Welcome, everybody. Good afternoon. Matt Sykes, the Life Science Tools and Diagnostics Analyst at Goldman Sachs. And I have the pleasure of welcoming Mike Brophy, of Natera. Mike, thanks for being here.
Yeah, thanks for having me.
Maybe if we just start off with sort of a quick recap of first quarter results, another really strong quarter of growth with record Signatera incremental units. What were the highlights from your perspective? I mean, we've all read it. We're on the call. But just sort of looking back now, I think you had described to me this is one of the quarters you were probably most proud of in terms of execution, particularly on the MRD side. Maybe just give your highlights of the quarter.
Yeah, no, I had a very strong Q1. Thanks again for having me. We had a record quarter kind of across the book of business, from Women's Health to Prospera to Signatera. As you mentioned, we had the best growth quarter we've ever had with Signatera. We did about 16,500 growth units sequentially off of Q4. Obviously, massive growth year on year. Very proud of that execution. Q1 was really supposed to be the first quarter where we were really supposed to see some increased competition from the field, from some very high-quality players I think that will have that are going to be doing good things for patients over time. I think in the Q1 results, we showed that we could really continue to just deliver kind of outstanding growth results for Signatera. We paired that with some very strong growth in the women's health business.
The reason why that was remarkable to me is that's such a big business now, particularly post the shakeout that we've seen in that industry over the last few years. We've been able to pick up a significant amount of volume from competing labs that have exited the space. Q1 really showed kind of the fruits of all that hard work where we grew high single digits just sequentially off of Q4, which is really impressive to do in a, relative to Signatera, a more mature market where NIPT is kind of clearly kind of the standard of care in that space. Organ health continued to ramp. We had a very strong growth quarter in organ health. I think we referenced that we grew more than 50% year on year in that within that franchise.
We highlighted some heart transplant data on the call, which, look, I'm not sure how many of the investors are in the stock because of the heart data per se, but it was quite impressive and very exciting for patients just showing the efficacy of using cell-free DNA. I think it augurs well for the evolution of cell-free DNA compared even to standard of care biopsies over a period of time. We saw that in the NIPT space over time with kind of the relative drop in amniocentesis volume that was required in that population. We're hopeful to see kind of the same kind of evolution in organ health as well. That's kind of on the volume side, on the patient side. The financials, again, were fantastic.
I mean, I think we broke $500 million in revenue for the first time ever in the company, which is always kind of a fun milestone. We had pretty significant, I think more than 100 basis point sequential growth in gross margins over Q4. It just continued to improve the gross margin profile of the business. We generated a substantial amount of cash in the quarter. Relative to our guide to be cash flow breakeven in the quarter, I think we felt very comfortable that we're in great position to meet that goal for the rest of the year. Really strong Q1.
Great. Maybe before we move on to some other questions, just ASCO was last week. It seemed to be a record number of abstracts from the diagnostics industry at this particular ASCO. Could you maybe cut through some of the noise and focus on maybe what the one or two takeaways investors should have about what you produced and the abstracts you had at ASCO?
Yeah, I think just a general comment about ASCO is just it was really heartening to see a lot of people reach out to me and mention that they felt like ASCO was a real coming out party for ctDNA, where there's been excitement building, but things like general ctDNA panels having standing room only and much more evidence of kind of just general standard adoption of ctDNA as a use case in cancer care. That's incredibly rewarding to businesses like Natera, where we feel like we basically created this category on a whiteboard at the company 10 years ago. It's been a long and sometimes difficult journey since then to bring it to the level that it's been at now. It's very rewarding to see that type of reception for the concept for MRD at ASCO.
For us specifically, it was probably our strongest academic conference we've ever had, just in terms of the breadth and the quality of data we presented. Just to highlight a couple of things, I mean, we had the DARE study in breast cancer. We had really excellent data with our genome backbone Signatera test that we're really proud of. Maybe I'll just spend a bit more time in breast cancer again on the iSPY data, which is really focused on the use case of Signatera in the neoadjuvant breast cancer space. Neoadjuvant breast is a really important indication for patients because an increasing percentage of people now, more than half of patients who have breast cancer, get some form of neoadjuvant care before they go on to surgery. There are just so many different choices to be made within the choice to get neoadjuvant care.
I mean, which chemotherapy regimens do you use? Do you escalate all the way to a platinum, for example? What we showed is that based on the ctDNA dynamics as characterized by Signatera, you can have huge implications for what are actually the outcomes of these patients. They are really kind of in very different categories based on what their Signatera results were, which has massive implications for how you care for these people most efficiently. We are very proud of that data. Obviously, there is going to be more readouts from iSPY and DARE in subsequent conferences as well.
Great. Going back to Signatera, growth continues to be the focus each quarter. I guess a couple of questions. What do you view as the main growth drivers to continue the momentum there? You've laid out a pretty interesting strategy of what I would term as sort of covering your bases in terms of whole genome, tumor naive. Are those going to be the future growth drivers for Signatera? Are there things just within the market in terms of penetration, et cetera, that have plenty of room to expand? Just as you look out the next couple of years, what maintains that level of momentum in Signatera?
I think the answer to all these questions is you start with what is the clinical problem? What is the unmet need? And you work backward from that. There's a huge unmet need for MRD generally to help guide people's cancer journey. I think that kind of the core growth driver over the next several years is just the amazing efficacy data that we've generated relative to the adoption in the population. We're still very early innings of adoption for MRD generally and Signatera specifically. We did something like 165,000 units in Q1. What does that annualize? Like 720,000 units, something like that, something on that order. Estimates will vary. There could be upwards of 10-15 million tests that are ordered annually kind of as an indicative kind of 100% penetration. Obviously, a huge amount of room to go there.
The primary driver is just going to be continuing to deliver very high-quality prospective outcomes data sets across a range of tumor types. We've been able to do that because Signatera really is kind of one core technology that works very, very well in a very broad swath of solid tumors. Just to highlight a few things, I mean, we have, for example, hopefully later this year, we'll have data in muscle invasive bladder cancer with Roche Genentech in the InVigor study. That could be a huge, huge benefit for MIBC patients when we read that data out. That will then, what we've seen previously when we did the first phase three study at InVigor, we had a huge halo effect in the overall business because of the benefit that was evident from Signatera in the first phase three study.
That's really more than any one particular product launch. It's more about kind of the core franchise just kind of continuing to deliver longer dated, bigger prospective data sets and just having the time on task to kind of continue to drive adoption with having excellent kind of customer service. Within that, I mean, I think an important component is there are kind of these use cases for MRD that I think can be addressed with the new products that we have. I mean, there is some percentage, and again, estimates will vary. Some fraction of patients will want to get an MRD test, and they're just not a good candidate for a tumor-informed test.
I mean, kind of like a classic example would be an older lung cancer patient that is just too frail to withstand the procedure to get a piece of tissue available for a tumor-informed test, but you'd like to offer that patient something. That patient would be a good candidate for a tumor naive MRD test. Even if it's a very small percentage of the overall unmet need for MRD, it's still an important clinical problem because those patients are kind of distributed across all of the oncologists in the United States. That is a clinical problem that many, many oncologists will face at some point over the course of their year. You've got to offer something there. We're excited to be launching that this year. It's a similar argument for the genome.
I mean, there are a set of arguments to be made around certain cancer types, perhaps, where the technology may end up yielding a performance that warrants using a genome backbone. That has not been borne out yet in kind of the longer dated prospective outcome studies that you ultimately need. We want to be on top of that. We want to be anticipating that. We want to try because if we can generate high-quality data with the genome backbone, then we certainly want to make the effort.
Got it. Maybe just describe your current split in Signatera between adjuvant and recurring volumes. I think you've characterized in the past as 50/50. I think the market is waiting for that to shift more towards recurring. As we think about sort of what that means from a margin perspective, from a growth perspective, when do you see that shift actually starting to happen?
I mean, I think you can start to see it happening. I mean, I think what we've seen historically is that the mix within kind of the volumes that we deliver in a given quarter has been pretty balanced between the adjuvant treatment setting and the recurrence monitoring setting. I think the momentum and just kind of the mass of people, more and more cohorts of people staying with Signatera over the course of time in their cancer journey to when they're in remission and they're getting monitored for recurrence means that you'll have a bigger and bigger base of volumes coming from that recurrence monitoring indication. What mitigates against that is that you have more and more data sets coming, and you have more and more patients kind of starting on Signatera. It wouldn't surprise me if that mix is even a little bit volatile.
I mean, historically, it's been relatively stable at about 50/50, but I think it'll bounce around over time. At steady state, I would expect the majority of the patients to be kind of in that recurrence monitoring indication just because of just the mass of kind of the people and kind of a prevalent status versus people that have just been diagnosed in the last year or so.
Got it. You also continue to expand ASPs for Signatera, and you've mentioned that you see a path to $2,000. What is driving the near-term momentum? Could you help us bridge to that $2,000? You're at, what, $1,100 right now?
Yeah.
How do we get there?
Yeah, ASPs were above $1,100 in the quarter, so continued good progress there. I mean, I think the bridge and the point of the $2,000 estimate is not to provide you with some specific piece of financial guidance over a specific time, but it's more to show you what's achievable there. I think the components are as follows. I mean, I think there is room for us to continue to drive higher compliance for reimbursement among Medicare Advantage patients where they're objectively already covered today. Medicare Fee for Service, the reimbursement is for those types of patients where they're covered by Medicare. I mean, Medicare Fee for Service coverage rates are above 95%, 97%. With Medicare Advantage, it's nowhere near that. I mean, it's 70%.
Now, that's up from 20% a year ago.
Yes.
But there's still work to do with a longer tail of commercial plans that have Medicare Advantage books with whom we just need to work collaboratively to kind of clear up any kind of administrative barriers, confusion about what the test is, that type of thing. We've just kind of we're now kind of grinding through that in a pretty linear way. The success we've had makes us feel confident that we've got a good roadmap there to work with any particular payer. Similarly, there's a set of patients now that should be covered for Signatera by dint of the fact that the patient is covered by a fully insured plan in a state that has a state biomarker law in effect.
The reason why we do not get reimbursed all that frequently for those patients is kind of the same reason. There is kind of confusion. There are kind of administrative hurdles to be solved. Honestly, with a lot of payers, it is the exact same people, and it is a very similar process that we just went through for their Medicare Advantage books of business. We are starting to see some good progress there. I mean, I think last year, we laid out a goal on one of the earnings calls where we said, "Look, Q3 of 2025, we would like to be able to kind of be able to point to progress in the ASPs that is attributable to the state biomarker law compliance." I think we are on good track to be able to deliver on that goal.
The next bucket that I would point to as a potential source of ASP improvements for the overall book would be a launch in Japan. We are kind of targeting a 2027 launch in Japan. Timelines will vary on that. I'll caution you. I mean, this will be kind of our first launch in Japan. We are learning as we go, but we are kind of working through the Japanese FDA right now. I would expect on balance, the Japanese ASPs to be accretive to the overall ASPs in the business because that is kind of more of a single payer healthcare system. They have a very strong guideline already in place in Japan. We are very excited for that launch.
Maybe the final component of that bridge would come from kind of initial inclusion in clinical practice guidelines in particular subtypes of cancer where we've got more data and we're kind of further along with the evidence development, like colorectal cancer, for example. Those are the buckets that I would point to that would kind of bridge you to that indicative kind of ASP goal.
Got it. If we shift over to women's health, I mean, this is a segment that I'm probably not alone in this that I thought would probably slow a lot sooner than it has. Either you've been really conservative or you've been surprised too of the strength. There's clearly been some consolidation as players have come out. You bought a book of business from Invitae, which also helped some incremental growth. What would you attribute to sort of the persistence of a fairly attractive growth rate and what I would consider a high penetration, relatively mature market? What is your long-term view as to what the women's health market should grow at?
Yeah, NIPT solves an important clinical problem. I mean, I sound like a broken record on these topics, but that really is the deal. I mean, if you go back to when everyone used to get a quad screen, for every 20 positives on a quad screen, you'd have one true positive. That is a lot of amniocentesis that are being run on those other 19 people that were in retrospect unnecessary if you had a better technology. NIPTs as a class are so good that it really knocks that down to where the amniocentesis volume driven by the quad screen has really dropped quite precipitously. There is just enormous kind of clinical utility associated with NIPT.
Within that, we ran a 20,000-patient prospective outcomes trial matched to heel pricks on the neonates that just will never be run again, hugely expensive and costly and time-consuming to run that study that showed outstanding results for both Panorama NIPT and Panorama for 22q microdeletion screening. I think when you solve an important clinical problem and you back up the performance with outstanding prospective outcomes data, I think you're meeting the need that the physicians have, right? They want to see that outstanding evidence. I think that's been an important driver both for the patients and then also that redounds to the business as well. I think that's been the number one component.
I think an important additional driver has been the intensity with which we have focused on customer service, whether that comes from patients needing to call in to us where they've got a clinical question or they need to pay their copay at their deductible. We do our very best to deal with those people in a compliant but sensitive way and a responsive way. I think that's really resonated for both patients and physicians. We've continued to. Just last year, in response to a shortage for Rh factor treatments, we launched a test that screens the fetus for whether or not they are kind of Rh factor positive or not. That effectively screens the population that really needs, for example, a RhoGAM shot. That was time-sensitive, incredibly important to the field.
We were able to kind of spin that up very quickly and get that out the door. That kind of commitment to continuing to kind of innovate has also ultimately served us well. Those are a couple of the drivers. Of course, just the overall dynamics of the market that we talked about have been critical for us. Going forward, look, I do agree with you that penetration continues to increase for NIPT, and it will not go on forever at the rate that it has been going. That is okay. That is a business where it is a sustainable business from a financial perspective, and we have got plenty of room to continue to invest in innovation there.
Got it. Coming out of the first quarter, you raised OPEX guidance slightly more than your revenue raise. I think in speaking to investors, I think that was one area of kind of questions. Can you break down where those investments are going and if you expect to continue increasing your investment in R&D in the commercial organization moving forward? Just how are you thinking about calibrating that? On one hand, you have this MRD market to yourself today, and you know competition is coming. It is a unique market because market share is stickier than it would be in sort of more of a screening type of diagnostic. It is important that you continue to gain that share. How are you thinking about OPEX in the context of expectations from your shareholder base of profitability, but also wanting to maintain your advantage and increase your share?
Yeah, it's an important consideration. I mean, I think first, just on the guide, I mean, the other part of the guide is that we reaffirmed our commitment to being cash flow break-even this year. I think the spirit of the guide is that we're effectively kind of reaffirming kind of the bottom-line commitment that we've made at the beginning of the year. We're a little ahead of schedule based on the fact that we generated cash in Q1. That's the goal this year is to have it be an investment year, be a cash flow break-even or thereabouts. No real change from the plans that we had articulated even midway through last year for 2025. I do think that it's just inevitable that you've got to generate profits to be a company that continues to serve patients.
I mean, that's just kind of part of the job. I think one of the questions that I will have, I mean, let's hold off on the investors for a second. I internally would have a concern as you're adding sales reps, for example, and the volumes are growing. Are you growing the volume just because you're adding more and more sales reps, or are the reps themselves kind of getting more productive, and are you actually.
Is there operating leverage?
Yeah, is there actually operating leverage in the business? We've shown now, I think, time and again that we've been able to generate meaningful operating leverage in the business. Case study number one, I'll take you all the way back to 2019. I feel like I'm getting old when I do these case studies. It's like six-year-old case studies, but we were actually at the time under a fair amount of pressure to show that we could actually make this happen just in the women's health business. We made a commitment 2017, 2018 that by the middle of 2019, we'd be cash flow break-even in the women's health business. We were able to kind of hold the sales reps constant in that business and continue to grow, and we hit the target.
Fast forward to 2022, the market was in a very, very difficult place. After post-COVID, there had been a very pro-growth mindset among investors. 2022, it was less that. It was much more around how efficient can you be? We laid out a path to what would the financial profile of the business need to be for us to be cash flow break-even. The way that that model worked out is that it implied by middle of 2024 that you'd be able to hit that. We hit that almost exactly to the extent that we actually did a little victory lap on that. We actually republished that slide on the quarter to show you that we could do it. One more case study was just second half of last year.
Even as we were investing in the business, rep counts were relatively constant, for example, for Signatera, and yet we continued to ramp volumes very rapidly, and we generated substantially more cash than what we had forecasted. There has been a good track record here of our ability to both deliver operating leverage and able to model it accurately. As I look to this year, I feel very good now with those case studies in hand that we ought to be investing in the business. I do not think that there is some open question about whether or not we can generate operating leverage. Now is the time to make the investments to focus on what do those patients need in this huge unmet need because we have seen now time and time again that the leverage will be there. That is kind of the plan for this year.
Got it. Just drilling down on that, on the R&D side, we recently did an NDR with you, and we published in the back of that. You had talked about doing certain smaller kind of exponential trials with health systems that are your partners that are shorter, smaller, but have generated meaningful clinical evidence. Could you talk about that element of R&D spend as being a little bit more episodic and then sort of your broad commitment to R&D and which ones do you see as being sort of meaningful catalysts moving forward that you're spending on today?
Yeah, I mean, look, the R&D investment has been a constant for the business going back to kind of my comments I made at the top of this discussion. Absolutely paramount that we continue to innovate. One of the really heartening developments that we've seen occur in the MRD space is as we've developed more and more customers and relationships with academic centers, we're finding more and more opportunities where those partners are coming to us with a chance to participate in a 200-patient, 1,000-time point trial in name your cancer type where we don't have, we may not have that data set yet. It's hard on our own to go and enroll the sites and circle all the people required to generate the data, but here's a center that has those patients and wants to partner with us to generate that data.
Those are the types of investments that we want to be making right now. I mean, rewind to 2022, when those opportunities would come up, we'd have to be, we'd have to make a tough decision there because the clinical trial budget gets planned a year ahead of time, and the answer would be, look, we have a fixed amount of money for this, and it's a very generous budget, but it's all spoken for. I think now we're in a position where we need to be doubling down in evidence generation, particularly for minimal residual disease and recurrence monitoring, and we're definitely doing that. That is one where, in addition to that being high ROIC, I think that's the best thing for patients. Our finding has been that if we solve the problems for patients, that the business end of it kind of takes care of itself.
Got it. On the commercial side, you've been adding headcount over the last couple of quarters. What's the strategy for implementing those reps? Can we start to see impact from that expansion in the back half of this year? You talked a little bit about enhanced productivity. Have you gotten better at ramping up your commercial organization? Therefore, the productivity and maybe even revenue per rep is actually higher than what it had been in the past.
Oh, we've definitely improved. I mean, this is now a 15-year journey for our commercial team where we've scaled very large sales teams, run into every type of problem that one can run into in a molecular diagnostic sales team that has a lot of specific requirements. I mean, these tend to be very high-touch, kind of high service, somewhat high complexity in terms of the technology involved. Offerings. It's a real pleasure to have colleagues with whom I've now worked for a long time. I mean, Steve Chapman, our CEO, was the first commercial employee that was ever hired here in 2010 after having a long career at Genzyme Genetics, which was really the first molecular diagnostics company to ever exist. So Steve is now, for a relatively young guy, he's pretty old in terms of his amount of experience in terms of molecular diagnostics commercial activities.
Over the last 15 years, we've built up a commercial team and operation and a set of principles for how we do things that include how best to motivate and how to manage commercial operations and how to scale commercial teams. Every day, the battle scars, the mistakes, the successes, all of those come to bear with every kind of micro, every daily decision that Steve makes on that front. Yeah, I mean, I think we've definitely gotten better over time. That's just another reason why I feel good about being able to invest in commercial operations right now.
Maybe just kind of staying on MRD for a minute, but obviously hear a lot about competitors coming into the market. Some of them are doing whole genome. I'm sure Quest has got Haystack and LabCorp is probably not going to be sitting still. As you think about that competition coming in, you think about your position today. You've obviously had an advantage of being a first mover, but there's also an advantage for sort of fast follower in terms of drafting behind what you've done. How do you, one, protect the market share you've got, understanding most of the battles are going to be for new patients? Two, where do you see the competitive dynamic and the competitive landscape evolving into over the next couple of years?
Will it be sort of the assumed oligopoly in five years that everyone kind of takes for granted, or do you think it could be very different for MRD?
I think, I mean, my first reaction is honestly the same reaction I had getting the feedback on ASCO this year is there's some joy in that. I mean, the companies that you mentioned are excellent companies. They're in the position that they're in because they know how to execute, and they also are very good at solving problems for patients. It's really not the worst thing in the world for a group of companies out there kind of aggressively competing and generating data and just trying to solve the clinical problem. They're going to come up with some good ideas that we're going to have to copy. You know what I mean? And we've come up with a few ideas that they're probably copying as well. That's good for the system. That's good for outcomes.
I think so long as the data continues to bear out, which I fully expect it will, we're going to have our fair share of the business, and the growing of the business and the adoption of MRD for the population will improve the health of the population, will take costs out of the system, and it'll end up being fine for us as well. When we think about, hey, how do we spend our time, it's less about worrying about defending some piece of share or dealing with one competitor or another. It's much more about, hey, just work backwards from the clinical problem. I mean, the physicians and the patients tell you what you need to be working on because they tell you what their problems are. That's the true north.
If you point at that, you'll run into other competitors that are trying to do that as well, and that's fine.
Okay. Maybe switching over to screening, which is one of the kind of new tests that you talked about this year. One, remind us of the timeline for data releases, how you're thinking about that. Two, what are you kind of baking in for R&D spend? I think commercially you've already kind of hinted that partnership or some lower-cost way of doing that might be the way you go if the data is good, but just kind of give us the overall view on screening and what you're looking forward to.
Yeah. You know what? We were very excited with the screening data that we were able to preview with folks at the JP Morgan conference this year. This is another worthy goal. Early cancer detection screening has an enormous role to play, I think, in the future of healthcare in the United States. I'm 45, so I just actually got my first colonoscopy, and that was quite an ordeal. I would love to have that have been just a blood test. I think over time, it probably will be. It will not be unless all these companies are kind of pointing at this and trying to make this as good as it can be. To say nothing of the multi-cancer early detection opportunity. Many people die from cancer not because their cancer is inherently untreatable.
It's just that they don't develop symptoms until they have stage four disease, and there's not much to be done. That's a very worthy goal. Step one for us is just to run the FDA-enabling trial. I mean, I think that there is enough there in the performance that we've shown to warrant that level of investment. Beyond that, just like anything else, we'll have to be heavily phase-gated based on success. If the FDA-enabling study is successful, we do have an excellent primary care channel already in the OB-GYN channel. I would humbly submit this is the best OB-GYN channel that's ever been assembled that we can offer the test through that can be quite useful. From there, we'll see what the data generates and what we can do.
Got it. Just pivoting towards Japan, which you mentioned, you kind of talked about the ASP impact, but it is obviously a major opportunity for Signatera volume growth as well. Can you maybe talk about any differences from the U.S. opportunity set and how quickly you can ramp up testing following reimbursement and then launch in 2027?
Yeah, it's very hard to know exactly what the curve of the adoption would be in Japan. There are some dynamics there that I think would argue for reasonably rapid adoption. Number one, colorectal cancer is very common in Japan, much more common than it is in the United States. Number two, there's been a huge emphasis probably related to that. There's been a huge emphasis on data generation and colorectal cancer treatment in Japan, as evidenced by the fact that there's already a very strong guideline in place in Japan for MRD usage, even though there's not really any products on the market just yet. Number three, some of our best prospective outcomes data is actually Japanese data. Okay? And so I think that's incredibly useful for that population.
The ramp of that, I mean, maybe one final one is that when we were launching in the United States, this was an entirely new concept. Now I think MRD is much more well-understood. I think it's easier to make the case to physicians. They kind of already understand why they would want to use a tumor-informed assay to help guide their patient's journey. I think all those factors would argue toward the faster ramp in terms of absolute units than what we saw in the United States. You do have to see it. You got to see it in person.
Do you think people might be underestimating the opportunity in Japan because the prevalence is so much higher? I mean, the population is smaller than the U.S., but the prevalence is higher. Is it a larger opportunity than you think people would assume?
I think one of the reasons, I actually think this is kind of thoughtful. I mean, investors, when you tell them that there's something that's coming in 2027 and it's like early 2025, it's just unfortunately, that's just a little bit beyond kind of the aperture that what most investors can really afford to spend a bunch of time and diligence. I think as we get closer to the launch and as we get into the launch, I think investors will be able to understand that just fine.
Got it. Got a lot more questions, but we are over time. Mike, thank you very much. Appreciate it.
Thank you so much for having me.
Thank you.