Why Did Stanley Druckenmiller Buy Natera Stock?

Stanley Druckenmiller is among the most astute stock pickers in the world and often ahead of broader market consensus. That may be attributable to his view that it’s best to buy with an eye on where things will be in 18 months versus today. 

One of his latest buys, and a big one at that, has turned heads. Its Natera (NASDAQ: NTRA), a genetic testing and diagnostics company that now ranks as the fourth largest stake in Duquesne’s portfolio.

The big question is, why is it commanding such a large position, and what’s so special about this healthcare stock to warrant Stan putting so many eggs in its basket?

Why Did Stan Druckenmiller Buy Natera Stock?

The most likely reason that Stan Druckenmiller bought Natera stock is the firm’s role in the genomics and diagnostics space, areas that most investors overlook. This is especially true as it relates to future growth and Natera’s prospects in emerging healthcare trends. 

For the most part, Natera has a focus on reproductive health, oncology, and organ health, with its best-known product being Panorama, a non-invasive prenatal test. Unlike traditional methods, NIPT can detect genetic abnormalities in a fetus with a simple blood test, making it less risky for patients. 

The company’s efforts have translated to the top line where total revenues for Q2 2024 were $431 million, representing a 58% year-over-year increase.

It’s also a leader in the the fast-growing oncology segment, where its Signatera test that tracks minimal residual disease has potential applications in monitoring cancer recurrence and treatment effectiveness.

The global oncology testing market is expected to exceed $31 billion by 2028, and Natera is likely to rise those tailwinds.

So, What Precisely Is Druckenmiller Seeing?

There are a few other standout reasons as to why Stanley Druckenmiller has made Natera such a large position.

For one, genomics is a fast growth sector and it has been accelerating with advances in personalized medicine, diagnostics, and treatment driving exponential growth. It’s quite possible that he believes investors are underestimating the broad potential of genomics and diagnostics.

According to research outfit MarketsandMarkets, the global genomics market is projected to reach $83.1 billion by 2030, translating to 19.2% annual growth. If true, Natera’s services that are rooted in genetic diagnostics will see persistent demand in both prenatal testing and oncology over the coming decade.

Secondly, Natera has a clear technological edge that the average investor might not spot right away. The company has established a moat by developing proprietary algorithms that improve the accuracy of its testing across reproductive, oncology, and transplant health. Combined that with its swath of patents competitors are going to struggle to mimic or replicate Natera’s offerings.

There’s also further credibility stemming from Natera’s 200 peer-reviewed publications supporting the clinical validity of its technology as well as its credibility in the medical community. 

When you put these ingredients into the mix you end up with a high barrier to entry and so, while many investors focus on the competition in the genetic testing space, the hurdles to compete in this sector are significant.

Natera’s accumulated expertise in bioinformatics make it hard for new entrants to imitate its success. Another way of saying that is its first-mover advantage for genetic diagnostics gives it an edge to grow around the world.

Speaking of which, while Natera has a solid foothold in the U.S. market, its international footprint is still relatively small. It seems Druckenmiller may be betting on the fact that investors are not fully accounting for the potential growth that is likely to come from overseas.

By way of example, Europe, Asia, and Latin America offer considerable opportunities, especially as awareness and acceptance of genetic testing grows. Evidence of this fact is that the company recently secured reimbursement approval in Australia for its Panorama test, a small but significant step toward global expansion.

Stan’s Duquesne Family Office may see this as the beginning of a wider international rollout that will drive revenue growth over the next five years.

A final further factor Stan may be focused on is Natera’s ability to scale and improve its operational efficiency. Management can be lauded for bringing down the costs of its tests while expanding its margin profile.

While its gross margin for Q2 2024 stood at 58.1%, there are clear signs that economies of scale are beginning to take hold. As a sign of what’s to come, Natera’s management has a long-term target of reaching gross margins of 70-75% as it continues to expand testing volume, negotiate more favorable reimbursement rates, and scale its technology.

But wait, there’s more, because regulatory tailwinds are supportive too. In the U.S., there has been a push for greater use of genetic testing, driven by both patient demand and insurance reimbursements. For example, the U.S. Centers for Medicare & Medicaid Services recently increased reimbursement rates for certain prenatal and cancer-related tests, benefiting companies like Natera.

No Cake Walk

While there’s lots to like about the future, management reported a loss of $43.9 million, which has been somewhat offset by strong revenue growth.

Another factor to consider is that while insurance reimbursement for genetic testing is improving, it’s still a very slow process and reimbursement rates vary widely between insurers. These delays or reductions in coverage certainly would be detrimental to Natera’s growth.

In addition, competitors like Illumina, Guardant Health, and Myriad Genetics all play in the genomics space and so, while Natera has built a competitive moat, it still faces constant pressure to maintain its technological advantage.

What’s Next for Natera?

Given Druckenmiller’s history, track record and reputation for spotting long-term trends before they gain widespread attention, the best days for Natera may still lie ahead.

Nonetheless, valuation is a concern at this time with Natera trading at a price-to-sales ratio of 11.7x, however if margins can expand as management predicts these lofty figures may compress dramatically.

After all, Natera’s revenue is expected to grow by 18.2% annually over the next five years and that level of compounding would quickly place the PS ratio into more reasonable territory. The takeaway seems clear that dips are buying opportunities.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.