But no cash impact.
Thank you, everybody, for joining us here on the last day of the UBS Healthcare Conference. I'm Dan Leonard, Life Science Tool Services and Diagnostics Analyst at UBS, and we're pleased to host this morning from Natera, CFO Mike Brophy. Mike, thanks for joining.
Yeah, thanks for having me.
So you just reported Q3 results. I thought the best way to begin the discussion would be if you could share some highlights from that report.
Yeah, no, thank you. You know, I think we had a very strong Q3 set of results. Revenues were up significantly, circa 63% year-on-year. It was, you know, $430 million in revenue. Gross margins were 61%. That was up substantially versus the year prior. The gross margins were in the 40s. We generated $35 million in cash in the quarter, which was a significant milestone for us. Just as a reminder, you know, we had guided at the beginning of the year to actually burn $50 million in cash. Then, you know, the first two quarters of the year, we actually had kind of gotten to this milestone of getting the cash flow break-even, which was important to us. This quarter was really the first quarter where we generated a meaningful amount of cash from the business.
So I think that just kind of speaks to the leverage that we're seeing and then just the continued kind of playing out of the business model. So very excited on all of that. Volumes are very strong. Had another very strong quarter overall with volumes, and then particularly with Signatera Clinical Units as one of the fastest kind of absolute growth units quarters we've had. When you look at it on either a sequential quarter basis versus Q2 or even like on a year-on-year basis, you can really see the momentum building. So that I thought that was very encouraging. On the clinical side, we had a couple of interesting readouts in the quarter. Many folks are familiar with the Galaxy data that was presented at ESMO just a month or two before we actually did the earnings call.
Super important data: three-year overall survival data in a prospective setting, really for the first time for the industry. The data was phenomenal. We showed Signatera was predictive of overall survival, predicted survival benefit from chemotherapy. And then a third point was that as patients were being monitored, if they cleared their ctDNA under treatment, then those people had 100% survival as well. So really a clean sweep across the board, a very important data, I think, for the space and for patients. So there was a lot of excitement around that. And we announced, you know, we've got two, we've got a number of abstracts and oral presentations coming at ASCO GI in January. The one we previously said that we'd have the ALTAIR data at ASCO GI as a late-breaking abstract, which is great.
We also highlighted that a little bit ahead of our expectations in terms of timing. We actually are going to see the CALGB 702 study is actually going to read out at ASCO GI. That study is very exciting. That study is effectively looking at stage three colorectal cancer patients plus or minus Celebrex. Okay? There's a lot of hope in the space that just adding an NSAID like Celebrex would have real benefit for stage three patients. There's a large prospective trial that was run, and the trends looked good. It was trending toward being significant, but probably didn't have enough patients to show a statistically significant benefit.
So the hope here is that if you just, if you drill down and just look on a pre-specified analysis, randomized analysis, where you look at the benefit of Celebrex in Signatera positive patients within the study, that you can see the hope for benefit. So we'll see how that goes. We'll get that data read out in January. We mentioned women's health and organ health. Both those businesses continue to perform very well. So really across the board, we were really excited about the quarter and where we were.
You gave some framing thoughts on 2025 as well. Could you revisit those?
Yeah. I mean, I think for 2025, there's a couple of pieces I think investors are kind of most interested in. One is, well, what about Signatera growth? We kind of reiterated on the call, we feel like this historically, we've said this kind of 8,000-10,000 sequential unit quarter units, growth per quarter, quarter -over -quarter is still the right framework for us. We've been above that these last couple of quarters.
But I think if you were comfortable thinking that we can continue to deliver that into 2025, continued performance in women's health and organ health along the lines of what we've seen this year just in terms of units, with the important caveat that in the women's health space, you've got to recall that we actually added a large bolus of units in the first half of the year from the acquisition of the Invitae women's health business. So it's important to kind of back those out and then kind of start us at a baseline for just kind of growing sequential units next year. So we think we're reasonably well set up for a strong 2025. That's not that different of a framework than what we've provided previously.
And that's been a fairly predictive pattern for us is just looking at kind of absolute growth units for the business, given that the commercial, the number of frontline sales reps has remained relatively steady.
Okay. And I'm glad to clarify that because I wasn't clear from the call whether I'm supposed to back out that Invitae bump or not.
Yeah, you should. I mean, if you think about that just kind of qualitatively, I mean, I would love it if you could just have a, just add a big set of accounts like that every single year. We've done a good job of retaining that business, and we've been very pleased with the performance of that deal. We added the reps, and we were kind of able to provide continuous care to those clinics, which we took a lot of pride in, and that's been a very successful interaction overall, but just think about growth. I mean, I'm going to retain those units so that you have that kind of base of units kind of staying with us into the future, but you don't get this influx of all of these accounts kind of coming in for the first time, right?
So you've got to just back that out when you think about 2025.
But the way you framed it, the volume or unit opportunity in aggregate was that the aggregate unit growth in 2025 would be comparable to the aggregate unit growth in 2024.
With the important caveat, the next sentence in the prepared remarks was with the important caveat that you've got to do what I just said. You've got to back out that. We had effectively an acquisition, right?
Yeah. And can you remind me the figure you're attributing to that, the unit number?
Yeah. I mean, the units for like the added units from Invitae, I mean, I think the way to get out that is to think about what was the sequential volumes Q2 versus Q1 this year. Usually that is down something like the women's health business is down something like 7%, 8% sequentially versus Q1. Why is that? That's a seasonal factor in the women's health space. It's a function of when people get pregnant and when people show up in the clinic to get the NIPT at the 10-week appointment. Usually you'd see that down mid to high single digits sequentially. This Q2 we were actually up modestly versus Q1, and that's because we had this influx of new accounts that kind of overtook that seasonal difference. And so that's a good way to kind of get at that scale.
I think you mentioned this growth is being accomplished with a largely stable number of frontline sales reps. Is that right?
Yeah. I mean, we're going to continue to make investments in the commercial operations. So if we see opportunities to kind of add reps, we're going to continue to try and do that. But I think in terms of just framing for the model, what I have in mind is, hey, what can our steady base of reps perform next year? Yeah.
And so you're assuming greater productivity per rep?
The way that it ends up working is the reps do have to deliver in this framework, the reps would deliver kind of the same number of growth units they delivered in 2024. Okay? Now, on top of doing that, they've got to manage a bigger book of existing business. So in a way, that is greater productivity. The way that we actually compensate the reps is more demanding than that. We re-rate their kind of base of business, and they get commissioned on the growth.
Understood, and remind me of the comments you made around ASP for 2025.
Yeah. So on a similar kind of breakdown, so on Signatera, we have gotten to about 1,050 here in the quarter, which is up modestly from Q2, probably 1,025 or so in Q2. And it's important to just note that when I say 1,050, that's backing out true ups. That's kind of like the underlying expected cash flows per test for units actually reported in the quarter in Q3. Okay? So we're about 1,050. We're cautiously optimistic that you could actually see some modest kind of continued improvement in the Signatera ASP going into 2025. And that would come from continued kind of increases in the fraction of time that we get covered for covered services in our Medicare Advantage book.
And perhaps in the second half of the year, you may see some green shoots from reimbursed commercial volumes that are being driven by some of these state biomarker laws, but TBD on that. I think it's important to note that over the last 18 months, two years, we've gone from an ASP for Signatera of $750-$800 to now $1,050. And that's a function of the product going through a launch and just kind of getting more mature. I don't expect to see another kind of $300 bump in Signatera next year. I mean, this is much more modest, more kind of linear improvement in the ASP along the lines of what we've seen kind of in the calendar year of 2024. So that's Signatera. Women's health, we've seen a lot of very encouraging trends in both NIPT and carrier screening.
I'm kind of of the mindset that we should be able to have kind of flattish ASPs in the women's health business next year, maybe even see some improvement. Typically, what I would advise you to do for any diagnostics business is just to bake in some measure of erosion because that's the way things go in the healthcare space generally and in diagnostics in particular. But the trends are looking really strong recently. So I'm more of the mindset to say kind of steady ASPs. And I think there can be kind of healthy differences of opinion there. I've talked to several investors and analysts that say, well, look, we'll have some modest ASP erosion next year for women's health. It's just because it's a more mature business. And reasonable people can disagree on that. We'll see.
Okay, and so for Signatera, you would expect the ASP improvement to be back half loaded?
I think that the benefit from Medicare Advantage just continuing to just get reimbursed on the test for which we have a covered service. I think that's just going to be kind of a linear process. So I'd like to have some improvement in the first half from that driver. And then, yeah, for additional growth beyond that, yeah, like state biomarker laws, other factors, that would be back half if we get there.
Why isn't Medicare Advantage coverage more straightforward?
That's a good question. I mean, I think, just as a reset, Medicare beneficiaries can either get their Medicare benefit directly from the federal government. These people would be what we call in the industry kind of Medicare fee for service beneficiaries where the actual Medicare program administers the program to these patients. As many of you know, most of the large commercial payers in the United States also have a book of business in which they administer the Medicare benefit on behalf of the Medicare program for seniors. That's Medicare Advantage. Medicare fee for service, the workflow to get reimbursed is quite straightforward. Medicare Advantage, by definition, you just have a much more balkanized system because you've got hundreds of payers with their own systems and preferences and data needs.
And so you just got to work collaboratively with all those payers and make sure that they're getting the information they need to feel comfortable that, hey, yes, this is a covered service and yes, we'll reimburse them. So it's just a process. And it's been very successful. I've been pleased with the interaction with the payers to date, but it does take a little more time.
Why would the benefits from state biomarker bills not accrue until the second half of the year? I think some of these have been established well earlier.
Yeah, really for the same reason I just described for Medicare Advantage. I mean, what those laws would effectively do is turn a good number of these commercial patients into Medicare Advantage patients where the payer has incurred an obligation to cover the same, provide the same level of coverage that Medicare provides. Okay? And you have the same kind of logistical process that you need to go through with payers to make sure that they're getting the information that they need to feel comfortable that, yes, this is an eligible patient and yes, this is a covered service as per Medicare. And you've got to get the systems working at the payer so that they can actually execute the reimbursement. And that is just something that we have a lot of experience in doing. And so the timeline that we're laying out there kind of reflects that experience.
It's been a good process so far. I mean, we've had very collaborative conversations with national plans and state Blue plans and things like that. These things just do take time, and we understand that.
Okay. And what's your Signatera ASP when you're getting paid?
Yeah. When we get paid, I mean, it's basically the Medicare fee-for-service, so it's about $3,000 per test when we get paid, and the ASP $1,050 basically reflects, roughly speaking, the mix of Medicare that we see in our book of business. The details are more nuanced than that. There's puts and takes, but that's kind of roughly right.
Okay, and then the true ups have been a pretty consistent feature of your performance in 2024. What are your thoughts on that going forward?
Yeah. I mean, so maybe just another kind of level setting on what are the true ups. So every quarter, we've got to make an estimate for what we are going to accrue for revenue for the test we've performed in the period. And if we were Walmart, this would be a very easy calculation because you'd have point of sale payments, and you would just have both the cash receipts and the units being sold would match up very closely in time, right? Any kind of healthcare provider has this lag between provision of the service. Someone shows up for their NIPT at 10 weeks, test gets ordered, blood gets sent to our lab. We send the result back as quickly as we can. Patient and physician are happy. And now we're holding the bag.
We've got to go back, and we've got to follow up and get reimbursed, right? It's an apt term from the payer. So there's this lag. Okay? So typically, it will take us four to nine months on average to complete that process. So when I'm sitting there doing a revenue accrual for a quarter, I've got to make an estimate of what I will get paid for the services I've already provided. So I've got to look at the history of what I've been paid in the past for these services. Okay? When the reimbursement in real time is going up a lot, I'm going to end up under-accruing for the covered services in a period because I'm only looking back at the history. Does that make sense?
It does.
Yeah. So that's what's happened here. It's good news really for both products in the women's health space and for Signatera. The cash flows per test have gone up pretty dramatically. As I mentioned, Signatera has gone from like $800 to $1,050. So as these cash flows come in above the accrued amount, that's got to go somewhere or my balance sheet won't balance, right? That's got to flow to revenue, to net income, to retained earnings so that I can balance my balance sheet with the extra cash I've received. Okay? So that is generally kind of a transitory factor because if you have some change in the reimbursement, you kind of have a change, and then you get back to more of a steady state. And now the accrual, the expected cash flows per test ends up matching much more closely the actual cash flows per test received.
Okay? So I think that's where we are. I mean, I think that we've had this kind of step up in ASPs, and so you have the true ups coming in because of those step ups, and now I think we're in a little bit more of a steady state, so that would argue for true ups kind of gradually declining now as we move forward, and that's a little bit of what you see. I mean, we had like $35 million in true ups in Q1, then we stepped up to $40 million, and then we're kind of back down to $35 million, so we'll see. If we have another step up in ASPs, then you'll have another set of true ups to manage.
But as it stands right now, that's what we, based on the data we have available to us now, we've now kind of accrued based on what we think the expected cash flows per test would be. And now the only thing that's driving true ups is the historical units are kind of continuing to get paid. That's continuing to flow in.
You're changing your accrual assumption over time.
Yeah, absolutely. And the way that you know that is what is my accrual assumption? It is like it's changed from I used to book $800 per test in revenue for Signatera, and in Q3, I'm booking about 1,050 per test. Yeah. Okay? So that is the step up.
Okay. Makes sense. Well, let's pivot a bit to talk about some of the data readouts you mentioned for 2025 on Signatera. I guess first off, what is the cumulative number of interventional trials you're reading out in 2025?
Yeah. I don't know what the number actually will be because the timelines of these trials can be pretty variable. We've got a number of important trials we're reading out, but I think the ones that I'm most focused on are the ones where I know that there's been an abstract submitted to ASCO, and I know that they're, at least I have a good sense that they're coming. We'll have a number of other trials kind of flowing through the rest of the year. But I find that it ends up being false precision to say, hey, we're going to have an important readout in September of 2025 when there's just so many lead times there. And we typically don't run these trials ourselves. We're working with a pharma partner or working with academic consortia, and those timelines can change.
Got it. I counted five, and I wonder if I'm undershooting the mark.
I mean, that doesn't sound, just sitting here today off the top of my head, that doesn't sound impossible, but please don't hold me to that as like, hey, we're going to have, we've got it to absolutely five. We're going to work collaboratively with both pharma and academic consortia, and usually, our partners are driving the bus in terms of the timing and the data readout and what is the content of the readout, and we're happy to partner with them.
Okay, and in terms of the ones you're talking about right now, it's 702, it's ALTAIR, and it's IMvigor011 . Is that right?
Yeah. I mean, those are the ones. Thank you for raising. I had not mentioned the Invigor readout. That's a good example. I mean, I'm cautiously optimistic that we could get a readout for IMvigor011 in the first half of next year. But again, we'll see what Roche and Genentech , what they deem appropriate there.
Would you rank order within those three? Is one of them more important than the other? Are they all equal children, if you will?
No. I think, look, the mission of the company is just to prevent cancer deaths and to have improved patients' cancer journey. And so is it more important to have important data in muscle invasive bladder cancer versus colorectal cancer? It's not. I mean, all of these things are critically important to us. In terms of kind of impact to the business, I think the answer is also the same. I mean, I think evaluating the impact to the business is you can start with the benefit to the patient and work backward. And I think each of those studies has a potential for enormous benefit to patients. And so we're really excited about all of them. Sorry for the generic answer, but that really is the truth.
And I think Steven mentioned on the call that you also have additional, you've submitted additional data to MolDX for some potential new reimbursed indications in 2025. Any way you could frame that opportunity?
Same answer. I mean, we'll work collaboratively with the MolDX program, and it would not surprise me if you have some additional reimbursed indications in 2025. I will tell you that in terms of the majority of our volumes today fall within the category of units or tumor types that are currently reimbursed by Medicare. I don't have the exact percentage, but it's a high percentage, so in terms of kind of change in reimbursement, I would view additional tumor types that are covered would end up representing kind of incremental improvements in reimbursement. But it's all important, right? The data itself is important to generate to benefit patients, and then this is just a process that we go through with MolDX.
So any new indications could lead to incremental volume in addition to potential incremental ASP?
I mean, I think it's an interesting question that reasonable people can disagree on. I personally don't take the view that MolDX coverage really has a huge impact on patient or physician behavior. I think, generally speaking, physicians are much more focused on what is the data, what is the clinical utility, and they kind of make their own assessment independent of MolDX.
Okay. All right. I hope I don't run off the clock here. Your foot's actually blocking me.
Oh, sorry.
Sorry. I've been trying to scoot my chair, but we're good to make sure I hit every topic. CRC screening.
Yeah.
Could you remind me, what is the goal? What do you hope to present? I didn't get the impression from your discussion on cash flow on the call that you really had the appetite to greenlight a big $100 million clinical trial. So please correct me if I'm wrong and help me better understand and frame what your aspirations are in CRC screening.
We're excited about the program. There are a number of different products that I think can be important to patients that flow from the same kind of technology platform that we've developed in the service of the kind of the early cancer detection program. There's other products that likely flow from that as well. It's been a bit of a joint program to date. We'd like to have an initial readout along the lines of what we fairly large kind of case-controlled study where we hope that we and the investors can kind of calibrate what the performance might be in colorectal cancer. I'll tell you in terms of the spirit of your comment, I think I agree with, which is we don't have an appetite to fundamentally derail the evolution of the P&L in the pursuit of an ECD program right now.
But you won't get derailed overrunning a study. The larger expense, the larger decision could be around, hey, do you hire a huge primary care sales team? And at this point, that's not on the cards for us. So the ECD program, it depends on what the data shows. So when that data is ready, we'll present it. And I'd like to see that be something that we pursue it, but it doesn't change the fundamental kind of evolution of our P&L. But I think you could do that. You could meet those objectives and still run a study. Yeah.
Okay. You've given frameworks before about what your P&L will ultimately look like once you're more scaled. I think the last communication was around $2 billion in revenue. You could do 25% EBIT margin, 70% gross margin. You're almost a victim of your own success. As the company keeps growing, you're getting closer and closer to that $2 billion revenue figure. Is that P&L you proposed before, is that still valid?
Yeah. So just the context, I mean, I think when we put up the slide, I think we had a quarter where we burned like $160 million in cash in the quarter. And the interest rate environment had really changed. And there was an intense interest from investors for us to show, well, what is the pathway to getting to cash flow breakeven? So we laid out the model. And then when we got to cash flow breakeven, we just sort of, we intentionally did not change the slide. We just said, hey, this is what we showed you. We said that we could kind of get to cash flow breakeven at $1.5 billion or so in revenue and mid-50s percent gross margins. And we're here and we're cash flow breakeven.
So that was a celebration and a thank you to a lot of, there's a lot of folks in the room and listening that have held the shares and have been partnered with us for a long time that remember that trajectory. So we wanted to revisit that with them. The point of that story is just to tell you, we put that slide together a long time ago now, I mean, a few years ago now. I think it's entirely possible that we could get to 2 billion in revenue faster than we have time to do all the things on reimbursement to have the margins be where you need to be to have that level of an EBIT margin. But that doesn't mean that, that doesn't mean that fundamentally one couldn't have those types of margins at a $2 billion revenue level.
It's just that the revenues might get here quicker than the margins, just given how quickly we've ramped, particularly the Signatera product. Having said that, I do think there was an important kind of theme that we've talked about consistently in public settings, and we revisited it again on the Q3 call. Our priority in the immediate term is not to deliver some incremental amount of EBITDA. The priority of the business is to continue to do everything we can to serve these patients. Okay? There's a lot to be done. There's a lot of product features, commercial operations, user experience features, clinical data readouts. There's a lot to be done, and this is a huge unmet need.
And so our focus is really going to be on meeting that unmet need in the immediate term, meaning 2025 and potentially beyond that, while recognizing that we don't have the appetite to come back to you guys, meaning the investment community, when we're guiding next year and say, hey, we're going to burn $400 million next year. We just don't want to do that. We understand it's important to kind of show that we can be self-sustaining as an enterprise. But beyond that, our focus is going to be on meeting the needs of the patients.
Okay. You know, I get asked about the competitive moat for Signatera all the time. I don't know if you would care to comment.
Yeah. I mean, we don't really spend a ton of time on competitive moats relative to other potential entrants in the field. I mean, I think there's a lot of really interesting companies that are also trying to come up with innovative ideas to serve patients, and we welcome that. I think what we end up doing is, again, starting with the patients and working backward to making sure that we have the right offering such that patients would want to, patients and physicians would want to choose Signatera, and those are the ones that we've talked about previously. I think several people here could probably rattle these off as well, but it's absolute total commitment to best-in-class clinical trial data. Long-term kind of longitudinal prospective studies that take years to read out are absolutely essential.
There's a commitment to kind of the commercial operations and user experience, whether that is very efficient and dependable turnaround times, to easy ordering via EMRs, to easy scheduling of blood draws. All these things, they seem like details, but they're not. They make a huge difference to the patients. There's an aspect to this that because it's a repeat monitoring test, unlike NIPT or unlike kind of almost any other diagnostic test, we continue with the patient in their cancer journey from diagnosis, post-surgery to minimal residual disease assessment to recurrence monitoring. Okay? And so it's incumbent upon us to do a great job throughout that journey to serve the patient so that they want to stay with us through that time.
I think that if we do a good job, that ends up, at least so far, that has shown to be pretty sticky both on the individual patient level and on a clinic level.
Okay. We've only got a couple of minutes left. And I know just a very targeted question on your reproductive health business is all we'll have time for. I know you're not reliant and you aim to be successful there. Guidelines or no guidelines when it comes to microdeletions and expanded carrier screening. But could you remind us what is the way to frame the impact of any guideline updates in those two product offerings?
I think I'll do microdeletions quickly. Maybe I'll do carrier screening quickly, then I'll do microdeletions. I mean, carrier screening, you've seen a real evolution in patient and physician understanding of the utility of carrier screening, where that's evolved from being really focused on cystic fibrosis only to a much more expansive review of the carrier profile of the mother and the father. And so I think a carrier screening guideline that just formally enshrines what I think is already the fact in the field that broader panel carrier screening really is the standard of care for most people, I think that would be beneficial to the patients. And that would help us mainly because it would just reduce some of this uncertainty that we talked about this earlier in our chat about like, well, what's going to happen with ASPs? Are they going to go up or down?
What you'd love to say is like, hey, we know it's a covered service. It's a standard of care. We know what the pricing is. It's not complicated to model. And so I think a carrier screening guideline could just reduce some of that complexity. It just kind of takes that conversation down. And that allows us to make investments with more confidence to continue to improve the products. Microdeletions, I mean, the microdeletions test, one of the reasons for Natera's founding was a desire to have a very high-quality microdeletion screen, which historically did not exist because kids that are affected with 22q, for example, have such a disparate set of phenotypes, set of outcomes that absent understanding the underlying genetic cause of the disorder, it's hard to know that all these kids are kind of affected by the same underlying problem.
So that's been a huge success, I think, for Matt, our founder, and for the company that we're going to run more than a million 22q screens this year. I think when an NIPT is ordered, when Panorama is ordered, 22q is ordered something like 75% of the time, so in a certain sense, that's been a big success. I think we've run an enormous clinical trial, 10-year trial, 20,000 patients, matched prospective, matched outcomes. Another study like that will never be run again. It showed the utility and the incredible impact of 22q screening in the field, and I'm cautiously optimistic that over time that'll get recognized in the guidelines, but again, we don't have a lot to say about the guidelines, and we'll just have to see.
Okay. Well, we'll leave it there. Thanks, Mike.
Awesome. Thanks so much for having me.