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

All right. I'll go ahead and get started. I'm Puneet Souda. I cover life science tools and diagnostics here at Leerink. And it's my pleasure to be hosting Mike Brophy, CFO of Natera. Mike, welcome. Thanks for joining us.

Yes. Thanks for having me.

Okay. Awesome. So maybe to kick off, obviously, you had a remarkable growth in Signatera for the fiscal year '24, more than 0.5 million tests, one of the best launches in the diagnostic history for a test. You have over 100 publications, and you're launching now whole genomes as well as other tumor-naive assay as well and product launches that you have upcoming. Beyond that, 50% market share in NIPT. That's impressive. So a lot of things are working here, and we'll get into some of those and including early cancer detection as well. But maybe on Signatera, this is from quarter-to-quarter, you previously talked about 8,000 to 10,000 volume -- sequential volume increase. And then that number was increased and now expected to be higher than that sequentially. So maybe just tell us what's behind that? And what's your level of confidence that, that's consistently going to be the case in quarter-to-quarter?

Yes. No, thanks for having me, and thanks for the question. Yes, I think this has been a topic the last several quarters throughout '24 as we've routinely exceeded that 8,000 to 10,000 threshold. Is that the right kind of baseline expectation? And we updated that to say -- in the '25 guide to say that the baseline expectation is now modestly higher than 8,000 to 10,000 quarter-to-quarter. And that's just a reflection of the growth in the business, the fact that we've got a critical mass of patients that have started with us and then continue with us through adjuvant treatment into recurrence monitoring, and we're seeing very healthy trends in terms of new patient starts and new clinic adoptions. So all of that combines to say that just the statement of fact is that the guide presumes modestly higher as a baseline kind of sequential growth volume number. I still -- I will tell you that I think we mentioned on the earnings call, we feel like we're off to an excellent start in Q1. Q1 is looking like a very strong quarter kind of across the board and particularly for Signatera volume. So we're excited about that. The quarterly volume growth will fluctuate from quarter-to-quarter just on randomness and things like receiving days. So I'll just remind you that every receiving day is worth a couple of thousand units. And so I think as you're evaluating the sequential growth progress of Signatera, I mean, I think it's worth kind of averaging kind of a rolling 4 quarters rather than focus on a quarter where we have, hey, we have a lot of upside or it's a little bit lighter in a particular quarter. But nonetheless, I mean, I think that kind of the average baseline is kind of structurally higher now.

Got it. Yes. Got it. That's helpful. When you think about Signatera with the current penetration, how should we think about the sort of the key drivers? And one is indication expansion. You've got data. You have penetration into the -- obviously, you're well penetrated into the leading academic medical centers. Maybe you can elaborate on that and how penetration is in sort of like Tier 2 and then community setting. Maybe just give us a sense of on the penetration side and where you see the most opportunity volume side?

Yes. I mean, look, we built Signatera to serve the workhorse community oncologists that's seeing a lot of different patients across different tumor types. And Signatera truly is a pan-tumor workhorse assay, and we've delivered data now across a broad range of solid tumor types where the results are, I think, remarkably similar kind of across tumor types and use cases. There's a lot of advantages associated with that in terms of patient care, a pretty consistent use case for the physician as she treats different types of tumors in her practice. And that's -- it's been very easy for physicians to adopt the test because there's just such obvious clinical utility. I mean you slot Signatera into your kind of standard follow-up paradigm, your standard cadence, and it just enhances your decision-making with the patient, be that for neoadjuvant breast treatment for breast cancer patients or trying to triage patients for chemotherapy post-surgery in colorectal cancer, the results are very similar. The penetration has really mirrored where the volumes are in the United States. And the majority of the volumes are obviously, almost by definition, are in the community. Because we've had a core part of Natera's strategy over the last 15 years has been to be very aggressive in driving top flight prospective clinical trial results, that necessitates a deep connection with key opinion leaders in oncology and in particular tumor types and all the major academic centers, participate in those trials. So that's kind of a key way to interact with KOLs. That's what they like. That's why they should like to interact is that they just want to see new science and new data. And so we do that. The thrust of the commercial effort is kind of serving the bulk of those patients in the community, and that's where a lot of the penetration is right now.

Got it. On the data side, obviously, a number of studies there. You've got GALAXY, ALTAIR. Now you have 702. And then you recently announced the HEROES trial will start -- begin enrolling as well. Maybe just could you talk to us sort of what should we be looking for in terms of new trial readouts and potential timing of those readouts?

Yes. I mean -- so for this year, we had a fantastic readout already at ASCO GI in January in the CALGB702 study. We thought that was actually going to read out the summer of '25, and it read out much more quickly than what we had anticipated, probably because the results were so good. It was easy to calculate the math on the results. What happened in that study was patients that had previously been randomized plus or minus CELEBREX that are Stage III colorectal cancer patients, that study had failed on all-comers, and it was a very disappointing result for the field. But then when you segment that population based on whether or not they're Signatera positive, you saw a massive treatment effect for CELEBREX, which is very cheap and safe and known to be quite effective for patients. But not something that you would give systemically or chronically for the whole population, absent a positive result because it can create bleeds for these patients. So it's hugely important for the field to be able to segment the population that can really benefit from the drug. There was a similar result just from an academic group at the same conference that showed results for PIK3-mutated patients, which are about 1/3 of the Signatera-positive patients. So that's a very exciting kind of interventional result for the field. And I think it's something that can and probably should drive additional adoption. Other studies this year that we're excited about, we're hopeful to get a readout in the IMvigor011 muscle-invasive bladder cancer study with Roche and Genentech. So just as a reminder, several years ago, Roche was reading out the first Phase III trial for atezolizumab in muscle-invasive bladder cancer. And the primary endpoint was treatment effect on all-comers, but they prespecified an endpoint to see what the treatment effect would be for the drug just among the Signatera-positive population, which is like a little -- it turned out to be a little bit less than half of the trial population. And unfortunately, the drug did not reach a p-value on all-comers, but had -- similar to the story I just told on CELEBREX, had an amazing treatment effect on the Signatera-positive population, okay? So Roche turned right around, enrolled a second Phase III prospective clinical trial where the patients are Signatera positive, and now we're going to -- they're going to be randomized to the drug, okay? So we're -- obviously await that data, excited about those results. Those should come sometime this year. Obviously, the specific timing is up to our partner in terms of when that gets read out. But I think that can be very important. I mean the first MIBC study had a very important kind of network effect across our -- across the entire franchise just because this is a pan-tumor assay and a lot of physicians were able to see what the results were in that study and then apply those learnings in their own practice. So I think that this will be a truly prospective interventional trial that we're very excited about those results as a possibility. Another -- we'll have continued, longer-dated and larger patient populations reading out through the CIRCULATE trial in colorectal cancer. Every time we read those out, we feel like that there's another tranche of patients and physicians that feel like they can benefit from Signatera as a result. So just as a reminder, last fall at ESMO, we were able to read out 3-year overall survival data in the CIRCULATE trial. This is the first time that there's ever been kind of overall survival data, prospective overall survival data read out in the MRD setting. It takes a very long time to read these data sets out. I mean this is a study we started in probably 2019 or 2020. It's only now reading out. We'll have more of those, we expect, at various academic conferences this year. I'm also -- I'm hopeful that we can have some additional kind of interventional pharma trials that present data. And as we get closer to the timing of which academic conference those will read out at, we'll try to preview those for you on different earnings calls. So a very full slate of data sets. Every major academic conference, we're going to continue the drumbeat of important data sets that we think that can be very helpful for patients.

How much of the contribution today is from biopharma? And how big of an opportunity is there for biopharma as you're getting involved in more and more trials?

Well, in terms of just a revenue contribution, it's relatively modest relative to the clinical contribution, as you might expect, right? I mean, obviously, there's orders of magnitude more volumes to patients to serve in the clinical practice versus just a subset of patients that happen to be enrolled in a clinical trial. So the pharma opportunity, that is -- we do run that as a business. I think that's helpful to run it that way. But the main thrust or the main return for interacting with pharma is you've got to partner with pharma if you want to run an interventional trial with a particular drug. And oftentimes, pharma has a massive amount of infrastructure already set up to investigate these new therapies that they're trying to unveil. And so we've been very effective over time at partnering with them. The IMvigor example with Roche is a prime example to demonstrate the efficacy of a drug within the framework of a Signatera result. So we'll keep doing that.

Okay. Just one quick question on the new product launches, whole genome and tissue-agnostic Signatera. The new product launches or the ones that are emerging in the marketplace, some -- they have different profiles in terms of performance and whatnot. I would love to understand sort of how are you thinking about overall performance improvement and the feedback from the oncologists that some of these assays are getting adopted, but they would love to improve on, let's say, sensitivity.

Yes. Well, look, it's very heartening to come to academic conferences or investor conferences and see minimum residual disease and recurrence monitoring listed as a vertical. When we made those terms up on a whiteboard at Natera in 2015, it's maybe worth understanding a little bit of the history there. I mean we did not hire McKinsey to come in and tell us what are the big markets in oncology. We sat around the room with the core people that were at the company at the time and thought about, hey, what's an important problem that we can solve for patients using the technology where we're already the best in the world, where we have developed a core set of expertise and capabilities around multiplex PCR chemistries and the associated algorithms, and we then honed that at that time for almost 10 years at the time in the service of having a best-in-class noninvasive prenatal test. And we alighted on this concept that care for patients in the adjuvant recurrence monitoring setting is incredibly inefficient. I mean it makes you sick to think about how much unnecessary chemotherapy gets prescribed and how chemotherapy, ultimately, doesn't get to the right people all the time because they can't tolerate it and they know their odds are pretty good with the surgery, for example. And so that's step one is, hey, solve this important problem. It should be no surprise that there's lots of other talented groups, companies that want to come in with additional products and ideas, and we completely welcome that, completely welcome the competition for -- to push the industry forward. I think the other players, I think, broadly speaking, kind of fit into 2 categories. You've got -- you've got groups that want to offer kind of a tumor-naive MRD test. That's kind of a one-size-fits-all test with the argument being like, hey, that can be more -- potentially more convenient for certain patients where tissue is not available, elderly lung cancer patient, for example, maybe it's not practical to get the -- extract the tissue from that patient, but you'd like to offer them something. Rewinding 3 or 4 years, I mean, I think there was a big debate around whether or not a tumor-informed assay like Signatera was even feasible. Can you get the thing to work? Can you get the logistics to work to get the tissue and build a personalized test for every single patient? Is that even a thing that can happen at scale? And I think that debate has come and gone. I think we've shown that it absolutely does scale, and it absolutely does generate excellent results. Nonetheless, there will be a subset of patients for whom a tumor-naive assay is better than nothing. And so we've launched -- we've actually launched a tumor-naive assay now to serve that subset of the market, which we think is valuable because that's just a clinical problem that needs to get solved occasionally. On the other end, you've got a set of competitors that -- and I love the branding. It gets reflected back to me as like a statement of fact that companies will brand themselves as ultrasensitive or, I think 1.5 years ago, I would come to these conferences, and there was a competitor who would just say that they were 10x more sensitive than Signatera, and that would just get reflected back to me as a fact for them for me to react to. And I'm thinking, well, how polite do I need to be in front of people. I don't want to be too rude. But the -- what ends up happening with a lot of those groups is when they actually get their hands on clinical samples, like the group I have in mind got their hands on some lung cancer samples from TRACERx. And these are not -- obviously, these are not like head-to-head studies or whatever, but they -- when you look at those results, the sensitivity is often worse than the 2017 version of Signatera. Now why is that? The reason for that is that sensitivity can be pursued on several different vectors, okay? One is kind of the number of variants that you have in your assay. And that's the primary vector that some of these emerging players want to use as they want to flood the zone with kind of 1,800 variants or something like that. The second vector is intensity of sequencing at a particular variant, okay? And the third is which variant calling, which variants are you going to choose to track. And on those second 2 points, we've actually put a lot more emphasis. We feel like the best way to achieve sensitivity is to do an excellent job calling and tracking specific clonal variants that will be present in the tumor reliably even as the tumor evolves, and then sequence those variants at 100,000x depth of read, such that any particular variant that we're tracking, we would expect to be much more sensitive than kind of an assay that is trying to track like 1,800 variants. Why? Because they've got to do a much lower pass at any particular variant. So there's no -- before running clinical trials, there's actually no way to infer which technology approach is going to be more sensitive. The only way to do it, and this is totally appropriate, is to run the data, deliver the clinical trials. And so our primary response there is just to deliver excellent data, long-dated prospective data sets. We have launched a genome backbone MRD assay that runs on 64 variants. And the goal there is to try and push the frontier forward in terms of sensitivity without paying a penalty in false positives. False positives, I think, get somewhat underrated by the investment community because physicians that are most available for diligence for you guys tend to be less concerned about false positives than the typical community oncologists for whom 30% false positive rates on a patient level are totally unworkable in practice. And so we'll continue to kind of push that forward as well as part of our menu. But again, there'll be other competitors with other good ideas, and we're happy to engage with them.

Yes. Just quickly on the ASP improvement, is that -- can you just talk about what's the ceiling that you see just given the mix that you have with commercial versus Medicare? And how much of that -- how much of a leeway do you see in shifting towards more Medicare patients? And how should we think about commercial payer adoption as well?

I expect our payer mix to remain relatively constant. I think that the guide this year presumes some modest improvement in the ASPs for Signatera, and that's just a function of the ADLT rate and also just improving the fraction of time we get covered -- we get paid for covered services from our Medicare Advantage payers. That's been an important story for us over the last year is just to get paid for covered services, particularly from -- for Signatera for Medicare Advantage. So I think that can improve modestly through the course of the year, and that would suffice to get you to the guide. Maybe just a minute away from oncology for a second. I think the guide also presumed that women's health realized pricing was going to remain relatively constant this year. That's actually a fairly bullish way for us to present a guide. Usually, people will recall that we'll usually guide to some erosion in realized pricing just because diagnostics is such a tough business. Personally, I'm going to be a little disappointed if the ASPs are flat in the women's health space. I mean we have some excellent momentum there. Those tests are, piece by piece, very gradually just becoming more and more kind of obviously entrenched as part of the standard of care. And as that happens and as our kind of execution continues to improve, we think that we ought to be able to get paid more consistently from covered services within the women's health space. And that obviously allows us to then take the gross margin benefit and then apply it back into more clinical trials and more useful ways to serve patients.

On the point of women's health, I think you pointed out nearly half of the births are to Medicaid mothers. And so again, Medicaid is often on in the news. There's a lot of noise. If there were Medicaid cuts, how do you think about that?

Yes. Well, I mean, Medicaid is an incredibly important program for the country. I mean, I think there's something like 75 million people that are covered by Medicaid and as compared to, I think Medicare is something like 40 million people or something. I mean there's a huge number of people that depend on Medicaid, and that's obviously above the state and federally funded program. For us, I mean, I find it a fact that most people don't know. I certainly didn't know that, that circa half of the births in the United States are covered by Medicaid. Within our volume mix, it ends up being about 1/3 of our volume mix of our patients are covered by Medicaid. So it's an important component to the business. Obviously, Medicaid reimbursement rates are substantially lower than the prevailing kind of commercial rates as you would see kind of in any setting within health care. So incremental cuts to the program would be kind of incremental to us as well. So there's a potential for there to be a modest headwind there in the short term, but kind of within the context of the way that we would guide. I mean there's always things that go well and things that -- there's always tailwinds and headwinds in any particular year.

Just on women's health, any update on 22q?

No update other than just as a reminder, we've run the study. I mean, we've run a 7-year 20,000-patient outcome study. That's -- we think is the gold standard that we don't think anyone else would ever embark on such a quest to run such a large clinical trial that establishes the prevalence of 22q in the population for the first time. It's incredibly common. There's obviously huge support for 22q screening in the community, as evidenced by the volume that we get for screening for 22q. Obviously, reimbursement is quite low until we can get the standard of care kind of evolved and reflected in the guidelines. I don't have a particular time line for you in terms of when that happens. It's obviously kind of up to the Society of Maternal Fetal Medicine Specialists and ACOG, and we kind of respectfully wait their updates there.

Just on the topic of -- well, let me switch gears and ask you about colorectal cancer screening. That's obviously a large market. You have a [ FIND-CRC ] trial that is starting on the back of PROCEED CRC. So maybe just talk a little bit about that. You have talked about advanced adenoma detection in 20s, correct me if I'm wrong, but can you maybe just give a context around sort of what you need to do in terms of performance levels to reach that? What -- and again, the time line for this and the expense that you're expecting for being in this market?

Yes. I mean, so we felt the need to build kind of the backbone technology needed for a colorectal cancer early cancer detection screen in the service of building the tumor-naive MRD product that we've now launched. So we feel like that tumor-naive product was a valuable kind of extension of the menu that we offer to our core MRD and recurrence monitoring customers. And then the question becomes, well, should you -- you've got this technology, shouldn't you run the clinical trial to demonstrate its efficacy in the early cancer detection setting where there's a huge amount of clinical utility to be generated because so many patients just do not follow through to get a colonoscopy or get a stool test. And so there's a huge number of patients that would really benefit from having a blood test that works well. The initial data that we unveiled at the JPMorgan conference and then subsequently on our earnings call was -- were initial data sets that we thought were very promising. I think the path from here is to go ahead and run the FDA-enabling study, which is substantially more efficient to run now than what you might have expected a few years ago. I think that's a function of how to run the study is much more well understood. The endpoints are much more well understood. The infrastructure required to run these trials has largely been set up. And so there's an element to where we can leverage all of those learnings from the first wave of companies that have gone through and tried to run these studies. And of course, the team has ambitions to have a best-in-class test. I think it's easy to say that, and it's -- what we've got to do is just deliver the data. And so we're going to work hard to try and deliver more data to you, potentially have additional readouts at the end of this year potentially, but really looking forward to the prospective readout, which takes about 2 years to run, and we would like to kind of get that going, start to get patients in the summer. So that's kind of the time line. And we think it's an interesting opportunity that kind of just spins organically off of kind of the core effort that we've been pursuing. And that's the way we've always evolved the business. It's always been kind of organic evolution into areas kind of adjacent to where we already play today.

So you're saying PROCEED by the end of this year, readout and...

Well, I think you'll have additional -- let me just call it, just additional kind of updates on data that we would have late this year, early next is one potential concept. But really, the thing that matters in terms of getting a product to market is the FDA-enabling trial, and that's something we'd like to pull the trigger on. We'd like to start to get patients enrolled and have that be -- that's kind of a 2-year process to get those patients all the way through and get it read out.

Got it. Just in the last minute, if you think about the overall opportunity in multi-cancer early detection, can you -- is this -- the technologies can reach that point. Again, performance improvements are needed and whatnot. Tell us a little bit about like how do you want to position for that market? Is there additional expense that -- because obviously, those are even larger studies, right? So how are you thinking about that? And is that -- and is that something you would want to start now so that you can have data by the time that market is about to potentially take off?

It's not something that would materially change our kind of our operating expense profile. We'll be very disciplined about that. Obviously, a multi-cancer early detection screen that actually catches the cancers that matter, so not like slow-moving blood cancers, but pancreatic, ovarian, colorectal cancer, others, would represent an enormous benefit to health care in the United States. And so we would very much like to participate in that, and that's going to require continued samples in the door, technology evolution. You referenced, I think the reimbursement frameworks. The regulatory framework has to evolve as well, and that will happen over the next probably 5 years, something like that. So in the background, it's something that we're excited about and working on, but it's not something that I think investors have to make a decision on or really diligence. You should expect that we're working on interesting things that are next in the background. And ECD is one. And there's a number of other topics in that kind of Skunk Works category as well.

Okay. All right. Okay. That's all the time we have. Thanks, Mike. Thanks for being here.

Yes. Thanks for having me. Thank you.