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

Good morning, everyone. I'm Matt Sykes, the Life Science Tools and Diagnostics Analyst at Goldman, and I have the pleasure of welcoming Steve Chapman, CEO of Natera and Mike Brophy, CFO of Natera. Steve, Mike, thanks for coming. Appreciate it.

So maybe we'll just start off sort of post Q1. Congrats again. It was a spectacular quarter you guys put up. Would love to kind of get sort of post the quarter feedback, things that you want to make sure that people are aware of in terms of some of the things that you saw during that quarter? And what kind of surprised you the most about that quarter and what could kind of continue throughout the course of the year?

Yes. So obviously Q1 was really strong for us. We had excellent volume growth, across all the different business units. We had very strong revenue growth, very good gross margins based on increasing average selling prices. And then What was really exciting was achieving cash flow breakeven in a quarter for the first time in the company's history. So a lot of great things happening and the momentum is continuing. We're continuing to see a lot of interest, so feeling positive about things.

Got it. Maybe to start on women's health. And I think that there was an expectation at some point that given the level of penetration where you are, given the level of relative maturity. I don't want to call it a mature market, but relative to some other categories, the growth would start to slow yet. It's just continued its momentum. What are some of the drivers of women's health growth? And how should we think about in the long term about that normalization in women's health?

Yes. So women's health, the main products are noninvasive prenatal testing and then carrier screening. And of course, they've been out for a while now in the market, and we have a 50%-plus share at this point and the market is continuing to get more and more penetrated. But there's certainly still opportunity to grow the market. We do see doctors and hospital systems today that aren't ordering NIPT on average risk patients or they're maybe doing single-gene testing from a carrier screening standpoint instead of moving to the more NGS-based multi-gene panels. So there's opportunities to grow the market. We're also seeing competitive wins where physicians are choosing Natera's products based on the strength of the peer-reviewed data and the strength of the clinical differentiation. And so the growth really comes from both of those areas. In Q1, we saw one of the fastest growth quarters that we've ever seen. When you look sequentially versus Q4, I think Q4 '23 to Q1 of 2024, I think we grew something in the range of 85,000 women's health units. And the vast majority, probably 75% of that was from our organic customer base. And the other 25% roughly was from the acquisition of Invitae's women's health volume. So definitely continued interest in what we're doing in the data that we generated and the unique differentiators of our SNP-based technology.

Maybe just touching on that Invitae acquisition that you guys did. I think it was about $100 million of revenue that originally you guys acquired. The expectation was that you would retain lower than that. There was some customer selection that you wanted to do. Where are you in that process today? And what level of contribution should we expect from that Invitae acquisition over the next couple of quarters?

Yes. So we saw -- I think, first of all, when you think about the numbers that they had reported out there, the $100 million in revenue, for example, I think that was sort of in Q3 of 2023. And so we acquired the business really in the end of January 2024. And I think during that period of time, between Q3 of 2023 and, say, the end of January there were obviously changes that were happening at their company, and there was sort of attrition in customer accounts. So the starting point for us was quite a bit lower than maybe their last reported number. But we're very pleased with the performance in retaining the accounts. I think the physicians have all transitioned over, the ones that intend to, at this point. And I think we -- I think the transition is completed. The vast majority came on in February and then in March and it's sort of been steady state since then. And I think it's gone really well. Overall, very pleased with the transaction.

Got it. Maybe talk about ACOG guideline inclusion for 22q and carrier screening. It's something that's been talked about for a while, but a lot of the timing is out of your control. I'm assuming they're not waiting on you for any additional things that you need to provide. So maybe just talk about what your expectations are now for that guideline inclusion? And then, I guess, more importantly, if and when it does happen, what is sort of the material impact on revenues that you guys see from that potential inclusion?

Yes. So -- we think at some point in the future, ACOG may recommend moving to a more expanded carrier screening offering and may consider including 22q testing as part of the routine offering. And that's really based on the clinical strength of the product and the clinical data that's been generated. For example, for 22q, it's very common about one in 1,500 pregnancies, one of the leading causes of congenital heart defects and abnormalities, there's treatments that you can administer at birth. If you can detect the case prenatally, you can treat the babies with calcium to prevent seizures and hypocalcemia. So it's a very important disorder. We did a 7-year trial, the SMART study, prospective study. We enrolled over 20,000 pregnant women and did a full micro-array on each of the newborns or on an amnio or CVS specimen. So it was a very robust study and the performance was very strong, very high sensitivity, very good specificity. I think, again, proving the incidence of the disorder was what it was thought to be. So everything has set up nicely for a guideline. And I think we're just going to have to see whether those come in or not. If a guideline was to come, of course, given our position in the market with 50% share in the NIPT and I think being the leaders in expanded carrier screening and broad panel NGS-based screening. We think we're in a position to help more patients. And certainly, the differentiation that we have in our 22q product will be highlighted and will become even more important to physicians as we go forward. This is important. There's 2 types of 22q assays. There's the SNP-based testing that Natera is performing, which has a high sensitivity and a good specificity and has been studied in robust prospective trials. And then there's other assays, which are more of the massively parallel sequencing types. And generally, they have low detection rates. And I think that's going to be one of the concerns going forward for physicians is what is the sensitivity of the test, has it been studied in a prospective peer-reviewed study and what is the detection rate.

And Mike, any comments on sort of the margin impact from that? I know you're kind of absorbing the COGS already from some of these tests. But if this were to come through, it's not in your guidance, but I assume it would be margin accretive.

Yes. I mean I think it can be margin accretive. I think a lot of the machinery, if you will, around reimbursement is kind of already set up for the test and that it's clearly -- it's got its own CPT code, price seems loaded with most of the payers. And in fact at the time we were actually reimbursing the tests relatively low right now. So I think a guideline could potentially be accretive to margins. But I think a lot of it -- we've got to see. I mean there's kind of a wide range of outcomes there.

Got it. Maybe just sticking to women's health, but just the opportunities with fetal RhD test and how that builds upon your NIPT test and when are you anticipating revenues from this test?

Yes. So we recently announced a fetal Rh test. It was actually very timely because there's a drug shortage happening now in the United States. And this is something that -- where we thought we could make an impact on care. We've seen good uptake from physicians. There's definitely quite a bit of interest. In fact, societies recently came out and made what I think is generally a positive statement about the use of these fetal Rh tests. So I think reimbursement is probably a ways off just given the newness of the product. But from a standpoint of physician interest and I think the ability to make an impact on care and to help patients, it's certainly going well and in line with our expectations.

Got it. Maybe shifting over to oncology and to start off, just any high-level takeaways from ASCO you guys have that you want to kind of communicate?

Yes. So ASCO went really well for us. Generally, I think for those that attended, there was a buzz about MRD at the conference. And that's sort of what we've seen in the last conferences over the last 12 months. San Antonio Breast, ASCO GI earlier this year and now at ASCO. MRD is really the hot topic. Now more than 40% of physicians are using -- 35% to 40% of physicians in any given quarter are using Signatera and MRD-based products. And so obviously, there's -- there's a lot of interest in discussing it at the academic level, reading -- seeing new data readouts. For us, we had oral presentations and multiple poster presentations that were all received very well. So continued very positive feedback and looking forward to reading out some of the randomized data that we're putting out later this year.

And going back to Q1 for a second. You mentioned the strong performance of women's health, but Signatera also had very strong performance. Is there anything about Q1 that kind of led to that sharp increase in ordering and adoption of Signatera? And how should we think about the phasing of that growth over the course of this year?

Yes. So generally, we're seeing -- we usually grow Signatera in the range of like 7,000 to 8,000 tests incremental on a quarter-over-quarter basis. And I think we were in the 15,000-plus range growth, which was sort of 2x what we normally see. And I think this is just based on the strength of the data that we've been putting out, more interest coming out of the ASCO GI conference earlier in the year. We generally see that, that's a period of time for doctors to kind of reset and think about what they're doing from a protocol standpoint. I think, obviously, there were some competitor clinical trials that were halted because of performance purposes -- or performance issues. So all of these things, I think, have led to some increased utilization of product. And we're just continuing on seeing both new customers join. We're seeing customers that are already using the product expand their utilization. And then we're seeing patients that are already on the protocol who will continue to get blood drawn and stay on protocols. So it's all these things adding up.

And what is the balance between new customer kind of acquisition? And then just going deeper and penetrating the existing customers? And how do you see that balance shifting potentially over the course of this year into next year?

Yes. I mean, it's a mix. You have to really do all of these different things if you want to grow the business. You have to go close new accounts. And at any given time, there's a doctor that hasn't used an MRD test or hasn't used Signatera before that is interested that is joining and ordering for the first time. You have another group of physicians that they've used it maybe for one time point or one particular patient, and they're starting to think about now what other indications can they use Signatera for? Or what other patients can they use Signatera for? And then you have physicians that have gone through that process, and they've implemented the product more routinely in their practice, and they're starting now to test every patient that meets the clinical criteria and then they're just doing follow-on testing. So it's really a mix of all these. Of course overtime, as the market gets more and more penetrated, you're going to start to see more patients in the surveillance setting.

Maybe talk a little bit about the competitive landscape. You guys have had this market for a little while. And it just seems that the nature of the tests don't really encourage switching and things like that. So there's a bit of a captive patient group that you're in. But just maybe talk about the competitive landscape you're seeing now, how you think it might evolve over time? There's certainly a lot potentially out there, but it just seems to me that you're not seeing them quite yet. Just maybe any color on that would be great.

Yes. So we've continued to focus on generating excellent peer-reviewed data, investing heavily into randomized clinical trials, investing into product enhancements that we'll be launching this year. And in 2025, we said, we have some sort of add-on opportunities. And we're investing into our commercial team, into our operations, into our user experience. And all that is paying off. We're seeing that we're continuing to grow rapidly and our share continues to be very high. We've had a handful of competitors that have been enjoined because they were infringing on our intellectual property and those products have now been taken off the market. There's been a handful of competitors where they just haven't -- [indiscernible] I think physicians are looking for and their products really have [indiscernible]. And so we'll have to see. There's always been someone coming and that's been the case for the last 5 years. We're just focusing on ourselves and trying to do the right thing for physicians and patients. And we'll continue to do that.

Just touching on that sort of the clinical evidence you guys have consistently generated over time. You have the CIRCULATE-Japan, CIRCULATE-France, but we've got Altera readout potentially coming out in August. What are some of the key endpoints investors should be measuring the results on? And will the timing line up with potential NCCN guidelines next year?

Yes, that's a great question. So -- now most of -- what people have seen so far from the CIRCULATE-Japan study has been from the observational GALAXY arm. And that's where patients who were MRD positive, those patients either got chemotherapy or they didn't. And if they were MRD negative, they either got chemotherapy or they didn't. And what that study showed is that MRD status is a prognostic indicator, disease-free survival and overall survival, but also that MRD status is predictive of who will respond to adjuvant chemotherapy. And it's also for MRD-negative patients, predictive that those patients, in fact, don't benefit from adjuvant chemotherapy. So now we're moving from the observational arm into the randomized arm. And this is where patients that are MRD positive after definitive treatment will get randomized to either get no treatment or to get additional or -- for the first -- their first course of treatment. And so we're really looking forward to seeing the results of randomized study because this is what the guideline societies have asked for. This is what physicians have asked for. And we're committed to doing this level of work. It's been ongoing for now, I think, 5 or 6 years. This is one of 5 randomized trials, I believe, that we have ongoing right now, many in CRC, breast cancer, muscle-invasive bladder and the readout is going to look at disease-free survival in the 2 arms. And I think there's some comparator studies when you look at historical treatment studies in colorectal that have really moved the needle in this setting. We have a sense of sort of what those hazard ratios look like. We're just going to have to see that when the study reads out. We said it's coming out -- the top line data will be released in August. And certainly, if the performance is good and -- it's blinded, we don't know anything about the performance at this point, if the performance is good, I think this will be a very significant trial in the space, and I would imagine would likely impact guidelines and volume utilization.

Got it. And just thinking about other indications, you had some pretty strong data from your IMvigor trial for bladder cancer recently. And so how are you thinking about sort of a commercial ramp for that indication near term for bladder. But then also, how are you thinking about additional indications? And any color you can provide as to what directions you're going in?

Yes. So Signatera is a pan-cancer assay. And one of the things that is, I think, good about the test is that it's the same workflow regardless of the tumor types. So we don't have to make a completely new workflow if the tumor type is breast or bladder, colorectal for example. Muscle-invasive bladder is an area where we've generated significant evidence with IMvigor010 that showed that patients that were MRD positive, responded, and it was predictive of response to atezolizumab. I think there was a 41% improvement in overall survival for those patients that were MRD-positive and treated versus not. So now IMvigor011 is the prospective randomized FDA-enabling version of the study, and we actually expect that to read out in 2025. And so lots of interest in bladder. We've also launched the prospective MODERN study, which is -- it's basically the CIRCULATE study applied to muscle-invasive bladder cancer, where there's an escalation and a deescalation arm. And so that's another exciting randomized trial that we're doing in muscle-invasive bladder. We are seeing really strong growth there. It's a smaller market from a size standpoint, but there's a higher portion of Medicare patients in that population. And we think we can get a very high penetration rate in that particular segment of the market, given the significant amount of data that we're generating. From other indications, of course, breast, muscle-invasive bladder, immunotherapy monitoring, colorectal, these are all areas that we're -- we have coverage in place today. But right now, I think we have 4, maybe 5 additional submissions that are either into Medicare or they are being submitted. And we have a full suite of additional peer-reviewed papers and studies that are underway or at various stages of being -- being published or being completed.

And maybe just to finish up on Signatera, just about the commercial coverage and the progress you've made so far at BCBS, California, Louisiana, and a few others. But just how do you see that evolving over the next year or so in terms of the commercial payer?

So, do you want to take that?

Yes, sure. I mean -- so we've -- we've made a lot of progress with commercial payers over the last year, but specifically in their Medicare Advantage books. So if you think about like a large national payer, they've got -- obviously, they've got a big commercial book, but many of them also have huge MA books. And so we've had to interact with them quite a bit to make sure that their MA patients are getting covered for the indications that Medicare covers, okay? We've got a similar dynamic, we think, in front of us for commercial patients that live in a state where there's a biomarker bill that's been passed that requires that commercial patients get the same level of coverage and care as Medicare patients. So oftentimes, with national payers, it's just the same people we've got to interact with and kind of a similar exercise, if you will, and we're heavily engaged on that topic right now with those payers. So we'd like to see some progress in terms of commercial coverage just via that mechanism over the course of '25 and then to '26. And I think the pathway to getting broader commercial coverage -- just formally enshrined is -- just matched up really tightly with getting into the NCCN guidelines, which we've talked about. And it's no coincidence, the strategy is really just to deliver excellent prospective data that enables guidelines, and that will ultimately drive commercial coverage.

Got it. And then maybe as you think about the biomarker bills because I think it's something you and I have discussed quite a bit. Part of the issue, I think, is some of the language is different for each bill and it can be very vague and therefore, the level of sort of enforcement of these bills is challenging. And so the way I've always seen it is sort of gives you leverage to speak to the commercial payers to progress the discussion along, but how do you see the biomarker bills is providing that tailwind for that commercial coverage, given sort of the vagaries within the different language and the different bills?

Yes. We just got to -- just interact with the payers on it. And I think the payers want to comply with these rules and the details matter. So it's going to be different from state to state. And that's okay. I mean the point for us is that we want to serve the community of cancer patients. And in that, we've got -- our mission overlaps a lot with the payers, and we can work collaboratively with them to serve these patient populations. So I think in the end, it's going to be positive both for -- for us, for Natera shareholders and for patients and for payers.

Got it. And just transitioning to organ health, which is usually less discussed than the other ones, but the KDIGO guidelines was a bit of a -- at least in mind a bit of a surprise and a huge positive event for you guys. And just given the duration of those guidelines when they come out, it was very timely as well. Could you maybe talk about how that has provided a boost to Renasight volumes, particularly in supporting genetic testing in CKD patients? And sort of what is the potential for this test longer term?

Yes. So Renasight is our germline product for patients that have been diagnosed with chronic kidney disease. And we launched this product in the 2019 time frame. And at the same time, we launched, we kicked off a prospective clinical trial called the RenaCARE study, which worked with 20-plus leading academic centers and enrolled more than 1,600 patients. And what we looked at is, if you're diagnosed with chronic kidney disease and you get offered a genetic test, first of all, what percentage of patients are positive for a genetic indication. But importantly, what do the doctors do with that result? And do they, in fact, change care? What the study found was that more than 20% of chronic kidney disease patients are positive for genetic etiology and that in 35% of the patients that screened positive, the doctor physically switched the drug that the patient was getting or the therapy that the patient was getting as a result of screening positive. And at about 75% plus patients, the physician changed the treatment path. So this study came out, subsequently, the major governing -- international governing body, KDIGO put out a guideline suggesting that genetic testing has a very significant role in the diagnosis of patients with chronic kidney disease and in identifying specific type and subtype of the disorder. And we do think it's possible, the NKF, which is the U.S. governing body could put out a guideline maybe in the near future. As far as the opportunity here, this is a very big opportunity. And there's about 1 million patients that are diagnosed every year with chronic kidney disease, but there's 40 million Americans or 10% of the population that's living with chronic kidney disease. So this is probably one of the largest applications of genetic testing. And we've made very significant progress here. We're seeing, I think, strong interest. I'd like to think about the size as maybe similar to hereditary cancer testing. If you -- there's probably over 1 million hereditary cancer tests done per year at this stage, when you -- at this point, when you add up all the different companies that are offering a product. And I think the market is probably bigger than the covered market today for hereditary cancer. But these things take quite a while to penetrate, longer than you would imagine. But certainly, everything is lining up nicely for this to be a real opportunity to help patients save their kidneys.

Got it. Mike, I want to focus a little bit on gross margins. I mean, if you actually look at the share price of Natera, there was an inflection in gross margins in Q3 of last year, and that really allowed the stock to start to significantly outperform. So clearly, investors are focused towards gross margin. There's so many different things that go into, whether it's ASP increases, COGS reduction, et cetera. You spend a lot of time focusing on no pays and cash collections. Could you maybe kind of highlight some of the priorities for you over the course of this year into next year, in terms of getting -- continuing that gross margin expansion? You're obviously going to get the growth that you've got on the top line, but I'm more interested in what -- in terms of COGS, ASPs, things that you're focused on to continue that margin expansion story?

Yes, that's the thing about gross margins that comes down to COGS and ASPs, right? So it's easy to kind of focus your efforts on those 2 areas, if you want to drive them. But the -- look, we've got a long history here, a core part of the strategy of Natera for over a decade of being a public company, is the majority of our R&D spend has been pointed at clinical trials, new features and then critically reductions in cost of goods sold that allows us to run the test at lower costs. That's going to continue. So as we mentioned on the Q1 call, for example, Signatera, COGS were kind of below $450 in Q1, that's critically important. We think we can stay below that level through the balance of the year. The guide presumes on the ASP front that the Q1 ASPs are steady for the rest of the year. And as we talked about potential sources of outperformance relative to the guide, they would come from things like ASP improvement from here. So we -- on the Signatera front, there's a couple of drivers. The one that's at the top of my mind is increasing the fraction of time we can get reimbursed. We're entitled to reimbursement from Medicare Advantage patients. That's a topic that has -- we've been working on for over a year, and we're making rapid progress there. We talked about the biomarker state, I think it's more of a 2025 outcome. I think on women's health. We've also seen very encouraging sequential improvements in kind of the realized pricing, we've been able to achieve in those products, particularly in care screening, but also in NIPT. And there's a number of kind of smaller bore topics that we can work on in that area, particularly around things like eligibility for patients, making sure that we've got the exact right information for the patients and submitting that to the right payer at the right time. Perhaps, for example, with medical records attached, a lot of automation and engineering required to get that exactly right at the scale that we're operating at. We're really excited about our ability to continue to deliver improvements there over the course of time. But I think for this year would be presented as a source of upside for margins. The guide for the year on margins, we've already improved in the Q4 call versus the Q1 call. And we're now kind of targeting that kind of mid-50s -- low to mid-50s gross margin, which we think allows us to be sustainable as a business. And I think longer term -- I think the trajectory can get us higher into the high 50s and low 60s, and ultimately higher than that.

And you also raised your OpEx guide for the year as well, a number of things you wanted to invest in. I guess 2 questions there. One, where is that incremental spend going to go to? And two, will that still allow for operating leverage, meaning you don't want $1 in SG&A, just to mean $1 in revenue, you want that to have some leverage there. So maybe talk through that dynamic.

Yes, exactly. And it's a really important dynamic. We were -- we increased the OpEx guide for the year, and yet we lowered the cash burn expectation for the year. And so I think that really speaks to this kind of leverage that we're seeing in the business, that's critically important for us to be sustainable. But it's not just that. It's also that leverage that we're seeing allows us now to make all the necessary growth investments so that we're not kind of having to make these kind of one-for-one trade-offs between growth and profitability. Each dollar that we're putting into growth is generating more than that in terms of its contribution to profitability. So that's -- we're at that place now where we're kind of seeing that leverage really kind of play out in the business, as we've been talking about for years, and it's nice to finally actually do it in a quarter.

And then just given the women's health business, it's profitable, how are you thinking about moderating the OpEx there in order to reinvest in other areas? Or are there still things you want to do in women's health that will require some level of spend?

No, we're very focused on important kind of new products and new product features in women's health. Steve talked a little bit earlier in the session about the launch of the Rh testing, which is a critical unmet need for our customer base. We've got a number of other interesting launches slated for this year and next. So there's no pause in our intensity and our commitment to innovation in that space. We're able to do that and meet our commitments to shareholders and because we are kind of getting the flywheel going here, we are getting good leverage on each incremental investment.

Great. And just in the minute we have left, Steve, I just want to turn back to you for a second. As Mike mentioned in breakfast, we had this morning, you're the first commercial employee at Natera. And I think that puts you in a unique spot as CEO from a commercial end. A lot of times, we're speaking with CEOs with a scientific background. How does that inform your decision-making? How does that prioritize what you do and what you focus on? And just given the commercial strength of Natera, does a lot of that come from some of the decisions that you're making given your background and given your emphasis on the commercial acumen of the company?

Yes. I think one of the good things is that we have a very experienced management team. I've been at the company now for 15 years, and many of the senior leaders have been there for 10-plus years. And either they've kind of built their respective area from the ground up and had to learn as they go and -- or they had significant experience when they come in. So now we have a very deep -- I think, understanding of what it takes to successfully commercialize our product. And my background on the commercial side, obviously, I've been through a lot of these things before, and it certainly helps making decisions. But we focused intensely on medical affairs, clinical trials, the right scientific quality and rigor, and that's what we're going to continue to do as we go forward because that's going to determine success.

Got it. Great spot to end. Steve, Mike, thanks very much.

Appreciate your time.