By:
Nick Shotkoski, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Natera (NASDAQ:NTRA) is a medical diagnostic company specializing
in the production and commercialization of prenatal genetic testing through
minimally invasive products.
• The company has had a
truly remarkable year delivering an impressive YTD return of 166.62%.
• The performance this
year has been driven by the enormous potential of two new products, signatera
and prospera.
•
Signatera is a cancer detection technology that has shown the ability to detect
a relapse up to 16.5 months faster and 8.7 months faster than current tools.
• Prospera, the other
drug in their pipeline has the ability to predict the success or failure of a
kidney transplant.
Key
points:
When a stock is trading
at a 9.3 price to sales multiple and a 28.0 Price to book multiple despite a
net margin year to date of -47.11%, there better be some serious potential for
the company to grow to ignore the sky high valuation and net losses. Luckily
for investors of Natera, there are some major reasons to justify this
valuation. Earlier this year, Natera announced the success of their drug
signatera in detecting the recurrence of cancer in patients. Management has determined
that this oncology minimal residual disease detection market represents a
whopping $15 billion opportunity. Further more, a test done earlier this year
demonstrated Signatera’s ability to detect cancer resurgence an average of 8.7
months faster and significantly more accurate than current methods. This ~9
month span is crucial in the successful treatment of cancer and can be the
difference between life and death.
There are well over a
million people in the United States today who are recovering from cancer and
need to monitor the resurgence of the disease. Furthermore, there are over
100,000 new cases every year, representing a massive potential market for this
drug which would be used multiple times a year. This is also just in the United
States. Globally, there is even more opportunity for this drug to catch the
resurgence of cancer faster than any other method currently available. The
Chinese market alone is estimated to be 4 times the size and the company is
currently working on rolling out the product in the country. While Signatera
clearly has immense potential, it is not projected to be available for sale
commercially until at least 2020.
But Natera’s success this
year is not entirely based on the expectations for Signatera. The company has seen
revenue growth of 18% in the 1st half of 2019 on their 2018 numbers.
This is due to unit volume growth on their existing products of over 20%. This
comes in addition to the strong prospects for Prospera, yet another product in
Natera’s pipeline with immense potential. Prospera is a genetic test that is
able to project whether a kidney transfer patient’s body will reject the kidney
transplant or not. This represents a market of 180,000 people in the US with
over 20,000 cases every year. This drug is set to be commercialized by the end
of 2019. Clearly, there is an immense amount of potential for Natera and their
offerings, but only time will tell if the company is able to live up to the enormous
potential.
What
has the stock done lately?
Simply put, Natera has
killed it recently, achieving a 3 month return of 43.43% and a year to date
performance of 166.92%. This significant outperformance has been caused by
positive data regarding pipeline drugs Signatera and Prospera. The immense
potential markets and early success of these drugs could not be ignored by
investors and have driven this recent performance as well as a positive review
of Signatera from Medicare draft coverage on August 22. Since this date, the
stock price has risen steadily and hit an all time high of $40 a share.
Past
Year Performance:
AIG has increased 73.28% in value over the
past year. Despite a rough 4th quarter of 2018, the triple digit
growth in 2019 YTD has been more than enough to overcome the rough patch. It is
worth noting that Natera trades at a significant premium of 9.29X LTM sales and
10.03X EV/Sales Multiple. Both are a significant premiums to their comps and
industry.
1 Year Stock Chart vs. Benchmark
Source:
Factset
My
Takeaway:
Natera clearly has a ton
of revenue growth and earnings growth potential from their pipeline products
Signatera and Prospera. While they are trading near their all time highs of
$40.92 and have already seen great performance this year, I think there is
still room to run. Genetic testing is a rapidly growing market within
healthcare with immense upside, and these two offerings are just a piece of the
puzzle. It is now time for Natera to convert this potential into results. I
believe the company and their management will be able to do this and create
shareholder value for years to come.
1 Month Stock Chart
Source: Factset
