Good morning, everyone. Matthew Sykes, the Life Science Tools and Diagnostics Analyst at Goldman, and I have the pleasure of welcoming Steve Chapman, CEO of Natera, and Mike Brophy, CFO of Natera.
Yep.
Steve, t hanks for having me.
Thanks for coming.
Yeah.
Thanks for coming. Appreciate it. So maybe we'll just start off sort of post Q1. Congrats again. It was a spectacular quarter you guys put up. We'd love to kinda get sort of post the quarter feedback, things that you wanna make sure that people are aware of, in terms of some of the things that you saw during that quarter, what kind of surprised you the most about that quarter, and what could kinda continue throughout the course of the year.
Yeah. So, obviously, Q1 was really strong for us. We had excellent volume growth across all the different business units. We had very strong revenue growth, very good gross margins, you know, based on increasing average selling prices. And then what was really exciting was achieving cash flow break-even in a quarter for the first time in the company's history. So a lot of great things happening. And, you know, the momentum is continuing. We're continuing to see a lot of interest, so feeling positive about things.
Got it. Maybe let's start on women's health. I, I think that there was an expectation at some point that given the level of penetration where you are, given the level of relative maturity - I don't wanna call it a mature market, but relative to some other categories - the growth would start to slow. Yet, it's just continued its momentum. What are some of the drivers of that women's health growth, and, and how should we think about, in the long term, about that normalization of women's health?
Yeah. So, you know, women's health, the main products are non-invasive prenatal testing and then carrier screening. And, you know, of course, they've been out, you know, for a while now in the market. And, you know, we have 50%+ share at this point, and the market's continuing to get more and more penetrated. But, you know, there's certainly still opportunity to grow the market. We do see doctors in hospital systems today that aren't ordering NIPT on average risk patients, or they're maybe doing single-gene testing from a carrier screening standpoint instead of moving to the more NGS-based, you know, multi-gene panels. So there's opportunities to grow the market. We're also seeing competitive wins where, you know, physicians are choosing Natera's products based on the strength of the peer-reviewed data and the strength of the clinical differentiation.
So the growth really comes from, you know, from both of those areas. In Q1, we saw one of the fastest growth quarters that we've ever seen. When you look sequentially versus Q4, I think, Q4 of 2023 to Q1 of 2024, I think we grew something in the range of 85,000 women's health units. And the vast majority, probably 75% of that, was from our organic customer base, and then the other 25%, roughly, was from the acquisition of Invitae's women's health volume. So definitely continued interest in what we're doing, in the data that we generated and the unique differentiators of our SNP-based technology.
Maybe just touching on that Invitae acquisition that you guys did. I think it was about $100 million in revenue that originally you guys acquired. The expectation was that you would retain lower than that. There was some customer selection that you wanted to do. Where are you in that process today, and what level of contribution should we expect from that Invitae acquisition over the next couple of quarters?
Yeah. So we saw, you know, I think, you know, first of all, when you think about the numbers that they had reported out there, the $100 million in revenue, for example, you know, I think that was sort of in Q3 of 2023. And so we acquired the business really in the end of January of 2024. And I think during that period of time, but between Q3 of 2023 and, say, the end of January, you know, there were obviously changes that were happening at their company, and, you know, there was sort of a, you know, attrition in customer accounts. So the starting point for us was quite a bit lower than, you know, maybe their last reported number. But we're very pleased with the performance in retaining the accounts.
I think, you know, the physicians have all transitioned over, the ones that intend to, at this point. And I think we, you know, I think the transition is completed. The vast majority came on in February and then, you know, in March. And it's sort of been steady state since then. And, you know, it's, I think, it's gone really well, overall. Very pleased with the transaction.
Got it. Maybe talk about ACOG guideline inclusion for 2022 and, and carrier screening. It's something that's been talked about for a while, but a lot of the timing is out of your control. And I'm assuming they're not—they're not waiting on you for any additional things that you need to provide. So maybe just talk about what your expectations are now for that guideline inclusion. And then, I guess, more importantly, if and when it does happen, what is sort of the material impact on revenues that you guys see from, from that potential inclusion?
Yeah. So, we think at some point in the future, ACOG, you know, may recommend moving to a more expanded carrier screening offering, and, you know, may consider including 22q testing as part of their routine offering. And that's really based on the clinical strength of the product and the clinical data that's been generated. You know, for example, for 22q, it's very common about one in 1,500 pregnancies, one of the leading causes of congenital heart defects, and abnormalities. There's treatments that you can administer at birth. If you can detect the case prenatally, you can treat the babies with calcium to prevent seizures and hypocalcemia. So it's a very important disorder. We did a seven-year trial, the SMART study, prospective study. We enrolled over 20,000 pregnant women and did a full microarray on each of the newborns or on an amnio or CVS specimen.
So it was a very robust study, and the performance was very strong, very high sensitivity, very good specificity. I think, you know, again, proving the incidence of the disorder was what it was thought to be. So, you know, everything has set up nicely for a guideline. And, you know, I think we're just gonna have to see whether those come in or not. You know, if a guideline was to come, you know, of course, given our position in the market, you know, with 50% share in the NIPT and, I think, being the leaders in expanded carrier screening and broad panel, NGS-based screening, we think we're in a position, you know, to help more patients.
You know, certainly the differentiation that we have in our 22q product will be highlighted and will become even more important to physicians as we go forward. This is important. There's two types of 22q assays. There's the SNP-based testing that Natera's performing, which has a high sensitivity and a good specificity and has been studied in robust prospective trials. And then there's other assays, which are more of the massively parallel sequencing types, and generally, they have low detection rates. And I think that's gonna be one of the concerns going forward, you know, for physicians is, you know, what is the sensitivity of the test? Has it been studied in a prospective peer-reviewed study, and what is the detection rate?
And Mike, any comments on sort of the margin impact from that? I know you're kind of absorbing the COGS already from some of these tests, but if this were to come through, it's not in your guidance, but that I would assume would be margin accretive.
Yeah. I mean, I think it can be margin accretive. I think a lot of, like, the machinery, if you will, around reimbursement's kind of already set up for the tests in that. It's clearly a, you know, it's got its own CPT code. Pricing's loaded with most of the payers. And the fraction of time we're actually reimbursed for the tests is relatively low right now. So I think a guideline would, you know, could potentially be accretive to margins. But I think a lot of it's just, you know, we've gotta see. I mean, there's kind of a wide range of outcomes there.
Got it. Maybe just, sticking with women's health, but just the opportunities with the new fetal RhD test and how that builds upon your NIPT test and when are you anticipating revenues from this test?
Yeah. So, we recently announced a fetal Rh test. It was actually very timely because there's a, you know, a drug shortage happening now in the United States. And this is something that, you know, where we thought we could make an impact on care. We've seen good uptake from physicians. You know, there's definitely quite a bit of interest. In fact, Society's recently came out and made, you know, what I think is generally a positive statement about the use of these fetal Rh tests. You know, so I think reimbursement is probably a ways off just given, you know, the newness of the product. But, you know, from the standpoint of physician interest and, I think the ability to make an impact on care and to help patients, it's certainly going well and in line with our expectations.
Got it. Maybe shifting over to oncology and to start off, just any high-level takeaways from ASCO you guys have that you wanna kinda communicate?
Yeah. So ASCO went really well for us. You know, generally, I think for those that attended, there was a buzz about MRD at the conference. And that's sort of what we've seen, you know, the last conferences over the last 12 months. You know, San Antonio Breast, ASCO GI earlier this year, and now at ASCO, MRD is, is really the hot topic. You know, now more than 40% of physicians are using, you know, 35%-40% of physicians in, in any given quarter are using Signatera and MRD-based products. And so obviously, there's, there's a lot of interest in discussing it at the academic level, reading, you know, seeing new, new data readouts. For us, we had oral presentations and multiple poster presentations that were all received very well. Continued very positive feedback, and looking forward to reading out some of the randomized data that we're putting out later this year.
Going back to Q1 for a second, you mentioned that the strong performance of women's health, but Signatera also had a very strong performance. Is there anything about Q1 that kinda led to that sharp increase in ordering and adoption of Signatera? And how should we think about phasing of that growth over the course of this year?
Yeah. So generally, we're seeing, you know, we usually grow Signatera in the range of, like, 7,000– 8,000 tests incremental on a quarter-over-quarter basis. And, you know, I think we were in the 15,000+ range growth, which was sort of 2x what we normally see. And, you know, I think this is just based on the strength of the data that we've been putting out, more interest, coming out of the ASCO GI conference, earlier in the year. We generally see that, you know, that's a period of time for doctors to kind of reset and think about what they're doing from a protocol standpoint. I think, you know, obviously, there were some competitor clinical trials that, you know, were halted, because of performance purposes or performance issues.
You know, so all of these things, I think, have led to some increased utilization of the product. And, you know, we're just continuing on, seeing both new customers join. We're seeing customers that are already using the product expand their utilization. And then we're seeing patients that are already on the protocol, you know, continue to get blood drawn and stay on protocol. So it's all these things adding up.
What is the balance between new customer kind of acquisition and then just going deeper and penetrating the existing customers? And how do you see that balance shifting potentially over the course of this year into next year?
Yeah. I mean, it's, it's a mix. You have to really do all of these different things if you wanna grow the business. You have to go close new accounts. And at any given time, there's a doctor that hasn't used an MRD test or hasn't used Signatera before that's interested, that is joining and ordering for the first time. You have another group of physicians that they've used it maybe for one time point or one particular patient, and they're starting to think about now, what other indications can they use Signatera for, or what other patients can they use Signatera for?
And then you have physicians that have gone through that process, and they've implemented the product more routinely in their practice, and they're starting now to test every patient that meets the clinical criteria. And then they're, they're just doing follow-on testing. So it's really a mix of all these. Of course, over time, as the market gets more and more penetrated, you're gonna start to see more patients in the surveillance setting.
Maybe talk a little bit about the competitive landscape. You guys have had this market for a little while, and it just seems that the nature of the tests don't really encourage switching and things like that. So there's a bit of a captive patient group that you're in. But just maybe talk about the competitive landscape you're seeing now, how you think it might evolve over time. There's certainly a lot potentially out there, but it just seems to be that you're not seeing them quite yet. Just maybe any color on that would be great.
Yeah. So, you know, we've, we've continued to focus on generating excellent peer-reviewed data, investing heavily into randomized clinical trials, investing into product enhancements that we'll be launching, you know, this year and in 2025. You said we, we have some sort of add-on opportunities. And, you know, we're investing into our, our commercial team, into our operations, and into our user experience. And all that's paying off. We're seeing that we're continuing to grow rapidly, and our share continues to be very high. We've had a handful of competitors that have been enjoined because they were infringing on our intellectual property.
And those products have now been taken off the market. There's been a handful of competitors, you know, where they, they just haven't sort of, I think, physicians are looking for, and their products really haven't. And so we'll have to see. There's always been, you know, someone coming. And, you know, that's been the case for the last five years. We're just focusing on ourselves and, trying to do the right thing for physicians and patients. And, you know, we'll continue to do that.
Just touching on that, sort of the clinical evidence you guys have consistently generated over time. You have the CIRCULATE- Japan, CIRCULATE- France, but we've got Altera readout potentially coming out in August. What are some of the key endpoints investors should be measuring, the results on? And will the timing line up with potential NCCN guidelines next year?
Yeah. That's a great question. So, now, most of what people have seen so far from the CIRCULATE- Japan study has been from the observational GALAXY arm. And that's where, you know, patients were MRD positive. Those patients either got chemotherapy or they didn't. And if they were MRD negative, they either got chemotherapy or they didn't. And what that study showed is that MRD status is a prognostic indicator of disease-free survival and overall survival, but also that MRD status is predictive of who will respond to adjuvant chemotherapy. And it's also, for MRD negative patients, predictive that those patients, in fact, don't benefit from adjuvant chemotherapy. So now we're moving from the observational arm into the randomized arm.
You know, this is where patients that are MRD positive, after definitive treatment, will get randomized to either get no treatment or to get adjuvant, for the first, you know, their first course of treatment. And so we're really looking forward to seeing the results of a randomized study because this is what the guideline societies have asked for. This is what physicians have asked for. And you know, we're committed to doing this level of work. It's been ongoing for now, I think, five or six years. This is one of five randomized trials, I believe, that we have ongoing right now, many in CRC, breast cancer, muscle-invasive bladder. You know, the readout is gonna look at disease-free survival in the two arms.
And, you know, I think there's some comparator studies, when you, when you look at, you know, historical, treatment studies in, in colorectal that have really moved the needle in this setting. You know, we have a sense of sort of what those hazard ratios look like. And, you know, we're just gonna have to see that when the study reads out. We said it's coming out. The top line data will be released in August. And, you know, certainly, if, the performance is good and, you know, it's blinded, we, we don't know anything about, the performance at this point. If the performance is good, I think this will be a, a, you know, very, significant, trial in the space. And I, I would imagine would likely impact guidelines and volume utilization.
Got it. And just thinking about other indications, you had some pretty strong data from your IMvigor trial for bladder cancer recently. And so how are you thinking about sort of a commercial ramp for that indication near-term for bladder? But then also, how are you thinking about additional indications? And any color you can provide as to what directions you're going in?
Yep. So Signatera is a pan-cancer assay. And one of the things that is, I think, good about the test is that it's the same workflow regardless of the tumor type. So we don't have to make a completely new workflow, you know, if the tumor type is breast or bladder, colorectal, for example. Muscle-invasive bladder is an area where we've generated significant evidence with IMvigor010, that showed that patients that were MRD positive responded, and it was predictive of response to atezolizumab. I think there was a 41% improvement in overall survival for those patients that were MRD positive and treated versus not. So now IMvigor010, IMvigor011 is the prospective, randomized FDA-enabling version of the study. And we actually expect that to read out in 2025. And so lots of interest in bladder.
We've also launched the prospective MODERN study, which is, it's basically the CIRCULATE study applied to muscle-invasive bladder cancer, where there's an escalation and a de-escalation arm. So, you know, that's another exciting randomized trial that we're doing in muscle-invasive bladder. We are seeing really strong growth there. You know, it's a smaller market from a size standpoint, but there's a higher portion of Medicare patients in that population. You know, we think we can get a very high penetration rate in that particular segment of the market given the significant amount of data that we're generating.
From other indications, of course, you know, breast, muscle-invasive bladder, immunotherapy monitoring, colorectal, these are all areas, you know, that we have coverage in place today, bu t you know, right now, I think we have four, maybe five additional submissions that are either in to Medicare or they're being submitted. We have a full suite of additional peer-reviewed papers and studies that are underway or at various stages of being, you know, being published or being completed.
Maybe just to finish up on Signatera, just about the commercial coverage and the progress you've made so far at BCBS, California, Louisiana, and a few others. But just, you know, how do you see that evolving over the next year or so in terms of the commercial payer?
So you wanna take that?
Yeah, sure. I mean, so, you know, we've made a lot of progress with commercial payers over the last year, but specifically in their Medicare Advantage books.
Okay. So if you think about, like, you know, large national payer, they've got, obviously, a big commercial book, but many of them also have huge MA books. We've had to interact with them quite a bit, to make sure that their MA patients are getting covered for the indications that the Medicare covers. Okay? We've got a similar dynamic, we think, in front of us, for commercial patients that live in a state where there's a biomarker bill that's been passed that requires that commercial patients get the same level of coverage and care, as Medicare patients. So oftentimes, with national payers, it's the same people we've got to interact with. And they're kind of a similar kind of exercise, if you will. And we're heavily engaged on that topic right now, with those payers.
So, you know, we'd like to see, you know, some progress in terms of commercial coverage, just via that mechanism over the course of, you know, 2025 and into 2026. And I think the pathway to getting broader commercial coverage that's just formally enshrined is just matched up really tightly with getting into the NCCN guidelines, which we've talked about. And, you know, it's no coincidence. The strategy is really just to deliver excellent prospective data that enables guidelines, and that will ultimately drive commercial coverage.
Got it. And then maybe as you think about the biomarker bills, 'cause I think it's something that you and I have discussed quite a bit, part of the issue, I think, is some of the language is different for each bill, and it can be very vague. And therefore, the level of sort of enforcement of these bills is challenging. And so the way I've always seen it is sort of it gives you leverage to speak to the commercial payers to progress the discussion along. But how do you see the biomarker bills as providing that tailwind for that commercial coverage given sort of the vagaries within the different language and the different bills?
Yeah. We've just got to just interact with the, with the payers on it. And I think, you know, the payers want to comply with these rules, and the details matter. So it's gonna be different, from state to state. And that, that's okay. I mean, the point for us is, you know, we want to, you know, serve, the community of cancer patients. And in that, we've got, you know, our mission overlaps a lot with the payers. And, you know, we can work collaboratively with them to serve these patient populations. So I think, in the end, it's gonna be a positive both for us, for Natera shareholders, and for patients and for payers.
Got it. And just transitioning to organ health, which is usually less discussed about these than the other ones, but the KDIGO guidelines was a bit of a, at least for mine, a bit of a surprise and a huge positive event for you guys. And just given the duration of those guidelines when they come out, it was, it was very timely as well. Could you maybe talk about how that has provided a boost to Renasight volumes, particularly in supporting genetic testing in CKD patients? And sort of what is the potential for this test longer term?
Right. Yeah. So, Renasight is our germline product for patients that have been diagnosed with chronic kidney disease. And we launched this product in the 2019 timeframe. And at the same time we launched, we kicked off a prospective clinical trial called the RenaCARE study, which worked with 20+ leading academic centers, and enrolled more than 1,600 patients. And what we looked at is if you're diagnosed with chronic kidney disease and you get offered a genetic test, first of all, what percentage of patients are positive for a genetic indication? But importantly, what do the doctors do with that result? And do they, in fact, change care? What the study found was that more than 20% of chronic kidney disease patients are positive for a genetic etiology.
That in 35% of the patients that screened positive, the doctor physically switched the drug that the patient was getting or the therapy that the patient was getting as a result of screening positive. In about 75%+ of patients, the physician changed the treatment path. This study came out. Subsequently, the major governing international governing body, KDIGO, put out a guideline suggesting that genetic testing has a very significant role in the diagnosis of patients with chronic kidney disease and in identifying specific, you know, type and subtype of the disorder. We do think, you know, it's possible the NKF, which is the U.S. governing body, you know, could put out a guideline, you know, maybe in the near future. As far as the opportunity here, this is a very big opportunity.
And there's about 2 million patients that are diagnosed every year with chronic kidney disease, but there's 40 million Americans or 10% of the population that's living with chronic kidney disease. So this is probably one of the largest applications of genetic testing. And we've made, you know, very significant progress here. We're seeing, you know, I think, strong interest. I like to think about the size as maybe similar to hereditary cancer testing. You know, if you there's probably over 1 million hereditary cancer tests done, you know, per year at this stage when you, at this point, when you add up, you know, all the different companies that are offering a product. And you know, I think the market's probably bigger than the covered market today for hereditary cancer.
But, you know, these things take quite a while to penetrate, longer than you would imagine. But, you know, certainly, everything is lining up nicely for this to be a real opportunity to help patients save their kidneys.
Got it. Mike, I wanna focus a little bit on gross margins. I mean, if you actually look at the share price of Natera, there was an inflection in gross margins in Q3 of last year, and that really allowed the stock to start to significantly outperform. And so clearly, investors are focused on this gross margin. And there's so many different things that go into it, whether it's ASP increases, COGS reduction, etc. You spent a lot of time focusing on no-pays and cash collections. Could you maybe kind of highlight some of the priorities for you over the course of this year into next year in terms of getting the continuing that gross margin expansion? You're obviously gonna get the growth that you've got on the top line, but I'm more interested in sort of what in terms of COGS, ASPs, things that you're focused on to continue that margin expansion story.
Yeah. That's the thing about gross margins is it comes down to COGS and ASPs, right? So it's easy to kind of focus your efforts on those two areas to if you wanna drive them. But the, look, we've got a long history here. A core part of the strategy of Natera for over a decade of being a public company is the majority of our R&D spend, has been pointed at clinical trials, new features, and then critically, you know, reductions in cost of goods sold that allows us to, you know, run the test, you know, at lower costs. That's gonna continue. So, as we mentioned on the Q1 call, for example, Signatera, you know, COGS were kind of below $450 in Q1. That's critically important. We think we can stay below that level, through the balance of the year.
The guide presumes on the ASP front that the Q1 ASPs are basically steady for the rest of the year. And, you know, as we talked about potential sources of outperformance relative to the guide, they would come from things like ASP improvement from here. So we talk on the Signatera front, there's a couple of drivers. The one that's at the top of my mind is increasing the fraction of time we can get reimbursed, where we're entitled to reimbursement from Medicare Advantage patients. That's a topic that we've been working on for over a year, and we're making rapid progress there. We talked about the biomarker states. I think that's more of a 2025 outcome.
I think on women's health, we've also seen very encouraging sequential improvements in kind of the realized pricing we've been able to achieve in those products, particularly in carrier screening, but also in NIPT. There's a number of kind of smaller bore topics that we can work on in that area, particularly around things like eligibility for patients, making sure that we've got the exact right information for the patients and submitting that to the right payer at the right time, perhaps, for example, with, you know, medical records attached. A lot of automation and engineering required to get that exactly right at the scale that we're operating at. We're really excited about our ability to continue to deliver improvements there, over the course of time.
I think that's, you know, for this year would be, you know, present a source of upside for margins. The guide for the year on margins, we've already improved at Q4 in the Q4 call versus the Q1 call. And, you know, we're now kind of targeting that kind of mid-50%s, low- to mid-50%s gross margin, which we think allows us to be sustainable kind of as a business. And I think longer term, I think the trajectory can get us, get us higher into the high 50%s and low 60%s and ultimately higher than that.
And you also raised your OpEx guide for the year as well.
Yeah.
Given the number of things you wanna invest in. I guess two questions there. One, where's that incremental spend gonna go to? And two, will that still allow for operating leverage?
Yeah.
Meaning, you know, you don't want a dollar in SG&A just to mean a dollar in revenue. You want that to be some leverage there. So maybe talk through that dynamic.
Yeah. Exactly. And it's a really important dynamic. You know, we increased the OpEx guide for the year, and yet we lowered the cash burn expectation for the year. And so I think that really speaks to this kind of leverage that we're seeing in the business, that's critically important for us to be sustainable. But it's not just that. It's also that leverage that we're seeing allows us now to make all the necessary growth investments so that we're not kind of having to make these kind of one-for-one trade-offs between growth and profitability. Each dollar that we're putting into growth is generating more than that in terms of its contribution to profitability.
So that's where we're at that place now where we're kind of seeing that leverage really kind of play out in the business as we've been talking about for years. And it's nice to finally actually do it in a quarter, so.
And then, just given the women's health business is profitable, how are you thinking about moderating the OpEx there in order to reinvest in other areas? Or are there still things you wanna do in women's health that require some level of spend?
No. We're very focused on important kind of new products and new product features in women's health. Steve talked a little bit earlier in the session about the launch of the Rh testing, which is a critical unmet need for our customer base. We've got a number of other interesting launches slated for this year and next. So there's no pause in our intensity or our commitment to innovation in that space. We're able to do that and meet our commitments to shareholders because we are kind of getting the flywheel going here. We are getting good leverage on each incremental investment.
Great. And just in the minute we have left, Steve, I just wanna turn back to you for a second. As Mike mentioned in a breakfast we had this morning, you're the first commercial employee at Natera. And I think that puts you in a unique spot as CEO from a commercial lens. A lot of times we're speaking with CEOs with a scientific background. How does that inform your decision-making? How does that prioritize what you do and what you focus on? And just given the commercial strength of Natera, does a lot of that come from some of the decisions that you're making given your background and given your emphasis on the commercial acumen of the company?
Yeah. I think what the good things are is that, you know, we have a very experienced management team. You know, I've been at the company now for 15 years, and many of the senior leaders have been there for 10+ years. You know, either they've kind of built their respective area from the ground up and had to learn, you know, as they go. You know, or they had significant experience when they come in. So now we have a very deep, you know, I think, understanding of what it takes to successfully commercialize a product. You know, my background on the commercial side, you know, obviously, I've been through a lot of these things before, and it certainly helps making decisions. We focused intensely on medical affairs, clinical trials, the right, you know, scientific quality and rigor. That's what we're gonna continue to do as we go forward because that's gonna determine success.
Got it. Great spot to end.
Great.
Steve, Mike, thanks very much.
Thank you.
Appreciate your time. Yeah. Cheers.