Monday, September 21, 2020

An AIM Small Cap Equity holding: Natera Inc. (NTRA, $59.21): “Early Detection for your Protection” by: Alexander Warstler, AIM Student at Marquette University

 Natera Inc.  (NTRA, $59.21): “Early Detection for your Protection”

By: Alexander Warstler, 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.



• Natera Inc. (NASDAQ: NTRA) is a global leader in cell-free DNA testing with a focus on developing new minimally invasive technologies to evaluate risk for, and thereby enable early detection of, a wide range of medical conditions within reproductive health, cancer, and organ transplantation. The company was founded in 2004 and is headquartered in San Carlos, CA.


• NTRA processed 234,000 tests in Q2 2020 (despite Covid-19) which was on par with all-time record volumes experienced in Q1 2020.


•  Reinstated and raised full year guidance based on projections of current and future business trends. The major contributors to raising guidance were the resiliency in NTRA’s customer base, stable ASP’s, good cost trajectory, and the timeline of new product introductions. 


• Announced a key partnership with BGI to bring Signatera technology to China. NTRA has already signed deals with leading Chinese biopharmaceutical firms who are excited about Signatera’s commercial launch at the end of 2020. 


• Management has made significant strides towards obtaining cash flow break even performance in their reproductive health business segment. Volume growth, stable average selling prices, and a decrease in cost of goods sold are all key performance indicators of management’s progress. 


Key points:

Natera continues to be the leader in reproductive health genetic testing. In Q2 2020 alone, the company processed 234,000 tests representing a 24% YoY increase in testing volume. Contributing to this explosive growth is the Panorama test Natera developed in 2018, which has the lowest false negative and false positive rates, the ability to detect triploidy and vanishing twins, and determine zygosity in twin pregnancies. Natera has processed more than two million Panorama tests and clinical use continues to increase. To date, Natera believes the noninvasive prenatal testing market is only 15% penetrated, particularly in an average risk setting because there are a lot of physicians who only order tests for high-risk patients. 

Natera is rapidly expanding into oncology with the addition of Signatera to its product portfolio. In oligometastatic disease, patients can be treated with minimally invasive surgery, plus or minus adjuvant chemotherapy. Many of these patients can be cured with surgery alone, but doctors do not have good diagnostic tools to determine which patients need adjuvant chemotherapy. Signatera is a blood test that can help clarify which patients still have residual disease in their blood after surgery. Originally, Signatera submitted a Medicaid reimbursement request for the indication of Stage II and III colorectal cancer, however data collected as of Q2 2020 showed the validity of Signatera in Stage IV colorectal cancer. Signatera detected relapse in patients with Stage II-IV colorectal cancer 8.7 months earlier than standard diagnostic tools. The favorable data results create an opportunity for 900,000 additional tests per year, nearly doubling Natera’s previous addressable market associated with Stage II and III colorectal cancer. Natera expects reimbursement details to be finalized by year end and a commercial launch at the onset of FY 2021.    

Natera is applying its expertise in cell-free DNA to non-invasively identify organ transplant rejection before kidney transplant failure occurs. NTRA’s Prospera test assesses kidney rejection by measuring the fraction of donor derived cfDNA in the recipient’s blood, without the need for prior donor or recipient genotyping. Following the same path for a number of indications in oncology, NTRA was able to submit claims to Medicare for Prospera and received reimbursement consistent with the final pricing of $2,841 per test. Natera is now focused on executing their commercial launch.


What has the stock done lately?

After reporting earnings on August 5th, the stock rose 17% due to stronger than expected earnings and a raise in full year revenue guidance. The stock continued to outperform the market, reaching an all time high of $66.93 on August 19th. Since obtaining an all time high, NTRA has started to form a base around $60. The stock continues to trade at a 14.1x P/S ratio which is high relative to the overall market and competitors.


Past Year Performance: 

Over the past year, NTRA has significantly outperformed the Russel 2000. NTRA is up 77% compared to -3% from the Russel 2000 index. On August 19th, 2020 NTRA hit an all time high at $66.93. The stock gained strong momentum from rapid growth in test volumes, Signatera’s potential for further application in oncology, and Prospera’s positive data results. At its high, the stock had a P/S ratio of 15.8. The stock currently trades at $60/share and has a P/S ratio of ~14.

1 Year Stock Chart vs. Benchmark

Source: FactSet

My Takeaway:

Natera is well positioned for continued growth ahead. The NIPT market has historically been exclusively focused on high risk patients. Going forward, the company sees a path towards testing a majority of moderate risk patients. In addition, based on favorable data results collected on Signatera, NTRA now expects to test ~1.7 million people annually beginning in 2021. Although pricing has not been finalized, analysts expect pricing to be between $1,800-$4,000 per test. The oncology segment alone could contribute an additional $3 - $7 billion to Natera’s top line. Furthermore, Natera’s Prospera product has a price of $2,841 per test and the company has just begun commercial launch. This could be another large revenue opportunity. Historically, the company has reinvested 20% of revenue into R&D which gives Natera operating leverage as R&D as a % of revenue decreases over time. Natera has a strong balance sheet with over $400 million in cash, however the company has a 14.1 P/S ratio and is valued at $5 billion which is high given the current and even future revenue base. Although, I believe in the longer term story, I recommend we trim our position in Natera to capitalize on the favorable near term stock price movement. 


1 Month Stock Chart

Source: FactSet