All right, welcome, everyone. My name is Tejas Savant, and I'm the life science tools and diagnostics analyst here at Morgan Stanley. It's my pleasure to host Natera today, and from the company, we have Steve Chapman, CEO, and Mike Brophy, CFO. For important disclosures, please see the MS Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. So, Steve, lots to chat about, but maybe, you know, as you look back on the last 12 months, just to set the stage for us, you know, what are the key accomplishments you're most proud of, and what are you most excited about heading into 2024?
Yeah. So, great question. You know, I think we've significantly advanced the ball forward across all three of the different areas that we do business. We've seen significant volume growth. We've published a very large number of peer-reviewed studies. We've had major reimbursement wins, and we've also hit all of our internal milestones on COGS, ASP improvement, and our research objectives. So things are really tracking right now on all cylinders, and we're excited about what's ahead. So, we're in three very large, relatively under-penetrated markets, particularly oncology. We're at the very early stages of penetration in a, you know, $20 billion+ market .
We've set ourselves up to be in a market leadership position, and we, you know, we intend on continuing to expand on that, you know, as the year goes on, as we turn the corner into 2024.
Got it. Let's take a closer look at oncology and starting with the MRD competitive landscape, right? I mean, even putting aside the ongoing litigation you guys have, there are many players out there that are beginning to enter the tumor-informed MRD space. They're touting sort of improved sensitivity versus Signatera. For low shedding tumor types like breast cancer, for example, why wouldn't a more sensitive assay get more traction? And how do you think about sort of Signatera's competitive moat, you know, as some of these, you know, new players, you know, look to enter the market?
Yeah. So the first thing I would say is, look, we've been seeing this for, you know, five years now, where someone comes out with an analytical validation based on maybe contrived mixture samples that were made in the laboratory. They know all the samples are positive, and they run, and they sequence as deeply as possible using a workflow that doesn't really make sense to use in a, in a commercial setting. And then they say, "Wow, look, our limit of detection is 5 times better than Signatera." But the reality is that that's not real world. You have to look in the clinical setting, and so there's many companies out there that, that are using expanded plex assays, where they've run clinical studies and had, you know, very, I think, disappointing clinical sensitivities.
You know, I mean, we're not gonna kind of go and name names and so forth, but I think the point is that what you can do in an analytical validation study, where you know everything is positive and you can sequence as deeply as possible and you're not worried about false positives, is very different from, you know, clinical performance. Now, with that said, I think there are some areas where, you know, certain things can make a difference. Of course, you know, we're spending a lot on research and development, and, you know, we're in tune with, you know, what those various things are.
As we said before, in our pharma business and in the RUO setting, we've done multiplexing of thousands of different variants at one point, at one time. You know, we've done, you know, various different sequencing configurations for the tissue, and so we can do all of these different things. It just really matters what we think, you know, we want to commercialize in the end.
Got it. And then, so turning to tumor-naive approaches, is this something you would ever consider dabbling in for use cases where tissue isn't available? I know you've had efforts underway. I mean, speaking of, you know, what you were doing with your RUO partners, in terms of a liquid exome backbone as well, just what are your updated thoughts on that modality?
Yeah, I mean, look, I think, there's a lot of work that we've done. We have really smart R&D people, and, you know, they've put a lot of work into various different things. And I think, when you look at, you know, our work and program, we've talked about on early cancer detection, you know, or, tumor-naive MRD, you know, I think we've made great progress, and I think, you know, we are seeing some good things there. You know, I don't think tumor-naive is, you know, is going to compete with tumor-informed, but I think that it's possible that there's a place for that, you know, within the bag.
You know, and I think as we work on research towards early cancer detection and, you know, some of that dovetails into tumor-naive, and you know, we'll see where things end up.
Got it. From a physician standpoint, right, I mean, there's all this chatter about comparing and contrasting, you know, landmark versus longitudinal-
Yeah
... sensitivity. And then you also have, you know, sort of the need for prospective interventional data.
Yeah.
Paint us a picture of what you're seeing, you know, among those sort of 30% of US oncs who are, you know, using Signatera today.
Yeah. I mean, the reality is, is that the investors talk a lot about other technologies, tumor-informed technologies and tumor-naive technologies, but the doctors don't. We very, very rarely see any competitors in the field today, and, you know, I think in the vast majority of cases, if we do see a competitor, you know, it's Guardant, and the tumor-naive MRD testing. And so I think, you know, the groups that are entering the space, they've got a very long way to go, to sort of get to, to a point where, you know, it's, it's really a part of the, you know, part of the discussion, from a, you know, from a physician standpoint.
I think for us, we're focused, you know, not on, you know, talking about, like, what competitors are doing or what we're doing, but on expanding the market, because we have 90%+ market share at this point, and we have 50 peer-reviewed publications. We have over 100 clinical studies that are underway that are going to be reading out, and we have Medicare coverage across a broad swath of indications, and we've got a pipeline of commercial coverage that we think is coming down the pike. So we're focusing on unlocking the next leg of growth in the MRD setting and really tapping into that, you know, $20 billion market opportunity. And that includes, you know, publishing the 24-month follow-up on the CIRCULATE study.
That includes the first, multi-site prospective randomized study looking at, treatment on, MRD and, escalation for MRD-positive patients, the ALTAIR study, which is going to read out at some point in the first half of 2024. We originally thought it would be kind of mid-2024, but actually, now it looks like it's progressing, you know, potentially ahead of schedule. No guarantees there. We have to kind of wait and see how, how many events we get, but that is going to be the definitive study that, really opens the market up and separates us, you know, completely from everyone else. So to have a randomized interventional study, versus an analytical validation is a huge difference.
So I think we're in a good spot, and, you know, we're focusing on growing the market, and as competitors come in, I think we'll deal with them. But so far, there's been very limited competition.
Got it. Do you sense physicians are reluctant to try out other MRD offerings once they have a cohort of patients in Signatera? And how sustainable is this dynamic as MRD goes mainstream?
Yeah. So, I do think that there's a big moat that we've built, you know, and you can look at that in a couple of different ways. I think the first thing is, you know, if your office is using Signatera and say, you know, half of your patients already have their tumor exome sequenced with Signatera, and you're doing monitoring, you really want to bring in another, you know, company and do tumor sequencing, you know, with another company for a portion of your patients? Probably not. Or do you want to resequence a patient's exome when you've already done sequencing, and you already have a test set up with them for Signatera? So I think there's some definite, you know, stickiness there, and I think that that's going to serve as an advantage to us, long term.
I think the other thing that, you know, doctors are seeing now is, well, you know, you really need to wait to see the data come out. You need to wait to see the definitive data because, you know, I think sometimes what is presented in marketing materials doesn't turn out to actually pan out when the test is being used in practice or when the definitive studies are being read out and trials get canceled and so forth. And, you know, I think doctors really want to see the definitive data reading out, and that's where we're in a good, you know, leadership position, and that's probably the biggest moat, by far, is having the strong, multi-site, you know, peer-reviewed data, that looks at, you know, outcomes, not just analytical performance.
Got it. You sort of alluded to this before in terms of, you know, a larger panel for Signatera and also liquid exome, et cetera. But what other dimensions are you hoping to see improvement in, in specs over time? And can you just give us a flavor for what, you know, subsequent versions of Signatera might look like?
Yeah. So, you know, obviously, we have a pretty large R&D budget, and I think we're tuned into, you know, all the different opportunities there are to make performance improvements. And, you know, for this, I'll just say, look, when we launched Panorama in 2013, you know, that was the first NIPT that we put out on the market. We're now on our seventh or eighth version of Panorama, and that includes not just improving the workflow, but that includes, it includes more peer-reviewed data. That means expanded content, that means some novel insights that nobody else can provide. And so this is what we do. We launch tests, we make significant improvements to those tests, and we innovate over time, and we never stop. And we're going to do the same thing in Signatera.
You know, anybody who's gunning for the Signatera 16, you know, looking at, well, they're going to outperform us. Well, we're not stopping with this test. We're going to keep doing everything we have to do to help patients, and we're going to keep innovating and keep evolving.
Got it. In terms of, you know, the reimbursed volume, right? You've talked about, I think, 80% of Signatera volume coming from reimbursed indications earlier this year. With expanded coverage of in the breast indication, what does that sort of number look like? And, you know, or is it sort of offset by the fact that you're also looking to push into more cancers?
Yeah. Yeah, so I think that kind of 75% range of cancers being under the bucket of, you know, tumor types that are sort of covered by Medicare is about right. You know, there's still a long tail of things like we've mentioned, where, you know, anywhere where we've published data, you can assume that, you know, we've submitted basically gastroesophageal, you know, et cetera. You know, I think there's good opportunities coming, too, with, like, pancreatic, where we have a readout coming, that we've already shared the data at previous conferences, but it's still waiting to be published. So any of these things where data gets published, we're gonna be able to submit to Medicare. I think the exciting opportunity is gonna be commercial coverage as well.
Mm-hmm.
We think, you know, that we are seeing the impact of, you know, in some of these biomarker states. I think we hope to be able to announce some additional coverages in the near future.
Got it. That's, that's actually interesting and, and dovetails into my next question. I mean, following that Blue Shield of California, I mean, how have those, you know, conversations gone with the private payers? And, you know, in terms of that, the biomarker bill that you just mentioned, I think it's up to 11 states. Texas is next. How does that sort of impact Signatera?
Yeah. So, look, I think exactly how this pans out, you know, remains to be seen. But, you know, we are seeing in some of the states that have passed the biomarker bill that the commercial plans are planning to cover Signatera. And I think, you know, we have to, we have to see, you know, those actually go into policy. But in the discussions we've had, you know, they've said, "Yeah, we're gonna cover it." So I think you know, stay tuned on that. We'll, we'll see how that pans out over the course of the year and into next year, but it, it could be a positive. You know, and the real question there is, well, you know, why, why is coverage important? Well, it, it enables access, but for us, it also improves the, the average selling price.
In addition to expanding coverage, there's also a lot of things that we're doing to improve the overall margin for the business-
Mm-hmm
... and to improve the overall average selling price. Some of that just comes down to blocking and tackling in the billing operations, and that's an area where we've been investing. In fact, actually this year, we hired, you know, 60 new people in the billing operations group, and we found opportunities. We developed a new project that we call the $100 million Profit Improvement Project, and that's where when you look across the business and you say, "You know, what is the amount of additional reimbursement you could get by, you know, execution?" We think it's potentially in this range of $100 million, and we're pushing for that. We've been working on that for nine months now.
Mm-hmm.
We haven't incorporated really any of this into our guidance. Yeah, I think there's opportunities now. We're starting to see the first modules get launched, where we're automating certain things or just doing better at certain things, and we're seeing some good signs there. That's exciting, too, in addition to just getting additional coverage that we can actually control our own destiny in some of these areas.
Got it. And on that point, I mean, where is turnaround time now, and where do you think it needs to go, and how low can it go, say, 12 months out?
Yeah. Yeah, I think one of the reasons why you haven't seen an influx in groups coming in to the tumor-informed space is because the operations are challenging and they take a long time to stand up and to do right. And I think, you know, we've been in a position where we've been able to scale and grow the business, you know, as we're working through the operations. And I think, you know, now we're at a point where things are really working smoothly, and we've made the investments over the last four years, you know, to put ourselves in a position to be able to run 250,000, 300,000 patients a year plus, you know, growing, so forth. And so the turnaround time is actually generally, you know, very quick.
I think, you know, around three weeks or so to get that first test back, somewhere in that range.
Mm-hmm.
You know, 3, 3.5, maybe 4, to get that first test back. And then, you know, and that includes sequencing the exome, drawing the blood, running the plasma sample, setting up the personalized test, and then ongoing tests can be five to seven days, so very quick. Now, you know, there's a lot of focus on, well, can you get the result back in time for that individual, that initial adjuvant decision? And, you know, the generally adjuvant treatment is being given somewhere in that eight-week range, and so, you know, we definitely are getting the results back in time. You know, for a patient that sends their tissue at the time of surgical resection, you know, we can, we can have the entire thing set up before they even do the blood draw on day 30.
If somebody sends their tissue at the time they're doing a biopsy, which is even, you know, a month or so before they do the surgical resection, we can have the test set up actually before they even have the tumor removed. So anybody that wants to have the result back at day 36 or 37, comparative with when a tumor-naive test can get the result back, they can have the same thing with Natera.
Got it. NCCN guidelines, you know, any feedback following the, the meeting, in late August, and, was Signatera sort of discussed? I mean, is there sort of more data that they're looking for, and, and what do you expect to have in place by the time the committee meets, next year?
Yeah. So, the good news is that the CIRCULATE-GALAXY study was published ahead of the meeting. And so I think, you know, for the first time, we now have an opportunity where that data set can be included in the guideline review. And so we hope to be included in a footnote for prognostic factors in colorectal cancer, and I think, you know, it's possible, and that's what we're shooting for. And then in the future to be, you know, further integrated into the guideline grid. That's kind of the standard progression that you see. So a footnote would be a huge win. This would open up a lot of opportunities for us. And, you know, backstopping this-...
Yeah, the good news is, we've been working on these randomized studies for a long time, and when the NCCN came out and they said: "Well, we wanna see randomized studies," we sort of said, "Okay, great, because we've got it." We started it five years ago. The ALTAIR study that I referenced earlier and the VEGA study that we talked about before, these are randomized controlled studies looking at MRD-guided decision-making in colorectal cancer. The ALTAIR study is done enrolling. We're just waiting for patients to recur, and the data will is gonna be read out in the first half of next year. So this, the thing that the NCCN committee said that they needed, they wanted to see in order to get into the, like, the grid, which is the most...
You know, we would assume into the grid, the most significant section of the guidelines, you know, that is these randomized studies, and we're not starting from scratch. They're pretty much done. And, you know, I think so from that standpoint, we're in a good position. The other thing that I think, you know, is also exciting is this question of, well, if you're doing surveillance or recurrence monitoring and the patient turns positive, well, what do you do, right? And there's a lot of data now coming out in colorectal cancer and then soon in breast cancer. So in colorectal, the INTERCEPT study, which Natera performed the testing, but it was led by MD Anderson, it showed that there was a huge clinical value in doing routine surveillance.
So they had thousands of patients or thousands of blood draws from, you know, over 1,000 patients, where they had done routine surveillance, and they showed that when a patient was positive, they were actually able to take action on that patient immediately in the vast majority of cases and do something, either enroll them in a treatment or molecular recurrence clinical trial, either go do much deeper imaging, you know, PET scan, so forth, that they would have done previously. So there we are seeing these cohorts come out showing the utility. And then in breast cancer, you know, treatment on molecular recurrence is another potential paradigm-shifting opportunity, and that's an area where we're pretty far ahead.
We announced two phase II clinical trials, probably 4 years ago now, that we're looking at treatment on molecular recurrence, and I think it's possible some of that starts to get read out at the San Antonio Breast Cancer Symposium coming up. You know, we've really set ourselves up in a leadership position in breast cancer with neoadjuvant breast, having big data sets with the I-SPY Consortium, and then having very strong MRD and recurrence monitoring data coming out. And so we had a slide in our last earnings deck on everything that we're doing in breast, and we, you know, we think we're the leader in that space right now, based on the data that we've put out and the performance that we're seeing.
Got it.
Yeah.
Let's hit up women's health before we turn to the numbers. You know, the California Prenatal Screening Program, where are you today in terms of converting those accounts? Is that sort of largely done now from Vistara to Panorama? And second, to what degree have LabCorp and Myriad been able to win back some of those accounts from you now that they're back on the market?
Yeah, you know, I would say for us, we kind of... You know, there was a period of time where everybody shifted over to the California program, and then there was a period of time where a lot of people were sort of shifting back and kind of ordering direct, and I think that's kind of settled down now. So we think that, like, that's kind of baked at this point, largely, is the people that wanna stay in the program are staying in the program. The people that wanna stay direct are staying direct. And that was our hypothesis all along, was that we could enter the program, and if there was an opportunity to stay out of it as well, we could have kind of the best of both worlds.
So I think we, you know, we executed pretty well there. You know, I think it's pretty rare that I've heard about accounts being lost. I'm sure there are some, you know, where maybe they were a longtime LabCorp user, and then they couldn't use LabCorp. Now they wanna shift back, you know, something like that. It's pretty rare that we've heard about those circumstances. I think largely our business has done very well.
Got it. And so same sort of question, you know, broadly, where are you in terms of exiting low-margin accounts you won, as, you know, a result of, you know, some competitor exits?
Yeah.
What is your sort of account margin threshold, and how do you go about discerning if there's, you know, room for near-term margin improvement or it's better that you exit?
Yeah, I mean, it is one of those things where you have to look at the scenario and say, "Okay, is this payer mix an opportunity that's gonna improve over time, right, as a result of more coverage coming in? Or, you know, is there really no opportunity here?" And I think we've tried to look individually and make a determination, and, you know, I think in some cases, it just doesn't make sense for us to service the account. And yeah, I think largely, you know, those, that transition has sort of taken place.
Mm-hmm.
You know, but of course, it's something that we always look at, and we always monitor. You know, I think as accounts don't make sense, I think we'll be in a position to, you know, in some cases, not work with them if it doesn't make sense.
Got it.
Yeah.
Same sort of question as NCCN on, on ACOG, on the prenatal, committee working group. They met in June. Another meeting is expected in September. I don't know if it's already happened, but, have you heard about whether, you know, 22q guideline inclusion was discussed? And, how should we think about timelines for potential upside if the guideline were to turn favorable? How long would payers take to come on board?
... Yeah, so I think you know, we think that the data that's been generated on 22q is really, really strong, and we think that it has an opportunity, by increasing access, to help more patients. The disease is very common, one in 1,500 pregnancies. The sensitivity of the test is very high. The positive predicted value is 50% roughly, which is strong in the prenatal setting, comparatively speaking. And there's interventions you can take, you know, for example, treating the babies with hypocalcemia at birth to prevent seizures. So we think it sets up nicely for a test that, you know, should receive guideline inclusion.
We don't really have a lot of insights into exactly what happens at the committee meetings, but I would hope, you know, the data would speak for itself, and this would be something where patients that need access to this really important testing could get access. So we'll just have to see, you know, what happens. When you look at the incidence compared to other things that are recommended, it's similar. So 22q is more common than cystic fibrosis and SMA combined. And, you know, the fact that it's common and all the other things that I've mentioned previously, I think bode well for potential coverage. So stay tuned, and we'll see.
Got it. Carrier screening, what is your exposure to expanded carrier screening, you know, within that sort of Horizon bucket today? And, you know, given that we've seen supportive guidelines for ECS, what do you think needs to happen for payers to be sort of, to, to come aboard? I mean, you know, there were some bad actors in the market. Do you think it's ACOG that finally needs to, come through there, and, and, and that's gonna be the, the, the push for the payers to start covering ECS more broadly?
Yeah, I mean, the expanded carrier screening is generally relatively low margin. I think, you know, we took on some business from some other competitors there, you know, that we knew was gonna be, you know, hurting our margin in the short term. And the idea was that we thought we could make a sort of clinical argument to, you know, payers into some of these governing bodies that, you know, expanded screening makes sense, and so we sort of took that on, you know, as a risk. And I think we're gonna see if this pans out or not. I think it... You know, it's a couple things that I think are looking positive, there have been some payer policy changes over the last six months.
There's been a guideline from the National Society of Genetic Counselors, you know, which I think is, you know, positive. But we've also seen physicians upset about the fact that they don't have access to the testing that they want for their patients. So, for example, you know, we believe that, you know, 95% of reproductive endocrinologists and infertility specialists today in the country are ordering, you know, expanded carrier screening. Yet, you know, ACOG doesn't recommend that necessarily for that cohort, but everybody's doing it. And so when you have a setting where, you know, almost all the physicians are doing it, it really becomes the de facto standard of care, and I think that that's hard for governing bodies to sort of ignore.
You know, now, with that said, we're, we're not reliant on any guideline changes on 22q or on carrier screening. And we don't control these, and all we can do is generate the data, and the physicians and the governing bodies have to make their own decisions on what they think is, is appropriate.
Got it. Mike, I'll spare you the question on the conservatism in the back half and guardrails for 2024.
Okay.
I do wanna talk about, you know, COGS initiatives.
Mm-hmm.
Specifically, now you've got a bunch of, you know, COGS reduction projects underway, but I wanna hone in on, you know, moving the upfront exome sequencing in-house, as well as, you know, potentially moving to, you know, higher-throughput sequencers, you know, the NovaSeq X specifically. Could you elaborate on both of those, and how much of an uplift in gross margins would you expect to see from both of them?
Yeah, I mean, so we've got a number of cost of goods sold reduction projects underway. I mean, if you look at our R&D spend, I mean, the number one and two areas are by far the, you know, the biggest bullet points on the budget are COGS reduction activities and clinical trials. I mean, it's, like, incredibly kind of practical stuff that we're working on in the R&D business there. We've got... We are underway with a pretty significant transition with our kind of upfront exome for Signatera, running that in-house. I think we're roughly halfway through that transition in terms of, you know, our volume mix today.
I expect that it kind of continue in a basically linear way through the rest of this year and early next year. We'll be largely complete with that transition. You know, you've referenced the, you know, the transition that's gonna be moving first to, you know, NovaSeq 6000 and then moving that on to the NovaSeq X-
Mm-hmm
... next year. So that, that's a significant cost of goods sold reduction initiative. I mean, just, just for reference, you know, our, our blended COGS per unit on Signatera these days is kind of in the, in the, in the mid- to high $500s, and I think kind of exiting, exiting 2023, I'd like to have that be in a kind of the low $500s, and then exiting 2024, kind of in the, in the mid-$400s. So that's kind of... What's driving that is, yes, there's some mix shift happening there that's just kind of, kind of linear and organic, but what the main driver there is the- is this kind of transition of the exome.
I'd say, you know, we're kind of out of time, so I won't elaborate in so much detail, but we've got three other cost of goods sold reduction initiatives related to workflows and platforms that are gonna reduce COGS kind of across the business, and we've done this over time. I mean, so for context, I mean, I've presented at this Morgan Stanley conference at, you know, some time in the past, where the cost of goods sold for the Panorama test was like $350 per unit, and you know, this year it's at $160 bucks, okay? We're gonna continue to reduce cost of goods sold per unit in Panorama and really across the product portfolio.
Got it. So one of the benefits of being the last meeting of the day is that I can keep going.
Let's go.
I do wanna ask one more-
Yeah.
And then we'll hop. Just on the follow-on offering, you know, $250 million, you know, following the completion of another follow-on you did in November last year-
Mm-hmm.
You were already in a good financial position, following that raise. Can you just walk us through the rationale of doing another top-up now? What things do you intend to spend on now that were not factored into the prior raise? And does this have sort of any implications for your, you know, cash flow, sort of, break-even target at all?
Yeah, no, thanks for the question. Yeah, no, no implications for changes in our strategy or our guide or our targets or anything like that. I mean, we're, we're continuing on the same path. This is purely kind of a, you know, an opportunistic, I think top-up is a, is a kind of an apt description for the raise. You know, relatively efficient in terms of percent, like, incremental dilution versus impact to the balance sheet. I think it puts us in a, in a very powerful position to just be opportunistic with all of these different growth drivers we have in front of us over the next kind of 18 months. So Steve alluded to, you know, a number of these things where a number of these indications where we're up for major guideline inclusions.
We wanna be in position to grow aggressively on the back of those guideline inclusions should they come. And I think this, this raise, you know, helps us to be in position to do that.
Got it. Awesome. Thanks so much for the time, gents. Appreciate it.
Thank you.
Thank you.
Yeah. Cheers. Yeah.