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Natera: Ahead Of Q4 2015 Earnings

|Includes: Natera, Inc. (NTRA)

Natera (NASDAQ:NTRA) stock rallied pretty hard the past few days leading into earnings tomorrow. There are a lot of moving parts in NIPT in general and specifically with Natera so I'd be cautious holding into the print. The key areas to watch include:

  • NIPT accessions vs commercial accessions. This has yet to be acknowledged by the company that I have seen. However both Morgan Stanley and Wedbush indicated the commercial accessions were between 9-13% lower than that reported by the company from 2013 through Q1 2015. Last quarter the question was again asked on the conference call but the company did not respond. The difference is likely a combination of redraws and clinical samples.
  • Average risk NIPT mix. This is not being disclosed by the company despite statements by management and analysts that they are the best positioned NIPT company for the nascent average risk market. The analysts had very divergent numbers in their initiation research reports last July. Wedbush reported 81,000 US average risk commercial tests which was 59% higher than the 51,000 reported by Morgan Stanley. This has been acknowledged to be important to Natera as indicated by the following management statement on the past conference call: We have not given so far the differentiation between high risk/low risk. We have said that low risk does represent a significant portion of the total market leading up to 70% to 80% of the total market, so you can kind of read into that what you will." The company added: We have made a concerted effort to try to capture the "average risk market" and that was our big bet and that's a lot of the investment that we've made and part of the reason for the IPO."
  • Average risk NIPT revenue recognition. Another area that management has chosen to avoid for disclosure purposes. Morgan Stanley estimated they recognized revenues of $28 million in 2014 average risk NIPT. Blair stated on page 4 of their initiation research report: "NTRA currently receives Panorama reimbursement for only the high-risk population"
  • Natera In-Network covered lives. Another area where disclosures are lacking or misleading. In their S-1 Natera stated: "We and our laboratory partners have in-network contracts with insurance providers that account for over 140 million covered lives in the United States." Wedbush stated in their initiation research report: "Natera estimates it has exposure, through its lab partners and direct relationships, to roughly 150 MM covered lives in the US. The company embarked on a more concerted effort to move in-network late last year and does not yet have a direct in-network contract with a large payor as far as we know." It would seem a stretch to assume that there are 150 million lives for which billings could be presented to insurers for reimbursement when only 10% of their revenues are generated through US lab partners. Note that Natera has stated that they expect price reductions as they move in-network with coverage providers. Look for some update on both the number of lives covered directly and the impact on average reimbursement prices.
  • Are US lab partners critical to strategy or not? In the S-1 Natera stated (page 2) a reason for commercial success was:"Our own direct sales force and managed care teams, both of which we have recently expanded, anchor our commercial engagement with physicians, laboratory partners, and payers. We can offer all of our products through our direct sales force and at a higher gross margin percentage than when we service customers through a partner." Natera also stated (page 17): We have expanded our U.S. direct sales force to increase our direct sales, but a significant element of our commercial strategy remains to establish and leverage relationships with our laboratory partners to sell Panorama and our other products both in the United States and internationally.

I'm looking forward to hearing how they are progressing with average risk coverage negotiations along with some clarity on the above focus points. With many regional coverage providers now changing their medical policies to include average risk pregnancies and at least one negotiated reimbursement coverage agreement announced by a competitor, some progress by Natera would be another indication that this large market opportunity is accelerating. Natera continues to be best positioned for an early adoption cycle in average risk though the reimbursement and recognition risk is significant making it a high-risk speculative investment.

Disclosure: I am/we are long ILMN, SQNM.