untapped growth opportunity for Panorama in the US and abroad. We believe that Panorama's low market penetration offers an opportunity for future growth in the short and medium run. The company's aggressive strategy in the NIPT market is evident through its continuous investment in new clinical trials, R&D, and marketing operations. NTRA was one of the few to maintain its growth budget last year, contrary to most peers who have responded to the tighter equity markets by drawing break-even cash preservation plans. Its trials around Panorama are critical to its strategy, aimed at enriching the academic literature to broaden the acceptance of Panorama beyond aneuploidies, lending confidence to our bullish outlook.

For further details see: