Good morning, everyone. Welcome to the, I think it's the 36th, Piper Healthcare Conference. I am the diagnostics analyst, Dave Westenberg. With me is CEO of Natera, Steve Chapman, and CFO, Mike Brophy. We're gonna start off with, the show me the money moment. $34 million in free cash flow, last quarter. So, you know, your Q3, was about $25 million higher than your Q2, I believe, in terms of revenue. So, I mean, you really got the, operating lifts here. So what benefits did you see in Q3 that you didn't get in Q2? And is contribution margin approaching your gross margin, or is there still underspending in, SG&A and R&D?
Do you wanna take that?
Yeah, no, thanks for the question. So, look, just more broadly, I mean, I think, you know, our plan has been to just to build an excellent franchise for patients and build something that can have a lot of operating leverage. And so when you, once you've got a critical mass of sales reps in the field, operations, you know, lab operations, clinical trial data, you've got all these things going which take years and years and years to build. Once you have that, you do get a bit of a flywheel effect where you have, you know, patients kind of coming in the door daily. So you see volume continue to ramp, while the operating expenses, you know, have grown much more slowly. I mean, that's just fundamentally what's happening here.
And so we've just crossed that threshold where you saw in both Q1 and Q2 we were able to get the cash flow break-even. And then you know Q3 obviously we generated a meaningful amount of cash. We said on the call that we expect that you know that cash flow dynamic to fluctuate quarter to quarter, but nonetheless you know really strong performance from us. Revenues continue to grow, and then also the gross margins just continue to improve, right? So that is a function of all of the work that we've done to get our cost of goods sold per unit down. It's gone down precipitously over the last four quarters. You saw us put up you know it's like a 61% gross margin. Even backing out true-ups, it was like a 58%-59% gross margin.
It wasn't that long ago that we put up a, you know, a 39%. And what that is is just the, you know, the maturation of the reimbursement, particularly for Signatera, but also, you know, really hard work and improvement in reimbursement for our women's health products. So the cash flows really are kind of a consequence of all those things kind of coming together. We're really excited about where we're at.
Yeah. So, you know, and you kinda answered my second question here, but gross margins did expand 1,000 basis points year-over-year. What were the key benefits? And, sorry to put you on the spot, Mike. I think you are going—your guidance for Q4 does not drop into negative, right? So are you guys—I mean, should we think about—I mean, there's always scenarios, you know, where it could be different, but should we think about Natera as just, you know, this cash flow positive company from here on out? 'Cause I know you gave yourself room in Q2 and Q3 to go and, you know, maybe there's one time.
Yeah, no, I look. I think you know the cash flow - I like that metric for investors, as a measure for us because there's no way to fake it. You know, I mean, it's just changing cash, and so I think that gives people a certain level of confidence. That does include dynamics like working capital and CapEx, which we're not going to be, you know, carefully managing quarter to quarter. We're gonna let the business do what it needs to do. I think we're in a pretty good position as the guide implies for Q4. And then just more generally, I mean, I think we were very clear on the call that, you know, looking into 2025, our focus is really on delivering the best possible service we can, particularly in Signatera but across our franchise.
So our focus is gonna be on reinvesting cash flows into the business in 2025.
Gotcha. Okay. You know, I think you said on the call 40% of oncologists are using Signatera. Now, you know, we just do oncologist kinda survey work and that kinda thing, so we don't have, like, the perfect metric either, but we're getting a number significantly higher than that. I mean, where do you think we're getting it wrong? Where is that number actually probably growing, but you have this kinda say 40% oncologist because it's kinda hard to track or anything like that?
Yeah, so, we're actually seeing, you know, really strong uptake and continued uptake. We look at just the number of physicians that have ordered the test in the previous quarter and then divide that by the number of oncologists that are out there, and we come up with a metric. And, you know, we don't, you know, it's sort of roughly 40%, but obviously, it's going up every quarter. You know, last quarter, we saw a record number of physicians using the test. And then as we move into October, again, it's another record number of physicians using the test. So, you know, we're excited about that, but as you get more, and remember, that's just one use, right? That metric is, hey, they used it once during the quarter.
What we really wanna do is have physicians use it on every eligible patient that walks through the door. You know, the further and further penetrated we get where we have, you know, a lot of doctors that are using it a little bit, that's actually better for us because it's much easier for us to take somebody from using one or 2x a quarter to using it routinely, than it is to get somebody to use it for the first time. The further and further penetrated we get, I think the kinda flywheel effect starts to happen where people use the product, they're comfortable with it. Now they wanna use it on more patients in, say, colorectal. They become happy with colorectal. Now they expand to breast or to other cancers.
Gotcha. Well, you know, I think Signatera has been on the market now, what is it, four or five years. So you probably have some visibility into some of these five quarter-year, five-year patient cohorts. Can you talk about the year four or year five ordering behavior? Now, I know in the first year, it's the first couple years, particularly, you know, neoadjuvant, adjuvant, it's pretty, you know, you probably do wanna order four or five tests, but, you know, what are you seeing in that three-year, four-year timeframe, time period?
Yeah, so, you know, this is something obviously we look at, and we track, but, you know, what we do see is when patients come on with Signatera, you know, if they continue on to a recurrence monitoring trajectory, they generally stay on unless there's some type of event. And, you know, of course, about, you know, 25%-30% of patients recur, and then they, you know, obviously have an opportunity to sort of reassess what they wanna do. And then, unfortunately, some patients die. But we do see patients consistently, you know, outside of those sort of two main factors are staying on, which is what you would expect.
What we said at the outset is basically, you know, CRC, you know, four tests per year, first year, four tests per year, the second year, and then sort of moving to kind of this biannual monitoring schedule. I think generally that's what we're seeing. It really depends on the practice and how the physician is using it. The other dynamic that we see, which, you know, is an upside for us, is that patients are entering directly into the recurrence monitoring phase. Let's say somebody that, you know, was diagnosed and had surgery three, four, five years ago, they may just enter, you know, at this point in time.
The reason why that's an upside opportunity for us is it gives us a chance to capture that prevalent pool, which I think is a much larger opportunity.
Gotcha. Going back to Mike, you know, models look fairly on the conservative side when you're talking about, you know, you're having 50% year-over-year growth in 2024. How should analysts think about the true-ups? And in your mind, has consensus done a good job of actually capturing all the true-up benefits that you got in 2024?
The way that we normally think about growth, just given that we typically have fairly constant, you know, commercial operations kind of size in the field, is that we look rather than on growth rates. We just try to evaluate the business on absolute growth units. And I think, you know, the bar's pretty high, and it's gonna be a challenge, and, you know, we're excited about being able to meet it, going forward. In terms of true-ups, you know, all things equal, I think those will kind of feather down, back down to the, you know, what they historically were kind of in that $5 million a quarter, type range.
The true-ups that arrived this year came really as a function of the rapid increase in the ASPs, both in women's health, but particularly in Signatera, just because that product was just kind of growing up as a product, and reimbursement was really getting established, and the workflows for getting paid for covered services, particularly from Medicare Advantage payers, was getting established, and so anytime you have a dynamic like that where the actuals far exceed the recent history like you've seen here, you'll have, you know, some true-ups, and I think you saw those moderate slightly in Q3.
Gotcha. And I probably going back to Steve on this one. What are your next submissions from CMS for Signatera? What are the organ types?
Yeah, so, you know, right now we have coverage for various colorectal submissions, breast, ovarian, muscle-invasive bladder, and then immunotherapy monitoring, and in breast, you know, multiple different indications. So, there's many others that we're, you know, submitting for. If you look at where we publish peer-reviewed data, that will give you sort of a good idea. You have to have a published clinical validation in order to submit to MolDX. The other thing that's important to remember is when you, when you look at, you know, a lot of the tumor types, like, say, for lung, for example, a significant portion of the lung patients are covered under the immunotherapy monitoring coverage already. So, you know, when you, when you look at what's not included there, it's sort of a minority, you know, of the overall patients 'cause the vast majority of lung patients are getting immunotherapy monitoring.
You know, we're pretty broadly covered right now. I would say somewhere around, like, maybe 25%-30% of the tumor types that we receive are under a tumor type that's not part of a kind of a MolDX coverage. Obviously, there's still upside opportunity that we're chasing after. And then we still have the commercial opportunity as well.
Gotcha. Now just how should we think about lapping the Invitae benefits? What did you quantify the benefits to being? And then, you know, and assimilating to that, you know, I think Ambry was just acquired by Tempus. Now, that's a good company and, you know, probably gonna do it, run it pretty well. But, you know, anytime there is a disruption or a change in hands, you know, there is sometimes some choppy events. Is there any opportunity to pick up share in prenatal or BRCA there?
Yeah, I think Invitae went, you know, really well for us. That was done very early in 2024. So I don't think that there's sort of a lapping opportunity just because of how early that came on in the year. You know, I think, you know, obviously contributed, you know, pretty significantly to our carrier screening business, and also to our NIPT business. When you look at the Ambry acquisition, you know, we obviously have a hereditary cancer business. We generally are focused more in the OB space and the community oncology space versus the hereditary cancer specialist center, because we have sales teams that call on the OB space and the community oncology space. I think Ambry was largely focused more, you know, in the hospital system in the hereditary cancer center.
So I don't think that there's a significant amount of overlap, where we would be in a position to sort of pick up business. But we do think, you know, hereditary cancer is an opportunity for Natera to continue to grow, given, you know, the size of our sales team, and just the sort of depth that we're now getting to within our customer accounts, both in OB and in oncology.
Got it. Now let's just talk about the sequential Signatera volume. You know, I think it's we're getting around 10,000 units sequential improvement. Is that still the right way to think about that? I mean, I think you guys guided or talked about eight, but you know, you continued to get 10.
Yeah, I mean, we've sort of said 8,000-10,000 . Just, you know, if you look historically, we were kind of in that 8,000 range, and then we, you know, we bumped up into the kind of slightly above 10,000 range. But, you know, things fluctuate quarter- to- quarter. You know, sometimes there's holidays or there's, you know, more Saturdays or more Sundays during the quarter. And just at the scale that we're operating at now, I mean, we're receiving, you know, more than 1,000 tests a day, right? So, you know, when you, when you start looking at, you know, well, oh, there's one less day or two more days in the quarter, you know, it can really kinda change this growth metric.
So what we've kinda said is, look, just look at the longer-term trend, and, you know, don't really focus in on, you know, the measurement of the exact, quarterly growth just 'cause there's these other factors. Now, with that said, I mean, you know, we've seen some incredible weeks of volume coming in, which, you know, when I look at the reports, I mean, I'm always surprised, just the continued strong growth that we're seeing.
Gotcha. You know, can you talk about maybe some of the ways of thinking about first-time exome and repeat testing? And there, what I'm kinda getting at with that is, you know, internally, do you guys think about modeling it as an exome and then, you know, I think we have an expectation of two or three tests from this one or any kind of assumption there? And if you guys wanna talk about sometimes you talk about an adjuvant versus surveillance in terms of percentage tests, that's cool too. And you know, on that note, what are the costs of the exomes these days? And I guess that one would be for Mike for sure.
Yeah. Well, you know, look, we, when we get a new patient in, we sequence the exome and, you know, we start to develop personalized primers, and then the patient goes through the adjuvant window if they come in, in the adjuvant setting, and then they move into recurrence monitoring. So, you know, of course, as time goes on, you're sort of amortizing the cost of that exome, you know, over all the different points. And so, you know, the longer the patient continues to get monitored, you know, the more you're able to sort of spread the cost of that exome. One of the dynamics that we've seen is that we have a lot of new patients that are coming in.
Because there's so much demand and there's so many new patients that are coming in, and like I said in the beginning, there's new doctors that are coming on, you know, we're still seeing this kind of large amount of exomes coming in. And we think that's a good thing, you know, because ultimately, you know, having more patients that are, that are, you know, part of the, system and part of the network, is gonna help us grow long-term, and we wanna help patients. Then from an exome cost, I'll make some comments, and then I hand it over to Mike.
Go ahead.
So, you know, look, there's a couple of different things that have allowed us to, I think, reduce some of our costs. You know, I think one is, you know, now a significant portion of the testing, the exome testing that we're running is being run in our updated facilities, where we run it, you know, in our CLIA laboratory, versus in some cases, we're using partner laboratories. You know, that's obviously reduced the cost. And then the other is, you know, versioning the sequencers that we're using and just focusing on, you know, reducing the actual cost of on a per-run basis. And then last, I think, is just the scale. I mean, when you're, you know, there's a big difference when you're running 100 exomes a month, you know, versus 10,000, right?
You know, we're now kind of getting to the point where, you know, we're spreading some of the indirect costs, you know, more broadly, and that's really helping us to reduce the cost as we scale.
Gotcha. Maybe could we talk about Signatera pan-cancer, built from CMS and private payer coverage? Has CMS given you any kind of direction on what it takes to kinda get a pan-cancer coverage decision? And when you're talking to private insurers, do they wanna talk about a pan-cancer coverage idea? I think some of the Blues may be, you know, extended beyond just CRC, if I'm not mistaken, but, you know, you can correct me there.
Yeah, I think there is, of course, always this idea that, you know, as you get a certain number of tumor types that are covered, eventually it becomes just pan-cancer. Now, I think you're probably gonna have to do that the hard way, which is where you just go get each individual tumor type covered, versus, you know, Medicare, any other payer, just kinda saying, "Hey, we're gonna cover everything." But that's an advantage for Natera because we have, now incredibly, over 100 peer-reviewed publications for Signatera, and, you know, we think we're significantly ahead of any other competitor when it comes to peer-reviewed publications, validation studies, studies that can be used for reimbursement.
So, you know, with the requirement to be tumor by tumor, indication by indication, grinding it out the hard way, that's a very expensive proposition for people, for companies, and it's also a very long process. Remember, we've been at this, collecting samples, getting biobanks, starting studies since 2015. Almost nine years we've been grinding out, to get these 100 peer-reviewed publications to get the studies that are coming out. So, you know, that process is very long. The studies we're reading out now, for example, the GALAXY study, you know, we have many patients with 36 months follow-up of overall survival data. So you just can't get that by coming in, you know, on day one and kinda starting up an MRD business.
The harder it becomes for Medicare, you know, other payers, I think the better that is for Natera given the lead that we have.
Gotcha. Maybe we can talk about IP. I mean, you had some success in IP against Invitae, a little success against NeoGenomics. I think a lot of companies now are in this IP share with Personalis. How do you think it just about IP and, you know, all the different competitive products that are coming out?
Yeah, I mean, you know, we can't really comment on you know, competitive IP other than to say our IP portfolio is very strong. We have, you know, something in the range of, you know, 300-plus patents, a significant number of oncology patents, foundational oncology MRD IP. We've just been at this for a long time, and we've been successful in our, you know, couple of cases that we've pursued, you know, I think in enjoining two companies. So, you know, we feel very good about our position and, you know, obviously kinda have to see what the future holds here, but we think we're in a good position.
Gotcha. Now next, or if we're thinking about big payer wins on the private payer side, how should investors think about your ability to drive some payer wins? And if you can give maybe some context around, you know, some of the biomarker bills, if that could help some of the private payer wins in the coming year.
Yeah, I think just commercial coverage more broadly is just gonna be a function of first the data, which you're seeing us roll out almost at every academic conference, then guidelines, which we think, you know, are. It's always, you know, very difficult to forecast when that happens, but we think that's, you know, going to be inevitable for the business as we put together larger and larger data sets and more and more physicians incorporate Signatera into their standard of care. So I, I don't think that investors should have in their mind, you know, some particular binary event where you're going to, you know, all of a sudden have, you know, you know, commercial payers, you know, announcing coverage.
It's gonna be a continuum, and it's gonna be a gradual process over time, and that's completely fine with us, where the business model is kinda designed to be robust to that. You know, we talked about on the earnings call, you know, there is an opportunity to start to drive incremental commercial coverage via these, you know, the state biomarker legislation that's now been in place. And, you know, we're starting to see some good traction from that, and I think that, again, is gonna be a process where, you know, we're cautiously optimistic by, you know, second half of next year, first half of 2026, you can start to see some real progress in terms of actual, you know, sustainable commercial reimbursement that flows from that legislation. But we'll have to see.
Gotcha. Yeah. And how should we think about NCCN guideline changes? I mean, what's kind of, is there any goals for kind of next year, footnotes? How should we think about, you know, post-VEGA, post-ALTAIR, what that looks like, in terms of how an update could look like? And again, is it footnotes? Is it small wins? I mean, and kind of some of the timelines on when that could happen?
Yeah, I mean, you know, I think we were excited to see the Footnote that was included last year and, you know, would like to see improvement on that or, you know, maybe something more substantial. You know, one of the studies we're really excited about that is gonna be reading out at ASCO GI. It's actually accepted as a late-breaking oral presentation. It's the CALGB/SWOG 80702 study or what we're calling now the 702 study. And that's a randomized prospective trial of over 1,000 patients that looked at adding celecoxib to a standard adjuvant treatment to look at whether this extended adjuvant treatment would actually improve overall survival for patients, disease-free survival and overall survival for patients. And that's a pretty significant trial in the space. We actually think that might be, you know, the most significant trial that's been done to date.
That's gonna be reading out, you know, in January. At the, I think it's January 17th or something in that range at the ASCO GI conference. So, you know, I think that has a potential to, you know, change care. You know, we'll have to see sort of, you know, how that is viewed after it comes out. And then, of course, you know, we just had the GALAXY read out as well for first time, 36-month overall survival data. So lots of exciting things, but, you know, we'll have to see what NCCN does.
All right. We're out of time. Thank you very much.
Good. Thank you.
Thank you, guys.