Natera, Inc. (NTRA) Earnings Call Transcript & Summary

Thank you for joining us. I'm here with Natera and I don't introduce anyone by name, but these 2 have really easy names where I can possibly not miss pronounce, Mike Brophy and Steve Chapman. The only company here today that I introduced by name.

So let's just start with the thing everyone cares about Signatera. You're expecting 185,000 tests on the year. I had the highest numbers on the street, and I think you blew passed me. So really, what's working so well here. So sort of start with the softball.

Yes. Thanks. So yes, we were really impressed with the numbers as well. And I think when we kind of set 185,000 for the year, obviously, we're being conservative with kind of where we could finish up, but we're seeing things kind of fire on all cylinders right now. New patient volume growth is up. We're seeing consistent repeat usage by physicians once patients start getting tested with Signatera. And then now we're seeing nice growth in immunotherapy monitoring, muscle invasive bladder cancer, where we've recently gotten coverage, plus continued use in additional indications. So overall, I think feeling very good about things and expect the growth to continue.

Got you. You gave color that 25% of oncologists have ordered Signatera. How did you find that number? And as we're thinking about reorder rates, how should we think about how these docs will change their ordering rates as they get more familiar with the test?

Yes. So just to be clear, that was just last quarter, 25% of doctors of oncologists have used Signatera. And there's about 12,500 oncologists or something in that range in the U.S. And so we just look at sort of that subgroup and who's ordering in a particular quarter. What we do definitely see is that people tend to start off with a small kind of subset of patients that they think the test might be appropriate for, maybe a single time point order or 1 particular patient. And then once they become comfortable with the test, they tend to implement it into practice in a more significant way. So I do think, ultimately, every patient that comes in that's diagnosed in an indication that where Signatera makes sense, the doctor could use for both adjuvant, neoadjuvant, in many cases, adjuvant in the recurrence monitoring settings.

Got you. Yes. I -- 1 of the arguments I made to investors is that I think Signatera is going to be a very sticky test. Now you don't have really any competitors yet. I mean I do think -- I think [ Guardant ] Reveal is doing something in the neighborhood of 3,000 tests a year. But is it right that you go, you order an exome, they get a custom assay. Is it fair to say, you built this specifically for that patient, and you're not changing it. And if you can kind of maybe give some qualitative dynamics around oncologist conversations or anything like that. Just so we feel comfortable as if when competition does come, that they ordered an exome from us, we build it for them, they're staying.

Yes. I definitely think there's some stickiness on the product level on a per patient basis. We sequence or exome, we've built a customized assay for them. We're in touch with the patient. They like to see the results tracked. They can look at the MTM values and how they're trending over time. So I think there's some stickiness there. I think certainly within the particular office with the infrastructure that we have with 50 medical affairs professionals in addition to our sales team plus EMR connectivity in many offices, we're now preinstalled on the latest software Epic. So Signatera can be implemented within about a week on the latest software in Epic, where it previously took about a year to get that in place, plus the physician portal and all the tools that we put in place to collect tissue and so forth. I mean we definitely have stickiness in the office as well. But I think the most important thing is what have we done to differentiate the product? And I think largely, if you look at the clinical data, I think that's going to be what drives the stickiness for Natera over time. The operations are working very well. The commercial team is in place. The performance of the test works very well. We have a reimbursement. All of those things are great. But I think the 25 peer-reviewed papers that we have and the 10 more that are coming in the next 6 months is going to be the main differentiation. It's very difficult to go, as you can see by the number of peer-reviewed papers that have been put out in the MRD setting, it's not easy to just crank these papers out. And we spend a lot of money on it, and we've been at it since really 2015 was when we first started investing in data generation, and that's what's put us in this position today.

Let's maybe go a little bit step further. I mean like I know that it's probably hard to see you're doing a run rate of almost half a 100,000 -- 50,000 tests a year. I do think Guardant Reveal is somewhere around 3,000. There's some other LDT versions. I mean is there -- I mean when competitors are coming in, is your data saying that it's almost all new market relative to your customers? Is it pretty...

We just haven't seen enough data from other competitor entrants to even have a metric there. I mean what we've seen is our growth is both driven by just new physicians starting to order the test and then growth within accounts in terms of number of patients from the given account that are getting a Signatera test, but then also kind of the embedded volumes from patients getting repeat testing. And just because the competitive volumes have been so small, it's hard to really extrapolate as to where that might be.

Got you. Okay. And Mike, actually, I have 1 for you here in terms of the 10-month cash conversion on Signatera that you called out last quarter. Can you remind us what that cash conversion, the reason for that was? And what you're doing to improve it? I get that this was asked on the Q3 call is kind of review, but I think it is important.

No, I'm happy to cover it. No, it's just -- there's just a very thorough documentation process that's required to submit claims to Medicare, which we're happy to do. I think part of it also is just a learning curve for us in terms of handling the huge amount of volume that we got in, in a short period of time and having the right investment in kind of automation of workflows to turn that documentation back around to submit to Medicare. So I think that timeline can come in pretty meaningfully through the course of '23. I mean this is kind of a -- this is a side effect of just really rapid growth that's well ahead of our expectations. And I think any time you have a product that grows that dramatically, I think there's some working capital that's kind of associated with that, and we're in a great position to bring that in.

Got you. So we almost want that to go up.

Well, look, I think it will -- like the -- on an absolute basis, I think you will have structurally there is kind of a working capital component to any kind of growing business. But there is -- there are also discrete improvements and implementation of automation that we are down the path to executing that does -- for prospective test will kind of bring in that conversion cycle much tighter.

Got you. When we're thinking about the cash conversion cycle, I mean, can you remind us about how you're paid on in the adjuvant setting versus the recurrence? I mean I do think you do get a payment upfront, larger payment upfront that covers a series of tests. So 1 of the things maybe I want to ask is, why aren't we seeing higher cash conversion because you are doing a lot of initial exomes upfront with some of that cash and some of the -- anyway.

Yes. I mean I think the simplest way to think about it is that there's really 2 primary ways that we are reimbursed by Medicare for Signatera. One is for an upfront bundle of tests. And the way to think about that is really, hey, there's -- it's a payment for a subscription to Signatera for a 6-month adjuvant treatment window. The patient is in this kind of minimum residual disease assessment post-surgery. Then once the patient is in remission, then the indication switches to a recurrence monitoring indication where, hey, we're in remission, and we're just monitoring the patient using Signatera to check for recurrence of their cancer and that we bill at the ADLT rate. Now that's -- I'm simplifying that quite a bit. I mean I think there are 5 other z-codes for different use cases there that are relevant. But I think from a modeling perspective, I think if you have those 2 right, then you'll be largely right in your kind of in your modeling of the revenue.

Got it. Let's go to the topic of what it seems to be for every lab, which is breakeven target. What are the revenue and some of the other assumptions that are required for you to hit your target? And can you remind me, is it H1 2024?

Yes. We said roughly mid of 2024. We think we can get to cash flow breakeven. And I think just as a reminder, we've set out a target like that previously. We set it out for the women's health business a few years ago and we got there. So the women's health business today is circa $600 million plus in revenue and generates more than $50 million free cash flow just from that business itself. And that was -- if you go back -- I know there are several people in the audience, people listening that have been involved with the company for a very long time. They can recall a time when that was a real point of emphasis is can you drive the women's health business to cash flow breakeven. We got there by first building up a world-class sales team, building up a best-in-class, from our perspective, data and customer experience and product. And then we were able to just leverage that existing kind of a constant sales team and continue to generate growth with that market-leading product, okay? So it's really the same playbook again now with Signatera primarily, okay? So we've gone through this phase where we've built out the commercial channel to a level where we can have a market-leading product and a very strong position there. And we've got fantastic data supporting what we think is a best-in-class product. And now you're seeing on basically constant sales rep count this year, you're seeing the volumes really ramp. So it's just as simple as kind of setting up the infrastructure and then seeing the volumes ramp once the infrastructure is in place. So that's kind of the main component is just for us going forward now for the overall business is to have operating expenses grow at kind of mid-single digits and continue to deliver volume and revenue growth. There's 1 other variable there, which is what kind of gross margin traction can we see in the business? And there, I think that answer is determined by how quickly can we get into guidelines in 1 of 3 key areas. One is the microdeletions guideline, one is a broad panel expanded carrier screening guideline, and the other is a potential footnote inclusion in the NCCN guidelines for colorectal cancer. Any 1 of those 3 enables kind of sequential improvements in gross margin paired with the revenue growth, and you kind of cruise the cash flow breakeven on the timeline that we described.

Got you. So I'm hoping I don't get you in trouble here because I'm a giant MRD bull, and I want you to absolutely cement that competitive advantage you have with Signatera. So when we're talking about cash flow breakeven, can you confirm you're committed to running these tests, expanding indications, running the studies necessary in order to really cement that competitive advantage? And I realize you have a couple of different masters, some shareholders what I want, which is that and then there is an OpEx...

I'll comment on the OpEx and Steve can comment on the strategy. I mean on the OpEx, just as a reminder, we did build up the OpEx to a new high in order to support just exactly the strategy you just described, David. So we feel like we're at a position where the investment is sufficient to kind of meet those objectives. But I'll let Steve talk about some of the studies and things like that.

Yes. So you've to build out a sales team. You have to have medical affairs support and you have to be -- you have to go indication by indication and look at the data strategy that you have for each 1 of those, and that includes biobanks, that includes prospective trials, that includes pharma partnering and data generation. And so that's what we've done as we said, look, do we have those teams in place and do we have the right trials funded. And when we look across the board, largely, we think we're in a good position. We're a peak spending on operating expenses, and we think we can keep that flat and kind of grow into that over the next couple of years, grow into the sales infrastructure that we've built. And that definitely helps us kind of get on that path to cash flow breakeven and hit the targets that we've outlined, while still making sure that we're growing Signatera. We are seeing a lot of utilization in tumor types beyond colorectal and beyond muscle invasive bladder and beyond immunotherapy monitoring. And I think that's something that while it's sort of costly in the near term, I think there's an advantage there in that doctors are wanting to use the test, even if we're not really promoting it and they're helping patients in those particular cancer types. And when that becomes reimbursed business, I think that we'll be in a good position there. But we do have multiple additional submissions in or in planning to Medicare for additional tumor types. And as more papers are published, we'll be in a position to submit more. So we just had an ovarian paper published. We just had a gastroesophageal paper accepted. That's a very large indication. I think it's the sixth largest in the United States. So of course, when that paper is published, we'll be submitting very quickly. We already have data published in lung and breast. We're going to have melanoma and pancreatic published very soon. So I think there's a large pipeline for us to go after there.

Got you. I'm going to go back to this, but I just got an inbound in the e-mail. And they were asking you to confirm what the revenue was or the run rate revenue was on the breakeven target, you gave 1 on that?

Yes. We gave 1 on the Q2 call, and we set a range of circa $1.3 billion to $1.5 billion is the kind of the annual number. And just to further clarify that, I mean where we set that out was that we could get to a quarter where we get through to cash flow breakeven on the quarter, not for the full year at that level, but on a quarter.

Okay. All right. So going back to the studies here, I think 1 of the things intriguing when you look at like the Genomic Health business was the fact that you couldn't run another clinical trial because it was tied to chemotherapy. Is there an opportunity for you and with CIRCULATE here where no one is going to be able to run a similar kind of clinical trial because it involves giving a patient chemotherapy? Is that -- do you see that as a major competitive edge that maybe is not talked about as much?

Yes, I do think so. I mean look, I think whatever you make the investment to do a large guideline enabling clinical trial, you're going to put yourself in a position where the standard of care is going to change depending on the results of the trial. And I think that itself sort of creates a competitive advantage. And when you look at multiple areas where we have randomized trials being performed including certain arms at the CIRCULATE study, I think we're in that position.

And just to confirm on that circulate study, there is given chemotherapy to patients right now as a standard of care, because it is the standard of care in some patients right now, right? And then potentially MRD would remove that.

Yes. I think the key readout that we presented at ASCO last year, which was on the 12-month data, and now what's in submission to nature medicine has been accepted as the 18-month data, but I can only really talk about the 12-month data because the remaining is embargoed. But the key finding there was, if you're positive, MRD positive, you benefit from adjuvant chemotherapy. And if you're MRD negative, there's no benefit to getting adjuvant chemotherapy. And so today, the doctors are using their best clinical judgment to determine who should get adjuvant, but there's a lot of patients that need it that don't get it. And there's a lot of patients that don't need it that actually are still getting it and getting all the cost and side effects associated with that. So the idea is effectively an MRD-driven stratification to determine who should get adjuvant chemotherapy or not. Now the CIRCULATE data was confirmed in a very large data set that was presented at ESMO recently. One of the world's leading experts in GI oncology presented results of 16,000 patients that have been tested with Signatera at top academic centers around the United States. And the conclusion of their study or of their data set was the same, which is if you're MRD-negative, you don't benefit from adjuvant chemotherapy. And that 16,000 patient cohort is also being submitted for peer-reviewed publication. So we now have multiple different cohorts where the same findings are in place, and I think it will be great to get the Nature Medicine paper published. We think that could be now any time, maybe in December or maybe early next year.

Got you. You're probably going to dodge this, but I'm going to try anyway here. So let's go back to some of the catalysts, microdels, breast, CMS Decision, carrier screening guidelines and NCCN guidelines. Which of these is the most near term and the highest probability?

Yes. So I think...

If you could rank order on it?

We've said for a long time that we think like it's possible that you're going to get commercial coverage for Signatera in colorectal cancer from some medium-sized payors. And we thought that, that would happen in 2022. And here we are, there's 30 days left in the year, and we still feel comfortable that, that can happen. So I think that's definitely a possibility. I do think that the data that's been published that supports the use of microdeletion testing is exceptional. And the lead authors, who are renowned scientists in the space and physicians in the space, have concluded that they think it is a candidate for screening in pregnancy. And so I wouldn't be surprised if guidelines are reviewing that given the quality and the strength of it. Societies are reviewing that given the quality and the strength of the data and the high clinical utility. I think on NCCN guidelines, we know the committee met in August, but unfortunately, the CIRCULATE paper was not published by then. It hadn't been accepted, and it's been accepted now and Nature Medicine will be published probably in December or January. So I think it's exceptionally unlikely that the August meeting will result in a guideline change for Signatera. It's exceptionally unlikely. In fact, we're not expecting that at all at this stage, because the paper that would be driving the guideline change wasn't even published. And they're not allowed to look at data that hasn't been public -- been made publicly available and published. So we think they're going to be meeting again early 2023, at which point the paper will be published and there will be an opportunity to review that. So lots of different potential upside drivers. But even without any of these sort of upside opportunities, just continuing to grow the business in these very large markets that we're in and executing our plan, generate a lot of peer-reviewed data, have a good user experience, have a strong distribution channel, grow reimbursement, and grow ASP, grow revenue while reducing COGS, keeping operating expenses flat and getting to cash flow breakeven, and that's what we're set up to do.

Got you. Okay. It just has been a big topic. I guess, I'm only talking about Signatera, but I'll talk about productive health here. What happened in California? Why does it impact all payors, not just necessarily like medical or -- and can we expect a reverse of the decision?

Yes. So the California State screening program has historically offered high-risk NIPT. And then for average risk patients, they offered serum screening. So California screening program decided that they wanted to offer average-risk NIPT to all women in California. And they selected 2 laboratories, Natera and Quest Diagnostics that would participate in the program. There may be others that participate in the future, but for now, those were the only 2 that have been selected initially. Now what they wanted to offer was a limited screening panel that had only a portion of the diseases that we could test for with Panorama. And so they contracted it at a very low rate for that more limited panel. And then they mandated that all NIPT that is run in the state has to be run through the California Program using either Natera or Quest. So what we saw initially was a pretty significant uptick in volume. But in exchange for that uptick, we saw a reduction in the ASP, because doctors were shifting from Panorama to this much more limited panel Vasistera. Now what happened since then, and that was kind of in late September, where really everything switched over to the Vasistera product. There's been an injunction put in place in California. And I think that injunction sort of limits some of the enforcement of the program. And now we do see some of the additional laboratories that aren't part of the program are coming back in and being able to operate outside of the program. And so we're still assessing how this impacts Natera, but I think, ultimately, we're in a good position because we're operating inside of the program, and we're waiting to sort of see how things pan out. And I think we're happy to be seeing an increase in volume that we expected.

Got you. We're out of time. I actually wanted to ask 1 more, but...

If we have time...

Really quick. It's the David Westenberg special, which is it's 2027, you're at the Piper Sandler conference. What's your most proudest moment you've had over the last 5 years?

Look, I think Natera is a very mission-oriented company. And when you walk around the halls and talk to people, everybody has had friends and family members that have been impacted by the type of testing that we offer, whether it's in pregnancy or organ health, but particularly in cancer. And I think helping millions of patients improve their care is certainly going to be our proudest moment. From a business standpoint, we hope to execute our plan and grow revenue significantly while getting the business to cash flow breakeven and be deeply penetrated in the very large Signatera opportunity.

Great answer. Thank you, everybody. Thank you.