Natera, Inc.
Q1 2019 Earnings Call Transcript

Published: 11 May 2019

[Operator:]

Welcome to Natera's 2019 First Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following managements prepared remarks’ we will hold a Q&A session. [Operator Instructions] As a reminder, this conference call is being recorded today, May 9, 2019. I would now like to turn the conference over to Michael Brophy, Chief Financial Officer. Please go ahead.

[Michael Brophy:]

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our first quarter. Also on the line is Steve Chapman, our CEO; and Bob Schueren, Chief Operating Officer. Today's conference call is being broadcast live via webcast. We will be referring to the slide presentation that has been posted to investor.natera.com. A replay of this call will also be available at investor.natera.com. During the course of this conference call, we will make forward-looking statements regarding future events and our anticipated future performance such as our operational and financial guidance for the full-year 2019, our assumptions for that guidance, market size, partnerships, clinical studies, opportunities and strategies and expectations for various current and future products, including product capabilities, expected release dates and related effects on our financial and operating results. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. Please refer to the documents we filed from time-to-time with the SEC, including our most recent Form 10-K and the Form 8-K filed with today's press release. Those documents identify important risks and other factors that may cause our actual results to differ from those contained in the forward-looking statements. Forward-looking statements made during the call are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. Natera disclaims any obligation to update or revise any forward-looking statements. We will provide guidance on today's call but will not provide any further guidance or updates on our performance during the quarter unless we do so in a public forum. We will quote a number of numeric or growth changes as we discuss our financial performance. And unless otherwise noted, each such reference represents a year-on-year comparison. And now I'd like to turn the call over to Steve.

[Steve Chapman:]

Thanks Mike. Good afternoon, everyone, and thank you for joining us. I will cover our recent highlights and progress in the business since we last spoke in March; and Mike will provide additional detail on our financial progress. As Mike mentioned, we will be referring to slides that were just posted at investor.natera.com. In 2019, we have three key goals

[Michael Brophy:]

Thanks, Steve. Now to summarize our results from the quarter, the results for the quarter are across the wire this afternoon, and for brevity on the call today, I'm going to focus on the key points of the Q1 results. As Steve mentioned, our first quarter total revenues were $66.8 million at the top end of the range we pre-announced for the deal. And if you strip out the non-recurring $5.5 million revenue that we received from QIAGEN in Q1 of last year that implies roughly 18% revenue growth. Gross margins were 35% in the quarter, which again, if you stripped out QIAGEN from Q1 last year that implies a roughly 700 basis point improvement on a like-for-like basis, which has been driven primarily by the reduction on COGS per unit, as Steve described. It's worth noting on both revenues and margins that we did not materially benefit from recognition of cash-based revenue from older deals. In 2018, we booked approximately $10 million in revenues from these older appeals. I think there is potential to collect on more appeals in the future, but as we've described on the Q4 call, we don't have any of that benefits factored into our guide for this year and we didn't see a lot of it in Q1. Also as expected, you can see that realized pricing was marginally lower in Q1 versus prior periods. Net of one-time reserves and similar variables, we estimate the organic blended average selling price in the quarter was roughly $384 compared to about $407 in Q4 2018. This is largely due to the factors that we think can resolve in the medium term, as Steve described, and are an area of future opportunity for our appeals collections, where we've had a lot of success very recently. Everything we've seen on volumes and pricing is consistent our expectations from the beginning of the year. Panorama revenues for the quarter were $37.2 million compared to $33.3 million in the first quarter of 2018, an increase of roughly $4 million, which was driven primarily by volume growth. Horizon revenues for the quarter were $22.7 million compared to $18.3 million in the first quarter last year, an increase of roughly 24% again driven by volume. Our total operating expenses for the quarter were $55.3 million in the first quarter 2019 compared to $52.3 million in the first quarter of 2018. We do expect to see operating expenses ramp up consistent with our guide through the year as we launch transplant and expand our commercial footprint in oncology. At the close of the quarter, the Company held $128.5 million in cash, cash equivalents, short-term investments and restricted cash compared to $158.5 million as of December 31. The capital structure remained in the same place at the end of Q1. Post the quarter, as you know, we closed an equity offering that brought a net cash of $108 million approximately. And we extended the maturity of the undrawn portion of our senior credit facility with OrbiMed. We now have the right to draw down an additional $50 million before December 31 of this year. We also anticipate receiving roughly $30 million net cash from BGI in the second quarter as part of the collaboration we announced on the Q4 call. Turning to our future outlook. The guide remains unchanged compared to the initial guide we gave in March. The guidance assumes we will maintain our leadership position in women's health with continued volume growth. We have made an effort to be conservative on the pricing assumptions, particularly in the first half of this year. The guide does presume steady improvement in average-risk NIPT reimbursement in the second half of the year. On revenues from new businesses, we are presuming steady growth and stable pricing in our core blood business, and the goal for total value of the contracted business for Signatera remains the same. The guidance includes the cash inflow and the BGI deal but still excludes any upfront revenue recognition from that agreement. I do think there is potential to recognize some revenue in 2019 from that deal, but we are still in the process of confirming that and finalizing next steps on the development plan with BGI. So we'll provide more details on this on our Q2 call. The gross margin guide takes into account the volumes and pricing comments above and also presumes we make steady progress in the reductions of cost of goods sold per unit that Steve described earlier in the call, and you've seen so far here in Q1. So with that, I'd like to open the line for questions. Operator?

[Operator:]

[Operator Instructions] And our first question is from Tycho Peterson with JPMorgan. Your line is open.

[Eleni Apostolatos:]

Hi. This is Eleni on for Tycho. Thanks for taking our questions. Starting off with – on Signatera, it sounds like the colorectal setting is what you are considering the low-hanging fruit at this point in the MRD setting given your pre-submission meeting for Medicare reimbursement. And with that indication, I was just wondering what is your reasoning there. And what are your plans in terms of what will follow?

[Steve Chapman:]

Thanks for joining. This is Steve Chapman. I'm going to have Solomon Moshkevich, who's just joined us as well. He's our General Manager for Oncology and Organ Transplant. I'm going to have him jump in on that, and then we'll follow-up.

[Solomon Moshkevich:]

Hi, great. Thank you for the question. So I'd say there's two key reasons that we've prioritized the colorectal indication. First is that our data is excellent there and really validates the performance of the test in that setting. And the second is that there's a real significant unmet need in colorectal cancer for localized and regionally advanced colorectal, where today physicians are making decisions for who will receive adjuvant chemotherapy and who will not receive adjuvant chemotherapy or the duration of that therapy based on prognostic factors. And the guidelines today give kind of a vague guidance for which patients should be treated one way or another. So physicians are faced with a relatively large amount of uncertainty. There's a lot of borderline cases. So this is an area where there is a great opportunity to help physicians make better treatment decisions and where the data, I think, really nails the opportunity.

[Eleni Apostolatos:]

Okay. Great. That's helpful color. And then on the exome sequencing RUO launch you're expecting later this year. Given the 20,000 plasma whole gene capability, what are you thinking in terms of pricing the whole test then? When can we expect to see some data – some concordance data between the tissue and plasma approach?

[Steve Chapman:]

Yes. This is Steve. I'll take that. So as we said, in the second half of 2019, we are going to make our RUO plasma exome capability available. And there's really two areas where we think that's going to be of significant value to pharma companies. I think the first is where there's not enough tissue available to design Signatera. So in certain cancer types, sometimes you just can't get tissue. This will open up that market for us and allow us to broaden the total available market for Signatera. And then second, as a standalone capability. The plasma exome is significantly beyond what anybody else has on the market today. So we haven't announced pricing, and we'll view that as we commercialize the test.

[Solomon Moshkevich:]

Just to add a little bit to your question about concordance data, we were very pleased to see our preliminary concordance data published in both the colorectal and the bladder cancer papers, which came out this week. The numbers are still relatively preliminary from a sample size standpoint, but the concordance looks really, really strong between tissue samples taking – time of metastasis versus the plasma samples at the same time where we ran the whole plasma exome. So very high concordance. So it makes us feel really good that as we do more and more concordance studies over the next six to nine months with the launch of the product that it's going to be a very strong offering.

[Eleni Apostolatos:]

Great. Thanks. And one last one for me, maybe this one for Mike. I was wondering – you mentioned that you're seeing strong traction and an uptick in Medicaid and others in terms of increasing coverage in the average-risk setting for NIPT. Was wondering if this is in line with the higher payment rates you're expecting or embedding in your guidance for later in the year.

[Michael Brophy:]

Yes. Thanks, Eleni. Yes. So what we're seeing in Medicaid is definitely encouraging. It is consistent with our guide and our expectations in the beginning of the year. And then Steve, if you want to comment on that as well.

[Steve Chapman:]

Yes. I guess the key is 50% of the births in the United States roughly are Medicaid. And so I think while we talk a lot about big commercial payers like United and Aetna and the need to unlock that, I think in the background, Medicaid is still a very large opportunity both from a volume standpoint and from a reimbursement standpoint. And so six months ago, we were seeing really zero payers in the state Medicaid side that had a policy in place for reimbursing for average-risk NIPT. And today that's shifted pretty dramatically. I think it was around five or six sort of the beginning of the year, and now we're seeing maybe close to 10 or 11 where the payment coming in on average-risk is similar to high-risk. So we think that's a definite trend and we see a lot of upside there in the future, and that is key to unlocking some of the additional upside from average-risk.

[Eleni Apostolatos:]

Great. Thank you.

[Operator:]

Thank you. And our next question is from Doug Schenkel with Cowen and Company. Your line is open.

[Adam Wieschhaus:]

Hi, guys. This is Adam Wieschhaus on from Doug. Thanks for taking my questions. Your reiterated guidance despite having the transplant draft LCD coming out seemingly sooner than expected. Maybe I missed it, but was there any thought to increasing the full year revenue guidance considering you were not initially including any transplant revenue?

[Michael Brophy:]

Yes. Adam, it's Mike. Thanks for the question. Yes. We haven't really changed our expectations in terms of timing of that launch. If it's possible it could come sooner that's potential upside. However, I mean, our goal with the guide is to kind of give a stable guide at the beginning of the year and really only move that when we've got really clear information that the guide doesn't capture our base case.

[Adam Wieschhaus:]

Okay. And on ASPs, it looks like you expect pricing pressures to be resolved in the medium term and there can be a potential for appeals. So just to be clear, should we be expecting ASPs to step up each quarter throughout the year? And is there any potential for any sort of appeals collection revenue in 2019?

[Michael Brophy:]

Thanks again. Yes. So there's potential for appeals collection revenue, certainly. I think in terms of what the pacing on the ASPs, it's same as what we've commented on this call and the last call, which is we expect there to be some pricing pressure in the first half of the year, which was just a function of things that we think are resolvable in the medium term. And in the back half of the year, we do expect some improvement driven by getting paid a higher fraction of the time on average-risk NIPT, for example.

[Adam Wieschhaus:]

Okay. And maybe if I could fit one more in. Did you guys provide any update on the cumulative pharma contract value at the end of Q1? I'm just trying to get a sense for how that's tracking to plan. Does that $40 million to $50 million in expected cumulative contract value by the end of the year imply any sort of assumptions on FDA approval time lines?

[Steve Chapman:]

Yes. So we're giving an annual forecast there, and I think the $40 million to $50 million as we reiterated in the prepared remarks is intact. I mean we're feeling very positive about all the data that has just come out. I mean man, this was a super busy week with multiple peer-reviewed publications. We started off on Monday announcing the approval by the FDA, the breakthrough status. So all of those things are really important in helping us move the business forward. The $40 million to $50 million is intact. We're feeling strong about that, and that's an annual guide. We're not going to be giving an update on a sort of quarterly trajectory there.

[Adam Wieschhaus:]

Okay. Fair enough. Steve, thanks for the color.

[Operator:]

Thank you. And our next question is from Bill Quirk with Piper Jaffray. Your line is open.

[Daniel Henry Macek-Alwell:]

Thanks. Good afternoon, guys. This is Daniel on for Bill.

[Steve Chapman:]

Hey, Dan.

[Daniel Henry Macek-Alwell:]

Hey. So solid testing volumes. I appreciate you got some sequential color there in terms of that as well as some ASP color. Could you just help us think about testing momentum throughout the rest of the year then? Thanks.

[Michael Brophy:]

Yes. Sure. So thanks for the question. As Steve mentioned, we expect the seasonal patterns of our volume growth to maintain consistent this year with what we've seen previously. So what we've seen in the past is that Q1 is the biggest sequential volume growth quarter for us because our existing accounts are sitting as 105%, 107% of the volume they sent us in Q4. And then behind that, we also have just steady new account growth really driving a strong Q1. In Q2 that trend just based on seasonality reverses itself with the existing accounts, where we're getting something like 90% of the volumes from existing accounts in Q2 as we got from Q1. So in order to have kind of sequential flat volumes in Q2, you got to have really strong new account volume growth, and that's roughly what we expect to see happening here in Q2. That still implies like really strong growth for the full year, and it's absolutely consistent with everything that we planned for in the beginning of the year.

[Daniel Henry Macek-Alwell:]

Thanks. That's great color. Appreciate that. One more for me. One of your competitors is having issues with lab benefit management programs in terms of carrier stream reimbursement. Could you just provide if you're seeing anything in that market there? Thanks.

[Michael Brophy:]

Yes. I think the verbiage can be different from company to company. I mean, I think, the prior authorization things that we're seeing may be a similar dynamic as what you've heard from other quarters – other companies.

[Daniel Henry Macek-Alwell:]

Okay. Got you. Thanks guys.

[Operator:]

Thank you. And our next question is from Catherine Schulte with R. W. Baird. Your line is open.

[Catherine Schulte:]

Great. Thanks for the question. Just curious, do you have any updated thoughts on ACOG guidance timing? And then realizing you don't have much control over that timing, are you in conversations with any payers about updating their policies even before a new guidance might come out?

[Steve Chapman:]

Catherine, yes, so we didn't expect there to be a big announcement coming out of the annual ACOG meeting. I mean they're not a public corporation that's putting announcements at the right time, I think, when their committee works through the details on what they want to put out. We do expect an updated guideline to come out. We had some really good conversations at the ACOG meeting. And those were sort of generally in line with what we said previously which is we absolutely expect an updated guideline to come out. We don't know exactly when and we don't know what it's going to say. But we do believe something is going to come out, and it's highly likely it's going to be positive. From a standpoint of discussions with payers, we're certainly in discussions with multiple payers. As we mentioned, there's been some nice changes in state Medicaid. We recently saw three of the top four remaining Blue Cross Blue Shield plans change their guidelines. That was North Carolina, Minnesota and a handful of others. And we've been directly involved in those conversations. So our Medical Director, Paul Billings, will go meet with them. And then shortly after, they looked at the data. They gave an updated policy guideline. So we feel like we're making an impact there. Paul, do you want to make some comments?

[Paul Billings:]

Yes. I would just say that ACOG has recently announced a change in their leadership, and we feel that that's going to be a positive impetus to our average-risk efforts. And that we have had very high-level meetings at Aetna and United around their policy of considerations, and we're hopeful that they're understanding the importance of average-risk coverage.

[Catherine Schulte:]

Great. Very helpful. And for the colorectal cancer test you're submitting for Medicare coverage. As we think about the market opportunity there, what are you expecting in terms of testing frequency on the recurrence monitoring side?

[Solomon Moshkevich:]

Yes. This is Solomon. I'll take that one. So I'll just start out with saying that this is the fourth most common cancer type. They're most common in men. Overall, we're seeing about 145,000 to 150,000 new diagnoses per year in colorectal cancer. Less than a quarter of those are the distant kind of metastatic cases. So you've got a lot of localizing and regionally advanced colorectal cancer. In terms of testing frequency per year, we are expecting episodes of care that will include multiple tests either to determine whether or not a patient has residual disease in order to help make that decision for postsurgical adjuvant chemotherapy, and also, for monitoring during treatment to see if it's working and whether a patient might need extended adjuvant treatment or escalated treatment. And then also afterwards, it is well established that early detection of recurrence in colorectal cancer specifically is useful for treating and actually curing many patients. So we expect there to be multiple opportunities for testing in that indication as well.

[Steve Chapman:]

I'll just add, Catherine that we've now had multiple meetings with MolDX on this particular topic, and they're very engaged. I think there's a lot of good, collaborative discussion going on about exactly how this is going to play out. And with the enormous amount of data that we just put out showing consistent performance across breast cancer, bladder cancer and now colorectal cancer, I think it's clear that this personalized monitoring approach is going to be the winner in that very, very big $15 billion monitoring segment. So we feel very positive about this very large market opportunity that we have in front of us. This colorectal indication is the first of many. But again, consistent data across multiple different cancers now.

[Catherine Schulte:]

That's a good segue into my follow-up. What could the time line be for potential Medicare LCD submissions for those other cancer types?

[Steve Chapman:]

Solomon, do you want to – let me comment on that and then you why don't you take it. I think there's really two ways that we're commercializing the oncology business. So I think the first is pharma services, and we've talked a lot about that. We talked about this $40 million to $50 million total contracted value projection for the year. And some of those are retrospective studies, but a lot of those also are prospective studies, where they're looking at sort of enrichment trials using immunotherapy in the adjuvant setting. And there's things that will come out of that like maybe treatment on molecular recurrence in breast cancer, for example, where the study that we do with the pharma services or pharma company turns into a CLIA or an FDA-approved indication over time. And those can be very, very big indications. So for example, this early treatment on molecular recurrence in breast cancer that would be an enormous, enormous indication if that were to go through with a clinical trial and we get FDA approval. When you look at the tests that we want to take through Medicare on our own, the first one is colorectal, but there's many others. We've talked about in breast cancer, extended adjuvant treatment. I think that's an area where we could go directly to Medicare. We talked about immunotherapy setting in the metastatic context, looking at exceptional responders. That's an area where we've gotten a lot of interest, when can you take patients off immunotherapy. We think that's going to be super valuable for Medicare from a cost-saving standpoint. So we could be filing multiple LCDs in 2020. I think 2019, we will be focusing on getting the colorectal one in, and then we'll follow that very quickly with multiple additional in 2020.

[Solomon Moshkevich:]

That was great. Nothing to add.

[Catherine Schulte:]

Very helpful. Thank you.

[Operator:]

Thank you. And ladies and gentlemen, this ends our Q&A session for today and conference. Thank you for participating. You may all disconnect. Have a wonderful day.