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

Good afternoon, everyone. I'm Tejas Savant, I cover Life Sciences here at Morgan Stanley. Before we begin, some important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. And if you have any questions, do reach out to your sales rep. It's my pleasure today to host Natera. And from the company, we have Steve Chapman, CEO; and Mike Brophy, CFO. So thanks, guys, for doing this. Let's get straight to it, Steve. Let's start with the Signatera business. Just give us a sense for the competitive moat for Signatera. You've seen significant momentum there, but you're starting to get various players beginning to make early inroads into the tumor-informed space. And you've got one player in the tumor-naive side as well with more coming. So as you think about the sensitivity advantages or the research or the body of research and evidence that you've assembled so far, Walk us through what you think are the key differentiators and the drivers of the moat for Signatera?

Yes, it's a great question. So I think Natera has done really well in a highly competitive environment when you look back to our days in NIPT. And so I think as more competitors come into the MRD space. I think it's a good thing for the market overall. We like to focus on 4 areas for success for the business. The first is really leading with technology and innovation, and there's a lot of effort going into the oncology space now, both technology development and innovation, which we think is going to be exciting. And if you look back on women's health and Panorama, I mean, we're now on kind of version 7 or 8 of Panorama. And so being able to innovate quickly and having a super strong team. It's always been something that we think is super important. The second area that we focus is on clinical data generation. And this is really where you see, I think, a very significant differentiation between Natera and some of the other MRD companies. I mean we now have more than 75 peer-reviewed publication. I think the next has maybe 5 or 6. And then below that, there's maybe 1 group that has 1 or 2 peer-reviewed publications. And a lot of the companies now that are making a lot of noise with various claims and press releases, they have 0 peer-reviewed data. And so they've got a long way to go to kind of show how their test works -- and more robust peer-reviewed setting. The third area that we focus on is having a strong commercial and medical affairs team, and that's an area where I think we have one of the largest sales teams. We support that with a very strong medical affairs and MSL team. We do many prospective clinical trials. We now have probably more than 100 clinical trials underway that are up supporting the Signatera product line. And then the last area that we focus, which is one of the most important, but it's often overlooked is user experience and customer experience. And there, we're in network with all the major insurance companies. We have EMR connectivity with all the major hospital systems with all the with all the major EMR companies. We have a large mobile phlebotomy network that is good for managing the patients that are on recurrence monitoring. We can track all of these different things patient portals and physician portals. There's a team, a big team of people that are responsible for collecting the tissue pathology, and we've now set up lots of interfaces with those laboratories, we get tissue very quickly. And the turnaround time now is very consistent and fast for a new patient to get set up. We're doing an excellent job. And then for ongoing patients, we can get the blood jobs back in about 5 days. So I think all of these things make an impact. But those are the 4 areas that we focus. And as we think about competitive moats, it's those 4 things, and there's a team of people working on those 4 areas.

Got it. So to just push along that thread a little bit, you stepped up your investment in R&D. Clearly, MRD is one of the areas that you're focused on. So as we think about the dimensions of that response, broadening out Signatera, improving the sensitivity and specificity, perhaps even a tumor-naive assay. Can you just give us an update on those R&D efforts? How much of a focus is this for you? And when could we expect to see some launches or data?

Yes. So we're actually spending quite a bit on R&D these days. Even though we're at cash flow positivity, we've gotten there because the core business strategy is working. The volume is going up, the ASP is going up. The gross margin is increasing. And that has allowed us to get to the point where we're at being cash flow breakeven while still making major investments in R&D. So I think we're going to spend like $400 million or something in that range in R&D. And you can imagine the amount of innovation that's going on behind the scenes there given, I think, what we've done in the past and the amount of kind of trials that we're doing. So I would just say, like stay tuned on when updates are going to be coming I think both looking at sort of ancillary products that can kind of sit alongside Signatera, but also enhancements and extensions I think we'll see some things too.

Got it. Fair enough. You've got the CIRCULATE GALAXY readout at ESMO next week -- or a couple of weeks, I guess, from now. You got 36-month follow-up data there, mature overall survival and DFS data, I think it's in about 2,000 patients. Are there any benchmarks you can provide around what would be viewed as clinically meaningful? And then if you hit those benchmarks, what does the commercial uplift on the other side look like?

Yes. I mean I think -- we're very excited about this readout. So I think you could argue that this is the most impactful readout that we've had in the -- for Signatera yet. It takes a long time to generate 3-year outcomes data. I mean, we -- I think we started with the CIRCULATE trial in 2019. And here we are in late 2024, we're kind of -- got this kind of large prospective outcome set ready to read out. I think what -- we're going to be interested to see are going to be the themes that we saw in the 24-month data okay? So you'll have a cohort of patients that on the strength of one time point with Signatera post surgery or Signatera-positive, and some of those patients have gotten chemotherapy and some of them haven't, okay? So what are the outcomes now both on disease-free survival and now for the first time, what are the overall survival metrics looking like for that cohort. Similarly, there are a whole head of these patients that were Signatera-negative at that time point post surgery, and some of them have gotten chemotherapy and some of them haven't. So now 3 years on, what is the benefit associated with chemotherapy in that cohort, okay? So those 2 data points are going to be incredibly meaningful, I think, to the space -- just kind of piggybacking off the 24-month data of what we saw was that Signatera-positive patients did get a statistically significant DFS benefit from their chemotherapy, okay? and the reversal was also true. Patients that were Signatera-negative did not get a statistically significant benefit from chemotherapy. And that was very meaningful data the field. Now we'll be able to marry that again at the 3-year follow-up point, which is an important metric historically in clinical trials. And we'll also have the overall survival along with it. I think one other kind of -- there'll be all kinds of other kind of cuts of the data that I think are going to be very interesting to monitor. For example, patients who were Signatera-positive underwent chemotherapy and then cleared their ctDNA under treatment. How are those patients doing 3 years on? Like what are their outcomes as compared to patients who were persistently ctDNA positive through their course of treatment. I think those types of differences will be very interesting to clinicians. And that particular cohort will be of acute interest also to the -- to pharma companies as well. There's going to be a wealth of data coming out, and we're very excited about that.

Got it. So that's a great segue to my next question, Mike, you've characterized NCCN guidelines in CRC and getting those as a body of evidence sort of situation, right? And clearly, this is going to be a very rich data set that's reading out here at ESMO. You've also got ALTAIR coming up in Jan. Do you think these 2 data sets to be -- assuming they are positive for you -- sort of get you to NCCN guidelines? Or are there any other prospective clinical utility data sets reading out in '25 that we should be watching out for as part of that next review cycle?

I wouldn't anchor you to any 1 particular data set as being like this positive or binary around guidelines. I mean, I think this is something where the weight of the evidence -- the reality of the broad usage of the product over time. Our belief is that the guidelines will -- are kind of inevitable that they'll end up being more and more supportive of Signatera than they already are. And they are supportive given the kind of the footnote inclusion we received last year. I would tell you that along the way, to that kind of getting into the kind of the Level 1 guidelines, there are all kinds of different milestones that we can hit in terms of data, in terms of reimbursement, in terms of just adoption of the test. That I think will kind of leave us with the right trajectory for that business.

Got it. Fair enough. Signatera ASPs already passed that $1,000 threshold. You mentioned that the guide embeds additional growth -- some additional growth, steady improvement coming from Medicare, Medicare Advantage plans. Can you help us think about the pace of the ASP uplift here, the potential pushes and pulls to that line? Do you think $1,250, $1,300-ish is possible exiting next year? And where does the biomarker state reimbursement uplift get baked into that sort of trajectory?

Yes. I mean I wouldn't anchor you to like a particular ASP target now for the end of '25. We're just a little bit too far away for me to have that level of granular visibility. Having said that, I mean, we've gone from ASPs in the $600s and the $700s in the recent past to now have ASPs more above $1,000 here in 2024. And what we mentioned on the Q2 earnings call that we felt like there was still room -- visibility for us to just continue to improve that ASP here in the second half. And it won't surprise me if we're able to kind of also deliver some linear improvement in the ASPs in 2025. But we'll have to check in on that Q4 early next year as well.

Got it. And the biomarker bill uplift, is that part of that?

Yes. I mean, I think that's not -- when I'm thinking about the trajectory I just laid out, I'm not really assigning a lot of weight to huge success in the immediate term, from those -- from the biomarker legislation. I think over a slightly longer time horizon, I think you can start to see some of the progress from that start to come into the business. I think that will be something that we're going to have to work very collaboratively with the payers to make sure that we can -- we and they can easily identify which patients fall under which which law -- which state? And then make sure that those patients are identified and covered. And that -- in our experience, that takes 18 months to 2 years to really get that process working smoothly.

And we do have a lot of good discussions underway there, and there's been a lot of good signs. It just -- it sort of takes time to work through. And so we don't want to kind of just assume we're going to get that, and then it takes longer.

Fair enough. Steve, about 40% of U.S. oncologists are on Signatera in the second quarter. Can you just walk us through the mix of new versus repeat customers? What do ordering patterns look like at new accounts? And once a physician has a bolus of patients in Signatera, does the likelihood of them trialing other vendors go down? One of the things that comes up from some of your competitors is that physicians aren't very loyal to a brand and some of them are taking like a whole portfolio approach. Just curious as to your take on that?

Yes. So certainly, what we see is the doctors generally will start off trialing the product on a couple of patients and maybe one particular indication. And then they're -- once they become comfortable with it, then they start using it more in that indication or more deeply in that tumor type and then over time, go to more of the pan-cancer setting. And I think the doctors that we have, these 40% of oncologists are at various stages of using the product in these different ways. And so the good news is that we have a ton of growth that we can go deliver just from the core base of customers that have already used Signatera, and they're already comfortable with it. They already have it in their office, just by them expanding to more of their patients, there's an enormous opportunity for growth. And then there's areas where maybe for one reason or another, we haven't been able to reach or they wanted to see the overall survival data. I mean, this overall survival data is, I would say, probably the #1 thing the sales reps hear when they -- somebody says we're not ready to use the product. They see where is the overall survival data, right? And now that we have a prospective data, I think that is going to help unlock new customers. But yes, there's a lot of room for growth. I do think that Natera has a lot of stickiness. And I think there are some pros and cons to the portfolio approach, sometimes with a portfolio approach, the sales team and the company has to focus on all the different products in the portfolio, whereas if you have a more targeted approach, you can really just focus on winning with that one targeted product. So there's pros and cons to both. We focus on the things that I highlighted earlier. And if we give good service, we have good peer-review data, we have innovation, and we're evolving the product lines. I think we'll continue to extend our position in the space.

Got it. Mike, one for you. Signatera gross margins are already north of 60% today. Where do you see them trending over the next couple of years? As your Texas operation ramps, you transitioned to the NovaSeq X, you get Medicare Advantage and maybe some partial uplift from the commercial payers as well. And then you've got the mix shift towards surveillance. So there's a lot of good stuff happening for the gross margin line on Signatera. What's that sort of theoretical maximum ASP and margin profile look like?

Yes. I don't know why -- it's interesting question what the theory of the Max would be. I mean I think over time, you've got the dynamic of -- we -- a lot of the things we already have established can hold us in good stead for that -- for the kind of the duration. And that is we have -- we're in network with all the big payers. We've got contracted pricing. We've got the data generation that will -- I think will ultimately drive coverage policies. And I think that's going to be a pretty differentiated offering that we have -- and that would tend to support the strong pricing that we -- in network pricing that we've already achieved. We said on the Q1 call, we laid out a slide that had kind of current gross margins and revenues. And then we had like a future state that had $2 billion plus in revenues and 70% gross margins, and these were kind of corporate level margins. It may be that we end up kind of getting to $2 billion in revenue before we have time to actually get the reimbursement placed to get to 70% gross margins which is probably a good problem. But I think we're going to need to have a couple of things go our way as it relates to guidelines and obviously, continue to generate excellent data and value for patients. But I don't think 70% for the overall business is unattainable -- over the kind of longer term.

Got it. Steve, preliminary data on the CRC screening program is expected in the near term here. Remind us what we should expect to see with the initial set of data? Could you provide a more sort of specific estimate around when it reads out? And how big will that initial cohort of prospectively collected samples be?

Yes. So we said -- the goal is to have the readout come this year. And I think this is sort of the initial readout. What we've done is we set up PROSPECTIVE study where we're collecting colonoscopy matched blood samples. And we're going to do the initial readout on that study. I think there's 1,000-plus collected at this point and if we want to turn the spigot up and collect a lot more faster, we can easily do that. But the good news about the way that we set this up is basically the same trial protocol that we set up, the same infrastructure that we set up can be used in the FDA trial. So we're running the initial collection. We're going to read out the results. If it looks good, and we want to roll into the FDA trial, we can do that without really having to go kind of back to the drilling board. But yes, I think it should be coming up pretty soon here in the next couple of months.

Got it. Fair enough. So Gartner's and Freenomer's have shown their cards. Exact got something coming up at ACG we hear on their sort of blood-based version of Cologuard. What is the right threshold for success here in terms of sensitivity, specificity on CRC and then AA performance that then unlocks in your mind, basically justifies continuing to invest in commercializing this indication?

Yes. And that's a good question. I think -- I think you also have to look at like what does commercialization mean and like what's our strategy going to be there? And that's something that we're thinking about. But the -- the good news is we know where these other groups are performing now. And so we kind of have a sense of whether it's going to make sense for us to continue on or not? And we're basically doing this because we have a good technology. We want to help patients. We develop the assay, we can do it very cost effectively. And if the data comes out and it just looks stellar compared to the competition of the competitors, I think that's going to help in our decision-making on what the next steps are. And if it comes out and it's in line with the competition, that's also going to sort of inform some of the different next steps that we might want to take. And obviously, if it comes out and it's sort of inferior to the competitors and then -- that's going to be a pretty easy decision and what the next steps are there. So we're letting the data drive the strategy, but we've committed to not really burning a ton of cash. And I think we can -- if we wanted to, we could take this all the way through the FDA trial without a significant expense to us given where we are from a cash position and cash burn position. it wouldn't make an impact on our financial statement in a significant way in 2025 or 2026.

I think that's kind of the guiding principle is that we have an evolution of our P&L that we're focused on. And that evolution allows for -- I mean, there's going to be room for us to work on the big, important problems that are in the future. But we'll be able to do that without fundamentally reversing progress on -- kind of our evolution there.

Got it. You've assembled a vast database on IO treatment and clinical outcomes, Steve, on tens of thousands of patients. One of the things you could do with this is obviously use that data to build superior neoantigen prediction algos, that's something that Matt Rabinowitz sort of alluded to when we sat down with them earlier in the summer as well as being a significant interest to you guys. Where are you in terms of that journey? When could we see some of that early data emerge? And what are your thoughts on how you go about monetizing that opportunity?

Yes. I think -- with that one, we do expect to see some of the initial data like immunogenicity scores and so forth and our calling algorithm, maybe made more public soon, which I think could be exciting. And then there are, I think, trials that are getting off the ground that will be able to actually show functional usage of the assay or the usage of the vaccine in a patient setting. I think -- but those things take a long time, right? And so I think we should just kind of let that program run at the pace that it's running, and we're in a unique position where we've got now -- 100,000-plus cancer exome sequenced with longitudinal monitoring and follow-up and information on drug treatment and outcomes. And we're able to leverage that to really use that for bettering patient care, and this is one of the opportunities. But I think we just have to let that program kind of run at the pace that it's running and let the team that's focusing on that do what they need to do. What we spend the majority of our internal energy on is focusing on the core business areas, right? And I think that's the right approach is winning an MRD, extending our leadership position in women's health and continuing to innovate and grow volume in organ health. And I think these opportunities really -- screening and neoantigen prediction are exciting. And it's good to have a couple of big bets that you could have, I think, within the P&L structure that is acceptable.

Got it. Fair enough. Speaking of women's health, you [bucked] typical seasonality in the second quarter, you're booked really good organic growth. And then help from that fetal-RHD test and of course, you have the inorganic contribution from the Invitae accounts as well. How should we think about sustainability of that fetal RHD momentum once that RhoGAM shortage abates?

Yes. I think the good thing about that test -- is sort of very timely for patients where they really -- where struggling hospital systems, we're struggling and physicians were struggling, and we were able to provide a test that can help physicians with decision-making. And about 15% of women are RH negative, and I think could be eligible to use this test. And so it's -- in and of itself, it could be a valuable revenue driver over time, but it's going to be limited to that kind of 15% of the patient population. But we are seeing guidelines kind of being put in place that support the use of the test, I think, reasonable pricing. But I think the other thing was some centers have said, "Hey, look, we now want to use you for all of our services in addition to the RH Testing. And I think that opportunity is good, and I think that momentum can continue. But we're also -- innovating in the women's health space. And I think we want to continue provide cutting-edge services there for physicians and extend our leadership.

Fair enough. Obligatory question on guidelines. So could you provide us -- what's the latest you're hearing from ACOG on expanded carrier screening? I felt like this was more near term than Microdels? And more a question of when they get published versus getting committee approval. And then on the 22q side, where do things stand on that process? And what are the chances that we don't get this until 2025?

Yes. So I think nothing has really changed there. We've heard positive signs from various physicians, but we just don't know the exact status. And so I think we're just in a waiting period. We think the data supports guidelines in place for both extended screening in 22q. We're sort of waiting to see what happens when they come out. But we haven't heard anything negative. Nothing to suggest that anything is sort of off the table. And it's just sort of a matter of time at this point. I think -- but it's been a long time coming, right? It's -- the 22q particularly is supported by the largest PROSPECTIVE trial that's ever been done in the NIPT space, which is the 20,000 sample SMART trial. And the performance there of the test was very, very strong, and it also showed that the incidence of the disorder was very high. So I think the data has lined up to support the fact that this should be included. And hopefully, that's the way that the societies are leaning.

Got it. Mike, one for you on women's health gross margins. I think they're probably in the mid-50s at the moment. How do you think about room for improvement there? And over what time frame do you think we can get to the low to mid 60s? And is that sort of contingent on some of those guidelines stuff coming through? Or can it happen independent of it?

I think low to mid-60s is achievable even without the guideline improvements, and that's really just driven by the long tail of payers that continue to update their coverage policies even at this date in support of both carrier screening and for NIPT. So I do -- I think that -- that's achievable and then Steve alluded to the impact that the guidelines could have. I think that's important for patients, and we think the data supports it.

Got it. A couple of quick ones on Organ Health. Following the NKF endorsement for Renasight, what do you think about sort of the commercial trajectory there? Or do you think -- but could you go in NKF in place now? It's largely a function of when the CKD drugs make it to market. I think Vertex has something that's reading out interim data early next year in the first quarter?

Yes. I think it's a little bit of everything happening together. I think certainly, education and peer reviewed publications and society guidelines do support utilization and -- but I think nothing would support the market overall like kind of a suite of new drugs coming on the market that are genetically targeted. So we think -- we think the market is developing nicely for this to really make an impact on Natera, there's got to be like a very significant kind of step change in utilization over time. And I think -- remains to be seen whether that can come or not? If you look at the overall kind of TAM statistics, it's a huge market. I think the question is really is -- can you change physician behavior and ordering patterns in a way that can make an impact given the scale Natera is operating at? And that's what we're going to be learning over the next couple of years.

Got it. On Prospera, how do you see the competitive advantage for that test relative to the Incumbent in the space or, I guess, the other player in the space now? And now that Medicare has decided not to drop coverage for their tests. Does that sort of -- well, first of all, I mean, there was a confusion around what Medicare was doing which led to a bit of air pocket. But now looks like Medicare has reversed course on that. Walk us through those sort of dynamics?

Yes. So if you look back 6 years ago when we launched into the organ health space. We were the -- sort of the newcomer -- we had good peer-reviewed data, but our competitors had more. They were sort of the incumbent in all the offices. Now you move ahead, we've invested a lot in generating really strong peer review evidence. And I think we have something in the range of maybe 30 peer-reviewed papers in organ health. I might be overestimating that or underestimating a little bit. It's something in that range. But I mean, we have a lot of strong data, including the first readout from the PROACTIVE trial, which showed that we can detect TCMR and ABMR up to 5 months or up to 2 months depending on which one it is ahead of biopsy. And that's a big deal. And I think that's been received very well, to see that kind of data in a prospective way. We've also developed innovative techniques to perform the test where we're looking at the background -- cell-free DNA, not just the donor-derived cell-free DNA percentage. And we put out, I think, good statistics there that we think support the product in both heart and kidney. So things are going well for us. I think our view is that we're taking share and we're growing and we're pleased with with the trajectory there. And I think Renasight kind of being right in there too and kind of having a nice growth trajectory makes -- kind of rounds out the Organ Health business. On the Medicare LCD, we saw the press release that came out from another company in the space. And our view is different from I think, the view that they took, and we're both similarly impacted. We don't think Medicare has reinstated surveillance testing. And I'm not -- I believe that's the sort of view that they've taken, but our discussions with MolDX don't indicate that, and our reading of the LCD don't indicate that. So obviously, if surveillance was reinstated, we benefit significantly, but we just don't think that that's what happened. And I think others might have a different interpretation. And that's -- that's only our interpretation. That's the conversations we've had. But I think it does differ from -- I think, some of the press release and the notes that were put out.

Got it. Fair enough. Mike, one for you on OOPs, I mean those have led to a few large beats and raises. First of all, what product are they related to? Is it largely Signatera with a little bit from Panorama and Horizon?

Yes. Well, first, I mean, even if you back out the true-ups, we're significantly beating and raising just on the kind of the underlying metrics. So -- and we take a lot of pains to kind of break those out separately, so that investors can kind of understand both the execution that derives from the excess cash flows that we picked up relative to the historical accrual and kind of the underlying business performance in a particular quarter. So even just the underlying business in a particular quarter has kind of driven the kind of the beats and raises that you've seen. Any time that cash flows per test increased dramatically in a short period of time, you will have true-ups, right, because we design the accrual based on historical cash flows, right? So -- that's what the driver is. And that's relatively evenly balanced between the women's health products and Signatera. Just as like one case study that I think we're all aware of is segmentary ASPs were kind of in the $800 range. And now they're -- like I mentioned earlier, that now they're above $1,000. That's a change in a short period of time, and so that's driven some true-ups. I expect those to moderate over time as the accrual catches up to our cash flow history now -- has been much stronger.

Got it. So if you ex out year-to-date true-ups about that's $75 million and Invitae is about $25 million. You get to about sort of 35% growth in 2024, embedded in the guide, right? Now when you look at that versus street models right now, how are you doing about sort of 20% of that organic number, so to speak, next year. Is that just the law of large numbers catching up with you? Is that conservatism? Is that something else?

Yes. I mean -- I think like the 20% is -- if you have to strip that. I have to be careful to strip out the true-ups from the actuals and then do the math there. So I'll take your word for it. I do think that -- that reflects kind of a linear pace of progress in the business, which I think is appropriate for like a baseline expectation, just given the fact that we're going to be holding operating expenses relatively stable. And then within that context, we're going to continue to drive volumes higher and ASPs are going to get higher -- so is there potential for out-performance I mean -- I certainly hope so, and you better believe that Steve and I are pushing very hard to make a reality. But I think it's not an inappropriate expectation at this juncture, looking into '25.

Fair enough. All right. We covered a lot of ground guys. So -- thank you so much for doing that.

Thank you. I appreciate it.

Appreciate it.