Dan Brennan, Tools and Diagnostics here at TD Cowen, third day of the 44th Annual Global Healthcare Conference. Really pleased to be joining here on stage. Senior management of Natera, we have Mike Brophy, Chief Financial Officer, and John Fesko, President and Chief Business Officer. So, Mike and John, welcome. Thanks for being here.
Yeah, thanks for having us. I—a lot of you guys know this, our CEO, Steve Chapman, and his wife welcomed the new baby the day before the earnings call. So he's still on emails and doing meetings and stuff, but we have him at home for just, like, a couple of weeks here. So, you know, but John and I are happy to be here with you.
Awesome. There's a lot to get through. Great, great 2023. So, so, guys, you know, fourth quarter results were solid. You know, the 2024 outlook achievement was well received. Maybe just reflect upon the performance 2023 and kind of what excites you guys for 2024.
Yeah, so 2023 was a great year for us. We capped off with our recent kind of Q4 results. You know, grew revenues, you know, 43% year-over-year in the quarter. Printed a gross margin a little above 51%, and that compared to, you know, low 40s in the Q4 the year prior and 39% in Q1 of 2023. Operating expenses were basically flat through the course of the year. So, cash usage was way down, particularly in the second half of the year, but obviously, overall for the year as well. So a couple of, I think, key observations from that is I think that's just, you know, 2023 showed that the strategy that we'd laid out previously is really working, right?
So we wanted to build a first-class operation, commercial, and lab infrastructure to offer all of our products in a first-class way. And having built that infrastructure, we felt like we could drive more and more volume kind of through that infrastructure. And we really showed that as evidenced by the kind of the rapid growth in volumes and revenues on stable operating expenses. So it's one thing to kind of model it out and say that it makes sense and scales; another thing to do it. And so we're gratified and pleased to show that we're kind of turning the corner, continue to deliver the volume growth, but also, you know, also getting kind of the gross margin traction that we were able to get through the year.
So on the financial side, I thought that was, that was really impactful, and that was really the, the key highlight. In terms of impact to patients, we've just continued to deliver a drumbeat, data that we think can be transformational for patient care kind of across the, across the spectrum, be that, in, care for kidney patients and transplant patients generally. We delivered a number of, very impactful data sets in the oncology setting. And of course, we've, we've read out some, large prospective data, in the women's health space as well. So really kind of hitting on all cylinders there as well.
Great. So, so gross margins in the fourth quarter, I think, were a notable surprise.
Yep.
The guidance was also well above expectations. Let's discuss specifically what drove this growth.
Yeah, I mean, I think, really, you start with volume growth. I mean, each of the businesses continue to perform well. We continue to, you know, to grow share and grow the market. Signatera on the volume side was, in particular, a bright spot. If you look at kind of the growth in our clinical volumes, that has just continued to ramp. I mean, that's just been a pretty steady kind of 9,000-10,000 growth units a quarter. You know, we saw that again, in Q4. You know, similar commentary across transplant, women's health as well. And then we, you know, continue to get, you know, ASP traction, right? We, you know, the reimbursement landscape continues to mature in response to the data that we've been able to publish and the clinical utility that we've been able to show.
And so I think sequentially through the course of the year, you saw meaningful gains in ASPs, particularly oncology, but also in women's health, as well. And so that, given the kind of the flat expenses, that's what's kind of driving, you know, your gross margin traction. And it's also driving your, you know, your cash burden reduction.
You know, we'll get into it a little later, but since it is such a critical area and exciting one, like, is this adjuvant to surveillance mix where you got the upfront sequencing cost versus PCR costs and kind of the margins, is that beginning? Like, was that fourth quarter print? Was that some real shift there? I mean, again, it's not a massive interquarter shift, but I'm just wondering if we're beginning to see that kind of leverage play out or kind of how much more of that is coming?
I think a lot of that is still in the future, Dan. I mean, I'm actually heartened to see that the new patient starts are still so healthy that you're kind of forestalling this kind of long tail of, you know, recurrence monitoring becoming the overwhelmingly dominant theme in the volume. So I'm quite happy to have that play out over a longer time period, even though it would help you in, like, the immediate term if it came quicker. So we just continue to see really strong new patient starts, and we see very high compliance with folks wanting to stay on Signatera through their cancer journey. And so both of those trends are positive, but the new patient starts are kind of holding that longer-term trend in check, which I'm fine with.
And then maybe one more kind of on the top-down view, and then we'll dig into some of the data. Can you hear me okay? Is this on? No, it's not.
Oh, I'm hearing you great.
Oh, it's good. So long. Sorry about that. Awesome. All right. Here we go.
All right.
You got me now or no?
Yeah.
All right. Sorry about that. You know, now Natera's turning free cash flow positive during 2024. You know, you're appearing on a path to turning EBIT positive. Just kind of discuss your margin and cash flow profile in Natera, you know, what can this look like, you know, over the next two, three, four years?
Yeah, I mean, and we've taken a moment here and there, you know, in different earnings calls to kind of lay out a longer-term framework for the company. You know, I continue to think that longer-term gross margins for the business can approach 70%, and EBIT margins can be, you know, 20%. And that's just again, that's just a function of each of the areas continuing to mature in terms of their reimbursement profile. And it's also a reflection of the relentless approach we've taken to cost of goods sold per unit reductions. That's always been a big focus in our R&D effort: how can we deliver a high-quality test at lower and lower costs? Because that's, you know, obviously critical in diagnostics and critical for, you know, taking costs out of the system.
So maybe let's flip over to, you know, readouts. ALTAIR's reading out in the first half, or kind of middle 2024. You know, so for those people who don't, kind of aren't as familiar, you just spent some time speaking about what this might mean for the clinical utility of MRD testing, not just for Signatera, but for the industry as a whole.
Yeah, I mean, I think we've got a whole drumbeat of readouts coming, you know, across tumor types. The CIRCULATE study has already read out, I think, some really important data in the observational GALAXY arm. So I think ALTAIR is just kind of the natural kind of continuation of, you know, of that trend. What ALTAIR specifically is doing is that it's an escalation arm within the within the CIRCULATE study. So we've got this is a truly prospective randomized arm where Signatera's going to be used to kind of guide treatment for Signatera-positive patients. So the idea is patients find out they have colorectal cancer. They have their surgery, as per the standard of care. They get a Signatera test. They screen positive on the Signatera test, meaning that we think their Signatera indicates that they're likely to relapse.
They're then randomized one-to-one into this ALTAIR arm where control is standard of care chemotherapy, and active arm is standard of care chemotherapy plus TAS-102, which is currently an agent that is approved in the metastatic setting and has shown, you know, a good amount of signal for patients for later-stage patients. And the idea is, can we accelerate that treatment to adjuvant treatments and improve their outcomes? There's one other dynamic here where patients who screen negative post-surgery are going to continue to get surveilled with Signatera. And when they screen positive, they will then flip into the active arm, and they'll get standard of care chemo plus TAS-102. So the point of the study is to show a relative risk reduction for these patients.
If they're Signatera-positive, can you get them a, you know, risk reduction by moving forward what has been a metastatic treatment to this adjuvant setting, standard of care chemo plus TAS-102? So that's, that can be, I think, practice-changing and guideline-enabling. And we're very excited to see the results. There's going to be a drumbeat of data sets coming behind that in colorectal cancer and in other tumor types as well.
But just on DFS, right? I mean, per ClinicalTrials.gov, I think it's disease-free survival at three years. There's numerous secondary endpoints, including rate of convergence to negative ctDNA.
Yeah.
At two years and overall survival. So just, just give us a sense how it's powered for DFS and just kind of what kind of benefit would allow you and DFS to reach a primary endpoint.
Yeah.
You know, I assume you guys feel if you hit that DFS endpoint, that's going to trigger guideline adoption.
Yeah, I mean, I think the right, like, one, one potential precedent that one could look at here. So all these things are in terms of what is guideline-changing, what is practice-changing. These are obviously judgment calls. I think one, you know, one precedent study that I think is worth reviewing is the MOSAIC study, which was, you know, published in the New England Journal, in 2004. That was really one of the last times we had a practice-changing study in the treatment of adjuvant colorectal cancer. And the setup for that study, the design of that study should seem fairly familiar to the, you know, to the design I just laid out for ALTAIR. The design of that study was a control arm getting standard-of-care chemotherapy, which at that time was FL.
Then, the active arm was FL plus a third-generation platinum. The idea there, very similar, right, is, for patients that are going to get chemotherapy, if you give them the platinum plus the standard of care chemotherapy, can you get relative risk reduction for that cohort of patients? They were able to show that in the MOSAIC study. So, I think the hazard ratio was something like 0.77. That implies kind of a 23% relative risk reduction, which was sufficient to be, you know, guideline enabling and practice-changing. If you think about what that means, that's, you know, for every five or so patients that you treat with that new regimen, you're going to get a cure that you might not have otherwise gotten, okay?
So that's kind of how we think about this, is we think about what can be the impact, what can be the relative risk reduction for these patients. And obviously, that is ultimately derived from DFS, Dan.
Mm-hmm.
and so you'll get data like that. You'll get a hazard ratio. You'll get absolute risk reduction, and so on and so forth.
Got it. Okay. And kind of is the hazard ratio, like, 0.8 or below? Is it that? I mean, how have you guys discussed the DFS and the hazard ratio that would be.
Yeah. Again.
Clinically significant?
Completely, you know, a judgment call. But I mean, I would think about it as a continuum rather than a binary, you know what I mean? I think, you have that precedent of the hazard ratio at 0.77, being something that was practice-changing, okay? So I would view that as an outstanding result. And, you know, moving up and down that hazard ratio curve, you know, there's not, like, a breakpoint where, you know, you totally change your opinion on that. You just move your enthusiasm. You dial it up and down based on that result, I think.
Yeah. Got it. Yeah. Well, I mean, the experts we hosted yesterday, one of which was not really using Signatera wholly at all in colorectal cancer, she felt like a 10%-20% DFS benefit would be practice-changing.
Well, there you go. And that I think that fits in pretty well with the math I just walked through, right? So.
Yeah. Okay. So, we can come back to stuff there if we need to. So just on broader MRD, so Medicare approvals, you recently got two new Medicare approvals in neoadjuvant breast and adjuvant surveillance for ovarian cancer, which I think, you know, kind of two of maybe the four or five you thought you'd get this year. Kind of how quickly can these ramp and, you know, what kind of impact can they have?
Well, yeah, I mean, I think the, you know, the, the volumes are coming in, in terms of kind of impact to ASP. I mean, I think it'll be, you know, kind of a modest impact to ASP in 2024. So the next step there is to, is to, you know, to get pricing, right? And I anticipate pricing will be very similar to, you know, what, what we've had for, for other solid tumor types. And then it'll be a contributor, you know, through the course of the year. You know, the guide for the year implies basically stable ASPs off of the Q4 performance, which admittedly, I mean, there, there we had a ramp in ASPs through the course of the year.
So, you know, to get a full-year benefit off of that ramp, I think, is what helped kind of drove the guide being, you know, above expectations, as you mentioned. And so we'll just see how that progresses through the year.
Kind of what % of your portfolio today is in neo? I mean, the volumes that you're doing at Signatera today, what % are neoadjuvant breast and ovarian?
Yeah, it's like high single-digit percent of the volume are in those two categories combined. Yeah.
In terms of the next indications, you know, what should we be looking at for 2024, and which of those do you think could be the biggest opportunity?
I don't anticipate the mix within tumor types to change really meaningfully from what we've seen, historically, and as we've talked about, on calls. It's a, you know, a little more than half of the volume mix is colorectal cancer. And then, breast cancer is a strong number two. Then you've got immunotherapy response monitoring. And then you've got kind of a longer tail of, you know, a lot of different solid tumors. Neoadjuvant breast is important. Ovarian cancer is important. Gastroesophageal cancer is important. Lung cancer is important, although the later-stage lung cancer patients, you do tend to see them in the IO monitoring setting. But early-stage lung, you know, speaking of, you know, tumor types that we, you know, would like to be able to, you know, continue to pursue, and we've generated good data in.
So those are that's kind of the volume mix as we see it. And our base case is that the volume mix remains relatively stable as it has been for the last, you know, couple of years.
And you would still think or plan, like, you could still get two or three more approvals this year? Is that right?
I think that's possible, although I, you know, it's certainly not contemplated in the guide that you would get, you know, a certain number of additional approvals. And I also just given that the vast majority of the volume is coming from tumor types where we at least have a Medicare-reimbursed beachhead, I also think that that's not something that's, you know, a huge needle mover in terms of, you know, in terms of your numbers per se. It's more about, from our perspective, continuing to just deliver that data for a ever broader swath of patients, across these tumor types. Yeah.
So the competitive landscape, you know, we hosted John back in December at a liquid biopsy event we did. And there's a number of private companies coming. And on the public side, you know, there's a few Personalis out, you know, Neo obviously have the injunction with, but you know, others are talking about it Exact Myriad. And you know, the list goes on some private companies. So just how does Natera defend its share? I mean, today, you arguably have, you know, 80%-90% share of the market or somewhere in that zip code, you know? So give us a sense of how you defend it. And five years out, like, is it right to assume, like, yeah, you'll that share comes down, but it's still, you know, a very healthy growth rate?
Yeah, I think Natera is in a strong position because of the truly vast amount of published years-long multicenter evidence data that we've generated. So any competitor has to come in and show that they're different and better and also that they have equivalent amount of data. And so that takes years to get through. A second barrier to entry is reimbursement. After you generate that data, you have to go through what is typically a 1- to 2-year process to get reimbursement coverage, which is important to physicians. I think a third barrier to entry is the legitimate complexity involved in running a truly patient-specific personalized test at scale. It, this is often overlooked, but that's not trivial or easy to pull off and to do that quickly. An additional barrier after that is, there's a switching cost.
So once a patient has gone through the expense and time and potentially, diminished what's left of the tissue to build a personalized test, they stay with that personalized test throughout the course of their treatment and, you know, cancer journey. So I think compared to every other product we sell or have even looked at, the barriers to entry on Signatera are much, much higher.
Mm-hmm. How about just sensitivity itself? It's, like, superior sensitivity. You know, that wasn't really brought up there. Is that an important aspect, or does it kind of fall down the spectrum below all these other factors you mentioned?
I think sensitivity is important. You have to go through all those hurdles, that I just described. I think we've seen this pattern where upstarts will have synthetic samples or a very carefully controlled analytic study that generates a seeming claim of superior sensitivity. But when you look at any sort of larger study, that tends to go away and be reduced. And I think Natera has developed a lot of expertise around cell-free DNA and that performance. And we have continually made improvements to the Signatera test as well to improve sensitivity.
I think there's another dynamic where we've continually raised the bar in terms of the what the type of data that you need to produce to drive adoption. So rewind five years ago, what you had available were these kind of case-controlled studies, things like that. But now, I mean, we're talking about, you know, prospective randomized data sets, that are reading out, sometimes in partnership with pharma trials, sometimes in partnership with large academic consortia. And so when you're talking to a physician, it's well and good to be talking about, like, your analytic sensitivity. But what we're trying to do is deliver data that says, "Hey, when the patient gets Signatera and they're Signatera positive and you give them chemo, they do better," right?
So that's data that fits in much better with the actual decision-making framework that physicians are facing every day.
How about just on the IP front? Just, you know, you've, you know, there's been a lot of news, you know, over the last 6 months, but specifically in MRD, you have the injunction with NeoGenomics. Just kind of what can we expect or, you know, is it possible just to discuss the, you know, IP estate and kind of what that can mean in terms of the future competitive landscape?
Yeah, I mean, just at a very high level, I mean, it's heartening to, like, come to conferences and see words like MRD and recurrence monitoring used as industry terms. And I remember, you know, us writing those words on a whiteboard, you know, middle of last decade. So how did we arrive at Signatera? You know, we didn't pay a consultant to go find a, you know, a market to go commercialize in. We thought hard about what our core technology could do and what are some large unmet needs in cancer that would be a good match for our existing core technology.
And that's how we ended up kind of creating this category, okay, is we identified this unmet need for patients, that we thought we could solve with our core technology, and then we just worked on delivering the data. So that has certain implications for the IP landscape because it just means that a lot of the fundamental IP that powers our test has priority dates that, you know, well precede the advent of Signatera or MRD, as a category. You've seen a couple of data points here in the second half of the year, demonstrating, I think, the strength of the IP portfolio. So in each of those, each of those litigations that you referenced, Dan, we were able to achieve an injunction, not on the same pattern, though, right?
Different patterns at issue in each of those cases, which I think is, you know, I think it's a data point to consider, you know, going forward. I think, you know, IP is obviously important and we'll continue to defend it.
How about enhancements to MRD? You've talked about innovation, I think, on the Q4 call and in recent calls. You know, you're working in the background on, you know, a lot of things. What is there a strategy to roll out even a better version of Signatera? Like, would you look to go more beyond the 16 markets that's currently focused on?
Well, I think, like, one case study is the Panorama NIPT. I mean, I think we're on, like, version nine of Panorama. So we've just continued to improve that test. And that's core to how we operate as a business. And we're going to continue to do that clearly in Signatera as well. There's going to be opportunities also for kind of what I would call kind of complementary menu expansions and things of that nature. Our typical framework has been to work on a new launch, get it launched, and then, like, the following quarter, talk about it with you guys. So let's we're going to try and keep that going, right?
We're going to try and have some additional improvements and product launches, not just in Signatera, but kind of across the business this year and first half of next year. We look forward to sharing those with you once we've launched them.
I think for 2024, you've talked about, like, absolute Signatera volumes year on year kind of isn't a bad starting point for 2024 versus 2023. You know, if we look out and we're trying to think about MRD volume growth over the next picking number three years. I don't know. Like, just how would you consider that?
Well, I mean, I think you can, I think over that, that time horizon, you've got to think about, what kind of data have we been able to, produce and what kind of clinical utility have we been able to show. So far, I think we've been able to show a lot of, of usefulness. We've got some big randomized prospective data sets coming. So we've got the escalation arm in ALTAIR. We've got a de-escalation arm in VEGA coming next year. We've got some, potentially practice-changing data sets coming in bladder cancer here, over the next 12 months or so, 12 to 18 months that we're very excited about. And I can just go on down the list, you know, across tumor types.
I do think in terms of just thinking about volume growth, the simplest way that we think about it is that the rep, you know, the commercial infrastructure is relatively constant. Like, we'll continue to make selective adds to that. And so the reps don't get to grow based on what their growth rate was. They just say, "Hey, I added, you know, X number of units last quarter. And can I manage my existing growing book and then add the same number of units next quarter?" So that's why I kind of default to that as a use case for modeling the business. And it has proved so far to be pretty consistent, right? If you like I mentioned, it's kind of 9-10,000 clinical units growth every quarter. That's going to fluctuate, right?
Like, there's going to be a quarter where we do 15,000 units, and, and everyone's going to be excited. And we're going to say, "Hey, you know, relax. It's fluctuation." Or there's going to be a quarter where it's 6,000 units. I'm going to say the same thing. Probably be easier to sell you on that when it's 15,000 units, but we'll, we'll see. As you go out to the 3 years, I think it's, it's more about, "Hey, what fraction of patients that have cancer are going to get the test?" And I think that's going to just continue to increase. Right now, the penetration as measured by total tests available is still quite low, even though, you know, 40% of, of oncologists ordered at least one test from us last quarter. So I think that's a very good kind of early indicator.
Just biomarker bills. You've been, you know, pretty outspoken, like, positive about the company, "Wow, you know, you got, you know, 15 states, I think, that have, if that's the number, passed, you know, 50% of the population in terms of your volume are in those states." Just what's kind of the progress there right now? It's early, but how should we think about when the impact or benefits of biomarker legislation might show up in Natera's results?
Well, I think it's not really contemplated explicitly in the guide. I mean, I think the biomarker laws are important for improving patient access. And a lot of them are fairly new, in terms of, you know, when they became effective. And so we're going to be engaging with our partners, you know, commercial payers in those states to work that out. These things usually take a bit of time. These things usually take, you know, 12-18 months to start to get normalized in terms of what are the workflows, what is the documentation needed to get reimbursement? And so I'm kind of thinking about it on that timeline. And of course, it could come quicker.
Obviously, women's health is actually your biggest business, and we haven't even touched that yet. You know, you've talked the last 12 months, you know, the SMART study and expanded carrier screening, so 22q. These are really big opportunities, to the extent guidelines decide to incorporate them. So, you know, came up on the 4Q call, but just what's the latest thinking there? Any sense on, you know, where ACOG is in their decision-making? Just kind of what can you share with your confidence in the guidelines getting updated and any sense on, you know, when that could happen?
Sure, Dan. So we don't know what ACOG is going to do. You know, we don't control that or their timeline and their bureaucratic organization. On 22q, we do think that is increasingly recognized as an important problem to solve. 22q, unique amongst the conditions we screen for in pregnancy, allows families and patients to take intervening clinical steps that meaningfully and permanently improve the health of that child. And we've seen a lot of interest among a lot of the leadership in ACOG to make this change. We've also seen two other medical societies, the American College of Medical Genetics and the Genetic Counselors Society, who have recommended that all women have access to 22q screening. So we think that is important.
Natera has generated the practice-changing study here, a 20,000-patient study that took something like 5-7 years all in all to run and read out last year. So we are optimistic and hopeful, but unable to predict exactly when that will happen.
Mm-hmm. But the confidence remains super high, I guess, that it will happen, but timing just uncertain.
It's hard to predict timing on these things and obviously, you know, beyond our control. It wouldn't be something that you'd include in a guide. And the reality is the way that we make decisions in the business, we kind of leave those things for others to control, and we just control what we control. And I think the things that we can control allow us to have a really exciting kind of, you know, next 12 months here.
I think another meaningful factor there is, you know, in the California program, they have detailed data tracking. And one of the things we've noticed is that, people will self-pay. So Caucasian and Asian populations are self-paying to get access to 22q. And, you know, other populations, Hispanic, African-American populations, much less so. And one of ACOG's pillar priorities is removing these disparities in access to healthcare and maternal health. And so I think that is also a significant factor. But as Mike has said, it's very hard to predict the timing of these.
Mm-hmm. Got it. So, so maybe just on, you know, 22Q, Mike, you've spoke about this. We have 50 seconds left. So I'll ask this and then we'll have a closing question. But I think you said, what, 900,000 tests you do, and you're really not getting paid hardly at all on those. Like, to the extent it does get in guidelines, what's the feedback you hear from doctors ultimately if we looked out two, three years? What % of these tests you actually think will, you know, could get reimbursed?
Yeah. I mean, the feedback from physicians has been phenomenal. I mean, I think we had an enormously positive response to the SMART study that read out. And so you do see physicians responding by ordering 22q screening for the majority of their patients. And I think the reimbursement is really, you know, it's a function of broad professional society adoption. And so, you know, see above. It's a, I think it's gated on professional societies. And so we'll see how that develops.
Maybe last question would be, the stock's done really well. You know, there's a lot of, you know, there's optimism towards Natera, but yet you have all these growth drivers ahead. Like, how, how do you guys view where you are on the opportunity curve today and kind of what's the kind of concluding message for investors?
Yeah. I think we're basically on track. I mean, if you go back and, you know, take a look at some of our, you know, comments at this conference, I'm just reflecting back over the years. We've basically laid out the framework in terms of where we are. And I kind of summarized that at the top of this chat. So we're just, you know, head down, continue to execute, and continue to try and deliver great results for our patients.
Excellent. Well, thanks, Mike. Thanks, John, for being here. Thanks, everyone in the audience.
Thanks, guys.