I'm Kyle Nixon. I cover Life Sciences Tools and Diagnostics for Canaccord. Please welcome you to a fireside chat with Natera here with us today. Natera is a leader in self-regulated DNA-based testing for women's health, oncology, and organ health. With us from the company, we have Mike Brophy, CFO. Thanks, Mike, for joining us.
Yeah, thanks for having me.
All right, we don't have a lot of time here. There isn't much to talk about after blowout. Just kidding. Blowout second quarter. Let's not go through, like, the high-level kind of information. I want to dig straight into Signatera volume.
Yeah.
I think it was like 189,000 units in total units in 2Q, growth of 20,000 or so from the first quarter. It's a record. A lot of new patient starts in there. Besides the new patient starts, what drove that sequential growth? We'll start there.
Yeah, maybe it's worth just characterizing exactly what the stats were, just so everyone's kind of on the same page. Yeah, man, thanks for having me. It's great to be here. We did, just on the clinical units, about 180,000 units, and that was 20,000 growth units, just purely in terms of Signatera clinical units sequentially versus Q1, which is far and away a record for us. If you look at the preceding trailing four quarters before we printed the second quarter, the average growth units were something like 13,000 or 14,000 units per quarter, something in that zone. Within that 13,000 to 14,000 growth units, on average, something like 1,500 or 2,000 of those growth units would represent new patient starts of the growth. Given a 20,000 growth quarter, I would have expected new patient starts to be, I don't know, 2,500, something like that, something in that zone.
The new patient starts were more like 6,000. It was a much, much bigger number just in terms of the new patient starts contribution to growth, which is obviously a fantastic number. Very welcome to see that. I think that it's important to note that the new patient starts will kind of bounce around quarter to quarter. In any given quarter, something like 10%- 15% of the clinical volumes will be new patient starts. Sometimes it's 15%, sometimes it's 10%. When you're going quarter to quarter, there can be quite a lot of just kind of total randomness associated with that. Again, on a rolling four quarters basis, you kind of see that trend just going just as you would expect, kind of steadily up into the right as adoption improves. What drove all of the interest? Obviously, there's a component of this where it's just time on task.
We've got a fantastic commercial operation in the field, tremendous customer service operation in the field. That operation writ large is just really, really humming smoothly. It's no small feat, but turnaround times are very tight. The customer service response times are very, very tight. People are kind of getting exactly what they need out of the operation. The sales team is very comfortable in their role, and they're executing very well. On top of that, we've had just an amazing wave of clinical trial data. I mean, starting, you know, going back to last year, we had, you know, for the first time ever we actually had overall prospective overall survival data in colorectal cancer. I think that was, there's a subset of physicians for whom that was incredibly important.
Previous to that, we'd had compelling DFS data, but this is the first time, you know, we had OS data. You roll the calendar forward to January, and we had incredible data, particularly in colorectal cancer with the use of Celebrex, where, you know, there had long been a presumption that these stage 3 colorectal cancer patients, you know, are having this polyp development driven by, you know, an inflammatory cascade. There is a strong temptation to try and knock down that inflammation with an NSAID. Yet, you know, when you run the clinical trial, it didn't work on all comers. That's very frustrating. The mechanism is more complicated than that kind of simple explanation. If you just peel back the onion using Signatera and you're able to use Signatera to characterize who's Signatera negative, who's Signatera positive, the positives had a fantastic response to this very inexpensive intervention.
Just give them Celebrex, you know. That's a very satisfying result to the field because now you have a relatively inexpensive drug that you can then layer onto the treatment regimen for those patients, and you can make a big difference for them. When you get data sets like that, like that is a very clear call to action, I think, for not only kind of our existing Signatera users, but for a lot of physicians that hadn't yet had like the time or the incentive or, you know, whatever it is to kind of just get around to adopting Signatera, at least for, you know, certain, you know, selected components of their patient flow. I think we saw a good amount of adoption here in the first half of the year.
The other thing that's happening is, somewhat to my surprise, I mean, in addition to kind of the major tumor types that have just continued to ramp, we've seen growth from Signatera kind of across the board, not just in like colorectal cancer and breast, but a broad swath of solid tumor types where we have excellent data. The growth of those smaller tumors has kind of kept pace with the larger tumors, such that now that you're kind of at a different scale than we were even a year ago, there's a large number of tumor types that I would characterize as the long tail, where we've got a real opportunity now to generate more and more clinical trial data in those areas, go and pursue Medicare reimbursement in those areas. That opens up another kind of ASP driver for us. We've really had an across-the-board very strong performance.
Everything that we kind of hoped we could get done over the last 12 months and earlier is basically coming together right now.
Perfect. Given there's this new patient trend, let's say there's so many new patients possibly, maybe it's a new paradigm, it feels elevated than the past, even though you said it's going to be kind of bumpy, like quarter to quarter. There's a lot of, there's a few new MRD tests out there. There's the blood test for CRC that has total reimbursement at this point. One tumor form that was just announced and launched with reimbursement CRC. There's others coming out, some in muscle-elastic bladder cancer, some in other breast cancer. One is reimbursement now. It's getting crowded. You're saying there's more new starts, more patients out there. What gives you confidence that that incremental new patient is going to go to Signatera, not a competitor test?
First, I just said general comment on competition. We've always just kind of welcomed competition. This is good. This is good for patients, right? When we first launched Signatera, it was pretty lonely to try and convince investors and stakeholders that this is a good use of our time to even try to build a personalized cancer test that's tailored to each patient's tumor. Now, you go to academic conferences, you come to investor conferences, there seems to be much more fulsome buy-in from the entire kind of spectrum of stakeholders, from patients to doctors to investors, that this is happening. This is a major, major sea change in the way that cancer is going to be cared for. It's very gratifying, honestly, to see the competition come. They've got good ideas. These are good companies.
They're going to have different feature sets and different data sets that are worth considering. I think, on average, having the consensus kind of evolve with more and more companies trying new cool things is good for patients and good for us, right? It's just good for the entire space. We're going to win our fair share. I think the way that we continue to try and be number one is we just, we don't, I'm not particularly focused on one competitor or another. We're just going to, we just try to stay focused on the patient. What are the needs of these patients? How can we be proactive in solving some of these needs that we didn't solve initially? For example, just in this calendar year, we've had a couple of product launches, right? We've got the genome backbone version of Signatera that's available.
If physicians want to avail themselves of that for selected patients, that's available to them. You'll hear more and more about the tumor-naive MRD assay that we launched. We launched the data. We announced all the data here recently. That's a very interesting product as well. We're just trying to be proactive in terms of feature sets and products that we offer in addition to just turning the crank on clinical trial data. I mentioned a couple of the really impactful data sets we've had in the recent past. In the near future, I expect to have another set of very, very impactful data. We have talked, maybe one just to highlight because I don't want to drone on forever, but we've got the phase three data coming with Rocean Intech in the IMvigor 011 trial for muscle invasive bladder cancer.
This is a program that we've been involved in that's been on the come for 5+ years. It just takes a very long time to generate data of that quality. I'm excited to see the readout there as an example. Competition is on the balance, good for everyone, most importantly, good for patients. We're launching new products, we're generating a lot of great data, and we're just trying to offer kind of best-in-class customer service and patient service.
Awesome. On the topic of genome now, the latitude, which is the tissue-free test, the tumor-naive test, which has not been launched yet, I guess. What's your view? What's your guys' take on how to commercialize those tests, like when you would offer them? Also, the long-term, basically, mix of Signatera volume between exome and genome and tissue-free?
Yeah, I'm totally agnostic on the volume mix. I mean, you just have to, you start with what is the challenge that the patient is facing, and then you work backward from that. I mean, one example would be, you know, if you've got a physician who is a consistent user of Signatera, but then maybe she has like an 85-year-old lung cancer patient show up in her clinic, and the guy is just too frail to stick a large needle into his chest to suck out some tissue to then run a Signatera test, but she'd like to offer him something, you know. That is a worthy use case for a tumor-naive MRD. We need to address that if we aspire to serve these patients and physicians. That's just one small example of where it might be relevant to have a tumor-naive MRD.
One can think of a half dozen other use cases. It's not really our job to dictate where to choose. That's up to the physician. Our job is to offer options.
Okay. In terms of gross margin though, I feel like, you know, the genome backbone version is going to be higher cost, you would think. I mean, how does that sort of compare?
I think over any kind of relevant time horizon, you're going to have to really squint to see the unit economics being massively different between these tests. I was very heartened to see us launch the genome test, get the data out there, and then we were very rapidly able to secure, just confirm reimbursement for the genome assay that's exactly in line, it's the exact same thing that we get for the exome backbone test. It makes sense because it's effectively kind of the same workflow, and both of those products are within the Signatera franchise. That type of thing, could you argue, could you have gone back and haggled for a few extra dollars for a thing perhaps. Having the same pricing makes life a lot simpler for us, for physicians, for payers.
It makes it simpler in terms of letting the physician just sort of make a choice. If you think about this franchise, it's not like a one-year franchise. We fully expect to be running Signatera tests 10 years from now. The incremental costs of one workflow or another, it's going to even out. The costs can come down, and we've always done that. We've launched new workflows, and then we invest heavily to reduce the cost of goods sold so that we can continue to offer these products sustainably.
All right, great. Another, you guys kind of called out the opportunity of $252 million- $300 million in, I guess, incremental revenue from new indications reimbursed by Medicare for Signatera. These are going to help you get to the $2,000 ASP as well. Maybe just dive into that metric and how you got there, what that looks like.
Yeah, I mean, there's nothing magical about that. I kind of already touched on that in my preamble. Sorry to steal your thunder with that one. The idea is that you have, when we initially built Signatera, we built this as a workhorse tool for the workhorse oncologist who's going to see a bunch of different tumor types through the course of her day. She needs a flexible tool that you don't need to have a grid that you've memorized that says, oh, you can use Signatera in this indication, but not that one. You need to have data sets kind of across a broad swath of solid tumors such that the physician can feel comfortable kind of using it in a similar way across her book of patients. That's what you've seen play out in terms of our volume mix.
As I mentioned, one could have easily made the case, a thoughtful case that in 2021, if you forecasted the 2025 volumes, the percent of volumes coming from the top three cancers would be even, would be much, much higher. It'd be like 95% of the volume coming from the top three most common cancers. That hasn't happened. These slightly less common tumor types have continued to maintain a fairly consistent share of our overall volume mix. Now that we've grown, now that we're instead of 10,000 units a quarter, we're 180,000 units a quarter. On an absolute basis, these are huge opportunities in terms of just going and just submitting the data we've already generated to MolDx to generate reimbursement for those tests. That's why it's a bigger opportunity now and why it's worth highlighting.
The timeline was like, I think it was like 12 months- 18 months for these several?
Yeah, I mean, we're sort of on a kind of a rolling timeline of submissions to MolDx. They've been a very thoughtful, you know, reviewer of those submissions. You won't get, you know, all of that all at once. It'll just come in a kind of a linear way over time.
Okay. How are we thinking about like ctDNA-based MRD in NCCN guidelines? Does this look like an important, you know, catalyst at some point for you guys?
Yeah, look, obviously the guidelines are completely beyond our control. The thing that we control is what we can do, everything possible to support just truly excellent, long-dated prospective outcomes data that any guideline committee would want to see when considering guideline adoption. One example, again, is I hope that the IMvigor trial would pan out in a way that could potentially be up for consideration for guidelines in bladder cancer. I think over time, if the trend in the kind of the quality of the results holds, it's inevitable that we'll get into the guidelines. I don't think that the strategy requires that we achieve that goal by a specific date. It's more important that it happens rather than when it happens.
Okay. I want to just talk about screening a little bit, the early cancer detection business, just briefly. You have a bunch of trials, like one, you know, one PROCEED is going to read out in 4Q, FIND reads out in 2027. I guess let's just say PROCEED is relatively successful. You'll move on to FIND and you'll kind of read that out. Basically, is the thought, two questions. First, is the thought that you'll announce, you'll launch an FDA-approved screening test for, you know, colon cancer in that 2028 timeframe? You'd be up for USPSTF type guidelines, like being in that group of blood-based tests, let's say. Number two, what are the costs associated with the test, with the trial? I think it's like 25,000 people.
Yeah, no, those are great questions. One, yeah, I mean, I think that timeline is roughly right. I mean, I think recognizing that it's 2025 and there are always uncertainties, when you're trying to do something new and hard like this, there always has to be error bars around those things. Yeah, I mean, what you just articulated is what we're running toward. That's what we expect to hit in terms of timelines. In terms of cost of the study, I think this is actually kind of a nuanced point, and it's worth considering for you guys. When you think about returns associated with any particular project, whether it's an acquisition or R&D project or what have you, any kind of commitment of investors' capital, I like to think of this on a return on invested capital basis.
That allows you to compare acquisitions and internal development on a level playing field. If you're an early cancer detection startup and you've raised a bunch of investor capital to run at that opportunity, the denominator for your returns is all the money that you've raised and put in, the years that you've put into developing the product, right? Then you've got to measure that against the revenues and the cash flows that you can generate, hopefully if you have good data. For us, it's a little different because, one, we had to develop the technology platform independent of making a decision about productizing an early cancer detection product. We had to have that because we were going to launch a tumor-naive MRD panel, right?
That is an important, probably a smaller kind of a niche use case, but nonetheless, that's an important need that our MRD customers have, and we've got to address that. That's a given. That's kind of separate. That decision to develop the platform, the technology platform, is totally separate from the early cancer detection decision. Similarly, a huge cost component to this decision for most companies is you've got to hire some enormous primary care call point, and that's an enormous commercial execution challenge. It's quite separate from the amazingly hard R&D challenge that's before you. Those are two pretty hard and pretty disparate problems. For us, we do have a lot of experience in the primary care channel, obviously with the OB-GYN channel. I think there, we have an excellent kind of hospital team as well.
We do have some initial kind of experience and an initial port of call for commercialization that I think can be helpful. Now, when you're calculating returns for this and costs, you're really kind of thinking about, okay, take the technology platform and apply it in the ECD settings, so productize, and then run the trial. The cost of this investment really does come down to the clinical trial. We've kind of characterized that as circa $50 million. I think if you're rigorous about counting the productization and things like that and incremental studies, it's more than that. It's still within a very manageable level that I think is worth doing given the size of the unmet need, given the size of the problem, and given where we are in terms of our track record of developing and delivering both an R&D and then our commercial approach.
I'm hopeful that that pans out, but we got to see.
Yeah, maybe, are there any read-throughs from having this huge NIPT database, maybe helping you inform the assay on the ECD side? Honestly, what gives you confidence in the ECD business given competitor data that's been more or less kind of disappointing?
Yeah, it's easy for, you know, a company that hasn't yet read out the FDA data to make a bunch of noises about how they're optimistic and things like that. I think the FDA enabling study is out there for a reason, that you've got to actually produce that. Obviously, there's a lot of internal excitement about that. We have a sense of how well the technology platform performs based on the data we've already shared with you and also the experience we've had with the tumor-naive MRD. We feel like we've got something that is really working there. Ultimately, it just comes down to that, you know, the FDA trial and we've just got to do it.
Okay, got it. Just on the financials, one bright spot of the quarter was that you raised the revenue guidance by a bunch and you raised it by a lot. You didn't raise the OpEx guidance, right? You're still going to generate cash. You haven't put specific guidance around that, but still that's positive. That's good. You called out some factors for driving the OpEx growth, that's commercial team expansion, new product launches, and clinical trials. Maybe just talk about what's going on, like how we should think about operating expenses going forward. We talked about the trial, but why are new product launches expensive? Just walk through the puts and takes and why it didn't make you have to increase the guide for OpEx, even though you had a nice top line beat.
Yeah, I mean, the goal for this year, we just said over and over again in 2024, the goal for 2025 was going to be to continue to grow the business, make all the necessary investments we need to solve these problems for patients to continue to improve the offering that we have, but also not to burn a bunch of cash. We wanted to maintain at this level where we're sustainably kind of cash flow break-even, cash flow generative. You see from the results in the first half, I think we're well on our path to achieving that for the full year. As we talked about on the earnings call, the growth in the OpEx this year has nothing to do with the revenues in 2025 or 2026. We could have just not done any of that.
It would not have changed the revenues for this year or next year. What we're doing with that growth in OpEx is we're investing in the future of the operation, 2027 and beyond. That includes having the right commercial scale to offer Signatera to a broad swath of patients in the United States and outside the United States. It includes just a relentless commitment that we've always had to run the absolute best, most thorough, long-dated prospective clinical trials we possibly can run. There we're still fully in investment mode. The fact that we've been able to generate cash and grow the business while being in investment mode should give you confidence. You should take heart from that. We've shown you time and time again that we can generate kind of operating leverage on our investments. We're doing that again this year.
Yeah, like $2 billion in revenue. You're still growing, I think it's like 28%, you know, normalized for the true ups and stuff. It's a pretty big story. When you think about just scaling and kind of getting to truly being a profitable company, you're probably not that profitable as it is, but either way, could you get to, again, like push through 70% gross margin and get to maybe 35% operating margins? We haven't seen that in the diagnostics since like Maridat, for example. What do you think about the long-term profile of the company?
Yeah, I mean, we've talked about it in the past at a high level. We've talked about 70% gross margins as a target. If you just look at the trajectory of the gross margins in this business over the last 24 months, that's kind of a less heroic move than what we've just accomplished. We've just gone from 39% gross margins to 63% gross margins in about a two-year timeframe, maybe slightly longer timeframe. Going from 63% to 70% doesn't, off the cuff, strike me as something that's impossible to do. It's going to require very good execution on our end. It's important to us because obviously it's important to shareholders. What it also means is that if we're hitting those goals and we're going to get to serve patients, that's when you're able to kind of generate cash, generate profit margins.
That's what allows you to be kind of sustainably fulfilling the mission that we have set out for in this company, which is to look after these patients. I'm excited about being able to do that.
Yeah, you keep generating cash. The question is, what are you going to use that cash for besides just reinvesting and everything? At this point, you're kind of outpacing. Again, you're generating cash. What are you going to use the cash for? You're not going to be taken out at this point, given you're like, you know, a $20 billion company, some would say. Are you going to acquire it? Again, how do you think about using cash?
Yeah, you know, don't have some religious opinion about how one uses, you know, cash in the future other than to be a good steward for the investors' cash as measured by returns on invested capital. What we have found time and again is we've bumped along, we've minded our own business, we've grown these franchises, and then high ROIC opportunities present themselves. Wonderful clinical trials that are obviously worth doing present themselves, and we need to invest in them. Opportunities to add to the product portfolio by building products that are complementary to our core products. These things present themselves because our customers tell us that they love the Panorama test, but they'd also really like to have a carrier screening test as well. That's a good idea. Let's launch Horizon, you know what I mean? We've done this, you know, Prospera.
We have a bunch of nephrology customers that love the Prospera test, but they would really like to see a germline panel that helps evaluate their CKD patients. That's a good idea. Let's launch the Renasight test. Over and over and over again, we've been able to find these opportunities where we really are pushing the envelope of helping patients while generating sustainable returns for the investors.
Got it. Okay. Maybe just finally, in looking at 2026, what's like, we talk about all these tailwinds and new products and stuff coming out, but what's one area that investors probably underappreciate that could surprise people next year?
You never know until you actually see the data, but I'm actually as strong as our clinical trial data has been, particularly in Signatera here in the last 12 months. I'm very excited about the slated data sets we have coming. I think there's a further unlock to happen where you can see this already at the academic conferences. As I mentioned, there's this momentum toward enabling a smarter era of cancer care, a more targeted era of cancer care that improves outcomes while also taking costs out of the system. I think we're going to have some data sets that really show you, and I won't belabor it here. We talked a lot about on the earnings call, treatment on molecular recurrence as a real opportunity.
We've got several data sets in that area coming that I think represent just a real shift change in how cancer is treated in the United States.
Okay, awesome. Let's leave it there, Mike. Appreciate the time.
Thanks for the time, man.
Sure.