Warning: The NIPT Growth Story May be Ending
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.
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?