All right, great. We're gonna go ahead and get started. I'm Catherine Schulte. I cover life sciences and diagnostics here at Baird. Very excited to have Natera here presenting today. From the company, we have the CEO, Steve Chapman, and the CFO, Mike Brophy. So, we're gonna dive right into Q&A, but if you have a question for the team, you can send it to session1@rwbaird.com, and I will pass it along. So Steve, Mike, thanks for joining us.
Thanks for having us.
Thanks for having us.
Maybe starting off on the women's health business and NIPT, maybe just give us a picture of where we are today in terms of market penetration and, you know, how you envision that playing out over the next couple of years.
Yeah. So, you know, today, we think there's, you know, around 4 million births in the United States, maybe, you know, slightly more, or excuse me, slightly less, and we think the market's about 50% penetrated today in the NIPT sector. So, you know, that's a mix of high-risk pregnancies and now average-risk pregnancies. We think over the next three years, that can get up to, you know, 80%, potentially even 90%, if more women opt in, you know, for aneuploidy screening. So we think there's, you know, a long way to go to continue to, you know, better serve patients, and we're excited about the growth opportunity there.
You guys have put up really robust growth in your women's health business over the last several years, probably the only name to keep beating and raising throughout COVID. But as we think about what's driven the penetration, whether it's better reimbursement in average-risk, market share gains, I guess, how would you parse out the biggest driver over the last couple of years?
Yeah, I mean, it's really a mix of things. You know, largely, I think the under-penetrated market, you know, giving us a long runway, combined with, you know, continued innovation and continued focus on generating meaningful clinical data. For example, what we did with the SMART Study, which is the largest prospective NIPT study, that's been done with genetic outcomes on more than 17,000 pregnancies. Yeah, so we think it's a mix of things, you know, combined with, you know, expanding reimbursement and access. But the good news is, there's a long way to go, and we wanna continue to focus on helping patients and expanding access to care.
Maybe on SMART Study and implications for microdeletions, I guess any updated thought on ACOG guidelines? I know they're having two working sessions this year.
Right.
So have you heard anything? I think the first one has already happened, at least. Any expectations for when we could potentially see more supportive guidelines?
Yeah. So, I think when you look at the sort of basic fundamentals of, you know, what the requirements are for a genetic test to be covered by a major medical society, has to be a common condition. There has to be a screening test that has a high sensitivity, high specificity, good positive predictive value. There has to be an intervention that can be taken, and the disease has to be well understood and, you know, well characterized. And when you go through that list, I mean, we think that 22q testing, particularly, I think, meets all of the basic criteria.
It's exceptionally common, one in 1,500 pregnancies, which is, in fact, more common than cystic fibrosis and SMA combined, which are two of the disorders that are routinely tested today in pregnant women and recommended by ACOG. So we think it really sets up nice for potential guideline inclusion. I think the missing link here over the past 10 years and why it's not already part of guidelines is that there was limited data available on the performance of tests and on the utility of screening.
But with the SMART Study, which was a seven-year, multi-site prospective study, that we started back in 2015 and that was published in 2022, you know, we showed that we could detect 22q disorder with a very high sensitivity and specificity and a very solid positive predictive value. And I think that that's really the you know the last missing link. So we're feeling positive about things, but of course, we don't control the outcome of the medical decision-making at the various societies. We would hope that they would want to enable access for this important screening, and you know we'll await updates.
As we think about what we saw for ACOG with average risk, the kind of first inclusion was maybe a moderately positive inclusion. We saw maybe a third of payers update their-
Right
... policies, then full inclusion, and more payers adopted. I guess, what do you view for microdeletions? Do you think it's kind of a step function like that, where there might be multiple iterations, or you think you could get a full recommendation off the bat?
Well, you know, the good thing is, the American College of Medical Genetics has come out with a very strong recommendation, and I think that that, you know, is, is a good sign. And I think that, you know, now with the frequent usage of the testing and the advancements of circulating cell-free DNA over the past maybe 15 years, I think we're in a different place than we were when average-risk guidelines first came out. But, you know, today, you know, it's this is a test that's largely unreimbursed, and so I think even if 30% of payers came out and covered, that would be, you know, a benefit for us in being able to continue to provide this type of testing to patients.
You know, we'll have to just wait and see what comes out and then go from there.
And Mike, maybe one for you, on the women's health business. Can't get too comfortable over there... you know, this is a business that's been cash flow break even or positive-
Yeah.
for quite some time now. But obviously a lot of market penetration to go, potential upside from microdeletions. I guess, how should we think about the profitability of this business going forward? I don't think you need a lot from an OpEx investment standpoint, but how should gross margins unfold for the women's health business?
Yeah. Well, I mean, I think it's a good point. I mean, I think the women's health business is a good case study for, you know, Natera, as a whole. You know, if many of you in the audience will recall that we had set a cash flow breakeven target for the women's health business back in 2019, and we'd said: "Hey, we'll get there, you know, by 2020," and we actually hit that target. And the way that we did that was we first built a what we think is a best-in-class commercial and laboratory operation, and then we grew the volumes.
You know, we went from something like 25% market share to now, you know, more than 55% market share by investing in the product, having great data, having a, you know, a great commercial team, and then basically holding that investment constant as the volumes grew, and maintaining, you know, strong levels of reimbursement for the test, and we, and we we hit that goal. So now the goal that, that... We're basically replaying that for the business as a whole, with, you know, the standard now being this investment that we've made in the oncology business, and we're way down the path for that target for the business overall.
In terms of women's health gross margins itself, I mean, I think you know, the gross margin in women's health, you know, to think about that as a business, you know, standalone would be, you know, circa 50%, 55%, something like that today. I think over time, I think it's both the women's health business and Natera as a whole, you know, it's not unreasonable to think about this as something, you know, 70% plus kind of gross margin business.
A meaningful component of that can come from just organic improvement in the average selling prices as we continue to match up the stated coverage policies, which are quite ubiquitous in favor of averages in NIPT, with our actual experience of getting paid for this test when we actually submit the claim. There remains a myriad set of administrative hurdles to kind of getting paid the way that we think that we should. So we're getting paid something like 75% of the time, for example, in NIPT, and that really should be 95% of the time, with the benefit of a couple more years. So I think that's... it's a similar story for carrier screening.
So overall, I mean, I think that's a really interesting business, right? Because obviously, it serves a critical unmet need for a large patient population. It, you know, and it can—it's gonna continue to be a, you know, a strong source of growth for us and can, you know, continue to generate cash flows.
All right, and we've got a question from the audience. Maybe it goes to our, our point earlier about market penetration. You said 50% today, that maybe goes to, to 80% over the next several years. The question is: How do you get more women to opt in to NIPT? So maybe what levers are you pulling to, you know, get that incremental penetration?
Yeah. So I think, you know, of course, you know, getting screening is always a choice between the patient and the physician. But I think historically, you know, we've seen rates you know that are kind of you know of opt-out in that kind of 20%-30% range because the biomarker screening that was available had a very high false positive rate. And there was a concern by many families that if you get tested and you have a false positive, you're gonna get an unnecessary amnio or CVS procedure. And so actually, 19 out of 20 women that previously would get tested actually didn't need to go get that additional follow-up amniocentesis, and that sounds like a crazy high number.
So today, with Natera's test, what we've shown is, for Down syndrome, there's a positive predictive value of over 90%. So if we tell you that you're positive, nine out of 10 x, if you go get an amnio, you're actually gonna have the disorder. And so I think that kind of higher level of positive predictive value removes some of the hesitancy for people to get screened. And so it's... I think it's really education around, you know, what can be done there. The other thing that I think can increase the likelihood that people opt in to screening is having more that you can do as a result of being positive and educating more about what you can do as a result of being positive.
So one of the great things about 22q screening is that if you're positive, you can actually treat the baby immediately at birth with calcium supplements to prevent seizures and prevent hypocalcemia. So if you don't get tested, and the baby turns out to have 22q at birth, there's a possibility that that won't get diagnosed in time, and that will cause brain damage or, you know, potential issues with the postpartum care. So, you know, I think educating more about interventions that can be taken to actually improve outcomes in that neonatal period is important.
Yeah. All right, I wanna shift over to Signatera and your oncology business. You know, oncology volumes grew almost 90% in the second quarter. I guess, what have been the main drivers of, of that momentum, and how durable do you think those trends are over the medium term?
Yeah. So we're at the very, very early stages of an incredibly large market. And I think for us, now having published 50 peer-reviewed papers on Signatera and being in the field, you know, really since, I think, our initial publication in 2017, but then the launch, you know, in kind of 2019, 2020, we've been out there for a while now. And I think physicians are starting to get comfortable with the test-
You know, the logistics are working very smoothly. Patients are now getting recurrently monitored in many cases where their Signatera was set up a long time ago. They're coming back for their fourth or fifth or sixth blood draw now. And so it's really hitting on all cylinders. But it's having great operations, delivering very strong peer-reviewed publications, having a, you know, a large, well-educated medical staff that's available to help physicians and help patients, and then importantly, having coverage from Medicare. We've now received coverage in colorectal, breast, muscle-invasive bladder, immunotherapy monitoring. So, we've made access, I think, readily available for many patients. And it's all of these things together that have led to the success, and we think it's gonna continue growing nicely.
I guess what's resonating the most with oncologists, and are there any areas that they're pushing back on when it comes to MRD?
You know, I think you know, in many cases, oncologists are facing you know, challenges where the tools that they have you know, I think provide important insights, but you know, not quite to the level of what they'd like to have. And so for us to be able to help the physician with additional information, you know, that you know, is now published in peer-reviewed data studies to be predictive in addition to being prognostic, I think it's very helpful for them, whether they're deciding you know, to give chemo or potentially, in some cases, change treatments you know, or change care for the patient.
You know, of course, particularly in oncology, everybody would always like to see more peer-reviewed data, more studies, more randomized trials, NCCN guidelines, and that's why we've invested heavily into those things. So a large part of our research and development budget has been on more peer-reviewed studies and randomized controlled trials. And we're excited because the first big randomized controlled study in MRD testing is gonna read out, we think, at some point in 2024. We actually thought maybe mid-2024, but in fact, it might actually be sooner than that, and that's the ALTAIR study, which is a randomized controlled trial in colorectal cancer, that is looking at treatment escalation for MRD positive patients, but it's also looking at treatment on molecular relapse for MRD negative patients.
So this will be the first large-scale, prospective, randomized controlled study that reads out, and we think it could be very impactful in the-
Mm-hmm.
in the space.
Yeah, so from that data lens, I guess, to date, what do you think the most impactful study that you have is? And, and then, you know, over the next 12-18 months, there's ALTAIR, but any others that you would highlight as, you know, big data sets that we should be expecting from you?
Yeah. So, I would say the CIRCULATE, you know, GALAXY trial in colorectal cancer has been, you know, the biggest to date. We've reported out on, you know, the first 1,000 samples with 18 months follow-up, and we've shown that the test performance is excellent. And in fact, we were also able to show that the test is predictive of, you know, who's gonna respond to chemotherapy and who's not. And that was a big insight, I think, that has enabled a lot of growth and utilization in the space. As we look forward, there's many studies that we'll be reading out. Some of them will lead to additional reimbursement. You know, we talked before about our publication in gastroesophageal cancers. I think that's important.
We've talked previously about our partnership with Foundation Medicine and, you know, the FoundationOne Tracker test, which we think is a good test that will be used, you know, nicely and for immunotherapy monitoring as, you know, as that works its way through getting coverage. I think at San Antonio Breast, and breast is an area that Natera has really become a leader. We generated a lot of data with the I-SPY consortium in neoadjuvant, as well as, adjuvant and recurrence monitoring. We think there's gonna be some new data, potentially on treatment of molecular recurrence, which is, I think, a new paradigm that's going to change cancer treatment.
More and more over the next couple of years, you'll be hearing more and more about treatment on molecular relapse, and this is where the pharma companies can actually administer a drug on molecular relapse rather than waiting for clinical relapse. And I think it's possible you could see some of the first data coming out at the San Antonio Breast Cancer Symposium, and then again in the ALTAIR study on treatment on molecular relapse. So we've got a full plate of the studies that we'll be reading out, we're excited about, you know, in oncology.
Yeah. How would you, you know, characterize your competitive positioning in MRD? You have a few tests on the market now. I think more and more are gonna come out with data over the next year or so. You know, what should investors and analysts be looking for in these data sets to determine how high quality or how to compare them to your data?
Yeah, I think, you know, what we see a lot is, you know, a company will come out with an analytical study, and they'll look at, they'll take, like, a big cohort of positive patients, and they'll say: "Look how amazing our limit of detection is. We can detect within this positive cohort of mixture samples, we can get a low limit of detection." But then, when you actually look at the clinical validations and how the test performs in the clinical setting, you know, the performance is really subpar. And so I think what you really need to look at is how these companies are performing in the clinical setting in a peer-reviewed publication.
You know, and ultimately, that's gonna determine, you know, I think the outcome and, you know, how competitors can do in this space. We've moved beyond looking at just kind of analytical performance specs, you know, sensitivity and specificity, to now looking at overall survival and predictive claims. And so I think as others are starting to do initial validation studies or analytical validations, we're rolling out randomized controlled studies that are interventional in nature, where the doctors have actually used the test to make a determination to give treatment. And we've shown two years of follow-up and whether the patient had an increased or improved overall survival.
So, you know, there's a lot that I think has changed, that, you know, I think has created a strong leadership position for us when it, you know, when it comes to data generation. The other thing that I think is important is that this idea that you can just ride the reimbursement coattails of, you know, a company like Natera, that's proven actually to, in fact, not be true. And I think we've seen now, you know, a couple of companies that have gone and got Medicare reimbursement, where they've actually only gotten a very limited reimbursement from Medicare.
I think that what the paradigm that has set up is, if you wanna get reimbursement from Medicare, you have to go do it yourself, and you have to go publish your own peer-reviewed study, and you have to show that your test works across all the different use cases. And so this notion that you can just ride coattails and get reimbursement, you know, rising tide, you know, helps all ships, it's just not. That's just not the case. You know, the other area of on reimbursement is ADLT status, right? And I think Natera has uniquely gotten positioned for an ADLT for recurrence monitoring. We now see other firms that have been priced for recurrence monitoring at, you know, an $800 price point.
I think that, you know, that shows that they're not gonna get an ADLT, and having that $800 price point is gonna be challenging.
Yep. All right. That makes sense. You mentioned NCCN earlier. I think the CRC panel met back in late August. I guess when could we potentially hear an update there? And how do you feel you're positioned in this update round?
Yeah. So, you know, last year, they came out... They had the meeting in August, and I think the report read out in March. You know, so from what I understood, that was a little bit delayed from when they normally read out, so it's possible we could see something in Q4, you know, or maybe earlier in the year. You know, we don't know exactly what's gonna happen, but I would say the good news is that we know the CIRCULATE study was reviewed this year. And, you know, in 2022, they just weren't able to review the CIRCULATE study because it was too early. The data had been read out, but it wasn't published, and so they weren't able to really include it in the vote.
You know, it's possible we could be included. What I think would be a huge win for us, actually, is if we're included in the guidelines as a footnote, where they talk about prognostic factors leading to cancer recurrence. If we get that, that's a massive win. That's really the first step towards having, you know, a strong position in with payers and in the community and being officially a part of the guidelines as a footnote. In the future, as the randomized studies read out, I think that's where you can get into the formal grid, where you're a required offering. If then if the test is not offered, you know, the doctor is potentially liable. But I think the first step is being a footnote.
So if we get that this year, that'd be a big win, and we'll just have to see how things kind of pan out.
Well, and Mike, maybe Signatera ASPs, they got into the mid-$800s this last quarter.
Yeah.
I guess, how do you see those trending into 2024? How much of a lift is from, you know, getting more patients in the surveillance setting, getting additional Medicare coverage, getting some private payer adoption-
Yeah
... is what do you think will be the biggest driver over the next 12 months?
Yeah. No, yeah, it's a good question. I mean, and just for context, I mean, you know, we're now, I guess, in a year or two or two and a half into the launch, and, you know, we started this progression at, you know, $500 range ASPs and, you know, high $600 cost of goods sold per unit. It's a tough, tough to make it up on volume at that, at, at that, those unit economics, and we've, we've really changed that dramatically as we expected, as, as we've kind of ramped the launch. So now, as you mentioned, fast-forward to Q2, we were kind of in the mid-$800s on ASPs and, you know, blended COGS per unit. We're now kind of below $600.
When you unpack the trends for what is driving the ASPs higher for Signatera, I mean, I'm actually pretty encouraged by the drivers. They seem pretty repeatable to me, and sustainable. You've got a critical mass of reimbursed tumor types from CMS there, you know, and those tumor types are kind of driving the majority of our volume and our volume growth at this point, whether it's colorectal cancer or breast cancer, for example. So I think that mix is gonna continue to improve for us. I think, you know, the fraction of our patients that are eligible for Medicare is continuing to kind of tick up gradually, which obviously is a plus.
You mentioned the mix between kind of people getting their initial test, and now you've got, as you've got, you know, kind of cohorts of patients who started their test in the last couple of years, you can think about them as kind of now moving on to this recurrence monitoring setting, which also, you know, further provides, you know, positive, you know, trends for ASPs. You know, looking forward, you know, I think there's a clear path to have the, you know, the ASPs, you know, into the 900s next year. We'd like to see that, and potentially higher.
One thing that gives me kind of some confidence on the trend continuing to improve is all everything I just said. I think is gonna just continue to compound on itself. In addition to that, when you look at kind of reimbursement from Medicare and Medicare Advantage in currently covered tumor types, there's a lot of room to run there to just improve the fraction of time we get reimbursed on tumor types where we should be getting reimbursed, okay? It's kind of similar to my prior comments about you know about NIPT. There are a number of administrative hurdles that are kind of inevitable in diagnostics that you have to just unpack and solve separate from coverage policy to get to you know to get reimbursed when you should.
There's a path, I think, to $1,000 just on kind of solving those, you know, those challenges, leaving aside kind of potential uplift from footnote inclusion in the guidelines or, you know, additional reimbursement, all of which we're working on.
How do you think about or how do payers think about cost effectiveness for MRD? As you have those conversations, some of which have yielded coverage results, you know, for $3,000 a test in the surveillance setting and total cost per patient, I guess, how have those cost effectiveness conversations gone with payers?
Well, the good news is that the, you know, the cost effectiveness and the clinical utility math of Signatera, I think is immediately apparent to anyone who wants to engage on kind of like the population health dynamics here. And you've seen that, as you've mentioned, from some of the, you know, the commercial coverage we've already received. I mean, you know, course of therapy for, you know, for chemotherapy can be quite expensive. I mean, this is... Estimates will range, and they'll vary by patient, but this can be $30,000-$70,000, kind of for a course of therapy for chemotherapy.
To say nothing of the expense of what happens when a patient forgoes chemotherapy that they perhaps should have gotten, and then they return to the clinic with stage III and IV disease, and now, you know, you're trying to get them onto, like, a targeted therapy, which are much, much more expensive. So even in the course of you know, even a calendar year postdiagnosis, you know, for a Signatera patient, you don't have to change the course of treatment for that for a high percentage of patients before the, you know, the cost of the Signatera testing is nominal compared to the savings. So we've seen that. I mean, that's, that's underlies the speed with which we've been able to secure Medicare reimbursement, because obviously, they own the outcomes for these patients.
And I think it's also, you know, an important harbinger for our ability to get commercial coverage here in the coming years.
Yeah. All right, we've got three rapid-fire questions to cap things off. Mike, I'll keep you on the clock, and Steve, you can chime in if you have something to add. But as you think about the next 12-18 months, you know, what are the two biggest opportunities that you see for the company?
You want me to go?
Yeah.
Okay.
Go ahead.
Look, I'm very excited about the data sets to come in Signatera. Steve mentioned this. We've got 24 month follow-up in the GALAXY arm. We've got, you know, randomized prospective data coming in in the ALTAIR arm. Continued kind of growth in the ramp this new space that Signatera is plowing forward. We've got some important guideline updates coming and just the continued progression and maturation of this business as we kind of progress through these product launches. You got it?
That's good.
That's the right answer?
Good job.
Okay, Steve checks me off on that. Okay, cool.
Free cash flow-
Yeah
... break even next year.
Yeah. Yeah, I mean, I think that's, you know, that's kind of comprehensive. Like, when I'm talking about kind of the maturation of this business, I mean, I think that's, like, one of the metrics. I think there's a way to measure that kind of in the clinical data, in the growth, in the volumes, and also, I think when you do the right things for patients, you know, the business kind of tends to follow with that, and we're seeing that already, you know?
On the flip side, next 12-18 months, two biggest potential challenges for the business.
Yeah, I mean, I'll take that. I think, you know, one of the challenges we have is that, you know, society guidelines aren't always under our... They're not under our control, right? And so we're... You know, in some ways, to really unlock that next leg of significant growth in getting to 80%-90% penetration in some of these markets, you need to get, you know, support from the societies. The good news is that we've done the hard work, and we've done the studies that are required, I think, or we're doing the studies that are required to get into the guidelines in a definitive way. So, you know, I think we're in a great position there, but, you know, of course, we don't always control the outcomes.
Yeah.
Yeah.
Last one: What's something that investors and/or analysts don't ask you very often, but you wish that they would?
You want me to make a Japan pitch, or do you want to do the Renasight?
Yeah, yeah. Well, there are two things, I think Japan and Renasight, RenaCARE. So go ahead. Go ahead, Mike.
I'll do Japan.
Yeah.
I think the next one of the many opportunities we see on the horizon for Signatera is being able to bring Signatera in a major way to Japan. As many of you know, you know the volumes of people who suffer from colorectal cancer in Japan is actually quite similar to that of the United States because colorectal cancer is more common in Japan, in the Japanese population, than it is in the United States. These trials that we're talking about, the CIRCULATE trial, these readouts we've had, have been, you know, these have been run in Japan, and these are landmark studies in Japan.
So we feel like, when we get more of these prospective readouts, ALTAIR and VEGA in particular, we believe that should put us in position, for Japanese FDA approval, National Health Service reimbursement, and a commercial launch, in Japan, which will give us a chance to really help a lot of patients, and it could—would be the next major leg of growth, and, you know, have an international vector to that growth for Signatera. So I'm quite excited about that. That's probably a 2026 or a 2027 event, so it typically falls just outside the, you know, the quarterly focus that we get from, the analysts present, company excluded. But I think that's worth knowing about, and, I'm quite excited about that.
All right.
Do we have time?
Yeah.
Go for it.
I think another area that is underestimated right now is chronic kidney disease, and we're doing some things looking at germline testing in the chronic kidney disease space. We have a product, Renasight, in a big study, RenaCARE, that's actually gonna be reading out, we think, potentially this year. And this was, you know, multi-site prospective study with 22 of the top leading academic centers to look at the impact of genetic testing on patients with chronic kidney disease. This might be the single largest application of genetic testing when you look at the patient population in the United States. 45 million patients are diagnosed currently with chronic kidney disease and about 1 million patients per year. So we think this could be, in the future, you know, big, as big as hereditary cancer testing, for example.
Yeah, it's—we've actually done a lot to put ourselves in a leadership position here, and we're known nicely by brand name. So stay tuned this year. Watch out for the RenaCARE trial, and when that comes out, we'll be doing a lot of announcements about it.
All right, great.
Good. Okay.
Steve, Mike, thanks so much.
Thank you for your time.
Thanks, everybody, for joining.