Last run of the day. I'm Doug Shankle. I lead Wolf's life science tools and diagnostics effort. It is my pleasure to have Mike Brophy of Natera with us. Mike, thanks for making the trip.
Yeah, thanks for having me. Yeah.
We really appreciate it.
Natera is a leading diagnostic company focused on leveraging cell-free DNA technology across prenatal testing. More in focus these days is the market leader, a pioneer in really advancing the field of minimal residual disease testing, or MRD. Again, thanks for being here, Mike.
No, thanks for having me.
Lots to cover. I know we won't get through all of it. Between the two of us, we have a hard time doing that. I think it's a good problem to have in the case of Natera, because there's so many great things going on right now. I thought we would spend a few minutes just doing kind of a state of the company to kick off. I do want to spend, no surprise, a bit of time talking about where we are in MRD in terms of market penetration, competitive dynamics, and some reimbursement developments fairly recently. A more recent announcement, really leaning in more on early cancer detection. I think it makes sense to spend a little bit of time there.
Love it.
State of the company, let's talk about Q3. Feels like it was a while ago, but I think you reported two weeks ago. It was another outstanding quarter. You beat revenue expectations by $25 million, excluding true-ups. You increased full year guidance. I think it was by $160 million. You're now tracking to 30% growth on a million, sorry, multibillion dollar base. What have been the biggest surprises that have driven upside to targets this year?
I think that the, look, I guess I'll start with just the ramp of Signatera has been transformational, I think, for the space and for patients and for increasingly just the way that cancer patients are cared for in the United States. Signatera is becoming much, much more the standard. If you go around to some of these academic conferences, just walking around, I think it's much more sort of the median presumption that cell-free DNA ought to be getting deployed and helping to guide patients' cancer journey. That's totally different than it was even 18 months, two years ago. That's a real credit to the team.
I think that's a function of all the data that we've delivered and the receptivity from the oncologists and from the patients, because this a couple of things, I mean, this fits in perfectly into their kind of existing clinical workflows. The clinical utility is just immediately apparent, whether you're trying to figure out there's so many kind of known inefficiencies around the way that people get treated for cancer, because we just don't know. For example, once you have a surgery to have a tumor removed, like, hey, should you go right to chemotherapy? Or should you watch and wait? Or should you escalate?
are so many of these little micro decisions that oncologists have to make in partnership with their patients all the time to have this tool that just informs that better, saves the system a ton of waste, and it makes for a much better experience and better outcomes for patients. It is just fundamentally because that works so well. We have just seen a massive ramp in the utilization of the product. More generally, I could tell you that same story in women's health and organ health. Just rewinding 10 years ago, I would be amazed to be telling you now that something like 80% of women get an NIPT in the United States. They ought to, right? It is just so easy to do, and it is so much better than what went before it. It is nonetheless heartening to see that market continue to mature.
Organ health is in the middle of this curve where you're seeing this kind of rapid, I think, changeover from a previous total reliance on pretty invasive biopsies toward we're not there yet. We're sort of in the transition phase toward kind of just having cell-free DNA just be the tool that helps you kind of monitor how a patient is doing post-transplant. In chronic kidney disease, there's a huge chunk of people who have chronic kidney disease because of a pathogenic variant that they've inherited. You treat these people differently if you just know that information. That's like now in the guidelines to be part of the workup. Kind of across the board, it's kind of the same story as, hey, we're solving these important problems for the patients and the physicians. It's fitting it.
These products make sense for them to use, and so they're just using them. That's happening pretty organically. As part of the function of taking costs out of the system, we've had a better and better time of it in terms of just getting paid for tests when they are covered by insurance. That's been a huge change for us even over the last couple of years. We made a massive investment in our own team, which was a little bit frightening to do because you kind of have to do these things kind of upfront and then hope that it works. The way that we have historically allocated capital to Natera is that we wait to see what's working, and then we feed it capital to kind of keep it going.
This was like, hey, you got to build a pretty good team and then see if we can get paid uncovered services more frequently, and we certainly have. The revenue growth in the women's health business has been outstanding this year. When you have a large business where we have a very strong position and then the revenues are really ramping just because the fraction of time you're getting paid is increasing, that sets you up to really blow through targets and exceed expectations. That's kind of what's happened this year. I think we're really set up to continue to do that in 2026.
I do want to talk about some of the other products, but Signatera specifically. You did outline a long-term framework for Signatera to grow to $5 billion in annual sales, gross margins approaching 70% with healthy EBIT margins. How would you describe line of sight to that as we sit here today versus six months ago?
Yeah, and I'm not trying to spin you guys on a particular number for Signatera revenues. I mean, I think that the investment community has very good visibility, and people are welcome to disagree. I'm just saying, look, how big is the addressable market?
Somewhere between 50 and 30.
You know what I mean? It's something like, I mean, I've seen thoughtful estimates in that range. And then what share should we have of that over time and maturity? I just don't think it's, I don't think it's unreasonable to think that the Signatera revenues ought to be something in that zone. Five is $8 billion? Is it more? The point is that when we're making decisions right now about what to build and what to do, that's a big target, and we ought to be doing those things to build. I think that's important context for investors. The main thing that I want to do when I come to conferences like this or we talk on the call, I just want you guys to just sit next to Steve and me as we're kind of allocating capital inside the business. What are we seeing?
What's the decision-making framework? The decision-making framework for Signatera is, hey, we're going to do something like a little less than $1 billion in revenue in oncology this year. This ought to be 5, 8, 10 times that. There ought to be a huge number of just we ought to be hair on fire with obvious things to do, and we are in that zone. That's very much our mindset right now.
You've talked about OpEx growing slower than revenue while still investing in MRD studies and now moving a bit more aggressively investing in early cancer detection. There's more commercial expansion to be done. How should we think about how you're balancing the opportunity versus OpEx?
I think the philosophy is very similar to the philosophy that we've had here, which is that we would like to just do the right things in terms of make the investment to do top-notch R&D, top-notch clinical trials, have an excellent user experience, and then have that be so successful that we grow into that infrastructure. We have done that multiple times over the life cycle of this company over the last 10 years. One recent case study is, I think, like middle of 2022, we had a quarter where we burned about $100 million in cash in the quarter. That was not a good time in the market to be burning so much cash. There were some very polite but persistent inquiries, like, hey, guys, what exactly is the plan? We said, look, we're going to grow into this.
We'll get to cash flow break even by middle of 2024. We expect to be kind of sustainably generating cash flow thereafter. If you look at the level, just absolute dollars of R&D and OpEx that we had in the middle of 2022 and compared it to the last quarter, much, much bigger now. I mean, we've massively expanded the R&D effort, massively expanded the commercial operation, the user experience operation since then, and yet we now sustainably generate cash. I think it's really the same story as you kind of progress toward EBIT and then EPS, is that there are kind of natural sort of limits to what one needs to do in terms of having a commercial operation, in terms of having a user experience operation. R&D, I think, is a little different.
I mean, I think there are kind of the amazing thing about Signatera is, I mean, this is like the thing people, I've said this before, but it's a little bit like Star Trek. I mean, there's always another planet. There's always another important clinical trial that you could be doing. We're going to do them. I think that when you think about an OpEx base that's kind of approaching $2 billion and we say, hey, it's going to grow 10%, there's some industrial logic around like 10% on that's an incremental $200 million. One can get a lot done with those dollars. The way that that works for us in terms of overall P&L is a math we've already gone through. I mean, the revenues can grow much more quickly than that.
Q3 was another record quarter for Signatera clinical volume. As we sit here today, would you be willing to at least kind of ballpark where you are in terms of penetration in your largest tumor types?
Yeah, I mean, I think so I think breast cancer and basically all the tumor types, we're basically nowhere in terms of, I mean, we have so much room to run that it's not really even worth considering. I think what we should do, like colorectal cancer, we should just do that one just to give you an example of kind of the most penetrated one. Again, guys, I'm not trying to get you to agree with me on a specific market size. I'm happy to have different ways to cut this. There's something like 200,000 people every year in the United States get diagnosed with colorectal cancer. Now, you've got to make a decision around, like, okay, what fraction of those people are relevant for Signatera use? Let's say it's 125,000. Again, different estimates. Your mileage may vary on that.
You need to say, look, this is a repeat monitoring test. What is sort of the annual testing volume as a TAM? I do times 10. That sort of comports with the idea that people get about 10 of these tests over the course of their cancer journey over five years. Also, if you think about multiple vintages, multiple class years of patients that are starting with us, that kind of creates this waterfall effect. Once you're kind of into year five, like we are now, if the rows are the patients and the columns are the years, you can kind of sum the columns and you kind of get to, on average, kind of 10 tests per patient, if you will. I kind of do times 10 as an annual to get to an annual testing volume TAM.
I can multiply it by 10, and that makes life a little easier for me. If it is 1.25 million tests as an annual opportunity just in the United States, colorectal cancer is about half of our volume. Okay? We did about 200,000 clinical units in the quarter. It is 100,000. We are run rating about 400,000 units. That is 400,000 on 1.25 million. In my experience, just having been in executive space for a long time, you might as well have infinite headroom at that point. There is just nothing that you will do where you are running into the top of the market when you are that underpenetrated. NIPT, as I mentioned, is probably 80% penetrated. You do see some of that.
I mean, you do see some of those dynamics where everyone's getting an NIPT that's going to get one, you feel like sometimes. And then sometimes there's growth opportunities. But colorectal cancer, there's plenty of room to run. To say nothing of the fact that we're hoping to launch in Japan in 2027, which would effectively double the annual volume TAM available to us. So lots of room to run.
Yeah. Should we be spending more time on the Japan opportunity? I mean, I don't mean here, but just as we update our models and think about the long term.
Oh, maybe. I mean, I think that it's one of these things where we've never launched in Japan or we haven't had a major launch like that in a different country. We're working with the Japanese FDA right now, and that's been a very good collaboration so far. I'd hope to get hope that we can get FDA approval from Japan sometime in 2026 and then queue up and get the coverage, at least for a preliminary coverage decision into 2026 and then a launch in 2027. It is interesting to see among investors who has a time horizon that can accommodate that. I'm kind of happy I pass no judgment on that. I do think it's an interesting opportunity in terms of further fulfilling the mission of the company.
I mean, the point is, if you solve these big important problems, then the reimbursement and the volumes, they tend to take care of themselves if you're solving the super important problem. This is a very important problem in Japan. Colorectal cancer is a very common disease. The Japanese key opinion leaders and just the health system in Japan have been very on top of it in terms of being forward-leaning in terms of running these amazing prospective clinical trials. A lot of our outcomes data is Japanese data because the system in Japan is so well disposed to innovation. Okay? I think it's a very favorable situation for us to help a lot of people. When you're doing that, like I said, I mean, the revenues and the volumes ought to flow.
Obviously, and you just put it well, the focus of the company is trying to solve a big problem and lead to better clinical outcomes. As I look at the menu of products you're offering, there's base Signatera. There's whole genome Signatera. There's now Latitude, which is tumor agnostic. From a strategic standpoint, again, you're trying to solve everybody's problems. Is there also, from a business standpoint, the idea that you've built this infrastructure, you've built thought leadership, you own this market right now, have a solution for everybody at this point and competitively don't leave a lot of room for others to maneuver where you can't go?
I certainly don't. I mean, I wouldn't characterize us as owning any market. I mean, this is a huge, huge problem that a lot of companies are going to be, a lot of smart companies are going to be deploying a lot of effort to help solve. And that's a good thing. I mean, that's kind of how things are supposed to work. We kind of welcome that. We welcome the pressure of having to be as good as some of these other really sharp groups. There is a lot of room to run there. In terms of the different kind of the portfolio, I think that for the vast majority of physicians, I mean, they're kind of ordering Signatera, and they're very focused on what is the clinical trial data for Signatera.
I think investors tend to be more focused on the components of is it a genome backbone or is it an exome backbone? That is because there are publicly traded companies that contribute to those things. There are not really a bunch of different companies to invest in for PCR primer manufacturing. I get fewer questions about what upgrades are you doing, are you making to the PCR primer designer. Those things matter for performance as much or more than exome or genome backbone. The pricing is the exact same. People are ordering Signatera. I think there is kind of, it is much more of a blend from the perspective of the patient and the physician than it is for the investors. That is fine. I think that is worth you knowing because that has implications for how these things grow.
I think Latitude is a little different just because I think there has been kind of a now kind of a fairly broad understanding that if you can do it, you'd rather have a tumor-informed assay. I mean, there's just such an advantage.
Performance is great.
Right. Yeah, yeah. I mean, that's such an advantage to know that information. Shouldn't we leverage that information to deliver a better product? We should. Historically, the question was, well, can we do it? How often can we do it? The answer is we can almost always do it. We can almost, yes, it's a huge chasm to cross to kind of build the infrastructure to make that a reliable service. We've done that now. It's very painful to do, but we've crossed it. Now people can just have a tumor-informed assay, but not every time. It becomes an important problem if you get an FFPE block in for a patient, and then we get the block in, there's no tissue in that block. That's a hard problem for us to solve.
I can't but it's still disappointing to report back to the patient and the doctor, "Hey, there was no tissue in this block. We can't build you a test." To have Latitude there as a reflex, you say, "Look, if we don't, for whatever reason, if we can't get access to tissue on the timeline that you need it, we'll just reflex to Latitude. What I promise you is that we're going to keep trying. For the second one, we'll try again. Hopefully, we can get you onto the tumor-informed platform." I think Latitude is a different conversation in that it kind of does solve this incremental problem. That is useful to the patients and the physicians.
Using that framework, any guess as to how much Latitude could account for as a percentage of volume long term?
You see in the Q3 results is tiny, right? I mean, it's a few hundred units on 200,000 total, which wasn't surprising to me. It's hard to know exactly what the uptake would be if there's certain use cases where it's particularly relevant. I'd be reluctant to hazard a guess other than to say, I mean, I think one thing that we've learned is I do think the vast majority of patients over time will get a tumor-informed assay just because it just makes sense and it is achievable. So we'll do it.
I think Signatera genome reimbursement is a little more straightforward. Latitude, what comes next there?
Yeah, we'll get the coverage. There's already a player that has tumor-naive coverage. We'll just use the same pathway. I would anticipate sort of the same pricing, that type of thing.
A few loose ends. MolDX, I think you've talked about, is it seven MolDX submissions by year-end? Is that right?
We've got them queued up, and I don't know if they all get in by the end of December or what have you. The point is that we have data and we've got kind of submissions in flight ready to either in flight already submitted or submitting. We're in that process.
What percentage of current CMS volume will those cover?
Something like very roughly, something like 30% or so of our volume that comes in from Medicare patients comes to us from a they have a cancer type that we have not yet been able to go to MolDX with and actually get coverage for. That is disappointing for us. I mean, we have done a lot of work and we have gotten the we have got the data in order to merit generating the volumes, and we just have not been able to complete that step with MolDX. That ends up being an opportunity for us, right? I mean, because I think we have shown you that we know how to engage with the Medicare program. We can show high-quality results. The results we have shown in the clinical trials across tumor types have been remarkably uniform. I mean, it is very similar types of performance almost regardless of the cancer type.
We're just going to work with them and get those submitted. Bad news is that they haven't already been submitted. Good news is that that represents kind of an incremental upside opportunity for us in terms of ASPs.
More coverage across the Medicare population. I guess sort of related, sort of overlapping, but not completely. Biomarker bills. I think we're up to somewhere between 20 states-25 states right now that have biomarker bills in place. Are you starting to see any increase in coverage as a result of biomarker bills?
Yeah. These things work kind of in conjunction with one another, right? The more Medicare reimbursement you have, the more volumes are relevant for biomarker reimbursement because the biomarker.
You cleaned up for me there.
Yeah, yeah. It's a thing. I mean, that's why getting the submissions to Medicare are important because they do have this kind of amplifying effect with our biomarker bill effort. I think I said on the Q3 call, I think on the $1,200 ASP stack, probably $25 of that one could attribute to the biomarker states. There's some judgment in there. I'm kind of making an estimate there, but I think $25 is probably fair. That's about where I hope to be. If you can go back and listen to Q3 call last year, I think I said $25. That's kind of where we've landed so far. That will be sort of a thing that we grind on with payers.
We have a good history over time as a very high-volume lab now of having kind of a collaborative ongoing relationship with a huge swath of the big payers in the United States. We have got to go to them, and we have just got to point out to them that, "Hey, this is a patient that is in a state with a biomarker law. They have a cancer type that is covered by Medicare. We have duly provided the service that is valuable to them and to you. We think that you have incurred an obligation to cover this patient." That is a dialogue with the payer. Oftentimes, it is around logistics.
It's around like, "Hey, the payer doesn't necessarily have the systems to be able to proactively kind of understand which patient should be covered and which should not, and what can we do to make that easy on them?" That is a thing that'll take six months of a dialogue. Once you get it fixed, you tend to get coverage from that payer.
Positives, more MolDX submissions, broader reimbursement within Medicare or that population triggers more biomarker bill activity, which gets you reimbursed more broadly. The thing with biomarker bills, though, is they do not typically, they mean coverage. They do not tell you a rate. The reason I bring this up is, do we need to be conscious of the fact that while there are some positives, at some point, there may be adjustments to the ADLT rate?
There is a this is how the rubber meets the road on this dynamic. A lot of Medicare patients receive their Medicare benefit from a commercial payer. If you are over 65, you can choose to have just your Medicare benefit administered by the federal government. You have Medicare fee-for-service in the parlance. Maybe you get your Medicare benefit from UnitedHealthcare. For a lot of payers, that is a very important part of their business as they are a service provider on behalf of Medicare, and they deliver the healthcare benefit for these Medicare recipients. That means that when I get Medicare coverage, it is incumbent upon me to not just contract with Medicare fee-for-service as a program. I have to go around to all these commercial payers, and I have to get a contracted rate for Signatera. That is largely done.
I mean, most of the big volume payers, I already have, I mean, I've been in network with all of them for a decade because we've been a big lab forever. So we just call up the relevant people at a big payer, and we negotiate a rate for Signatera. If you look at my in-network contract for Cigna, Aetna, United, any of these big payers, page four of that contract is a list of all of my products, NIPT, carrier screening, Signatera's on there. And then there's a negotiated rate. Okay? And so when the coverage changes, when their coverage expands, we've already done the logistics with the business team at these payers to have a contracted rate.
If you're some Blues plan in a biomarker state, we already have a contracted rate with you for Signatera, and you're already paying me on the Medicare Advantage patients that you see that you cover. Now I'm just coming to you with another patient that ought to be treated just like the MA patients are treated. There's not this need to go back and redo rates or things or redo contracts. I mean, the contracts are kind of already locked in there.
IMvigor 011 showed that Signatera-guided use of [adjuvant Zumumab] can drive a very meaningful improvement in disease-free survival and overall survival. Should we think this could be a trigger to NCCN guidelines?
Yeah, we'll have to see. I mean, I think that the, so I think the study, the broad consensus is that the study was very successful. The study was powered for disease-free survival, and we were able to generate an overall survival signal really early on. That's a smashing success. That's why the study is actually published in the New England Journal. This is kind of groundbreaking data. It's very likely that Roche and Natera will be able to use this data to support an FDA approval. Okay?
What typically happens when you have a new drug approval is that the relevant guideline committee for that cancer type will convene, and they'll just update the guideline to just incorporate, "Hey, there's a new on-label drug and this indication, and this is how it can be incorporated into the standard of care." I would presume that given that Signatera will be in the label for a TzO in this use case, that there'll be some reference to that this has to be cell-free DNA enabled in order to order this on-label for bladder cancer. I think that process is sometime over the next year, I would expect those things to happen. Bladder cancer is overwhelmingly the muscle-based bladder cancer patients are Medicare patients. It is very important to us to have this data.
I think that it confers kind of a halo effect across the entire franchise. I think it does is a very strong argument to be using Signatera in the management of your bladder cancer patients, particularly your muscle-invasive bladder cancer patients. Yeah, I think the guidelines are another one of many kind of steps that we've had here that further validate the effort.
We're about out of time. I have three, I think, important questions.
Okay, speed round. Let's go. Let's go fast. That's you too. You got to come on. Let's go. Let's go fast.
All right. You're making me nervous. Early cancer detection. Is it fair to say, one, you wouldn't move into this if you thought it was going to be a me-too product, and two, you feel like the biggest way you can differentiate is leveraging the samples you have in CRC, which nobody else has access to?
Look, I mean, back to the important problems, right? I mean, there are 40 million people in the United States that should be getting screened for colorectal cancer that are just not doing anything. Okay? I'm 46. I had a colonoscopy this year, probably only because I work in a company where I'm just so constantly exposed to people who are my age that have colorectal cancer. I went and got it. Otherwise, I mean, I have other things to do, and it was a huge—it was like a three-day ordeal. I am much more sympathetic to people who are not getting screened than I was when I was 35. I was like, "Of course, you should get screened." It is not that easy, right? You have to take three days off of work, and that is an amazing luxury that I have.
I can just reschedule my Friday calls to Monday. Not everyone can do that. You know what I mean? It is a very important problem. I think the data that we showed on a preliminary basis was extremely promising. Okay? Why do we even bother running interim data? A couple of things. I mean, we want to understand before we undertake a big investment in a large FDA-enabling study, we want to know internally, we want to have some good confidence that we have a shot for this thing to work. Okay? The data read out beautifully. Does that mean that it is a guarantee that the FDA-enabling study will read out in the same exact way as the interim study? No, it is not a guarantee.
I mean, that's why one has to run the bigger study, but it's certainly good enough for us to feel very confident in going forward on this and making the right investments to take our shot at solving this problem. There's not going to be that many companies that are in this space. Okay? I had previously thought maybe there'd be six or seven of these players. Turns out it's very hard to run that study. It's very hard to run a blood test that actually reliably catches, does its job in terms of screening this population without throwing off too many false positives. It's a hard problem.
I think the paucity of companies that can solve the problem and the preliminary performance that we put up, combined with our history of doing a good job in getting these important solutions to patients, I think sets us up very well to help solve this huge problem. It won't be just us, but we can be a big part of the solution.
$30 million- $50 million incremental spend, something like that next year?
It's more than that. I mean, it's going to be more than that.
More than that.
Yeah. Just the trial itself is going to be more expensive than that. Again, happy to do it because just in terms of just the capital allocation, I mean, hopefully, you guys, when you heard us kind of step through the results, you can at least you do not have to agree with us, but you can at least see what the thinking is as to why that is a useful the ROICs there ought to pencil out. I mean, that's worth us taking a shot on.
Last one. Not doing justice to your other great businesses in prenatal and organ health, but certainly from an opportunity and competitive standpoint, competitive dynamic standpoint, it sounds like you feel as good as ever.
Yeah. I mean, as always, there is just a flow of great companies that are in there competing and coming up with new ideas, and I love it. I really do. It forces us to be better all the time.
Like Fetal Focus?
I mean, I think that's one example. I think there's a lot of innovation going on in organ transplant, for example. I've been very pleased with just the drumbeat of new features and new data sets that we've just continually published in both of these areas. I mean, the heart data that we were able to publish in organ transplant, I mean, I think is incredibly important for heart transplant recipients. That's just I don't know how many people in this room are investing in the company because of the heart transplant opportunity. I kind of don't care because we can do this. This is right on the run for us, and we're really ramping that business extremely quickly because we're solving an important problem. NIPT has been amazing. I mean, I have four kids. My youngest one is 10.
He's the only one where we got an NIPT. I mean, this is like a new thing. Now like 80% of women get an NIPT. We've played a critical role in just changing the way that women are cared for in their pregnancy. That's been, I mean, that's part of the mission. That's why Matt started this company, is that he had a situation in his family where a partner had a child affected by an inherited disorder. It's just absolutely awful. Now that happens much less frequently because of Matt and because of all the effort over the last 15 years.
All right. This is fantastic. Thank you as always.
Yeah. Thanks, guys. Yeah. Cheers. Yeah.