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Natera Refutes Claims in Short Seller Report After Stock Plummets

This story has been updated from a previous version to include comments made by Natera executives in a Thursday morning investor call.

NEW YORK – A report published on Wednesday by short seller Hindenburg Research accused Natera of driving its growth through deceptive sales and billing practices, saying that payors had imposed prior authorization requirements for Natera's tests in an effort to curb excessive billing.

Natera's stock subsequently nosedived on Wednesday, finishing the day down nearly 33 percent at $36.80. In early morning Thursday trading on the Nasdaq, the stock had recovered somewhat, rising nearly 19 percent to $43.68.

Despite the report, Kyle Mikson of investment bank Canaccord Genuity issued an analyst note defending Natera and noting that Hindenburg holds a short position on the company. Mikson suggested that Hindenburg may see Natera as an "attractive short seller candidate due to its recent solid performance over the past two years and recent business momentum."

Mikson further noted that little is known regarding Natera's use of third parties for prior authorizations and that the debate surrounding deceptive billing practices is not new.

Natera responded late Wednesday accusing Hindenburg of attempting to turn a quick profit and mentioning that Hindenburg itself is under criminal investigation for illegal trading tactics.

The Department of Justice issued subpoenas to over two dozen financial firms last month, including Hindenburg Research, related to an investigation into trading abuses.

Prior authorization is a process that allows insurance companies to determine whether they will cover a product or service before it is administered.

In 2017, several payors imposed a prior authorization requirement on Natera's noninvasive prenatal testing (NIPT) tests, an action that Natera's risk disclosures warned could "severely hamper revenue growth."

Shortly thereafter, a company called My Genome My Life (MGML) appeared, offering free prior authorization help to physicians.

Despite Hindenburg's accusation of excessive billing, the only evidence it offered to that effect was the prior authorization requirement itself. Prior authorization is a widespread practice throughout the pharmaceutical and diagnostics industry, and the use of third parties is common. The practice has grown over the years and its value as evidence of overbilling is debatable.

The Hindenburg report claimed that MGML and Natera are connected through the president of MGML having had a relationship with a former vice president of sales at Natera and suggested that MGML may have violated anti-kickback policies that call for transparency by third-party prior authorization providers by not disclosing its identity when submitting for prior authorization approval.

In a special investor call early Thursday morning, Natera CEO Steve Chapman stated that "MGML is neither owned, operated, nor controlled by Natera."

Asked about how payments to MGML are handled, Chapman said that Natera had made an initial "generalized donation" that evolved into a payment structure consistent with industry standards. He called the payments nominal and said that they roughly cover the group's operating expenses.

Regarding the allegation of a personal relationship between MGML and the former Natera employee, who left the company in 2019, Chapman stated that "we do not know whether or not that is true, and regardless, we had no knowledge of any personal relationships between MGML and the employee at the time we selected MGML as our outside vendor."

The Canaccord Genuity note admits the alleged relationship could pose problems for Natera, which could find itself penalized for its involvement with MGML, but that Natera should be able to shift its prior authorization strategy elsewhere, limiting any fallout.

"If needed, we would be in a position to cease using MGML with minimal if any impact to our business," Chapman said in the call.

Chapman also noted that he expects the overall number of prior authorizations to decline moving forward, as "a handful" of large providers have recently been removing their prior authorization requirements.

Although the American Medical Association has called for a reduction in the overall volume of medical services and drugs requiring prior authorization, many insurers still see the practice as an essential component of their cost containment strategies.

Natera also refuted the Hindenburg report's assessment of the volume of business done between Natera and MGML, calling it "completely inaccurate."

The report claimed that MGML has provided prior authorization assistance for "up to 44 percent of Natera's total test volume," and that Natera accounted for "the overwhelming majority" of MGML's business.

"In reality," Chapman said, "MGML performed prior authorization services on roughly 11 percent of our volume in 2021. And we estimate less than 7 percent of our volume going forward in 2022."

Chapman further estimated that Natera accounted for approximately 25 percent of MGML's business.

Another point in the report that Natera categorically refuted was the claim that the Michigan attorney general's office is investigating the company as part of a regulatory inquiry.

"We have not received any communication from the Michigan AG and are not aware of any such investigation," Chapman stated.

Among its allegations, the Hindenburg report noted that a D.C.-based nonprofit ethics watchdog group called the Campaign for Accountability (CfA) had asked the US Securities and Exchange Commission to investigate Natera for possible misconduct related to the Securities Act of 1934.

In the morning investor call, Chapman clarified that the CfA had asked the SEC to investigate whether Natera knowingly overstated the accuracy of its NIPT to the detriment of shareholders.

"Natera has not misstated the accuracy of NIPT to investors," Chapman said. "On the contrary, Natera has published more data on microdeletions in leading medical journals than any other company in the field."

Chapman further noted that the CfA shares counsel with a law firm that is currently suing Natera for an unrelated matter.

Finally, the Hindenburg report accused Natera of luring expectant mothers into agreeing to expensive testing for microdeletions, referencing a New York Times article that called attention to how high false positive rates in such testing drive the termination of pregnancies that are later found to be healthy.

Natera refuted this article in its response to Hindenburg, saying that it was "full of inaccuracies, resulting in multiple corrections."

Several other media outlets did indeed call that article out for mistakes, citing for instance, a failure to accurately differentiate screening tests from diagnostic ones.

Chapman commented that Hindenburg's allegation of double billing is incorrect and hinted that it may stem from the use of two CPT codes used in NIPT; one for aneuploidy testing and one for microdeletions.

CPT, or current procedural terminology codes, provide healthcare professionals with a uniform language for coding medical services. Each code may be associated with a separate cost of service.

"When a doctor orders microdeletion and aneuploidy testing, Natera will bill both NIPT aneuploidy code 81420 and NIPT, microdeletions code 81422 to the patient's insurance," Chapman said.

Copayments and deductibles are billed to a patient as part of their out-of-pocket responsibility.

"This," he added, "is the correct way to bill for the services, and the notion that we double billed patients is simply false."

While Canaccord Genuity noted that microdeletion testing has yet to be recommended by medical guideline committees, Mikson wrote that Natera's recent SMART study may help lead to their inclusion.

In that prospective 20,000-patient study of mostly average-risk pregnant women, Natera's Panorama test showed a high sensitivity and specificity for trisomy 21 and 22q11.2 microdeletion.

Canaccord Genuity maintained its buy position on Natera, with a price target of $150 per share.

"Short reports should not be taken lightly," Mikson wrote, "but overall the claims appear aggressive at this juncture."

Although unrelated to Natera's NIPT business, the firm's shares may have also been impacted following the Tuesday publication of a study that questioned the reliability of the company's Signatera assay for minimal residual disease monitoring in colorectal cancer.