By creator to seekingalpha.com
Natera (NTRA) has emerged as a quickly rising firm with seven commercialized molecular diagnostic assessments concentrating on key markets of reproductive well being, organ transplantation, and oncology. The corporate enjoys a management place within the reproductive well being section, which is nearly totally COVID-19 resilient in the long term. The transplant surveillance assessments and oncology assessments will also be not deferred for too lengthy since most of the focused circumstances are imminent and quickly progressive. The market additionally appears to have realized this in regards to the firm.
Therefore, whereas the inventory had tanked from $33.29 on January 2 to $17.27, it rapidly recovered and has already reached $36.10 on April 23. Natera is presently up 7.15% YTD (year-to-date). Even within the presence of the COVID-19 pandemic, folks will proceed to get pregnant and wish prenatal assessments. Individuals with failing organs must go for transplants. Most cancers sufferers would require genomic assessments for optimum remedy. The demand for the corporate’s merchandise is fairly inelastic, which is a uncommon benefit in these unsure instances. Therefore, I consider that there’s nonetheless a lot upside left on this molecular diagnostic inventory for 2020.
Natera is a number one participant within the reproductive well being section
Natera gives a complete portfolio of assessments concentrating on reproductive well being. The corporate’s non-invasive prenatal take a look at, Panorama, is used to detect widespread chromosomal abnormalities of a fetus with a blood draw from the mom. The corporate additionally gives prenatal single-gene screening assessments, Vistara, for figuring out single-gene problems and Horizon service screening to assist {couples} decide the danger of passing down severe genetic circumstances to their youngster. Natera’s Anora assessments are used to research the reason for miscarriage, whereas Spectrum preimplantation genetic testing is used to guage embryos for additional or lacking chromosomes, structural rearrangements, and single-gene circumstances.
Reproductive Well being-focused assessments are main income drivers for Natera. The corporate’s take a look at quantity for reproductive well being merchandise reached round 804Ok in 2019, a YoY enhance of 20.18%. This coupled with an rising deal with peer-reviewed publications has enabled the corporate to turn out to be a number one diagnostic participant within the reproductive well being market. Natera has additionally been profitable in reducing COGS (price of products offered) and rising ASP (common promoting value) for its reproductive well being enterprise. The corporate is aiming to realize breakeven on a cash-flow foundation for this enterprise in 2020. Product enhancements and COGS reductions will proceed to be main priorities for Natera’s Reproductive Well being enterprise within the coming years.
On March 27, CVS Well being’s (CVS) managed care group, Aetna, introduced liberalization of prenatal testing coverage as one of many steps for decreasing viral transmission through the COVID-19 pandemic. It is a large albeit short-term profit for Natera. Now, wherever potential, physicians and sufferers can go for molecular diagnostic assessments as an alternative of the obstetric ultrasound and fetal nuchal translucency assessments. This protection additionally extends to girls at common threat for fetal aneuploidy. This coverage will stay efficient until June 4, 2020, and might help offset a few of the discount in take a look at volumes because of COVID-19 disruptions.
Though the high-risk marketplace for reproductive well being assessments is fairly saturated, there’s nonetheless a lot scope within the common threat market. The momentary protection by CVS extending to 20 million average-risk sufferers might help Natera begin penetrating on this underexplored affected person section. This could show to be a significant long-term development driver for Natera.
The corporate plans to penetrate quickly in organ transplant and oncology markets
Natera’s Prospera Transplant Evaluation assessments are used for early detection of organ rejection in kidney transplant sufferers. The take a look at is used to evaluate kidney lively rejection and damage, a phenomenon that leads to lack of kidneys for 30% of the kidney transplant recipients inside 5 years of transplant. Inside 10 years, virtually half of the transplanted sufferers lose their kidneys. Since virtually 180,000 sufferers live within the U.S. with transplanted kidneys and the quantity retains on rising yearly by round 20,000, there’s undoubtedly a necessity for a greater know-how to successfully establish organ rejection. Natera gives an answer to this downside with Prospera, proprietary know-how to detect donor-derived cell-free DNA within the plasma as a biomarker of organ rejection.
The corporate estimates the addressable marketplace for post-transplant monitoring to be round $2.zero billion. Nonetheless, lower than a 5% market is penetrated. The corporate has additionally estimated annual income potential for varied ranges of market penetration, assuming 20,000 new transplants per yr within the U.S., seven assessments per yr for the primary yr after which quarterly for the following two years.
For 2020, Natera is prioritizing payer protection and extra proof technology for Prospera. The corporate believes that these steps can drive up its adoption submit full industrial launch.
Natera has additionally developed a personalised, tumor-informed assay optimized to detect ctDNA (circulating tumor DNA) for MRD (molecular residual illness) evaluation and recurrence monitoring for sufferers beforehand identified with most cancers. Recurrence monitoring for most cancers sufferers is a market alternative value $15.zero billion.
Natera is signing contracts with biopharma firms to inculcate Signatera outcomes as an early endpoint to guage remedy effectiveness testing for clearance of that residual illness upon remedy. Signatera will also be used for affected person screening, to seek out sufferers who’ve residual illness after surgical procedure or early indicators of molecular relapse.
The corporate has a strong monetary profile
In 2019, Natera reported revenues of $302.three million, a YoY rise of 42% and forward of the corporate’s fiscal 2019 steering of $295 million to $302 million. Within the fourth quarter, the corporate’s revenues jumped by 24% YoY to $83.zero million. The corporate additionally reported a gross margin of 47% and 42% within the fourth quarter and financial 2019, respectively.
Natera had guided for revenues of $335 million to $350 million, gross margins of 43% to 49%, SG&A (promoting, normal, and administrative) bills of $240 million to $260 million, and R&D (analysis and improvement) bills of $80 million to $90 million for fiscal 2020. The corporate has additionally guided for fiscal 2020 money burn to be $125 million to $150 million. The corporate had assumed a powerful development in reproductive well being take a look at volumes and the brand new scientific product launches in transplant and colorectal most cancers in 2020. In April, the corporate, nonetheless, withdrew the steering because of COVID-19 disruptions.
Natera, nonetheless, has provide you with encouraging preliminary outcomes for the primary quarter of 2020. Preliminary income is predicted to be $89 million – $91 million, whereas whole assessments carried out are near 235,000. Check volumes have been a report excessive within the first quarter. The corporate highlighted round 15% decline in take a look at volumes within the final two weeks of March because of COVID-19 disruptions.
It is smart to imagine the corporate’s annual money burn fee to be near $150 million, the upper finish of its fiscal 2020 steering money burn fee. That is the utmost money burn anticipated in 2020 in regular working circumstances. Since COVID-19 disruptions can defer some demand within the reproductive well being section and delay product launches, money burn will most probably be decrease than that predicted for 2020. Therefore, $150 million will be thought-about to be a really conservative money burn fee for 2020 and past.
On the finish of 2019, the corporate had money value $440.99 million on its stability sheet. In April, the corporate introduced the sale of $250 million convertible senior notes due 2027 to institutional buyers. The corporate appears to be profiting from the ultra-low rates of interest. Whereas there will be fairness dilution after the notes are due, this capital increase will guarantee easy functioning for a lot of extra years. On this backdrop, Natera appears able to sustaining its operations till the tip of 2023.
Traders ought to think about these dangers
Natera is just not fully resilient to the COVID-19 pandemic. Restrictions on the motion of individuals could trigger some lack of enterprise. The corporate can also face challenges in creating consciousness for its merchandise.
Reproductive Well being section is saturated with a number of prenatal testing gamers. Then once more, Prospera may even face intense competitors from already established CareDx’s (CDNA) AlloSure and AlloMap transplant surveillance assessments. The corporate additionally competes with different main cash-rich gamers equivalent to Thermo Fisher (TMO) and Qiagen (QGEN) on this section. All of the opponents have a headstart over Prospera when it comes to payer protection and hospital relationships. It could show difficult for Natera to penetrate this market.
What value is true right here?
In line with finviz, the 12-month consensus goal value of Natera is $42.67, 18.19% greater than the earlier shut. The corporate is presently buying and selling at P/S (price-to-sales) a number of of 8.95x, which isn’t low cost for a loss-making firm. Nonetheless, I consider that the inventory can climb a lot greater contemplating that the corporate is concentrating on medically important affected person populations equivalent to pregnant girls, transplant sufferers, and oncology sufferers. I consider that the goal value of $42.67 is a practical estimate of the true potential of this inventory.
The vast majority of the analysts are optimistic in regards to the inventory. On April 15, Cowen analyst Doug Schenkel raised the goal value to $40 from $32 and reiterated Outperform score. On April 15, Canaccord analyst Mark Massaro reiterated Purchase score and goal value of $46. On April 13, Piper Sandler analyst William Quirk reiterated Obese score and goal value of $49.
I like to recommend buyers to choose up this inventory forward of its first-quarter earnings name estimated to be on Could 14. The corporate’s first-quarter efficiency is most probably to be good primarily based on take a look at quantity rise and bettering payer protection. Therefore, probabilities of a dramatic share value dip on emotional promoting appear low, regardless of the corporate withdrawing fiscal 2020 steering. Therefore, retail buyers with above-average threat urge for food and funding tenure of at the least one yr can start thinking about this inventory as a dependable decide for 2020.
Disclosure: I/we have now no positions in any shares talked about, and no plans to provoke any positions inside the subsequent 72 hours. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from Searching for Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.
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