Warning: The NIPT Growth Story May be Ending
Table of contents
A good disruptive technology can succeed in creating a market that didn’t exist before by meeting a need that people didn’t know they needed. Take non-invasive prenatal testing (NIPT) which is defined as “testing for diseases or conditions in a fetus or embryo before it is born“. The idea is to find out if your newly conceived baby will be free of “defects” during the very early stages of pregnancy. Demand for this piece of mind has resulted in nearly 800,000 tests annually being sold by just 3 of the 6 players in the NIPT market. Companies are making real money now selling these tests and just last week, a NIPT company that we profiled before, Natera, filed for an IPO.
So what does the potential U.S. market look like?
In 2013 there were 3,932,181 babies born in the USA alone. Being one of the wealthiest countries in the world, we can assume that at least 80% of the population could afford the cost of a NIPT at $1,495 or would have insurance that covered such a test. This puts the potential U.S. market for NIPT tests at roughly 3.15 million tests per year. We can then take the number of tests sold in Q1-2015 directly from the filings of each company. First, for Natera:
Over 185,000 Panorama tests were accessioned during the year ended December 31, 2014 and over 55,000 Panorama tests were accessioned during the three months ended March 31, 2015. Our revenues have grown from $27.3 million in the three months ended March 31, 2014 to $47.4 million in the three months ended March 31, 2015.
Note that use of the term “accessioned” in this industry is a fancy way of saying “we sold and completed a test”. If we assume that Q1-2014 tests sold were 46,250 (185,000 / 4) then this would represent a +19% increase in NIPT test sales growth in 2015 for Natera year-on-year. This isn’t bad but it’s not spectacular. Next is the Sequenom (NASDAQ:SQNM) statement:
Total accessions for all Sequenom Laboratories tests during the three months ended March 31, 2015 increased by 2,900, or 5.8%, to 52,800 when compared to 49,900 during the same period in the prior year. Total revenues during the three months ended March 31, 2015 increased $0.7 million, or 2%, to $37.8 million when compared to $37.1 million for the same period in the prior year
The total year-on-year growth of tests administered here is not so impressive at only +5.8%. Lackluster growth aside, incredibly these two companies are neck and neck when it comes to the number of tests they are selling. We previously wrote about Ariosa when their IPO filing was announced and noted that Ariosa “ascended” 45,000 tests in the quarter ended Q4-2013. Since Ariosa withdrew their IPO and was acquired by Roche, we have no insight into the growth of the number of NIPT tests sold but let’s assume with Roche’s distribution channels they can achieve 15% growth each quarter. This would mean that Ariosa would have sold 90,500 tests in Q1-2015.
If we extrapolate all these numbers out, it would appear that between these three companies, they’re selling 793,200 tests and have captured 25% of the potential market for NIPT tests in the USA. Maybe another further 25% is already captured by competing NIPT offerings such as informaSeqSM (Labcorp NYSE:LH), QNatal Advanced™ (Quest Diagnostics NYSE:DGX), and verifi Prenatal Test (Illumina NASDAQ:ILMN). That leaves 50% of the market to be fought over by 6 different companies essentially selling the very same thing; some peace of mind prior to your child being born.
Conclusion
We would expect that all these companies continue to compete on price and functionality, both of which will not help the bottom line. This means growth in the number of tests sold may not necessarily mean a growth in profits. We’re inclined to say that the market looks saturated with some formidable players in the NIPT space and the likely winners of this race to capture market share will be those with deep pockets and international marketing and distribution infrastructure already in place (Roche/Quest/Illumina/Labcorp). The only NIPT pure-play opportunity here is to buy equal shares of Sequenom (SQNM) and Natera after they IPO and hope that both of these companies can successfully compete against the likes of a Roche or an Illumina when it comes to addressing the NIPT growth opportunities in international markets.
As existing or prospective NIPT investors, what do you still think about investing in Natera and/or SQNM? Can they compete against the likes of Roche and Illumina or is their growth story over?
Share
There are a couple inaccuracies in article:
Accessions (ascended isn’t a derivative) isn’t intended to be fancy or equate to sold or processed. It’s a medical term defined as a specimen or sample received and officially logged in by a lab. The term is actually important to understand because it is the equivalent of an order received by a manufacturing facility. Since NIPT processing requires validation to be processed in a lab other than the one that created it, these samples are coming in from markets world wide. Assuming the samples are from US births only dramatically understates the market size and overstates the penetration thereof
Next to consider is the comment related to insurance coverage for all pregnancies in the US. Only in the past few weeks as insurers started to declare the tests as Medically Necessary for average risk pregnancies which make up about 75% of the total market. The tests being accessioned in the Q1 timeframe were largely for high risk pregancies or they were selfpay by aveage risk women who were interested in the test. That has been estimated to be perhaps 10% of the total average risk market with the remainder of the market likely to be addressable only after insurance coverage is negotiated. This is likely still 3-9 months away as only a few insurers have stated they will reimburse and after likely just starting negotiating rates with test providers.
Another important trend to consider is that all test providers are starting to license their test to other labs and work with them to validate the test as their LDT, allowing them to process tests in their labs. LabCorp (InformaSeq) in the US had begun processing tests in Q1 so their samples were not included. However they paid ILMN/SQNM a royalty for every test processed. Quest (QNatal) begain in Q2 with a similar approach. This licensing trend is continuing very aggressively. Sequenom/Illumina have a pooled approach reporting 10 labs world wide validated as of June 30th and starting to process tests locally with another 22 that signed and pending validation. These labs are all paying a per test royalty to SQNM/ILMN for the rights. Natera and Ariosa are actively licensing as well though have not been as open with their progress. Note also that effective Q1, Illumina has started restricting who can submit samples for Verifi. They are now only accepting samples from international partners or domestic labs that are in the process of validating a licensed test. Within a few quarters it’s likely that Verifi will no longer be accessioned and processed in an ILMN lab.
Bottom line is that most still believe this is a multi-billion dollar market opportunity that will begin accelerating aggressively once coverage is available. The evolution of the test is to drive processing to an outsourced model by licensing which takes 6-12 months but improves market access and economics for all.
Another perspective to consider for investing: Illumina currently has around 80% of the sequencing hardware market. Ariosa is not available on their equipment. Natera runs on ILMN platforms as does SQNM. SQNM is now partnered with ILMN though they receive a lower ASP per test processed as a licensee than if they were accessioning and processing the tests themselves.
Even more intriguing is the next phase of Liquid Biopsy or Oncology. This has been estimated to be a $20 billion market opportunity within 5-7 years by ILMN. The ctDNA process is very similar to cfDNA used by NIPT companies which is why they are all racing to get their tests done and clnical data submitted to accelerate reimbursement decisions.
Hope this helps!
Marty
Hi Marty. Thank you very much for taking the time to provide such insightful commentary. This paints a very different picture of growth potential compared to the conclusions we arrived at. Based on your research, what is the best way to play this theme for retail investors? If there are only three publicly traded pure-play companies, would it be best to invest in a market cap weighted portfolio which contains NIPT, SQNM, and NTRA?
Great Q but certainly not an easy one. Investors need to have a thesis on several different trends to pick the winners. My view is:
ILMN is the best pure play. They win 3 ways. The clinical lab market is growing dramatically WW as everyone wants to process tests locally and they have the gorilla position (80%) and the best short read sequencing tech. Gaining more labs provides them an annuity revenue stream as they sell reagent (consummables) kits for every NIPT sample processed on their equipment. Their final leg is that having the installed base of equipment puts them in the drivers seat for down stream incremental uses from liquid biopsy to personal genomic reference sequencing. (I’m long the stock).
NTRA is a very high risk play on holding a costly market share gain. They currently have a market cap around $750m with C15 revenues expected of around $180m so call it 4x current year revenues. Their reimbursement rates are under pressure driven by the 1/1/15 cpt code change for NIPT and they are pursuing unit market share even though they are not getting reimbursed for low risk in all cases. That’s going to drive a FCF burn of approximately $90m per analysts this year. They are projected to grow top line about 25% in C16 but they have disclosed that this assumes a healthy low risk adoption and reimbursment of Panorama in US. If achieved their burn will decrease next year but likely still in the $50m+ range. They have disclosed internal work on Liquid Biopsy which they are commercially targeting for C16-17 and have several collaborations signed which indicate progress. My view is to avoid. Their approach presumes they can absorb the costs of unreimbursed tests and an expensive direct selling approach by gaining share which will benefit them once reimbursements start flowing. They claim the better (next generation SNP) NIPT approach but the claims are disputed and are very from a sensitivity/specificity/PPV persepective to Verifi and MaterniT 21. The licensing/IVD strategy of ILMN/SQNM has the potential to significantly hurt their efforts.
SQNM (I’m long) is a better risk/reward play here in my opinion. They tried the spend/burn/free testing approach 2 years ago and have moved to a more rationalized business model over the past 12 months. They are no longer conducting tests for free to gain unit market share. The licensing model is causing a business model transition which has been the primary driver of the price decline in the past several months as the revenue/unit declines are in large part caused by labs moving into a licensing mode. Licensees are lagged about 1 quarter and have a much lower revenue per test contribution. The business benefit is that there are no costs associated with this revenue stream so as it grows it is projected to add substantially to the bottom line. They currently have a market cap of around $260m on projected C15 revenues of $140 for a revenue multiple of 1.8x. They are projecting a cash burn of around $15m this year. Their projected C16 revenues growth is between 15-20%. Today SQNM is launching a new deeper and more broad NIPT called MaterniT Genome. This is still a screen but is coming much closer to being diagnostic and is examining every chromosome for abnormalities which no other test is yet able to do. This test is very differentiated for the first time in a couple years but until they are able to get an issued modifier/addon CPT code the reimbursement challenge could restrain the adoption rate. Much more will be made known over the next month in their analyst day presentation and their launch announcement later today.
NIPT is Premaitha in the UK. They have very little shot at being a long term player of any note. They have minimal presence and are partnered with minor players to date. Because they have a very low market cap it’s quite possible that they will be acquired for a nice upside by another player wanting a foothold but the IP suit with ILMN may be a fly in the ointment.
Thank you again for your insightful commentary Marty. There’s lots of good reasons to own Illumina outside of just NIPT. You may want to check out Motif investing which can help you save transaction costs by letting you buy a portfolio of up to 30 stocks while only paying transaction fees of $9.95 per trade.
Motif Investing Info
We use it for themes like 3D Printing and it works great. You should create a NIPT motif and share! The tricky part would be weightings. If you weighted by market cap, Illumina would dominate the weightings. Figuring out what weightings to use would be active investing while buying the motif would be passive. You would have to come up with a methodology so that the weighting was objective. It’s interesting to think about!