Good afternoon, everyone. I'm Tejas Savant. I cover life sciences here at Morgan Stanley. Before we begin, some important disclosures. Please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. And if you have any questions, do reach out to your sales rep. It's my pleasure today to host Natera, and from the company, we have Steve Chapman, CEO, and Mike Brophy, CFO. So thanks, guys, for doing this. Let's get straight to it, Steve. You know, let's start with the Signatera business. Just give us a sense for the competitive moat for Signatera. You've seen significant momentum there, but you're starting to get, you know, various players beginning to make early inroads into the tumor-informed space. And you've got, you know, one player on the tumor-naive side as well, with more coming.
As you think about the sensitivity advantages or the research, so the body of research and evidence that you've assembled so far, walk us through what you think are the key differentiators and the drivers of the moat for Signatera.
Yeah, it's a great question. So, you know, I think Natera's done really well in a highly competitive environment, you know, when you look back to our days in NIPT. And so I think, you know, as more competitors come into the MRD space, you know, I think that's a good thing for the market overall. You know, we like to focus on four areas for success for the business. The first is really leading with technology and innovation, and there's a lot of effort going into the oncology space now, both technology development and innovation, which we think is gonna be exciting.
You know, if you look back on women's health and Panorama, I mean, we're now on kind of version seven or eight of Panorama, and so being able to innovate quickly and having a super strong team, that's always been something that we think is super important. The second area that we focus is on clinical data generation, and this is really where you see, I think, a very significant differentiation between Natera and some of the other MRD companies. I mean, we now have more than seventy-five peer-reviewed publications.
Mm-hmm.
I think the next has maybe, you know, five or six. And then, you know, below that, there's, you know, maybe one group that has one or two peer-reviewed publications. And a lot of the companies now that are making a lot of noise with various, you know, claims and press releases, they have zero peer-reviewed data. And so they've got a long way to go to kind of show how their test works in a, you know, more robust, peer-reviewed setting. The third area that we focus on is having a strong commercial, and medical affairs team. And, you know, that's an area where I think we, you know, we have one of the largest sales teams. We support that with a very strong, medical affairs and MSL team. We do, you know, many, prospective, clinical trials.
We now have probably more than a hundred clinical trials underway that are supporting, you know, supporting the Signatera product line. And then the last area that we focus, which is one of the most important, but it's often overlooked, is user experience and customer experience. And there, you know, we're in network with all the major insurance companies. We have EMR connectivity with all the major hospital systems, with all the major EMR companies. We have a large mobile phlebotomy network that is good for managing the patients that are on recurrence monitoring. We can track all of these different things on the patient portals and physician portals.
There's a team, a big team of people that are responsible for collecting the tissue pathology, and we've now set up lots of, you know, interfaces with those laboratories. We get the tissue very quickly, and the turnaround time now is very consistent and fast. You know, for a new patient to get set up, you know, we're doing an excellent job. And then for ongoing patients, we can get the blood draws back in about, you know, five days.
Mm-hmm.
So, you know, I think all of these things make an impact, but those are the four areas that we focus on. And as we think about competitive moats, it's those four things and, you know, there's a team of people working on those four areas.
Got it. So to just push along that thread a little bit, you know, you stepped up your investment in R&D. Clearly, you know, MRD is one of the areas that you're focused on. So as we think about, you know, the dimensions of that response, you know, broadening out Signatera, improving the sensitivity and specificity, perhaps even a tumor-naive assay, can you just give us an update on those R&D efforts? How much of a focus is this for you, and when could we expect to see some launches or data?
Yeah. So, you know, we're actually spending quite a bit on R&D these days, even though we're at cash flow, you know, positivity. You know, we've gotten there because the core business strategy is working. You know, volume is going up, the ASP is going up, the gross margin is increasing, and, you know, that has allowed us to get to the point where we're at, of being cash flow break even, while still making major investments in R&D. So I think we're gonna spend like $400 million or something in that range in R&D. And you could imagine, you know, the amount of innovation that's going on behind the scenes there, you know, given, I think, what we've done in the past, the amount of kind of trials that we're doing.
You know, so I would just say, like, stay tuned on when updates are gonna be coming. You know, I think both looking at sort of ancillary products that can kind of sit alongside Signatera, but you know, also enhancements and extensions. ... Yeah, I think we'll see some things soon.
Got it. Fair enough. You've got the CIRCULATE GALAXY readout at ESMO next week, or a couple of weeks, I guess, from now. You get 36-month follow-up data there, mature overall survival and DFS data. I think it's in about 2,000 patients. Are there any benchmarks you can provide around what would be viewed as clinically meaningful? And then, if you hit those benchmarks, what does the commercial uplift on the other side look like?
Yeah, I mean, I think we're very excited about this readout, so I think that, you know, you could argue that this is the most impactful readout that we've had in the for Signatera yet. It takes a long time to generate three-year outcomes data. I mean, I think we started with the CIRCULATE trial back in 2019, and here we are in late 2024, we're kind of got this kind of large prospective outcome set ready to read out. I think what we're gonna be interested to see are going to be the themes that we saw in the 24-month data, okay?
So you'll have a cohort of patients that, on the strength of one time point with Signatera post-surgery, were Signatera positive, and some of those patients have gotten chemotherapy and some of them haven't. Okay, so what are the outcomes now, both on disease-free survival, and now, for the first time, what are the overall survival metrics looking like for that cohort? Similarly, there are a whole set of these patients that were Signatera negative at that time point post-surgery, and some of them have gotten chemotherapy, and some of them haven't. So now, three years on, what is the benefit associated with chemotherapy in that cohort, okay? So those two data points are gonna be incredibly meaningful, I think, to the space.
It just kind of piggybacking off the 24-month data, what we saw was that Signatera-positive patients did get a statistically significant DFS benefit from their chemotherapy, okay? And the reverse was also true. Patients that were Signatera negative did not get a statistically significant benefit from chemotherapy, and that was very meaningful data for the field. Now we'll be able to marry that again at the 3-year follow-up point, which is an important metric historically in clinical trials, and we'll also have the overall survival along with it. I think one other kind of. There'll be all kinds of other kind of cuts of the data that I think are going to be very interesting to monitor.
For example, patients who were Signatera positive, underwent chemotherapy, and then cleared their ctDNA under treatment, how are those patients doing, you know, three years on? Like, what are their outcomes as compared to patients who were persistently ctDNA positive through their course of treatment? I think those types of differences will be very interesting to clinicians, and that particular cohort will be of acute interest also to the pharma companies as well.
Mm-hmm.
So there's gonna be a wealth of data coming out, and we're very excited about that.
Got it. So that's a great segue to my next question, Mike. You know, you, you've characterized NCCN guidelines and CRC and getting those as a body of evidence sort of situation, right? And, and clearly, this is gonna be a very rich, data set that's reading out here at ESMO. You've also got, you know, ALTAIR coming up in January. Do you think these two data sets to be, assuming they're, they're positive for you, sort of, you know, get you to NCCN guidelines? Or are there any other prospective clinical utility data sets reading out in 2025 that we should be watching out for, as part of that next review cycle?
I wouldn't anchor you to any one particular data set as being, like, this positive or binary around guidelines. I mean, I think this is something where, you know, the weight of the evidence, the reality of the broad usage of the product, over time. You know, our belief is that the guidelines, you know, will are kind of inevitable, that they'll end up being more and more supportive of, Signatera than they already are. And they are supportive, given the kind of the footnote inclusion we received, last year.
I would tell you that along the way to that kind of getting into the kind of the level one guidelines, there are all kinds of different milestones that we can hit in terms of data, in terms of reimbursement, in terms of just adoption of the test, that I think will kind of leave us with the right trajectory for that business.
Got it. Fair enough. Signatera ASP is, you know, already past that $1,000 threshold. You mentioned that the guide embeds, you know, additional growth, some additional growth, you know, steady improvement coming from Medicare, Medicare Advantage plans. Can you help us think about the pace of the ASP uplift here, the potential pushes and pulls to that line? Do you think, you know, $1,250, $1,300-ish is possible exiting next year? And, where does the biomarker state reimbursement uplift get baked into that sort of trajectory?
Yeah, I mean, I wouldn't anchor you to like a particular ASP target now for the end of 2025. We're just a little bit too far away for me to have, like, that level of granular visibility. Having said that, I mean, we've gone from ASPs in the $600s and $700s in the recent past, to now having ASPs more, you know, above $1,000 here in 2024. And what we mentioned on the Q2 earnings call is that we felt like there was still room, visibility for us to just continue to improve that ASP here in the second half.
Mm-hmm.
It won't surprise me if we're able to kind of also deliver some linear improvement in the ASPs in 2025, but we'll have to check in on that, you know, Q4 and early next year as well.
Got it. And the biomarker bill uplift, is that part of that?
Yeah. I mean, I think that's not. When I'm thinking about the trajectory I just laid out, I'm not really assigning a lot of weight to, you know, huge success in the immediate term from those biomarker legislation. I think over a slightly longer time horizon, I think you can start to see some of the progress from that start to come into the business. I think that will be something that we're gonna have to work very collaboratively with the payers to make sure that we can and they can easily identify which patients fall under which law and, you know, which state, and then make sure that those patients are identified and covered. In our experience, that takes eighteen months to two years to really get that process working smoothly.
Yeah, we-
Got it.
We do have a lot of good discussions underway there, and there's been a lot of good signs.
Mm-hmm.
You know, it just sort of takes time to work through, and so we don't wanna kind of just assume we're gonna get that, and then it takes longer.
Yeah.
Fair enough. Steve, about 40% of U.S. oncologists ordered Signatera in the second quarter. Can you just walk us through the mix of new versus repeat customers? What do ordering patterns look like at new accounts? And once a physician has a bolus of patients in Signatera, does the likelihood of them trialing other vendors go down? You know, one of the things that comes up from some of your competitors is that, you know, physicians aren't very loyal to a brand, and some of them are taking, like, a whole portfolio approach. I'm just curious as to your take on that.
Yes. So, you know, certainly what we see is the doctors generally will start off, you know, trialing the product on a couple of patients and it may be one particular indication, and then they're... Once they become comfortable with it, then they start using it more in that indication or, you know, more deeply in that tumor type, and then over time, you know, go to the more of the pan-cancer setting. You know, and I think the doctors that we have, these 40% of oncologists, are at various stages-
Mm-hmm
... of, you know, using the product in these different ways. And so, you know, the good news is that we have a ton of growth that we can go deliver just from the core base of customers that have already used Signatera, and they're already comfortable with it. They already have it in their office. Just by them expanding to more of their patients, there's an enormous opportunity for growth. And then there's areas where, you know, maybe for one reason or another, we haven't been able to reach, or they've wanted to see the overall survival data. I mean, this overall survival data is, I would say, probably the number one thing the sales reps hear when they... You know, somebody says, "We're not ready to use the product," they say, "Where's the overall survival data?" Right?
Now that we have the prospective data, I think that is gonna help unlock new customers. But yeah, there's a lot of room for growth. You know, I do think that Natera has a lot of stickiness. You know, and I think there are some pros and cons to the portfolio approach. You know, sometimes with a portfolio approach, the sales team and the company has to focus on all the different products in the portfolio, whereas if you have a more targeted approach, you can really just focus on winning, you know, with that one targeted product. So there's pros and cons to both. We focus on the things that I highlighted earlier, and if we give good service, we have good peer review data, we have innovation, and we're-
Mm-hmm
... evolving the product lines, you know, I think, I think we'll continue to, you know, extend our position in the space.
Got it. Mike, one for you. Signatera gross margins are already north of 60% today. Where do you see them trending over the next couple of years as your, you know, Texas operation ramps, you transition to the NovaSeq X, you get Medicare Advantage and maybe, you know, some partial uplift from the commercial payers as well, and then you've got the mix shift towards surveillance. So there's a lot of good stuff happening for the gross margin line on Signatera. What's that sort of theoretical maximum ASP and margin profile look like?
Yeah, I don't know. It's interesting question, what the theoretical max would be. I mean, I think, you know, over time, you've got the dynamic of, A lot of the things we already have established can hold us in good stead for, for that, for the kind of the duration, and that is, you know, we have. We're in-network with all the big payers. We've got contracted pricing.
Mm-hmm.
We've got the data generation that will, I think, will ultimately drive coverage policies, and I think that's gonna be a pretty differentiated offering that we have, and that would tend to support, you know, the strong in-network pricing that we've already achieved. You know, we said on the Q1 call, we laid out a slide that, you know, had kind of current gross margins and revenues, and then we had, like, a future state that had, you know, $2 billion plus in revenues and 70%-
Mm
... gross margins, and these were kind of corporate level-
Mm-hmm
... margins. It may be that we end up kind of getting to $2 billion in revenue before we have time to actually get the reimbursement in place to get the 70% gross margins, which is probably a good problem. But I think we're gonna need to have a couple of things go our way as it relates to guidelines and you know, obviously, you know, continue to generate excellent data and value for patients. But I don't think 70% for the overall business is-
Mm-hmm
... is unattainable over the kind of the longer term.
Got it. Steve, preliminary data on the CRC screening program is expected in the near term here. Remind us what we should expect to see with the initial set of data. Could you provide a more sort of specific estimate around when it reads out? And how big will that initial cohort of prospectively collected samples be?
Yeah. So we said the goal was to have the readout come this year, and I think, you know, this is sort of the initial readout. What we've done is we've set up a prospective study where we're collecting colonoscopy-matched blood samples, and we're gonna do the initial readout on that study. You know, I think there's, you know, thousand-plus collected, you know, at this point, and, you know, if we wanna turn the spigot up and collect a lot more faster, we can easily do that.
Mm-hmm.
But the good news about the way that we've set this up is basically the same trial protocol that we set up, the same infrastructure that we set up, can be used in the FDA trial.
Mm-hmm.
So we're running the initial collection, we're going to read out the results. If it looks good and we want to roll into the FDA trial, we can do that, you know, without really having to go kind of back to the drawing board. But yeah, I think it should be coming up, you know, pretty soon here in the next couple of months.
Got it. Fair enough. You know, so Guardant and Freenome have shown their cards. You know, Exact's got something coming up at ACG. We are on their sort of blood-based version of Cologuard. What is the right threshold for success here in terms of sensitivity, specificity on CRC, and then AA performance that then unlocks, in your mind, you know, basically justifies continuing to invest, you know, in commercializing this indication?
Yeah, and that's a good question. I think you also have to look at, like, what does commercialization mean? And like, what's our strategy going to be there? And, you know, that's something that we're thinking about. But the... You know, the good news is we know where these other groups are performing now.
Mm-hmm.
And so we kind of have a sense of whether it's gonna make sense for us to continue on or not. And, you know, we're basically doing this because we have a good technology, we want to help patients. You know, we developed the assay, we can do it very cost effectively. And if the data comes out and it just looks stellar compared to, you know, the competition or the competitors, I think that's gonna help in our decision-making on what the next steps are. You know, and if it comes out and it's in line with the competition, you know, that's also gonna sort of inform some of the different next steps that we might want to take.
Obviously, if it comes out and it's sort of inferior to the competitors, then that's gonna be a pretty easy decision, you know, on what the next steps are there.
Mm-hmm.
So we're letting the data, you know, drive the strategy, but, you know, we've committed to not really burning a ton of cash, and I think we can. If we wanted to, we could take this all the way through the FDA trial without a significant expense to us, given where we are from a cash position, a cash burn position. It wouldn't make an impact on our, you know, financial statement in a significant way in 2025 or 2026 .
I think that's kind of the guiding principle-
Yeah
... is that we have an evolution of our P&L, that we're focused on. And that evolution allows for, I mean, there's going to be room for us to work on, you know, the big, important problems that are in the future. But we'll be able to do that without fundamentally reversing progress-
Mm-hmm
... on kind of our evolution there. Got it. You've assembled a vast database on IO treatment and clinical outcomes, Steve, from tens of thousands of patients. You know, one of the things you could do with this is obviously use that data to build neoantigen prediction algos. You know, that's something that Matt Rabinowitz sort of alluded to when we sat down with him earlier in the summer as well as being of significant interest to you guys. Where are you in terms of that journey? When could we see some of that early data emerge? And what are your thoughts on how you go about monetizing that opportunity?
Yeah, you know, I think with that one, it. We do expect to see, you know, some of the initial data, like immunogenicity scores and so forth, on our calling algorithm, maybe made more public, soon.
Mm-hmm.
Which I think could be exciting, and then, you know, there are, you know, I think, trials that are getting off the ground that will be able to actually show, you know, functional usage of the assay or the usage of the vaccine in a patient setting, but those things take a long time, right?
Mm-hmm.
and so I think we should just kind of let that program, you know, run at the pace that it's running. And we're in a unique position where we've got, you know, now, you know, a hundred thousand plus, you know, cancer exome sequence with longitudinal monitoring-
Yeah
... and follow-up and information on drug treatment and outcomes, and you know, we're able to leverage that to really use that for bettering patient care, and this is one of the opportunities, but I think we just have to let that program kind of you know run at the pace that it's running and let the team you know that's focusing on that you know do what they need to do. You know what we spend the majority of our internal energy on is focusing on the core business areas.
Mm-hmm.
Right? And I think that's the right approach, is, you know, winning at MRD, extending our leadership position in, women's health, and, continuing to innovate and grow volume in, in organ health. And I think these opportunities, early screening and, you know, neoantigen prediction, are exciting, and it's good to have a couple of big bets, that, you know, you can, you can have, I think, within the, the, a P&L structure that, you know, is acceptable.
Got it. Fair enough. Speaking of women's health, you know, you bucked typical seasonality in the second quarter. You had both really good organic growth and then help from that fetal RhD test and of course, you have the inorganic contribution from the Invitae accounts as well. How should we think about sustainability of that fetal RhD momentum once that RhoGAM shortage abates?
Yeah, I think the good thing about that test is it sort of very timely for patients where, you know, they really, you know, were struggling, hospital systems were struggling, physicians were struggling, and we were able to, you know, provide a test that could help physicians with decision-making. And about 15% of women are Rh negative, you know, and I think could be eligible to use this test. And so, you know, it's in and of itself, it could be a valuable revenue driver over time.
Mm-hmm.
But it's going to be limited to that kind of 15% of the patient population. But we are seeing, you know, guidelines kind of being put in place that support the use of the test, and I think reasonable pricing. You know, but I think the other thing was some centers have said, "Hey, you know, look, we now want to use you for all of our services, you know, in addition to, you know, the Rh testing." And I think, you know, that opportunity is good, and I think that momentum can continue. But we're also, you know, we're also innovating in the women's health space, and I think, you know, we want to, we want to continue to provide, you know, cutting-edge services there for physicians and extend our leadership.
Fair enough. Obligatory question on guidelines.
Mm. [crosstalk]
So could you provide us, you know, what's the latest you're hearing from ACOG on expanded carrier screening? Felt like this was more near term than MicroDels, and more a question of, you know, when they get published versus getting committee approval. And then on the 22q side, where do things stand on that process, and what are the chances that we don't get this until 2025 ?
Yeah. So I think, you know, nothing has really changed there. You know, we've heard positive, you know, signs from, you know, various, you know, physicians, but we just don't know the exact status, and so I think we're just in a waiting period. You know, we think the data supports guidelines in place for both, you know, expanded screening and 22q. And, you know, we're sort of waiting to see what happens when they come out, but we haven't heard anything negative. You know, nothing to suggest that, you know, anything is sort of off the table.
Mm-hmm.
You know, it's just sort of a matter of time at this point, I think. But you know, it's been a long time coming, right? You know, the 22q, particularly, is supported by you know, the largest prospective trial that's ever been done in the NIPT space, which is the you know, 20,000 sample SMART trial. And the performance there, you know, of the test was very, very strong. And it also showed that the incidence of the disorder was very high. So you know, I think the data has lined up to support the fact that this should be included, and you know, hopefully that's the way that the societies are leaning.
Got it. Mike, one for you on women's health gross margins. I think they're probably in the mid-50s% at the moment. How do you think about the room for improvement there, and over what timeframe do you think we can get to the low- to mid-60s%? And is that sort of contingent on some of this guideline stuff coming through, or can it happen independent of it?
I think low to mid-sixties is achievable even without the guideline improvements, and that's really just driven by the long tail of payers that continue to update their coverage policies, even at this date, in support of both carrier screening and for NIPT.
Mm-hmm.
I do. I think that's achievable, and then Steve alluded to the impact that the guidelines could have. I think that's important for patients, and we think the data supports it.
Got it. A couple of quick ones on organ health. You know, following the NKF endorsement for Renasight, what do you think about sort of the commercial trajectory there? Or do you think, you know, with KDIGO and NKF in place now, it's largely a function of when, you know, the CKD drugs make it to market. I think Vertex has something that's reading out interim data early next year, in the first quarter.
Yeah, I think it's a little bit of you know everything happening together. I think you know certainly you know education and peer-reviewed publications and society guidelines do support utilization and you know and but I think nothing would support the market overall like kind of a suite of new drugs coming on the market that are genetically targeted. You know so we think the market's developing nicely. You know for this to really make an impact on Natera there's got to be like a very significant kind of step change in utilization over time. And you know I think remains to be seen you know whether that can come or not. You know if you look at the overall kind of TAM statistics it's a huge market.
You know, I think the question is really, you know, can you change physician behavior and ordering patterns in a way that can make an impact, given the scale Natera is operating at?
Mm-hmm.
That's what we're going to be learning over the next couple of years.
Got it. On Prospera, how do you see the competitive advantage for that test relative to the incumbent in this space, or I guess, you know, the other player in this space now? And now that, you know, Medicare has decided not to drop coverage for their test, does that sort of... Well, first of all, I mean, there was confusion around what Medicare was doing, which led to a bit of an air pocket, but now looks like Medicare has reversed course on that. Walk us through those sort of dynamics.
Yeah. So, you know, if you look back, you know, six years ago when we launched, you know, into the organ health space, we were the sort of the newcomer. We had, you know, good peer-reviewed data, but, you know, our competitors had more. They were sort of the incumbent in all the offices. You know, now, you move ahead, we've invested a lot in generating really strong peer-reviewed evidence. And I think we have something in the range of maybe 30 peer-reviewed papers in organ health. I might be overestimating that or underestimating it a little bit. It's, it's something in that range.
But, I mean, we have a lot of strong data, including, you know, the first readout from the PROACTIVE trial, which showed that we can detect TCMR and ABMR up to five months or up to two months, depending on which one it is, ahead of biopsy. And that's a big deal, and I think that's been received very well. You know, to see that kind of data in a prospective way. We've also developed innovative techniques to perform the test, where we're looking at the background cell-free DNA, not just the donor-derived cell-free DNA percentage. And we put out, I think, good statistics there that we think support the product in both heart and kidney. So things are going well for us.
I think our view is that we're taking share and we're growing, and you know we're pleased with you know with the trajectory there, and I think Renasight kind of being right in there too and kind of having a nice growth trajectory you know makes the kinda rounds out the organ health business. On the Medicare LCD, we saw the press release that came out from another company in the space, and you know our view is different from I think the view that they took, and we're both similarly impacted. You know we don't think Medicare has reinstated surveillance testing.
You know, I believe that's the sort of view that they've taken, you know, but our discussions with MolDX don't indicate that, and our reading of the LCD don't indicate that.
Mm-hmm.
So, you know, obviously, if surveillance was reinstated, we'd benefit significantly, you know, but we just don't think that that's what happened. You know, and you know, I think others might have a different interpretation, you know, and that's only our interpretation.