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Natera Raises Guidance on Test Volume Growth, Notes Reimbursement Opportunities

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NEW YORK – Strong test volume growth, increased near-term coverage opportunities, and growth in Signatera testing as a standard of care drove both revenue growth and a higher financial guidance for Natera, despite headwinds from legal questions over new regulation by the California Department of Public Health.

The CDPH recently declared a new requirement that only labs contracting with CDPH be allowed to perform trisomy screening for California residents, prompting a challenge from Myriad Genetics and Laboratory Corporation of America, who argued that the new regulation unfairly cuts them out of California's market while favoring labs that have joined the state's prenatal screening (PNS) program.

On Nov. 1, the Superior Court of California issued an injunction preventing the CDPH from enforcing the requirement in question, which will remain in force until the case is settled.

Natera and other participating labs offered lower test prices under the California program, resulting in lower margins within the state. While Natera CEO Steve Chapman said that such lower margins weren't ideal, such concerns are balanced by the value perceived from being able to expand within California.

In a conference call with investors held Tuesday, Chapman said that while the possible effects of the injunction remain incompletely understood, Natera was unlikely to see a negative outcome.

"I think one of the likely paths is that we go back to the way things worked [before]," he said, "and that's frankly a positive for us."

Despite downplaying any effects of the case, Mike Brophy, the firm's CFO, said that it contributed to Natera "being cautious with the guidance to account for the disruption in the medium term."

The company raised the upper and lower ends of its 2022 revenue guidance to between $810 million and $830 million, from its previous estimate of $805 million to $825 million, and reiterated its cashflow breakeven target of mid-2024.

Natera reported after market close Tuesday that its total third quarter revenues rose 33 percent year over year, on the back of a healthy 27 percent year over year test volume growth, primarily driven by the Signatera minimal residual disease assay.

Organ health product volume also grew, with Prospera tests expanding into the heart and lung transplant space, although these do not yet contribute to revenue, pending reimbursement decisions.

For the three months ending on Sept. 30, the Austin, Texas-based company said that revenues increased to $210.6 million, up from $158.1 million in the same period last year, and beating the Wall Street average estimate of approximately $206.7 million.

Product revenues grew approximately 30 percent to $199.8 million in the third quarter of 2022 compared to $153.9 million in the same quarter last year.

"We're seeing strong momentum across all product lines," Chapman said, adding that Signatera volumes are rapidly growing even in areas that aren't currently reimbursed, but for which the company sees near-term coverage opportunities.

Signatera volumes grew by 153 percent in Q3 year over year, with the firm saying it processed 53,000 tests this quarter and is on track to process 185,000 tests by the year's end. Natera said that it processed 518,000 tests overall this quarter.

This "is one of the reasons we're increasing the cash flow forecast for 2022," Chapman said. 

Natera also sees solid continued growth potential in noninvasive prenatal testing. "We think the NIPT market is only about 45 to 50 percent penetrated," Chapman said, "so there's still a large opportunity to help more patients."

Also, earlier this year short sellers alleged excessive billing practices by the company for its NIPTs. However, an independent investigation into the firm's NIPT billing practices conducted by law firm WilmerHale determined these allegations to be unfounded, and while Natera has fielded several regulatory inquiries stemming from that incident, there have been no regulatory investigations into the company.

The company said that this, along with Natera's recent inclusion into the UNH Preferred Lab Network, are expected to alleviate NIPT billing practice concerns.

R&D spending fell nearly 34 percent in Q3 2022 compared to the same period last year, from $98.5 million to $65.5 million, and Natera anticipates positive returns on prior research investment from multiple studies either published or accepted for publication this quarter.

Chapman announced that the company's Circulate Japan study was just formally accepted for publication in Nature Medicine, while a large-scale gastroesophageal validation study was just accepted by JCO Precision Oncology, and another Signatera validation study was published in Gynecologic Oncology. The company expects these publications to help drive test adoption, guideline inclusion, and coverage.

Additionally, Chapman announced that Natera remains on track to deliver initial case control performance data for Signatera in colorectal cancer in 2023, with final feedback from the US Food and Drug Administration expected by the end of next year.

The company anticipates that the FDA will either recommend a submission based on case-control validation data from a study with Denmark's Aarhus University, supplemented with post-market surveillance, or that the agency will ask for a prospective study.

Natera reported a net loss for Q3 2022 of $121.5 million, or $1.25 per share, down compared to a net loss in Q3 2021 of $151.3 million, or $1.63 per share.

As of Sep. 30, Natera held approximately $57.0 million in cash and cash equivalents, $464.1 million in short-term investments, and $86,000 in restricted cash.