NEW YORK – Investment banking firm Craig-Hallum on Monday initiated coverage of Natera at a Buy rating on its stock and a price target of $117.
Analyst Bill Bonello said in a note to investors that the Austin, Texas-based firm is a well-run company with the potential for both long-term revenue growth and positive near-term catalysts. "In nearly 25 years of following the diagnostic industry, we have rarely seen a company execute so effectively, on so many fronts, in such a short period of time," he wrote.
However, he also noted risks stemming from potential payor decisions to lower reimbursement, the perception among physicians and patients that Natera's tests are equivalent to those of competitors, an intensely regulated healthcare industry, and the company's lack of profitability, leading to the need to raise more capital.
Natera operates within the oncology, women's health, and organ health markets, each of which, Bonello wrote, hold the potential for continued growth.
Within oncology, Bonello expects minimal residual disease (MRD) testing to become a "foundational diagnostic tool" with a market potential of up to $20 billion. He also sees potential for significant expansion within the women's health market. Guideline changes recommending 22q microdeletion testing and broader carrier testing in this field, he wrote, could strengthen Natera's competitive position and deliver a revenue potential of over $100 million.
Finally, Bonello sees several reasons for optimism within the organ health arena. These include wide room to further penetrate the donor-derived, cell-free DNA testing space in the kidney transplant market, and to increase Natera's presence in the heart transplant field.
"Perhaps most excitingly," he wrote, the total addressable market for the firm's Renasight test in chronic kidney disease could be between $800 million and $1 billion, "if not higher," should that test gain traction.
In the near term, Bonello said that top line data from the ALTAIR study evaluating Signatera's utility in colorectal cancer patients and potential legislation mandating commercial coverage of biomarker tests, as well as clinical guideline changes, could all prove to be growth catalysts.
Although factors such as tighter regulation of lab-developed tests or the removal of injunctions recently won against competitors in patent lawsuits could impact these catalysts, he noted, they are unlikely to affect Natera's long-term growth potential.
Among possible longer-term risks, Bonello pointed out that Natera is dependent on third-party insurers for reimbursement, making the company's revenue susceptible to any decisions that might lower prices or discontinue coverage entirely.
Finally, he noted that Natera is not yet profitable and may need to raise additional capital in order to reach profitability.
In morning trading on the Nasdaq, Natera's shares were down approximately 2 percent at $95.08.