Hi, welcome to the Canaccord Genuity Global Growth Conference. I'm Kyle Mikson. I cover life sciences and diagnostics for Canaccord. Pleased to welcome you to a fireside chat with Natera. With us from the company, we have Mike Brophy, CFO, and John Fesko, President and Chief Business Officer. As a reminder, Natera is a leader in cell-free DNA-based testing for women's health, oncology, and organ health. Thanks, guys, for joining us today.
Yeah, thanks for having us.
So Mike, maybe first go through the second quarter results. You know, big beat, raised guidance, really good results. So, you know, volume, ASP, just walk through those.
Yeah, we had another really strong quarter. In Q2, we were up, revenues was about $413 million. That's up about 60% year-on-year. Volumes were up about 20% year-on-year. So right in there, you see that we've also had some very meaningful increases in our, just our expected revenues per test, which has been fantastic. Gross margins were also up in sympathy, so the gross margins were, like, 59% in the quarter, 54%, if you back out the kind of the one-time true-ups, and that compares to 45% this time last year. And so all this kind of rapid growth and improvement in the gross margins has been accomplished on the back of, you know, operating expenses that haven't grown that much.
You know, the operating expense growth has been in that kind of, you know, single digit kind of range. And so the net of all that is that we were able to produce our, you know, our second consecutive quarter in which we were cash flow breakeven. And what's driving all these results is really just kind of success kind of across the board. I mean, we've had a very strong, particularly seasonally adjusted, women's health performance in Q2. And then the Signatera launch just continues to ramp. We're run rating now about, like, 125,000. Sorry, we did about 125,000 Signatera units in the quarter. So run rating about 500,000 units now.
We actually added about 13,000 clinical units just sequentially over the Q1 results, which itself was a massive step up from Q4. So historically, we've been kind of growing Signatera at this kind of 8,000-9,000 absolute unit clip, quarter-over-quarter, and then we did 18,000 in Q1 to 13,000 in Q2. So we really feel like there's some real momentum there, and we'd like to see that through the second half of the year. Then you mentioned the guide. I mean, we were able to make another very meaningful upward revision to the guide. So now we're centered around, like, just above $1.5 billion for the full year.
up the revenue guide, I mean, up the gross margin guide as well, and, you know, continue to guide to cash flow breakeven for the full year. So really things continue to proceed ahead of schedule for us so far in 2024.
So a lot of—I'm not sure if, like, the revenue beat was based on the true-ups, but definitely, like, the gross margin kind of beat or outperformance. So I—maybe it's not worth diving into for too long, but, like, just talk, like, walk through that a little bit and why-
Yeah
you know, why those occur, what those really are, which side of the business that really occurs on, and, and why you can't really, you know, foresee that or predict that or-
Yeah, I mean, even, like, if you just back... There are $40 million in true-ups, revenue true-ups in the quarter, and even if you back us out, I mean, I think the organic—like, the underlying organic beat was something like $30 million. It was a very meaningful beat, even if you're inclined to back that out. Really, I mean, the true-ups represent good execution. Basically, what's happening there, is that the, the average selling price or the, you know, realized cash flows per test, turned out to, you know, significantly exceed what we had accrued as revenue per test a year ago.
So what's happening there is last, you know, Q2 of last year, we were accruing Signatera ASPs in that $800 range, $800-$850 range, and now we're up closer to, like, $1,050, okay? So what's happened there is that the reimbursement that we're seeing from Medicare is becoming much more consistent, particularly among Medicare Advantage payers. We continue to get reimbursed on an ever broader set of tumor types, and that's what's really kind of driving that outperformance. Anytime you have, like, a rapid uptick in your realized pricing, that's gonna end up generating true-ups, and we've seen that these last couple of quarters. I think going forward, it wouldn't surprise me, as I mentioned on the call, wouldn't surprise me to have some true-ups in the second half of the year.
I expect them to moderate somewhat, just because we have raised the, the accrued revenues quite a lot per test, in the last three or four quarters. But nonetheless, I mean, we, we continue to execute on initiatives that will continue to grow our ASP or average selling price, which would tend to contribute to to more true-ups. The reason why, you know, we don't, we don't guide to it, and we're careful to show it to you, a pro forma as well, is one, just so you can understand, you know, the comps year-over-year and sequentially. Those true-ups tend to be very lumpy, right? It's really just a function of when, when cash is received, which can be somewhat capricious.
So I wanna make sure that people understand what those are, and they understand what the kind of underlying, you know, accrued revenues and gross margins are in a given quarter. And I just think it's simpler for the street just to guide without making specific assumptions around true-ups for the rest of the year.
And then on the guide, though, like ASP seem like you're now... You're, you're thinking about, like, you know, increases rather than maybe modest increases, but rather than the, the path, which was more stable ASP. So what's- and that was both in women's health as well as oncology Signatera. So is it- I mean, is that true? And like, what's kind of the thesis behind that, the, the philosophy?
Yeah, I mean, for on the ASPs in the guide, we're modeling some very modest, continued upward trajectory in the Signatera ASPs. In women's health, I think we're just kind of more guarded, not, you know, not because of any underlying trends or storm clouds that we're seeing, but just, just, more of a philosophical point around how one should model, reimbursement in the diagnostic space more than anything else. I mean, what's driving the, the upward momentum in the Signatera ASPs, is just the continued, execution in, in getting reimbursed where we're covered, for our, particularly for our Medicare patients. So now, you know, in the entire book of business, Medicare represents about 35% of the volume.
That's maybe 70% traditional fee-for-service, 65% traditional fee-for-service Medicare, and the balance is Medicare Advantage. Traditional fee-for-service Medicare, you know, was paying. It reimburses us, like, 80% of the time. We've fixed a bunch of, like, eligibility documentation topics with them, so that now that when we send them a claim, we're getting paid, you know, 90% of the time, 95% of the time. So that's a big, big advantage. Medicare Advantage was only getting reimbursed at about 20% of the time for covered tests, and now we've kind of moved that to 60%. How? We've just been able...
We've had enough time on task with the payers to remove these kind of administrative hurdles, particularly around eligibility and just making sure that we flag these claims for them in their system, and they know how to process them. So that's always a process. That's always a journey, and we're making very solid progress on that now, as you can see in the numbers.
Okay. So the recurring and kind of higher margin side of Signatera testing is a surveillance setting.
Yeah.
You guys obviously offer, like, a, you know, test in the adjuvant window as well as a, you know, surveillance setting. But what, how does your mix kind of shake out today? It seems like it's more even, but when does that kind of flip to be the majority in the surveillance setting?
Yeah, it's a good question. I mean, I think, steady state, I would guess that the recurrence monitoring volumes would be something like 65%-70%, perhaps more, as a percent of the total volumes. The reason why I think that is just kind of if you just do the weight of the math of, like, the waterfall of patients getting signed up for Signatera when they're diagnosed with cancer, and then staying with Signatera through their recurrence monitoring years. Over time, as you build up these years of patients that start Signatera, you start to get a lot of patients flowing through as recurrence monitoring patients, okay? So in order to have, your adjuvant treatment volumes be...
remain pretty consistent as a percent of the mix with the recurrence monitoring, that means you've got to have a very healthy pipeline of new patients coming into the system, kind of coming into the top of the funnel, and we've certainly seen that so far. So we, we have a huge amount of room to run, in this market, and I think that shows up in the new patient starts and the new account starts.
Okay. And then in the past, I think you were talking about how Signatera gross margins could be looking in line with the company, kind of average. You know, at this point, it seems like that's probably what's happening.
Yeah.
What, to get to, like, the 60+, 70% margins for Signatera as, like, a segment, basically, do you need to get to that, you know, pretty high mix of surveillance setting testing?
Yeah, I mean, I think that the mix will evolve in our favor. The Signatera gross margins now have kind of blown through. So up until very recently, they were dilutive to corporate gross margins, and now they're probably, you know, on the accretive side to corporate gross margins, just due to the above factors. And I do think that if you think about kind of long-term gross margin targets for this business, you know, we, we've tossed out, you know, 70% as, like, an aspirational future gross margin. I think in order to get there, I think you'd need to have Signatera ASPs instead of, like, $1,050, they need to be, like, $1,700, which I think is imminently achievable, given where our contracted rates are still well above $1,700 today.
And I do think that, you know, you can continue to see ASP improvements in the women's health business, both in NIPT and carrier screening, such that NIPT moves from... or women's health moves from, you know, like, a mid-50s type of gross margin business to, like, a low- to mid-60s gross margin business. And the net of that, you know, could get you to 70% over time. I guess the-
The other thing I'd add is that the mix of the recurrence monitoring time point, where we have the ADLT price versus the bundled earlier uses, is only relevant in Medicare. You know, it's not relevant in Medicare Advantage, it's not relevant in commercial, which is coming online. So over time, it'll trend towards the ADLT rate, which is where we're contracted in those other settings.
Mm-hmm.
Okay. And then in terms of, like, sequential growth or even, like, annual growth in volume for Signatera-
Mm-hmm.
I mean, how do you think about that? Like, what's driving that? Is that new ordering physicians? Because now I think it's, like, 40% or so penetrated in the country, or is that test per doc in, like, the recurrent kind of thing?
I think, you know, sorry for the boring answer, but it's honestly both. I mean, I think there's definitely a progression for a given clinic, where very often it's the case that gets started with Signatera to solve a corner case that they're dealing with, and then they see, you know, it's quite easy to use, and the utility is really there, and they gradually adopt it more broadly within a given practice. And then, as you can see in the quarterly results, the fraction of U.S. oncologists that ordered a test in the last quarter just continues to expand. And I think we said that was circa 40% of oncologists in the quarter. So it's really, you've got dimensions in both areas that are working in our favor.
Then maybe just a quick update on the commercial payer progress, like getting Blues and stuff were announced in the past, and then also the biomarker bill impact, if there's anything there, just like an update.
Yeah, not, not yet. I mean, I think that the biomarker bills are something that are fairly new to the industry. I think there's going to be the same kind of effort, just working collaboratively with the payers to make them aware of the rules and the attending, you know, coverage policies that are needed in those states. We've always felt like that would be a process. I feel like that's moving, you know, qualitatively, that's moving in the right direction, such that, you know, you could see that be a contributor for us in terms of ASP growth in 2025 and into 2026.
Okay. And then maybe like for John, like the study for Signatera coming up. So 36-month data for GALAXY, I think that's ESMO this year, and then, you know, ALTAIR in maybe early 2025, maybe like an ASCO GI then. So maybe let's walk through some of the important, like, benchmarks or endpoints for those trials and why that could really, like, kind of impact the physician community. And I think that, you know, just for example, the DFS for ALTAIR, like this 0.667 threshold, why is that okay, you know, appropriate?
Yeah, I'll speak to that at a high level and then invite Mike-
Yeah
to weigh in. But I think there's been a lot of talk about this in the investment community to add precision around something which is not necessarily precise. I think that endpoint derives from a hazard ratio from the establishment of FOLFOX in chemotherapy. So it's not like a hard rule, and there aren't hard fixed rules around what will drive guideline or adoption generally. I think what we've seen is a huge and evolving weight of significant evidence, particularly in CRC, as new data comes out, and that's what's driving increased adoption amongst physicians. So at ESMO, we're going to be reading out the 36-month data for the GALAXY trial in CRC. This will be the first time we have overall survival data, which we think will have an incremental benefit on adoption.
It's not gonna be dramatic, but it's gonna be one more piece of evidence that pushes physicians towards more frequent usage. And then at ASCO GI, we're going to have the ALTAIR study readout, which is, you know, an outcome study looking at survival with a drug Lonsurf. And so the performance there is gonna be a combination of both Natera and then also the efficacy of Lonsurf. And that's where you get some fuzziness around what is success. Do you want to add to that?
Yeah. So I mean, I think, just to make sure we have the... I think two different numbers were quoted there. So what we've been asked in the past, like: Hey, what does good look like for ALTAIR?
Mm-hmm.
We've generally pointed people, with the disclaimers that John made, we've generally pointed people toward the result that was achieved in the MOSAIC study in 2004, which is really the last time that there was data that really shifted the standard of care in this setting. And what was achieved there was a hazard ratio of 0.77. And so we, you know, continue to kind of lay that out there as, you know, that's what we'll be looking for in terms of a hazard ratio. Beyond that, yeah, I mean, there's gonna be analyses that show you how Signatera performed in this study.
I generally expect that the, you know, Signatera performed reasonably well, just based on the experience we've had in the same patient population in the Galaxy arms of the same study. And there'll be some endpoints related specifically to the drug, which will be interesting to see, but perhaps less impactful to Signatera itself. So we'll see how that goes. In terms of the, you know, the weight of the data, I mean, it's going to be a drumbeat of data, both in colorectal cancer and other solid tumor types, where just about every, you know, major, you know, cancer conference, we're going to have, you know, important data, not just in colorectal cancer, but in other tumor types as well. So you mentioned that there...
We're gonna have three-year follow-up data, prospective follow-up data, on a critical mass of patients in the GALAXY arm of CIRCULATE for colorectal cancer. That should be the first time we, we start to look at not just disease-free survival, but overall survival. So I think will be quite interesting and, you know, excited to read that out. Away from colorectal cancer, perhaps, you know, first half of next year, we should also get a readout from the second Phase 3 trial of the, of the IMvigor studies, IMvigor011, in muscle-invasive bladder cancer, which is a study that's being run, by Roche and Genentech, evaluating, their compound atezolizumab.
So, just as a reminder, Roche ran an initial Phase 3 study for Atezo and pre-specified an endpoint before unblinding that study to measure the efficacy of the drug just among Signatera-positive patients, had a fantastic response in that cohort, like 40% treatment benefit, and that's what spurred a very rapid turnaround to a second Phase 3 study where the population is Signatera-positive. And so that'll be... That's a kind of a different example-
Mm-hmm
... of a, you know, different treatment, an MRD concept.
Yeah, and so MOSAIC was, like, you know, 20 years ago.
Mm-hmm.
The kind of therapeutic landscape, the precision medicine landscape has, has evolved, has changed. Probably got more refined, I guess, and more advanced. Is there a reason why this 0.77, you know, like, why—what gives you confidence that's, like, the right number, I guess, and why it hasn't changed?
Well, I mean, I think that that, I mean, just qualitatively, I mean, that implies that, you know, one in four patients are going to get a benefit, right? Which I think, like, meets kind of the bar in terms of just general sense of when you talk to oncologists, so something that's meaningful. And the reality is that that is the last data point in this particular setting. And there are many other examples of hazard ratios in that zone that have yielded data that has moved the bar in other cancer types as well, even with the advent of more targeted therapies.
You know, I mean, there's a number of targeted therapies on the market today where the treatment benefit is quite good for a very small subset of patients, and those are successful trials.
To take in guideline questions. So, you know, maybe early 2025, you have this ALTAIR data that seems—that, that was going to be the last, you know, catalyst milestone people thought, you know, before NCCN kind of updated the guidelines for CRC, for MRD, ctDNA. You know, could that update happen in 2025? How is the company thinking about that now?
I mean, I don't think that we wouldn't necessarily point people to any one study as something that is binary for guideline inclusion. I think it's going to be more like the weight of the evidence and the reality of the, you know, breadth of usage in the community. So that'll be a data point. The GALAXY data will be a data point. We've also got, you know, de-escalation data coming from that same cohort. We've got additional colorectal cancer studies coming, so I think it's going to be just based on the weight of the evidence. I'd also point out that, you know, I understand the desire to kind of triangulate around a particular, you know, timing of guideline inclusion.
If you showed me in 2021 what our Q2 2024 volumes and ASPs were going to be, I would tell you, "Well, we must have gotten guidelines." And the reality is that the adoption has been there, the reimbursement has been there, such that I think there's a little less time pressure on getting to a specific milestone as it relates to NCCN.
Yeah, the other thing I'd add to that is, if you look at another line in Natera, which is NIPT in pregnancy, the guideline for women under 35, all women for NIPT, only came in 2020, but the majority of people were using the test by then. We just weren't getting paid. And in Signatera and CRC, there's been a fixation on guidelines, but I'd also just point out that we're seeing huge adoption and advancement in advance of the guidelines. And we've already got reimbursement in close to half of that population because of Medicare, Medicare Advantage. And then, you know, these biomarker laws, which are coming through and covering most of the population, should pull through some of the rest.
And then we've also had one health plan that's written a policy on CRC, Blue Shield of California, based on cost savings for the plan. So this may be a situation where you have reimbursement, most of the market reimbursed, regardless of the guideline, and the guideline is just something that kind of takes you towards the end.
Okay. Yeah, on the... Just switching to women's health, I guess. So, you know, you guys have 50% market share, 50% penetrated. Seems like it's getting kind of like, you know, saturated, I guess. What's going to drive growth going forward? It did well in the second quarter.
Yeah, I mean, look, the volumes continue to come in and the, you know, the revenue growth is still there. I mean, so this is still, you know, double-digit year-on-year grower. And that is down to both organic growth and the fact that we were able to add some accounts from our Invitae acquisition that we announced in the middle of January. So look, I think that market has evolved pretty meaningfully over the last 5 years, such that it's, you know, it's much more centered on Natera and several of the large reference labs in terms of volume. There are kind of 4 million pregnancies in the United States, and that's gonna kind of grow at GDP or thereabouts.
So, over time, I think the, you know, the volume growth will moderate, but, I think we still have some room to run there, just given where we are in the market and the trends we're seeing right now. I'd also say that on the ASP front, there's a lot of wood to chop there. We've made tremendous progress, both in, NIPT and carrier screening over the last 18 months. And, you know, speaking of guidelines, there's a couple of guidelines, that are still sitting out there, that we still view as opportunities, that would be very important for patient care, that could come in, you know, as soon as this year. So we'll see.
A couple, couple of things I'd add there, too, is on NIPT, we now have Rh typing added as a co-orderable with NIPT, which may have some positive impact on share.
Mm-hmm.
The big driver, though, for NIPT share growth for Natera would be related to 22q. Natera does something like a million NIPTs per year. About three-quarters also order 22q, which is a really important test to run, because if you know that early, you can actually prevent harm to the child. We don't get paid for any of those right now. CMS has recommended pricing at $750 for that. It's recommended by two medical societies, the College of Medical Genetics and the National Society of Genetic Counselors, but not yet by ACOG, the OB medical society, but there's a belief that they want that to be covered. So that'll have a big impact in two ways. One, as a meaningful financial driver, getting paid for stuff we're already doing.
But also, Natera has vastly better performance than our peers on the ability to detect 22q, and we could use that to significantly take share from Labcorp and other players.
Okay. And then on the Invitae, like, on the tail end-
Mm-hmm.
I think it was like, maybe like a quarter of the growth in women's health this quarter, possibly year-over-year. So in the guidance, is it... I mean, what's... is it fair that there's, like, maybe $50 million-$100 million in revenue for the year?
Oh, there's less than that. I mean, you know, I think we initially set out that we were gonna-- we were hoping to do, you know, $20 million or so in incremental revenue, and that was explicitly in the guide. We're, we're above that now, you know, modestly in terms of absolute dollars relative to the scale of the overall business. But it's been a good, it's been a good pickup and a good driver, and we're, we're very excited to have been able to add those reps pretty seamlessly and also just provide very seamless, kind of, continuous care for those customers that would've needed to switch their NIPT provider on very short notice otherwise. So that, I think that was a great win for the patient care as well.
Okay, and then, you know, just not a ton of time here. So there's some product updates that you guys have been alluding to in-
Yeah.
Women's health and oncology. Like, what could that really mean, and how it can work in this way?
Yeah, I mean, you know, we've previewed at the beginning of the year that we wanna have a number of important kind of product in future rollouts, and you've seen a couple of them. I mean, I think the most prominent one, in terms of the organic side for women's health, has been this launch of our Rhesus D testing that John alluded to. I mean, that's an enormous. It's an enormous win. I mean, we became aware, as did the rest of the field, of this shortage of RhoGAM, you know, around end of last year, beginning of this year.
And, what that really means is that there's now an acute need to kind of ration RhoGAM just to the patients that need it, that just have an Rh mismatch between fetus and mother. And, you know, our R&D team, to their credit, you know, kind of looked around and said, "Look, we can do this. Like, we can deliver this on the NIPT.
We've got to rush around, we've got to do a bunch of work, but we can deliver something that's absolutely critical to the field in a pretty short period of time." I think when you're able to roll those things out, I mean, I think that just shows kind of the partnership that we've got with the providers in the field and our desire to kind of provide that kind of top-level care to the patients. We're gonna have more stuff like that. I mean, we're gonna have... I wouldn't be surprised if we have several other rollouts kind of across the business in the second half of the year.
Okay, and then one on the guidance, like, for the year, you've raised revenue guidance, you've raised, gross margin guidance this past quarter. You kept, I think, the expenses the same.
Yeah.
Cash flow guidance is still breakeven, basically, at the midpoint.
Yeah.
Why, why did that not, like, you know, go up?
Yeah, you could... I mean, you could easily model it as, hey, like, revenues are up, gross margins are up, OpEx is flat, so cash, cash, the cash position will improve, and it could certainly play out that way. I would just highlight to you that cash burn is, you know, not a GAAP metric. If we were guiding to, you know, net income, I would agree with you. Those, all three of those variables have to move in sympathy. Cash has the additional variables of, like, working capital and timing of CapEx and things like that. They're not totally within our control or, you know, the CapEx would be under control, but we may wanna be opportunistic and accelerate the CapEx. So there's just that one extra layer of caution that's warranted when guiding to cash.
Yeah. Okay. Last one on 2025, just thinking about that, when we talked about, we talked about a lot of, like, tailwinds, possibly. Biomarker could be, like, a real impact from that.
Yeah.
Maybe even 22q, other guidelines, possibly, have ALTAIR being some kind of, like, a benefit. What, what, what are investors not really, like, focusing on that could be a, like, a solid benefit next year?
Well, I think the investors kind of basically get the point, which is that we, we have a very, very strong position, in the women's health space, where we've got the best-in-class, in our opinion, tests. And we've got a very strong position in that field with what we think is kind of the best data. So we've got a very strong and defensible position there. And then in Signatera, we really, at this point, we are really, just continuing to ramp, and we're just kind of at the very early stages of adoption, just in the United States. And so I think just fundamentally continued execution in the women's health business.
We didn't talk a lot about transplant, today, which is, which is fine, but transplant has also, had a very strong recovery here in the last 12 months, I think will be a, a meaningful contributor in 2025, along with just the continued trajectory that you've already seen from us in Signatera. I think sets up, second half in 2025 as to be a very, you know, very good time for the company.
Okay, perfect. Thanks, Mike.
Yeah.
Thanks a lot for joining.
Awesome.
Appreciate it.
Thank you.