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

Hi. Welcome to the Canaccord Genuity Global Growth Conference. I'm Kyle Mikson. I cover life science tools and diagnostics for Canaccord. Please welcome me to a fireside chat with Natera. With us from the company, we have Mike Brophy, CFO; and John Fesko, President and Chief Business Officer. As a reminder, Natera is a leader in cell-free DNS -- DNA-based testing for woman's health oncology and organ health. Thanks, guys, for joining us today.

Yes. Thanks for having us.

So Mike, maybe first go through the second quarter results, dig deep, raise guidance, really good results of volume ASP just walk through those.

Yes. We had another really strong quarter in Q2. We were up -- revenues was about $413 million. That's up about 60% year-on-year. Volumes were up about 20% year-on-year. So right in there you see that we've also had some very meaningful increases in our -- just our expected revenues for test, which has been fantastic. Gross margins were also up in sympathy. So the gross margins were like 59% in the quarter, 54% if you back out the kind of the onetime true-ups, and that compares to 45% this time last year. And so all this kind of rapid growth and improvement in the gross margins has been accomplished on the back of operating expenses that haven't grown that much. The operating expense growth has been in that kind of single-digit kind of range. And so the net of all that is that we were able to produce our second consecutive quarter in which we were cash flow breakeven. And what's driving all these results is really just kind of success kind of across-the-board. I mean, we've had a very strong particularly seasonally adjusted women's health performance in Q2. And then the Signatera launch just continues to ramp, and we did -- we're run rating now about like 125,000 -- sorry, we did about 125,000 Signatera units in the quarter, so run rating about 500,000 units now. We actually added about 13,000 clinical units just sequentially over the Q1 results, which itself was a massive step-up from Q4. So historically, we've been kind of growing Signatera at this kind of 8,000 to 9,000 absolute unit clip quarter-over-quarter. Then we did 18,000 in Q1 to 13,000 in Q2. So we really feel like there's some real momentum there, and we'd like to see that through the second half of the year. And then you mentioned the guide. I mean, we're able to make another very meaningful upward revision to the guide. So now we're centered around like just above $1.5 billion for the full year. Up the revenue guide -- I mean, up the gross margin guide as well and continue to guide to cash flow breakeven for the full year. So really, things are continuing to proceed ahead of schedule for us so far in '24.

So a lot of -- I'm not sure if like the revenue beat based on the trip, but definitely like the gross margin kind of beat or outperformance. So maybe it's not worth diving into for too long. I would like to -- just talk -- like walk through that a little bit and why those occur, what those really are, which side of the business that really occurs on and why you can't really perceive that, to predict that or...

Yes. I mean, even -- like if you just back, there are $40 million in revenue trips in the quarter. And even if you back those out, I mean, I think the -- like the underlying organic beat was something like $30 million is a very meaningful beat even if you're inclined to back that out. Really, I mean, the true-ups represent good execution. Basically, what's happening there is that the average selling price or the realized cash flows per test turned out to significantly exceed what we had accrued as revenue per test a year ago. And so what's happening there is last Q2 of last year, we were accruing Signatera ASPs in that $800 range, $850 range, and now we're at closer to like 1,050, okay? So what's happened there is that the reimbursement that we're seeing from Medicare is becoming much more consistent, particularly among Medicare Advantage payers. We continue to get reimbursed on an ever broader set of tumor types, and that's what's really kind of driving that outperformance. Any time you have like a rapid uptick in your realized pricing, that's going to end up generating true-ups. And we've seen that these last couple of quarters. I think going forward, it wouldn't surprise me. As I mentioned on the call, it wouldn't surprise me to have some trips in the second half of the year. I expect them to moderate somewhat just because we have raised the accrued revenues quite a lot per test in the last 3 or 4 quarters. But nonetheless, I mean, we continue to execute on initiatives that will continue to grow our ASP or average selling price, which would tend to contribute to more true-ups. The reason why we don't guide to it and we're careful to show it to you pro forma as well is, one, just so you can understand the comps year-on-year and sequentially. Those trips tend to be very lumpy, right? It's really just a function of when cash is received, which can be somewhat capricious. So I want to make sure that people understand what those are and they understand what that kind of underlying accrued revenues and gross margins are in a given quarter. And I think this can get simpler for the Street just to guide without making specific assumptions around true-ups for the rest of the year.

On the guide though, like ASP, it seems like they're now -- you're thinking about like increasing this rather than -- maybe modest increases, but rather than leave the path towards more stable ASPs. So what's -- and that was both in woman's health as well as oncology Signatera. So is that -- I mean, is that true? Like what's kind of the thesis behind that philosophy?

Yes. I mean, for -- on the ASPs in the guide, we're modeling some very modest continued upward trajectory in the Signatera ASPs. In women's health, I think we're just kind of more guarded, not because of any underlying trends or storm clouds that we're seeing, but just more of a philosophical point around how one should model reimbursement in the diagnostics space more than anything else. I mean, what's driving the upward momentum in the Signatera ASPs is just the continued execution and getting reimbursed where we're covered for our -- particularly for our Medicare patients. So now in the entire book of business, Medicare represents about 35% of the volume. That's maybe 70% traditional fee-for-service, 65% traditional fee-for-service Medicare and the balance is Medicare Advantage. Traditional fee-for-service Medicare was paying reimburses like 80% of the time. We've fixed a bunch of like eligibility documentation topics with them. So that now that when we send them a claim, we're getting paid 90% of time, 95% of the time. So that's a big advantage. Medicare Advantage was only getting reversed at about 20% of the time for covered tests, and now we've kind of moved that to 60%. How? we've just been able -- we've had enough time on task with the payers to remove these kind of administrative hurdles, particularly around eligibility and just making sure that we flag these claims for them in their system and they know how to process them. So that's -- always takes -- that's always a process. That's always a journey, and we're making very solid progress on that now as you can see in the numbers.

Okay. So -- and the recurring and kind of higher margin side of Signatera testing, the surveillance setting, you guys obviously offer like test in the adjuvant window as well as surveillance setting. But how does your mix kind of shake out today? It seems like it's more even. But when does that kind of flip to be the majority in the surveillance?

Yes. It's a good question. I mean, I think steady state, I would guess that the recurrence monitoring volumes would be something like 65%, 70%, perhaps more as a percent of the total volumes. The reason why I think that was just kind of if you just do the weight of the math of like the waterfall of patients getting signed up for Signatera, when they're diagnosed with cancer and then staying with Signatera through their recurrence monitoring years, over time, as you build up these years of patients that start at Signatera, you start to get a lot of patients flowing through as a recurrence monitoring patients, okay? So in order to have your adjuvant treatment volumes be -- remain pretty consistent as a percent of the mix with the recurrence monitoring, that means you got to have a very healthy pipeline of new patients coming into the system, kind of coming into the top of the funnel. And we've certainly seen that so far. So we have a huge amount of room to run in this market, and I think that shows up in the new patient starts and the new account starts.

Okay. And then in the past, I think you were talking about how Signatera gross margins could be look in line with the company kind of average -- and at this point, it seems like that's what's probably been happening. What -- do you get to look the 60-plus, 70% margins for Signatera as like a segment basically [indiscernible] to get to that pretty high mix of surveillance and testing?

Yes. I mean I think that mix will evolve in our favor. The Signatera gross margins now have now kind of blown through. So up until very recently, they were dilutive to corporate gross margins, and now they're probably on the accretive side to corporate gross margins just due to the above factors. And I do think that if you think about kind of long-term gross margin targets for this business, we've tossed out 70% as like an aspirational future gross margin. I think in order to get there, I think you need to have Signatera ASPs instead of like 1,050, they need to be like 1,700, which I think is imminently achievable, given where our contracted rates are, are still well above 1,700 today. And I do think that you can continue to see ASP improvements in the women's health business, both in NIPT and carrier screening, such that NIPT moves from -- women's health moves from like a mid-50s type of gross margin business to like a low to mid-60s gross margin business. And then net of that could get you to 70% over time.

I guess the other thing I'd add is that the mix of the recurrence monitoring time, where we have the ADLT price versus the bundled earlier uses is only relevant in Medicare. It's not relevant in Medicare Advantage. It's not relevant to commercial, which is coming online. So over time, it'll trend towards the ADLT rate, which is where we're contracted in those other settings.

And then in terms of like sequential growth or even like annual growth in volume for Signatera, is that -- I mean, how do you think about that? Like what's driving that? Is that new ordering physicians? Because now I think it's like 40% or so penetrated in the country. Or is that test per doc and like the recurring kind of thing?

I think -- sorry for the boring answer, but it's honestly both. I mean, I think there's definitely a progression for a given clinic where very often is the case that gets started with Signatera to solve a corner case that they're dealing with, and then they see it's quite easy to use and the utility is really there. And they gradually adopt it more broadly within a given practice. And then as you can see in the quarterly results, the fraction of U.S. oncologists that ordered a test in the last quarter just continues to expand. And I think we said that was circa 40% of oncologists in the quarter. So it's really -- you've got dimensions in both areas that are working in our favor.

And then maybe just a quick update on the commercial payer progress, like [indiscernible] announced in the past and then also the biomarker bill impact. Is there's anything there? Just update.

Yes, not yet. I mean, I think that the biomarker bills are something that are fairly new to the industry. I think there's going to be the same kind of effort just working collaboratively with the payers to make them aware of the rules and the attending coverage policies that are needed in those states. We've always felt like that would be a process. I feel like that's moving -- qualitatively, that's moving in the right direction, such that you could see that be a contributor for us in terms of ASP growth in '25 and then in '26.

Okay. And then maybe like for John, like on the studies for Signatera coming up, so 36-month data for GALAXY, I think that's ESMO this year and then ALTAIR in maybe early '25, maybe with ASCO GI by then. So maybe just walk through some of the important benchmarks or endpoints for those trials and why that could really like kind of impact the physician community. And I think that -- just for the DFS for ALTAIR is like this like 0.667 threshold. Why is that appropriate?

Yes. I'll speak to that at a high level and then invite Mike to weigh in. But I think there's been a lot of talk about this in the investment community to add precision around something, which is not necessarily precise. I think that endpoint derives from hazard ratio from the establishment of FOLFOX in chemotherapy. So it's not like a hard rule, and there aren't hard fixed rules around what will drive guideline or adoption generally. I think what we've seen is a huge and evolving way to significant evidence, particularly in CRC as new data comes out, and that's what's driving increased adoption amongst physicians. So at ESMO, we're going to be reading out the 36-month data for the GALAXY trial in CRC. This will be the first time we have overall survival data, which we think will have an incremental benefit on adoption. It's not going to be dramatic, but it's going to be one more piece of evidence that pushes physicians towards more frequent usage. And then at ASCO GI, we're going to have the ALTAIR study readout, which is an outcome study looking at survival with drug Lonsurf. And so the performance there is going to be a combination of both Natera and then also the efficacy of Lonsurf, and that's where you get some fuzziness around what is success. Do you want to add to that?

Yes. So I mean, I think just to make sure we have -- because I think 2 different numbers were quoted there. So what we've been asked in the past, like, hey, what does good look like for ALTAIR. And we've generally pointed people with the disclaimers that John made, we've generally pointed people toward the result that was achieved in the MOSAIC study in 2004, which is really the last time that there was data that really shifted the standard of care in this setting. And what was achieved there was a hazard ratio of 0.77. And so we continue to kind of lay that out there as that's what we'll be looking for in terms of the hazard ratio. Beyond that, yes, I mean, there's going to be analyses that show you how Signatera performs in the study. I generally expect the Signatera to perform reasonably well just based on the experience we've had in the same patient population in the GALAXY arms of the same study. And there'll be some endpoints related specifically to the drug, which will be interesting to see, but perhaps less impactful to Signatera itself. So we'll see how that goes. In terms of the weight of the data, I mean, it's going to be a drumbeat of data, both in colorectal cancer and other solid tumor types, where just about every major cancer conference, we're going to have important data, not just in colorectal cancer, but in other tumor types as well. So you mentioned that we're going to have 3-year follow-up data, prospective follow-up data on a critical mass of patients in the GALAXY arm of CIRCULATE for colorectal cancer. That should be the first time we start to look at not just disease-free survival, but overall survival. So I think it will be quite interesting and excited to read that out. Away from colorectal cancer, perhaps first half of next year, we should also get a readout from the second Phase III trial of the IMvigor studies, IMvigor011 in muscle invasive bladder cancer, which is a study that's being run by Roche Genentech, evaluating their compound atezolizumab. So just as a reminder, Roche ran an initial Phase III study for atezo and prespecified in the endpoint before unblinding that study to measure the efficacy of the drug just among Signatera-positive patients, had a fantastic response in that cohort, like a 40% treatment benefit. And that's what spurred a very rapid turnaround to a second Phase III study where the population is Signatera positive. And so that'll be -- that's kind of a different example of a different treat MRD concept.

Yes. So MOSAIC was like 20 years ago. The kind of therapeutic landscape, the precision medicine landscape has evolved, has changed, probably got more refined, I guess, and more advanced. Is there a reason why this 0.77 -- what gives you comment that that's the right number, I guess, and why it hasn't changed?

Well, I mean, I think that, that -- I mean, just qualitatively, I mean, that implies that 1 in 4 patients are going to get a benefit, right, which I think like meets kind of the bar in terms of just general sense of when you talk to oncologists, so something that's meaningful. And the reality is that, that is the last data point in this particular setting. And there are many other examples of hazard ratios in that zone that have yielded data that has moved the bar in other cancer types as well even with the advent of more targeted therapies. I mean, there's a number of targeted therapies on the market today where the treatment benefit is quite good for a very small subset of patients, and those are successful trials.

Your token guideline question. So maybe early '25, you have this ALTAIR data. That seems -- that was going to be the last catalyst milestone [indiscernible] before NCCN kind of update the guidelines for CRC, for MRD, CTDNA. Could that update happen in 2025? How is the company thinking about that now?

I mean, I don't think that we wouldn't necessarily point people to any one study as something that is binary for guideline inclusion. I think it's going to be more like the weight of the evidence and the reality of the breadth of usage in the community. So that'll be a data point. The GALAXY data will be a data point. We've also got de-escalation data coming from that same cohort. We've got additional colorectal cancer studies coming. So I think it's going to be just based on the weight of the evidence. I'd also point out that I understand the desire to kind of triangulate around a particular timing of guideline inclusion. If you showed me in 2021 what our Q2 '24 volumes and ASPs were going to be, I would tell you, wow, we must have gotten guidelines. And the reality is that the adoption has been there, the reimbursement has been there, such that I think there's a little less time pressure on getting to a specific milestone as it relates to NCCN.

Yes. The other thing I'd add to that is if you look at another line in Natera, which is NIPT and pregnancy, the guideline for women under 35, all women for NIPT only came in 2020, but the majority of people were using the test by then. We just weren't getting paid. And in Signatera in CRC, there's been a fixation on guidelines. But I'd also just point out that we're seeing huge adoption and advancement in advance of the guidelines, and we've already got reimbursement in close to half of that population because of Medicare or Medicare Advantage. And then these biomarker laws, which are coming through and covering most of the population, should pull through some of the rest. And we've also had one health plan that's written a policy on CRC, Blue Shield of California, based on cost savings for the plan. So it's maybe a situation where you have reimbursement. Most of the market reimbursed regardless of the guideline, and the guideline is just something that kind of takes you towards the end.

Okay. Yes. On the -- just switching to women's heath, I guess. So you guys have 50% market share, 50% penetrated. It seems like it's getting kind of like saturated, I guess. What's going to drive growth going forward? It did well in the second quarter.

Yes. I mean, look, the volumes continue to come in and the revenue growth is still there. I mean, so this is still double-digit year-on-year grower. And that is down to both organic growth and the fact that we were able to add some accounts from our Invitae acquisition that we announced in the middle of January. So look, I think that market has evolved pretty meaningfully over the last 5 years, such that it's much more centered on in Natera and several of the large reference labs in terms of volume. There are kind of 4 million pregnancies in the United States, and that's going to kind of grow at GDP or thereabouts. So over time, I think the volume growth will moderate, but I think we still have some room to run there, just given where we are in the market and the trends we're seeing right now. I'd also say that on the ASP front, there's a lot of wood to chop there. I mean, we've made tremendous progress, both NIPT and carrier screening over the last 18 months. And speaking of guidelines, there's a couple of guidelines that are still sitting out there that we still view as opportunities that would be very important for patient care that could come in as soon as this year. So we'll see.

A couple of things I'd add there, too, is on NIPT. We now have Rh typing added as coorderable with NIPT, which may have some positive impact on share. The big driver, though, for NIPT share growth for Natera would be related to 22q. Natera is something like 1 million NIPTs per year, about 3/4 also order 22q, which is a really important test to run because if you know that early, you can actually prevent harm to the child. We don't get paid for any of those right now. CMS has recommended pricing at $750 for that. It's recommended by 2 medical societies, the College of Medical Genetics and the National Society of Genetic Counselors, but not yet by ACOG, the OB medical society, but there's a belief that they want that to be covered. So that'll have a big impact in 2 ways. One is a meaningful financial driver, getting paid for stuff we're already doing, but also Natera has vastly better performance than our peers on the ability to detect 22q. And we could use that to significantly take share from LabCorp and other players.

Okay. And then on the Invitae, like on the tailwind, I think it was like -- maybe like 1/4 of the growth in women's health this quarter possibly year-over-year. So in the guidance, is it -- I mean, what's -- is it fair that there's like maybe $50 million to $100 million in revenue for the year?

There's less than that. I mean, I think we initially set out that we were going to -- we were hoping to do $20 million or so in incremental revenue. That was explicitly in the guide. We're above that now modestly in terms of absolute dollars relative to the scale of the overall business. But it's been a good pickup and a good driver, and we're very excited to have been able to add those reps pretty seamlessly and also just provide very seamless kind of continuous care for those customers that would've needed to switch their NIPT provider on very short notice otherwise. So I thought that was a great win for the patient care as well.

Okay. And then just -- not a lot of time here. So there are some product updates that you guys have been alluding to in women's health and oncology. Like what could that really mean and how much important could this be?

Yes. I mean, we've -- we previewed at the beginning of the year that we want to have a number of important kind of product and future rollouts, and you've seen a couple of them. I mean, I think the most prominent one in terms of the organic side for women's health has been this launch of our RhD-CE-D testing that John alluded to. I mean, that's an enormous win. I mean, we became aware, as did the rest of the field, of the shortage of RhoGAM around end of last year, beginning of this year. And what that really means is that there's now an acute need to kind of ration RhoGAM just to the patients that need it that just have an Rh mismatch between fetus and mother. And our R&D team, to their credit, kind of looked around and said, look, we can do this, like we can deliver this on the NIPT. We've got to rush around. We've got to do much of work, but we can deliver something that's absolutely critical to the field in a pretty short period of time. I think when you're able to roll those things out, I mean, I think that just shows kind of the partnership that we've got with the providers in the field and our desire to kind of provide that kind of top-level care to the patients. We're going to have more stuff like that. I mean, we're going to have -- I wouldn't surprise -- really, we have several other rollouts kind of across the business in second half of the year.

Okay. And then one on the guidance. Like for the year, you've raised revenue guidance, you raised gross margin guidance this past quarter and you kept -- I think the expense is the same. Cash flow guidance is still breakeven base at the midpoint. Why did that not like go up?

Yes. You could -- I mean, you could easily model it as, hey, like revenues are up, gross margins are up, OpEx is flat, so cash -- the cash position will improve. And it could certainly play out that way. I would just highlight to you that cash burn is not a GAAP metric. If we're guiding to net income, I would agree with you, all 3 of those variables have to move in sympathy. Cash has the additional variables of like working capital and timing of CapEx and things like that, that are not totally within our control or -- the CapEx would be in our control, but we may want to be opportunistic and accelerate the CapEx. So there's just that one extra layer of caution that's warranted when guiding to cash.

Okay. Last one on '25. The -- just thinking about that when we talk about -- we talked a lot about tailwinds. Possibly, biomarker could be like a real impact from that, maybe even 22q, other guidelines possibly, the ALTAIR being some kind of like a benefit. What are investors not really like focusing on that could be like a cell benefit next year?

Well, I think the investors kind of basically get the point, which is that we have a very, very strong position in the women's health space, where we've got the best-in-class, in our opinion, tests and we've got a very strong position in that field with what we think is kind of the best data. So we've got a very strong and defensible position there. And then in Signatera, we really -- at this point, we are really just continuing to ramp. And we're just kind of at the very early stages of adoption just in the United States. And so I think just fundamentally, continued execution in the women's health business. We didn't talk a lot about transplant today, which is fine. But transplant has also had a very strong recovery here in the last 12 months. I think it will be a meaningful contributor in '25. Along with just the continued trajectory that you've already seen from us on Signatera, I think, sets up second half and '25 as to be a very good time for the company.

Okay. Perfect. Thanks, Mike. Thanks, John, for joining.

Awesome. Thank you.