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

Welcome, Day 1 of the TD Cowen Healthcare Conference. Dan Brennan, I follow Tools and DX. Pleased to be joined with me on stage here, Mike Brophy, CFO of Natera. So Mike, welcome.

Thanks for having me. Good to see you guys. You got it.

So Mike, obviously, you guys reported last week, a really strong end of the year with nearly 60% revenue growth. Guidance was strong as well, 5% above consensus on the top line as well on gross margin. So maybe just to kick it off, Mike, when we think about key initiatives for Natera this year in MRD and women's health, just how would you outline them?

Yes. No, thanks for the time, and it's great to be here with you, Dan. So in terms of the '24, obviously, is a transformative year for Natera. I think we went from $1.1 billion in revenue to something like $1.7 billion in revenue. We grew gross margins like 1,000 basis points thereabouts. We initially were hoping to burn less than $100 million in cash. We actually generated something like $80 million in cash, had a very strong Q4, in particular, where we ended the year kind of 59% gross margins kind of ex the true-ups, 63% with the true-ups, really generated about $65 million kind of operating cash flows just in the quarter. And so that performance in '24, coupled with our experience in 2023 in which we held OpEx flat and grew revenues 31% in that year, those are kind of the case studies that we are seeing that showed us that we're really getting leverage on this business model and that we need to -- it's time to kind of put our foot on the gas in terms of investments in order to support the top line growth for the 2027 through 2029 kind of time frame. I feel like for the guide for this year, I mean, we're really kind of set in terms of the initiatives we have in place to achieve the top line we've guided to for 2025. I mean that's already in place, and that's already rolling and the investments really focused on the future. So in terms of the key initiatives for this year, it's really going to be more of the same. I mean we had an excellent year in the women's health business, really rapid volume growth. But even more importantly, I think, to me as you're humble bean counter here, is that the ASPs continue to really improve. That goes back to a decision that we made in 2022 to really double down on the execution and the kind of the investment in engineering that we make in that business to make sure that we get covered for covered services. And we really saw that initiative play out well in our favor in '24, expect more of that here in 2025. We got some interesting product launches happening in women's health. We launched our fetal RhD test last year, which was incredibly well received, served -- solved a really kind of critical problem that the health care system was experiencing with the shortage for RhoGAM at the time. And we've got some interesting product launches scheduled for this year, which we'll talk about as we kind of get closer to the launch. Organ Health, similarly, I mean, we kind of called out on the Q4 call, Organ Health actually grew circa 50% last year. Volumes and ASPs were quite strong. That's always been a high-margin business for us, meets a critical unmet need for a patient population. A lot of strong data both for Renasight and Prospera. And on the Q4 call, we previewed a couple of trials that we're going to have reading out this year that we're very excited about in Organ Health. Finally, Signatera, just really continues to ramp. I mean we had one of the best quarters we've ever had in terms of just sequential quarterly clinical growth units. In Q4, we grew more than 14,000 clinical units above the Q3 number. The guide for this year -- I mean as many of you will recall, we've kind of guided to kind of 8,000 to 10,000 sequential growth units as being kind of our baseline. We're -- now kind of the guide acknowledges we're kind of modestly above that now as this kind of flywheel continues to accelerate for Signatera. So the volumes look quite strong there. That is supported by a continued drumbeat of excellent clinical trial results. So just to pick 2 in particular. Last fall, we were very excited to unveil for the first time kind of 3-year prospective outcomes data in colorectal cancer via the CIRCULATE trial at ESMO. And then more recently, at ASCO GI here in January, post the JPM conference, we had a number of very important readouts. In particular, we had an amazing readout with our CALGB-702 study, where we showed something like a 40% treatment benefit among patients just -- Signatera-positive patients just by adding an NSAID, just by adding CELEBREX to the regimen on top of the standard of care, and that was a randomized prospective clinical trial that had been run previously and had failed on all comers. And then you come back and you segment the population just for Signatera-positive patients and the Signatera-positive patients have a 40% treatment benefit for a drug that is very inexpensive and the safety profile for which is very well understood. So we have an excellent kind of like data sets driving momentum into 2025 in addition to the kind of the commercial momentum we've already demonstrated in the clinical volumes. So this is year 10 for Natera as a public company and something really fun is going to happen that in July will be the kind of the 10th anniversary of our IPO. And we're -- actually, we're going to New York, and we're going to -- I think we're going to like ring the bell or we're going to do something like that. And it's really meaningful to us because if you look around our management team, I mean, almost all of us were there, almost all of us were there 10 years ago. So we've gone through this kind of journey together. And I think it's fair to say that we've never been in a better place in terms of where the business is and where we're headed. So I'll pause there.

Excellent. So maybe we zoom out on MRD and you think about the volume growth that's coming forth. Obviously, you've got surveillance as more of the CRC patients mature into the surveillance. And when you think about new adds, how much of that new add, if you think out over the next couple of years, is it CRC carrying the bulk of it? How much spreads into breast, bladder, lung? Just trying to think through how much those other indications could begin to see the penetration rise?

Yes. I mean, look, the mix of our volumes across tumor types has actually remained relatively stable over the last year-or-so, where we had a little bit more than half of the volume is colorectal cancer volume, then circa 25% of the volume is breast cancer volume. Then you've got several tumor types that comprise 10% to 15% of the volume. One of them is kind of a pan-tumor immunotherapy response monitoring indication, which is primarily adjuvant treatment for lung. Then you've got muscle invasive bladder cancer, melanoma, other GI cancers, also kind of in that high single-digit range. And then you kind of round out to kind of like a longer tail. That's been relatively consistent over the last year to 18 months. And what we presume is that, that will kind of remain so for the immediate term. It's interesting over the slightly longer term what the mix can be. In the United States, it probably starts to evolve more and more toward breast cancer, just given the incidence of breast cancer in the U.S. and the huge unmet need that particularly women in the -- who are in remission, there's something like 4 million women in remission for the breast cancer just in the United States. For our mix of our business, though, it may kind of remain kind of in this kind of balanced zone because in addition to U.S. colorectal cancer patients, we're starting to get closer to the time when we can hopefully get approval for colorectal cancer Signatera monitoring in Japan, okay, which would effectively double the patient -- the volume opportunity, probably more than double the revenue opportunity for that tumor type. So as you look forward, you have these couple of drivers that can grow several of these tumor types quite rapidly.

And what's like the visibility or events that we have to watch to play out for that Japan kind of primary?

Yes. So we're working through the process to get Japanese FDA approval. And then once that's attained, then you've got to go and apply for coverage from the National Health Service, and those things happen in serial instead of happening in parallel. So what I'd like to have happened this year is we have a few updates, either press releases or we'll give you some updates on earnings calls where we kind of walk you through kind of hey, what steps have we completed and what kind of -- there are some measurable kind of progress points that we'll be able to point to through the year in terms of which modules have we submitted and what's our updated thinking on timing?

And there's no LDT in Japan that you can launch prior to approval?

Yes. There's -- it's really, it's -- the way that you end up commercializing in Japan is via like a Japanese FDA approval and a national health service pricing decision. Yes, so...

Got it. So maybe just on some of the newer products which you mentioned, tumor-agnostic and whole genome. So how do you plan to roll those products out like throughout the year? And what kind of potential like mix do you think we could see by year-end between existing Signatera and those other 2 applications?

Yes. We're really excited to announce the launch of these additional offerings for the Signatera franchise. And this is really consistent with the strategy that we've always undertaken at Natera, which is to kind of offer a menu approach for our customers. So while we fully expect the vast majority of our patients will continue to use kind of the workhorse Signatera assay that has all of the clinical trial data behind it. You will have -- on the margin, you'll have an older lung cancer patient who is just not going to withstand a fine needle aspirate to the chest to remove tissue and then build the Signatera test. But you might like to offer that patient something. And for that patient, we think it's great to be able to offer them a tumor-naive panel. On the tumor-naive side, I mean, I was very encouraged by the initial data set that we were able to kind of preview with investors at JPMorgan. I mean as many of you know, one of the real problems that we've seen with these tumor-naive panels is they just throw off way too many false positives. And so we were able to show in this kind of early data that for pretty good sensitivity, I mean, relative to Signatera, it performed reasonably well, not quite as good as Signatera, but had very high concordance on the negative cause. So hopefully, that can give physicians some comfort that you're not going to be -- your practice is not going to be inundated with a bunch of false positives that you have to deal with. And it's a valuable kind of additive step to our franchise. And of course, we have to deliver more data there, and we will. Similar answer on the genome side. I mean on the other end of the spectrum, you'll have a subset of physicians that have an opinion about the technology and want to go ahead and push forward into an assay with a genome backbone. And you have a similar set of drawbacks, right? You will generate more false positives with that product most likely. And some physicians are like -- have a preference there. They're happy to manage those false positives. They're in the extreme minority, but they exist. And so for them to be able to offer them this broader panel can be useful. I expect there to be some incremental uptake of these new products that I think on balance are going to be additive to the Signatera -- the kind of this core Signatera product because offering this menu kind of enhances kind of the overall Signatera offering for a physician who's trying to decide whether or not to adopt MRD into their practice or not.

Maybe just on Signatera then talking about the sequential volume gains and you've kind of upped the guide range from 8 to 10, something above that. I think you talked on the call that 3-year GALAXY data as being a driver of that. Just kind of what else are you seeing that kind of got you into that ZIP code throughout 2024? And what gives you the confidence to think you're also seeing something, I don't know, it sounds like 12,000, 13,000, maybe I don't know if that's the number in 2025?

Yes. I mean what we said on the call is that we just acknowledge that the guide contemplates that we're kind of -- we're just modestly above that kind of 8,000 to 10,000 range. So I sort of think about it as like 10,000 to 12,000 is a decent kind of starting point for that. I think we'll almost certainly have quarters that are kind of similar to the one we just put up where we did like 14,500. I will caution you, as I do every time, that like the sequential volumes are going to fluctuate quarter-to-quarter, largely driven by the number of receiving days that happen to arrive in that quarter. I mean we're now operating at a scale where every receiving day in our lab is worth a couple of thousand units. So if you have like holidays or you have some kind of disruption, you could have that be a little bit lower. If you have an extra 3 receiving days, that's 6,000 units. I mean in the context that can look like a big deal when really -- if that happens, we'll be downplaying that on the call. The broader kind of spirit of the comment is that we are seeing the underlying kind of baseline volume growth here continue to accelerate on really pretty steady rep counts. So that's been very exciting for us.

Right. So I think last year was like a 13,000 average. I think that's what it was last year in 2024. In terms of maybe 80702 and Altera, maybe start on the 702 data. What's been the feedback from customers and doctors in the last month or 2? Do you see the regimen being implemented in the clinical practice? I know Steve talked about it a little bit on the call.

Yes. I mean it's been incredibly positive. I mean even just walking around ASCO GI -- there were actually 2 data sets that were somewhat similar that were read out at ASCO GI. One was our 80702 data. One -- there was another data set that was, I think, Stage 1 through 3 patients that evaluated adding an NSAID to PIK3-mutated patients, okay? And that data also looked amazing. The only difference is that like the PIK3-mutated patients are like a subset of the Signatera-positive patients. So the Signatera positive patients is a much bigger patient population. And that -- like our feedback of that is that that's a pretty satisfying result for the field because there's long been the strong supposition that a lot of these Stage III patients are having this polyp development in their colon being driven by some kind of inflammatory response. So it makes sense mechanistically that you should be able to help these patients by giving them an NSAID and kind of knock down that inflammatory response. And yet when the study is run on all-comers, it failed. So like so many things in cancer, it turns out like life is more complicated than that, and there's -- the drivers of Stage III disease are kind of multifactorial. So what this data was able to do is it was kind of an aha moment, like, hey, we can subset -- we can segment this population into a group of people that actually probably are having polyp development driven by an inflammatory response, and we can help them a huge amount with an NSAID where you wouldn't probably -- even though CELEBREX is a very safe drug, the base case has not been to give it to everyone because you're going to create -- you're going to cause bleeds. If it doesn't work on all-comers, it's tough to kind of give it chronically to people for years and years. But if you can have a 40% treatment benefit for a very cheap and otherwise very safe drug, you're going to do that, right? So we have that kind of initial feedback at ASCO GI that several of kind of the top KOLs in the space are just saying like, "Hey, look, I thought that this should have worked on all-comers, and I was disappointed they didn't, but now that I understand I can segment my population, I'm going to start doing that right away." And of course, I don't mean to oversell. I mean the response is going to fall on a continuum. There's always going to be physicians who have a thoughtful desire to see more data, and we will certainly deliver that.

So you are running kind of a randomized [indiscernible]?

I'd say there's going to be more -- because these -- both of these data sets are read out at the same time and there's clearly going to be more data from us and just from the field going to be evaluating this effect further.

Got it. Maybe in terms of randomized readouts, VEGA comes to mind, you have CIRCULATE-US, kind of what's in the current pipeline of clinical data that you're anticipating this year?

Yes. I mean I think for this year, I mean, what I have in mind primarily is IMvigor011 is a very important study that we expect to read out this year. Just for people's background, that's IMvigor011 is the second Phase III muscle-invasive bladder cancer trial that we're running with Roche and Genentech. We ran IMvigor010, which evaluated patients in muscle-invasive bladder cancer for atezolizumab efficacy. And before unblinding that data after running a 7-year $100 million clinical trial for atezo, actually prespecified an endpoint to see what is going to be the treatment response just among the Signatera-positive patients. And very similar to what this example I just gave you for CELEBREX in Stage III colorectal cancer, unfortunately, the drug did not meet its endpoint in all-comers, but had, again, about a 40%-or-so treatment benefit among Signatera-positive patients. So that was amazing. Unlike CELEBREX, this is not a drug that was on the market. So Roche immediately turned around and launched a second Phase III trial in which interest criteria is predicated on being Signatera-positive and then they were going to randomize you to atezo. So that's expected to read out sometime this year. I'd love to have that readout sometime like midyear, although we obviously don't control that timing. And that could be a very exciting result, obviously, for these very sick patients, but I think for the field. I mean I think when we read out the IMvigor010 data, that's in muscle-invasive bladder cancer, but what we saw was a massive network effect kind of across the volumes of the business because physicians have understood the use case and felt that this can help their patients in these other indications. And I think that's proven to be true as more data has come to life. In addition to IMvigor010, I mean, I also just call out, I mean we will have a continued drumbeat of additional data sets kind of across all these tumor types, including, I would expect more CIRCULATE data, may have more [ pharma ] data in breast cancer. And as we get closer to those readouts, we'll preview those to you on the earnings calls when we know that, hey, there's going to be a presentation at a certain upcoming conference.

So Guardant recently got surveillance coverage in CRC, like have you factored in any impact of kind of share degradation from that launch or other players like some of these ultrasensitive players looking to come to market this year?

Yes. I mean I think, look, competition is great, very healthy for the space. We've had a number of competitors over time in the space and haven't really gotten any meaningful traction just yet. On balance, I mean, I think it's very constructive for the health care system for -- to have several sales teams out there helping to kind of move the consensus toward -- of course, you should get an MRD. Like I mean, of course, you get a CT scan, just moving that to just be more kind of a consensus standard of care is on balance. I think that's good for patients. And generally, what's good for patients is being a pretty good thing for Natera. So we welcome that. In terms of kind of share degradation, it's hard to model. I mean these are all very good companies that are launching these products. And we know these people for a long time. We know how talented they are. So I'm sure they will be able to gain some share. But I would just remind everyone like what a huge unmet need this is, and there's plenty of volumes for us to go capture to kind of meet all of our goals.

So on screening, you showcased 18% AA data on the fourth quarter call, which is based on 76 AAs from, I guess, 3,000 asymptomatic colonoscopy screening patients. Maybe could you just give maybe just some more background on that study, kind of where you go from here? I think you said you're going to have another data set later this year. And ultimately, you sounded pretty confident, but just, again, walk through how you think this kind of assay development plays out?

Yes. I mean we were very encouraged by the results we had. We previewed the Stage I through IV results in JPMorgan. And then on our earnings call last week, we were actually able to supplement that with some performance in advanced adenomas that I think was very promising. That was really on the first kind of cut of initial kind of subset of the PROCEED patients, and we'd like to have a larger set of patients to read out likely by year-end that gives you a more fulsome look on our AA performance on a bigger patient population. And we've done -- I think all of us that have been kind of around the early cancer detection space for a while have learned the thing that I think is yet to be learned in the MRD space, which is that initial clinical trial results, initial validation studies, unfortunately, don't always live up to the scrutiny that comes from larger prospective data sets. That's one thing that we've been very proud of with Signatera. If you look back to our 2017 data or our 2019 paper in colorectal cancer with Reiner and then compare that to the 3-year prospective outcomes data, arguably, the 3-year data is better. I mean the assays continue to improve and things like that. But also we tried to be very rigorous when we first announced data to the world, and we try -- we take that very seriously to try and live up to that data as we read out bigger data sets. So it's really the same process that we've deployed in early cancer detection for CRC. We've tried to take as many precautions as we can take in terms of making sure that these are kind of randomized asymptomatic patients to kind of hopefully give you as real-world a sense of what our performance can be. We're cautiously optimistic that we can do better than the 18%. But of course, all you can do is just produce the data, and we'll have more for the end of the year. Maybe just a few other comments on that opportunity. I mean this looks like actually an excellent opportunity for us and for the space. I mean, as we know, it's a massive unmet need. Would it be that everyone just got a colonoscopy, but that's just -- that's not realistic. There's an excellent stool-based test that, again, the form factor will just limit -- you won't get 100% of the people screened that need to get screened because of the form factor. And so there's a huge unmet need for a very easy plasma test that can capture a big chunk of the population that would otherwise be unscreened. It looks like the health economics for that are compelling enough to support reimbursement that actually supports the business. And we have an excellent channel for that business. I mean the -- our OB/GYN channel is one of the best primary care sales channels that's ever been built in the space. And so that's one potential port of call for that assay in addition to potential partnering opportunities, which we also think are interesting. So more to come on that.

So maybe jumping over to women's health. Great year in '24. Invitae bankruptcy helped. But beyond that, certainly was a solid year. Kind of walk us through the pricing, the underlying pricing in NIPT and carrier screening, the expanded carrier screening opportunities ahead. But just walk us through what to expect in '25 and what's going on underneath that's allowing you to get some better pricing right now?

Yes. I mean like the actual -- the rates haven't changed that much, right? So the market is more mature in terms of the reimbursement, like the contracted rates that you'll get from payers. What's really changed is the fraction of time that we get actually reimbursed for a test that is objectively should be covered basically every single time you ought to be able to get covered for an NIPT if you're pregnant in the United States. And sadly, historically, that just hasn't been the case. There's been all kinds of administrative issues and reasons why a payer may deny a claim. And we've just really doubled down on our investment to just to clarify that and to make sure not argue with the payers about the merits of different administrative barriers, but just meet whatever hurdles that they have, just meet them where they're at. And we've been able to do that at a much, much higher clip, much better clip over the last year, and that's been very important just for the health of the underlying business.

So in terms of that price increase, what's kind of baked in for '25 underlying for women's health?

Yes. I mean the women's health, I mean, those of you who have followed the company for a long time and listen me guide to women's health ASPs know that the standard -- like the SOP is to guide to erosion in women's health pricing just because we can't have nice things in diagnostics, as you guys all know. But this year, I mean, you should take it as much more of a bullish sign that we actually are kind of guiding kind of stable ASPs, which means that as we improved ASPs through the course of the year, we kind of exited Q4 at a much stronger level than we entered the year. And now we're getting to kind of annualize that for a full year in the guide. And that's part of what's driving -- you referenced at the top of our chat, what a strong gross margin guide we had this year. That's a component of it. It's just that level of success that we had towards the end of the year, kind of just amortizing that across the full year. Having said that, I am -- like I'm cautiously optimistic that there's more to come there, that there's more execution that we can do that can improve our ability to get paid on covered services more frequently than we have even in 2024.

So 2 quick last ones. So tumor types of Signatera, should we expect, while it's not in the guide, that you'll have other MolDX approvals this year?

Yes. I mean I think when you look at our volume mix, which we touched on earlier in the chat, I mean, the major tumor types we have MolDX coverage for. So it shouldn't surprise you that we have additional this year. I would consider them as kind of incremental. There's not some hidden MolDX approval that we need in order to hit our guide, for sure. I mean the guide kind of presumes that this is our set of covered tumor types.

And then last one. So you talked about in the beginning now is the time to invest on the OpEx side in '25. Why is OpEx going up? Like what are the drivers of that OpEx increase in '25?

Yes. More intensity on customer service. We feel very strongly that we've got the kind of the best offering in the world in terms of what is objectively a complex service that we make feel very simple for the physician in terms of tissue acquisition, in terms of blood draws, in terms of patient portals, in terms of availability of nurse coordinators to help facilitate all of the logistics required to deliver a personalized test. R&D, I think the increase in R&D just underlines our commitment to innovation here. We're going to continue to deliver best-in-class clinical trial results and best-in-class measured by size of studies, duration, quality of the outcomes, that's going to be our goal. And we're going to continue to launch and support new products like we have this year.

Great. Well, Mike, thanks for being with us, and thanks, everyone, in the audience.

Yes. Thanks, guys.