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

Perfect. Good morning, everyone. This is Rachel Vatnsdal with the Life Science Tools and Diagnostics team. Thank you so much for joining us today. As a reminder, this is a 40-minute session. Roughly, the first half will be a prepared presentation followed by roughly 20 minutes of Q&A. With that, I will pass it off to Steve.

Great. Thank you, Rachel. This is the standard safe harbor information. So the mission of our company is to transform the management of disease worldwide. And we do that through a proprietary technology that combines molecular biology techniques with bioinformatics to look at extremely tiny quantities of DNA. Today, Natera is the leader in cell-free DNA technology. We launched our first flagship product, Panorama, in 2013, looking at cell-free fetal DNA to detect chromosomal aneuploidies. Now we were the fourth company to market, but today, we're the market leader with roughly 50% market share. In 2019, we expanded the same technology to look at circulating tumor DNA in oncology patients and donor-derived cell-free DNA in organ transplant patients. Now across all these business areas, we follow the same formula for success. We combine leading-edge technology with constant innovation. We strive to be the leader in peer-reviewed evidence and published clinical data. We provide excellent customer service with an extreme focus on the patient experience, and we hire broad and talented commercial teams. Now looking at our Q4 performance, we had an excellent quarter across the board. We processed 793,000 tests, which was growth of 26% over Q4 of last year. This was a record quarter across all of the flagship products for the business, Panorama, Prospera, Signatera driven by new features, new publications and new guidelines. Revenue was up 52% from Q4 of last year, which you can see on the right-hand side at $472 million. And on the left, you can see the excellent sequential quarter-over-quarter growth that we've had over the last 6 quarters. And finally, on cash flow, we were pleased to generate $46 million of cash flow in Q4. And you can see our progression here from just a few years ago, burning cash, but we stuck with the strategy of increasing average selling prices, reducing COGS, growing volume and being smart about our operating expenses. And now you can see we're generating free cash flow. In fact, in Q4, we actually generated $65 million in free cash flow, but we made a $20 million technology investment, bringing it down to this roughly $46 million range. So the strategy is working, and we're sticking with it. Now I want to talk for a minute about our portfolio and give you an innovation update. Signatera clinical units were up about 14,500 units in Q4, which is one of the fastest sequential quarter-on-quarter growth quarters we've ever had in the company. This was driven by the strength of our team, the strength of our peer-reviewed evidence and the moat that we're building for this business. So there are several first-mover advantages that we have at this stage after being on the market for 5-plus years. First, we have more than 100 peer-reviewed papers and we have multiple randomized trials in clinical utility trials that have either published or underway to generate even more definitive evidence. We are leading in reimbursement and market access initiatives where we've now received broad Medicare coverage across many different indications. We have a robust pipeline of additional submissions that are going into Medicare and to private payers. And importantly, we received the unique advanced diagnostic laboratory test status, which is only awarded to 1 laboratory in the space, which allows us to price our test at $3,900 on the Medicare fee schedule, which was just increased in 2025 from $3,500. We built out an extensive laboratory and customer experience platform that allows us to deliver at scale, fast turnaround time, provide thousands -- hundreds of thousands of mobile phlebotomy blood draws, patient and physician portals, push-button EMR connectivity across the country. And we have more than 100 people that just simply acquire tissue and bring that into the laboratory for assay. So we're really scaled up for the assay that we're delivering at scale. And then last, we focus very extensively on innovation and also developing intellectual property. You'll see some of the innovation today, but we're increasing our spend on research and development, and we have been because we believe MRD is just at the very early stages and has a long way to go. We also have a very strong patent portfolio of over 450 issued or allowed patents. So I want to touch for a second on data leadership in oncology. You can see on the left side here that we've now published more than 100 peer-reviewed publications on Signatera and the Signatera technology. Now when you're in the very early stages of developing a product and you don't have a lot of clinical data, you focus on analytical validation, doing mixture experiments or contrived experiments and you look at the analytical performance metrics. We've moved beyond that now, beyond clinical validation into clinical utility data, which is what doctors really care about. So if I treat the patient based on your Signatera result, are they going to respond to the adjuvant chemotherapy or not? Or if I use MRD to guide my treatment, will the patient have longer overall survival? The doctors don't care about analytical validation. They care about clinical utility data. And that's what we've generated with Signatera, and we think that's what's driving our continued leadership position. Now one of the great examples of that was the GALAXY Study that we read out in late Q3 that powered some of the growth we saw in Q4. So this was the first readout of up to 36 months overall survival data in colorectal cancer and it was received very well by the community, showing that Signatera is predictive and prognostic of overall survival in a prospective setting. Now coming up, we have a big readout actually next week at the ASCO GI conference. We're pleased to announce that the 702 study has been awarded an oral presentation at ASCO GI. And I'm going to talk in a minute about this study, but we think this is a very significant study and physicians and academics are telling us that by selecting it as an oral presentation for all of their members. And then last, another clinical utility study that's going to be reading out soon is the IMvigor011 study, which is being done in partnership with Genentech, looking -- this is an FDA Phase III trial looking at giving atezolizumab in the adjuvant setting in muscle-invasive bladder cancer. So we're excited for this readout, which will be coming up. So on the 702 study, again, we think this is a really exciting study that's going to be reading out next week. It's a Phase III randomized study in colorectal cancer with a prespecified endpoint. The objective is to see if Signatera can identify which patients may benefit from the addition of celecoxib to standard adjuvant chemotherapy. So effectively, comparing standard adjuvant chemotherapy to adjuvant chemotherapy plus celecoxib to see did the patients have improved disease-free survival and do they have improved overall survival. So we've already answered the question largely of whether MRD-positive patients should get adjuvant chemotherapy or not. But now we're entering a new question, which is should MRD-positive patients escalate their adjuvant chemotherapy in colorectal cancer. And we think this is going to be a very big readout and look forward to reporting it next week. So I want to touch for a second before I talk about some of the new launches on the Signatera multiplex PCR, NGS capability. So what we do is we sequence the tumor tissue to identify unique signatures in the tumor mutations. We then custom design a multiplex PCR assay for each patient targeting only the very, very top clonal mutations found in the tumor. And then we sequence the targets at an extremely deep depth of read, over 100,000x coverage at each of the variants that we select. Now this enables exquisite single variant detection, which is unique compared to all the other assays that are available. Now our chosen approach, which we've intentionally selected is to be highly curated at only the best variants and to go extremely deep at those variants. Now this is very different from some of the other hybrid capture approaches that you see today from groups that are coming in, where they sequence at a very -- I guess, I would say at a shallower level across a broad set of variants. So we've intentionally chosen to sell their approach because we think it's the best approach. Now I want to introduce Signatera developed on the genome. For this assay, we're using the same proven multiplex PCR, NGS method that we've used for the past 5, 6 years. And we're following the same principle, which is intentionally curating a targeted set of the best variants in sequencing at an extremely deep level. Now this allows us to offer the assay in a very efficient way, which we also think is important. Now we have detection in ultrasensitive range down to low single-digit part per million. Now there's some open clinical utility questions on really what that means, right? What's the impact of detecting something in this ultrasensitive range or extremely low limits of detection? And what's the impact of detecting something early? We still need to understand really what it means to the patient's outcome. Does it actually improve overall survival? Does it increase the chance that the patient is going to respond to adjuvant chemotherapy if you're detecting patients in that range? One of the things we've seen from one of our competitors recently is that at these extremely low levels of VAF, you're actually seeing some biological false positives. And what they reported is that some of these patients actually clear on their own. So if the doctor is trying to make a decision about whether to give chemotherapy to the patient, it's kind of difficult if the patient is highly likely to clear on their own. So some of these questions need to be answered. And the good news is we're actually, at Natera, in the best position to answer these questions because we have this extensive data sets that we've reported out, this extensive history where we have biobanks and additional samples where we can run concordance studies and generate a lot of new clinical utility data on the genome test. Now in addition, we're leveraging our commercial and operational infrastructure with this assay. We think that's incredibly important. We've heard reports of very long turnaround time, clunky operations from some of the competitors. We'll be offering this at scale right out of the gate, same fast turnaround time, same scaled-up phlebotomy network, customer service, tissue procurement network, plugged into the EMR networks. So we think that that's a differentiator. Sometimes it's about more than just the assay. It's about the service that you can provide to patients and physicians. And then lastly, we have a broad portfolio of intellectual property that includes early priority dates that apply to both exome and genome MRD. So now I want to talk about tissue-naive MRD. We have done extensive in-house discovery to look for methylation targets. And we have the capability to do this because now we've processed over 250,000 tumor exomes. And we can leverage this data combined with other information we have to develop our own biomarker discovery platform to find novel targets that you simply aren't available in the literature. So this data set that is unique to us has now gone through a rigorous training and test evaluation process, where we separated the test from the training set on over 800 samples. The data is going to be reported out next week at ASCO GI. But what we're seeing is really solid performance here. Excellent performance that we think is competitive with other tumor-naive assays in the field. We're going to follow up the ASCO GI data. But with additional data sets, it will be read out later in the year. The RUO test is now available for pharma companies. And as I said, the commercial CLIA launch will be later this year. So on MRD, we now have the complete portfolio. We have the workhorse Signatera exome test that has been proven, that has all the overall survival data, 100 peer review papers, all the data that doctors really want. We think that's going to be the test that is used in the majority of cases. We now have the Signatera on genome clinically available for pharma. Doctors want it, if they want to get to extremely low limits of detection, they can do that, they can order it. We think it's mostly going to be used initially in clinical trials and physicians that want to do investigation -- further investigation, but it's available clinically, if doctor wants to order it today, they can order it. And then last, we have a tumor-naive test for physicians that want that. So we really believe in this portfolio approach, having options where we don't have to debate about which option is -- which approach is the best as long as they buy approach from us. Now I want to talk about early cancer detection. And again, we have a unique data set of over 250,000 exomes that have been sequenced, we can leverage -- now these are early stage in the vast majority of cases. So nobody has this type of data that we have of these early-stage patients. And we're able to leverage this biological depth to do discovery platforms that we built over the past 2 years to look at deep and broad methylation discovery that includes not just cancers but premalignant lesions and also other conditions, which are -- can be important and can skew the results. So we developed in addition to CRC an algorithm that's specific to advanced adenoma just given the importance of that disorder with targets and samples specific to advanced adenoma. And we're using methylation technology that has a refinement that really reduces the noise floor and we think is the best approach. So I want to talk about our validation strategy for ECD. Now our goal here is to be very transparent. So you can see extreme levels of detail into how we're validating the test. So we have the CIRCULATE-CRC study, which the goal is to establish the clinical performance -- we have over 5,000 confirmed CRC cases. Now what's great about this data set is that 30% of the patients are asymptomatic CRC patients, meaning they were screen-detected by colonoscopy and we think that's unique and that provides some value because that would be similar to what you would see in an FDA-enabling study. This includes stage I through IV patients. We have robust clinical data annotation. And we also have circulating tumor DNA measurements from Signatera on all these patients, which we think helps us in the development. Then we have the PROCEED-CRC study where the goal is to establish the performance in a screening population basically mirroring the FDA-enabling study. Now we wanted to collect 3,000 patients. Good news is we've already collected 2,600 patients and rolled them into the study. So we're almost done enrolling in the trial. We'll probably have around 10 CRC cases, about 240 advanced adenoma cases. And again, this is an average-risk cohort precolonoscopy blood draws matched with colonoscopy that really derisks the FDA study, and we're going to talk about some of that data today and some in the future. And then we have the FIND-CRC study, which would be our FDA-enabling study. And we actually can move right into this after PROCEED reads out, if it's positive because we're using the same infrastructure. So we don't have to spend a year spooling up the FDA study. We just continue on and ramp up PROCEED. So to show you the analysis, we had an independent training and testing cohorts on the left, which included 432 prospective samples for both CIRCULATE and PROCEED. There were 127 confirmed colorectal cancer cases. Importantly, and most other companies haven't disclosed this information in their case-controlled studies, we have 34 screen-detected CRC cases in stage I through III. We had 80 symptomatic CRC cases. That's similar to what others included in their case-controlled and then we have 13 with unknown diagnosis. Then we have 305 patients from the PROCEED study that were colonoscopy screen-negative controls. Overall, combining the screen-detected and symptomatic patients as others have done in their case controlled studies, we had a 95% sensitivity at 91% specificity. And you can see across the stages, Stage I and II, 92%, Stage III and IV above 98%, which we think is very good performance. But of course, there's this issue of deterioration which I think everyone asks about and as you go do your FDA-enabling trial, there's always some deterioration. So what we did is we called out specifically the screen-detected CRC cases. So these are the colonoscopy-detected CRC cases that have no other symptoms. And these tend to be more in line with what you would see in an FDA-enabling study. And we did see a little bit of deterioration. But in this cohort, we're still seeing 91.4% sensitivity with a 91% specificity. So we think this is excellent performance. We plan on following this up with an advanced adenoma readout that will be coming sometime in the first half, we believe, of 2025, maybe sooner. Now the advanced adenoma readout is in line with the FDA-enabling research. So these are all screen-detected. They're all blood draws that have been done precolonoscopy matched with a colonoscopy. So the data that we read out on advanced adenoma will mirror what we expect to see in the FDA-enabling trial. And so stay tuned for that. We'll announce that when it's ready. And then later this year, we'll be reading out the full readout from the PROCEED trial, which will include another cohort of advanced adenoma plus more negative controls plus screen-detected prospective CRC samples from PROCEED plus additional added CRC samples just because we're only enrolling 3,000 patients in PROCEED. So we need to augment with additional CRC patients. But we're excited about this road map. We're doing it in a cost-effective way, and we're going to get to the -- all the way through PROCEED without impacting our cash burn in any way. We have a significant amount of cash on the balance sheet. We have free cash flow. And we actually even think we can get through the FDA-enabling trial without even really making a significant dent or issue in our cash burn. So last, I want to talk about future catalysts. Next week, stay tuned for the 702 study and then coming up after that, IMvigor in muscle-invasive bladder. We're ramping our investments in R&D and ramping our investments in infrastructure so we can win in MRD. We are launching new women's health products, which will be announced later this year. We expect and hope to see continued growth in ASP and volumes across the different business areas. There's a large list of potential opportunities on new guidelines. We don't like to predict when those might come out. But there are opportunities ahead of us, which could be very meaningful for Natera. We are hoping for additional coverage decisions in oncology. And then we're making progress towards getting reimbursed and being on market for Signatera in Japan, which, as a reminder, is about the same size as the U.S. market for colorectal cancer. So with that, we'll open it up for questions. And I'd like to invite our company President, Solomon Moshkevich; and the General Manager of our Oncology business, Dr. Alex Aleshin, to come up on the stage as well.

Perfect. So thank you, Steve. Maybe just to kick it off here, just unpacking the solid top line and cash flow beat that you guys announced on Monday. Can you walk us through what were really the main drivers that drove that strong performance this quarter?

Yes. Thanks for the question. It's great to be here. I mean, really, it was -- sorry for the boring answer, but it was really kind of across-the-board performance. I mean, we had very strong volume growth, as Steve alluded to. I think the -- I think ASPs were, again, incrementally stronger sequentially versus Q3, and that's really across the board in women's health and in oncology. I think that when we get to the Q4 print, we'll be able to talk about oncology ASP is going to continue to grow, and I expect that to be a trend continuing on through '25.

Perfect. And then obviously, a lot of new product announcements today, I think that's the highlight of this presentation. So first off, just on the tumor-free MRD offering. Can you talk more about the decision to launch that product? How do you envision this operating coexisting with the current standard of Signatera? And then how should we think about the performance of Signatera versus that other tumor-naive tests that are on market today?

Yes. So I think the answer to that is pretty simple. If the doctor wants tumor-naive, they can get tumor-naive. We'll give it to them. And we think that's a great approach. If they want Signatera tumor-informed, they can have that, they want tissue-naive. They can have that. There might be circumstances where it may make sense for them to order a tumor-naive test or that might just be their preference. The way we see it panning out, we think probably 85% business will end up being Signatera exome, which has all the overall survival data that's involved in over 100 studies, has 100-plus peer reviewed papers and then we think kind of genome and tumor-naive will be on the other 15%, over time of course.

Perfect. Then just on the early cancer detection test, can you talk about how that early data that you showed shook out really relative to your internal expectations? And then where do we go from here in terms of pursuing an FDA-grade validation study?

Yes. So we're really excited about this. I think what we've seen from a lot of case-controlled studies that have come out, they sometimes haven't given the stage breakdown or they haven't given the breakdown of symptomatic versus asymptomatic, but they've all sort of included a similar number of symptomatic patients. And so we think our data is very good in comparison to some of the other case-controlled studies that we've seen. And we actually are, I think, excited that we've been as transparent as we have, breaking out the screen-detected cases and still seeing that good performance there. And I think that can give you maybe more confidence going into some of the more definitive readouts, because really those screen-detected cases are going to be driving the definitive performance. I think we're -- people are probably surprised about how far ahead we are on the PROCEED study. Having 3,000 collect -- probably here this month, we'll have the full 3,000 enrolled, so having a 3,000 patient perspective, colonoscopy-matched screening set in our hands is I think something people didn't expect. So we're excited about that. And then the fact that we've set up this infrastructure, and we can kind of roll directly into the FDA-enabling study I think is great. In addition, something that's unique for us compared to others in the space is the advanced adenoma set that we're going to be reading out is 100% screen-detected. So we did the work. This isn't case-controlled. This is advanced adenoma, colonoscopy-matched screen-detected from PROCEED, and we're going to have that first readout coming up soon here.

Perfect. That's helpful. And maybe shifting over to the whole genome version of Signatera that you announced. Can you walk us through how should investors be thinking about the margin profile of this test? And anything we should be aware of on the margin front as you launch it?

Well, we -- obviously, it's a little more expensive to sequence a genome than an exome. But I think the good news is that that's sort of amortized over the sequential blood draws of the patient. So really, while it is more upfront, over time, I think it sort of can kind of reduce over the number of blood draws that you do. I think there's potentially opportunity to get reimbursement increases. We're going to have to see about that. But it won't impact our COGS profile in a very significant way, especially because we think the vast majority of doctors are going to want the proven utility of the exome, which has all the overall survival data. And I highlighted some of the limitations that have already been presented by competitors that, I think, really raised questions about some of the clinical utility aspects of the tests.

Perfect. Then maybe stepping back across these 3 new product launches that you talked about today, should we expect any of them to meaningfully contribute to 2025? Or is this more of a '26 and beyond story?

I think a lot of it is going to depend just on how kind of things play out. I think we're gearing up to have a good year. I think we're doing the right things. We have our strategic planning in sort of Q3, and we kind of go over all the stuff that we need to do and tune that up in Q4. And I can tell you, like I'm pretty excited right now about what I'm seeing as far as the excitement on the team, energy and the field coming from physicians and from our sales team and from our medical affairs team engagement that we're seeing with top KOLs, principal investigators around new studies and it's important to remember that we're just at the very early stages of MRD. So this is going to be like an opportunity that has never been seen before in cancer diagnostics. We're at the low single digits of penetration right now.

Perfect. That's helpful. Maybe shifting to 2025 volume growth expectations. You guys have talked about how you expect to be able to at least expand volumes at the same level that you did in 2024, excluding some of the onetime impacts, obviously. So given where 4Q landed, can you just talk about your confidence? Is that still in play for '25?

Want take that, Mike?

Yes. I mean, we're off to a great start so far in '25. I think it's worth just noting that we're kind of at a scale now where every receiving day just for clinical oncology for Signatera, let's pick that as an example, it's worth something like 2,000 units. And so as you kind of go through the year, you'll have the variations in kind of number of receiving days, which will affect kind of your sequential growth that folks like to really monitor. But underlying that is real momentum that you've seen. If you look back over the last few quarters, you see us grow 11,000 units Q3, 14,500 units in Q4. So we feel great about where the momentum is pointing to us in '25.

Sure. That's helpful. Maybe shifting to a few Signatera-specific questions, then Signatera saw really strong volume growth again throughout 2024. You've exceeded your historical guidance of that 8,000 to 10,000 units of sequential improvement on Signatera. So given the past approach, just given some potential onetime fluctuations in order trends are you planning to continue embedding that same 8,000 to 10,000 level? Or is It time to kind of update that range as we look throughout '25?

I still think that's the right baseline range just because of what I just said, I mean there's 2,000 units come in every receiving day. So if you have an extra holiday or whatever, you can have the -- you'll have those kind of quarterly fluctuations, which is fine. I think that still portends a very strong year for us going into '25, and we'll have quarters where we clearly exceed that just like we just did in Q4.

Yes. And I do think one of the catalysts that we have driving growth is new data readouts. We saw that a little bit with GALAXY and we have the 702 study coming up. I don't know, Alex, if you want to talk about, from a physician perspective, the significance of the 702 study. I think that would be great.