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

Good morning, and welcome to the RBC Capital Markets 2025 Global Healthcare Conference. I'm Conor McNamara, the Life Science Tools and Diagnostics Analyst at RBC. It's my pleasure to host Natera, a company we launched coverage on in March. And with us today are -- is Mike Brophy, the CFO of Natera. Mike, thank you for joining us.

Of course. Thank you for having me. Yes.

Really appreciate it. So I would like to just kind of rehash Q1 results quickly. You posted 37% revenue growth in the quarter, and you raised the guide by $70 million. Can you just walk us through -- guide for the full year? Can you walk us through what drove the outperformance in the quarter? And what gives you confidence that you're able to raise guidance by more than the beat in the quarter?

Yes. No, yes, we -- it's great to see you guys. We had a really strong Q1, I think. I was honestly more encouraged by the Q1 results than I have been for a set of results in a while, and we can kind of get into why that is. But just first on the revenues. We -- sorry for the boring answer, but we really -- we were just humming on all cylinders of kind of across all of the businesses. So women's health had a fantastic volume and ASP quarter. We've had a number of important adds to the women's health business over the last couple of years. As competitors have exited the space, we've been able to kind of really gather even more share in that space. And then most recently, this time last year, we were kind of consolidating the deal we did with Invitae to kind of take on their women's health business. So this year, I was quite encouraged to see, even though that business was really quite large last year, particularly pro forma for the Invitae additions that we were able to do it again. We were able to just kind of consolidate all those accounts and then grow 8% sequentially versus Q4. Q1 should be our biggest -- kind of our best growth quarter just based on seasonal factors. And so it's important that you have a good result in Q1 in the women's health business and really excellent growth there on volumes. On ASPs, the Panorama and Horizon ASPs continue to outperform. That's really a function of our decision a couple of years ago to really double down on investing in the revenue cycle operation. And we've always had, I think, reasonably good execution and visibility as it relates to revenue cycle, but we really decided to make that a core kind of strength of the company, just given the scale at which we were operating in terms of volumes. Every dollar that you get in terms of average selling price improvement, you leverage that across so many units now, it really pencils out, and we've seen that. So now Panorama ASPs are actually higher now than they were when we went public 10 years ago. And the 10-year anniversary is kind of coming up here in July. So I'm in the mood to kind of look back at like 2015, July 2015 versus July of this year. And you just don't see that, right? I mean, particularly like in high-volume diagnostic space to see that type of maintenance is really strong. So that was an excellent result. Carrier screening is kind of the same answer, very strong growth and strong ASPs in carrier screening. In organ health, we had some important data, which I'll get into. The organ health business continues to really ramp. So we were north of 50% growth in that call point. And that's a combination of both our flagship kind of Prospera Kidney and organ transplant rejection monitoring test and also the Renasight panel for CKD. So that business did extremely well. Same answer on that business in terms of ASPs. ASPs were strong again in organ health. And then the numbers that I think investors are perhaps most focused on is we had an absolute blowout quarter in Signatera. This is the biggest sequential growth unit quarter we've ever had in terms of clinical unit growth. We did about 16,500 growth units versus Q4, okay? And that's -- now we did about 165,000 units in the quarter. I think that's the metric where I'm really -- I was quite encouraged by that result. This quarter was supposed to be a quarter where there's supposed to be a lot more competitive noise, unlike the several like very high-quality competitors had referenced that they had their commercial teams and reimbursement in place and I was very pleased to see us be able to power through that and deliver the best quarter we've ever had for Signatera. Signatera pricing continued to improve sequentially in the quarter as well. So really, all of those things are combining to -- there's really no weak points in terms of the revenue outperformance. And so the guide for the rest of the year, I think is kind of our standard philosophy is to guide in a way that is a strong guide, but also one that hopefully strikes you as achievable. And so we're -- the guide for the rest of the year basically consolidates these trends and implies them for the rest of the year, and I think that's kind of how you get the revenue guide for the year. Of course, that's -- our team is going to try to keep improving these trends. So that's always kind of our SOP. So that's kind of what drove the beat and the outperformance.

Great. And then taking a step further on the gross margins, one of the things that investors always -- and you always -- most of the time disclose is ASPs on Signatera, cost of goods on Signatera, and obviously, your gross margins were incredibly strong. How much is -- of that outperformance was on Signatera versus the Prospera and the other tests that you referenced at the start? And is there -- and I guess the question is there still more opportunity in the non-Signatera gross margin expansion?

There absolutely is. I mean we've seen a massive amount of gross margin expansion, particularly in women's health. I mean the journey on the women's health ASPs has been a volatile one to put it politely for the long-suffering long shareholders -- long-term shareholders in the audience and they are listening. I mean the -- we've seen a real turnaround in the ASPs kind of calling back to kind of fall of 2022. And so the gross margins in the women's health business are an important -- that's not going to be as high margin business as Signatera or Prospera, but that's an important for just given that of the revenues, circa $1 billion of last year's revenues were derived from the women's health business. So you've got to keep performing there in order to support continued gross margin expansion. The guide for this year implies continued gross margin expansion. And then ex the true-ups, we had another very strong kind of sequential quarter in Q1 of margin expansion over Q4.

Okay. So other than the true-ups, if you just think of the progression throughout the year, is there anything that would change? Obviously, you mentioned seasonality in Q1 on the women's health side. But just anything that we should be aware of as we look at the rest of the year as far as both the revenue growth throughout the year and then as far as gross margins, the progression there?

Yes. I mean I think the guide implies, as you referenced, I mean, the guide was larger than the beat, right? So that implies continued progress over and above Q1 really on all of these trends. I mean the way that ends up breaking down and as long-term followers of the company, know the way we typically like to forecast that is we tend to hold ASPs relatively steady when we're forecasting this business, if not have some like erosion factor in there and then presume that we're going to have kind of continued volume growth. This year, just given all of the traction we've had across the business, we've gotten a bit more aggressive in the sense that for women's health, the guide presumes that ASPs are relatively stable. We do expect some modest improvement in the Signatera ASPs through the course of the year; that's set up as a guide. And of course, our team -- the internal expectations on our team are higher than what the base expectations ought to be for a guide as is customary. So that's really the plan in terms of like pacing through the rest of the year. You've got the typical seasonality in the women's health business. So the tide really comes in, in Q1 and the tide goes out in terms of same-store volumes in Q2. And that's just -- that's a function of when people show up to get their NIPT in the United States. This is -- when I first joined the company, I thought, look, this is -- there's no way like why would there be such a pronounced seasonality, but there really is. I referenced that because the last couple of years, we've had these exogenous events that have somewhat masked that kind of natural same-store seasonality. I mean you had -- we've had a meaningful competitor exit the market at the beginning of the year, each of the last 2 years. And then we've been able to kind of gobble up a bunch of that share. And so this year, I think, it tends to be more kind of return to normal in terms of the seasonality for women's health business. The other businesses, you have to kind of squint to kind of detect some kind of seasonality or a notable topic around pacing. So pretty easy to model if you have the women's health seasonality in mind.

Got it. Okay. And then on the ASPs on the non-Signatera, are the investments that you've made and are making in Signatera to just secure reimbursement nationwide, does that have any carryover effect that as you're billing, you have more people that are making sure you're getting paid for more of the tests? Is that what's helping the non-Signatera...

Yes. I mean, look, there's a -- I mean, one of the impetus for us to really double-down on that operation is that we were launching -- we really were getting a significant amount of Signatera volume. And Signatera, there's just a lot of documentation required as is appropriate from payers and from Medicare to like precisely document where each patient is in their cancer journey in order to submit the claims correctly. And that just -- it just required like a much bigger infrastructure. And so we made that investment. When we make an improvement in that operation, you leverage it across all of these different products. And so that's -- I love that math. I mean that's extremely scalable.

Okay. And if you look at your list price versus your ASP, your ASP is obviously below what the list price is. And so what's the pathway to get to an ASP above 2,000? And can you ever get close to that 3,950 that the ADLT rate is? Or what's kind of -- what's the ideal long-term steady-state ASP based on current reimbursement rates?

Yes. I think no comp is -- no comparable is perfect. But I think our experience in women's health gives you some sense of how this evolves. I mean we're now kind of at the place where we get paid something like 80% of the time in the women's health space. So it's not 100%. But the ASPs are actually -- as I mentioned, like the ASPs [indiscernible] are actually higher now than they were in 2015, even though as contracted rates have come down in return for much more volume in the space, the fraction of time we've got -- we get paid now more than compensates for the reduction in contracted rates. I expect -- and reasonable people can disagree on exactly how the market evolves in MRD. There's a lot of arguments to be made that would argue for particularly around clinical utility of MRD that would argue for price points, at least where the contracted rates are today. When I model the business, my point is not to kind of come up with the most hopeful bull case, but more of, hey, what's a downside case that would still be survivable for us. And I feel like given that contracted rates are kind of in the 3,000s, the ASPs are in the 1,100, 1,150 range, like why is that current state? That's steady state today because we have fairly broad reimbursement within Medicare in a good distribution of our tumor types. That also means that we get reimbursed reasonably well for our Medicare Advantage patients, and that's been a point of pride that we've really improved that over the last couple of years. And then we don't yet have -- because we don't yet have guidelines and we're still relatively early innings with Signatera, we don't yet have kind of consistent reimbursement for commercial patients, which is more than half of the volume for Signatera. So the path to kind of building a higher ASP is right ahead of us. It's just delivering more data, which will improve our ability to kind of get into guidelines, demonstrate the clinical utility even more than we have already, increase the fraction of the time at which we get paid. And that gives you some scope where even if you're of the mindset that, hey, this is a very large market as measured by volumes, there's a huge unmet need. So even if there's millions of tests being performed, there's a lot of scope for our ASPs to move up considerably even if you have some contracted rate erosion over time.

Okay. And I want to get -- I want to spend some time getting into the upcoming catalysts because you guys have a robust catalyst pipeline. But just over the next 6 to 12 months, let's talk about the IMvigor study. When you expect -- when you anticipate seeing some results there? And I would love just if you can walk through how we should quantify that opportunity if the data are positive and the timing for when that becomes a big revenue generator for you guys?

Yes, good. Maybe it's worth just level-setting on what the IMvigor study is. I mean so this is a study that we're running in partnership with Roche and Genentech in muscle-invasive bladder cancer, which is just later-stage bladder cancer, very serious, very dangerous form of the disease. We ran a Phase III clinical trial with Roche already in this exact area for -- it's called IMvigor010 was the study. So Roche had run a study for their drug atezolizumab where the primary endpoint was efficacy in all-comers for MIBC. And they started that study well before Signatera even existed as a concept, very expensive study to run. Before they unblinded the results, they prespecified an endpoint to evaluate the efficacy just among the Signatera-positive patients, okay? So then they unblinded the data -- this is circa 2021, something like that, they unblinded the data and unfortunately, the drug did not reach a p-value on all-comers. But when you drill into the results for the Signatera-positive patients, a little less than half the patients had something like a 40% treatment benefit. I mean just an absolutely massive treatment benefit, which is hugely encouraging. So the Roche turned right around immediately started a second Phase III clinical trial where entrance criteria is you are Signatera-positive and they were randomizing Signatera-positive patients with atezolizumab. So very powerful case study that I think can demonstrate how a lot of these compounds, a lot of these therapeutics that clearly have activity, but frustratingly, because cancer is such a multifactorial disease, may not work on an all-comers population, can have a huge effect for people who, Signatera says are, actually sick. They have not been cured, for example, by the previous -- the second-line therapy or what have you. So that -- the second Phase III study is what's going to read out. We hope to read out this year. We've previously talked about expectations around midyear. And I'll just caution you again that it's obviously not our trial. It's our pharma partners trial, and we defer to them on the timing. The potential outcomes for that are, I mean, humor me for a second, and let's just presume that the second Phase III trial works similarly well as the first Phase III trial, that would support an FDA approval for atezolizumab and Signatera would be in the label for the drug. I think that is -- that's important as just a milestone in terms of meeting a critical unmet need for patients, which is kind of the point of the business. But also, I think it has implications for Signatera as a franchise commercially. We've mentioned that something like 45% of physicians -- oncologists ordered Signatera in the quarter, which is fantastic progress, but that still means that 55% didn't order the test, right? To be expected; we're still kind of in this kind of ramping phase. But these are the types of results that I think can be compelling to that universe of physicians that just have wanted more data, have wanted a use case that in their minds looks very clear. I think this does look like a very clear use case. So our plan from here would be presuming that the data is positive is that we would take -- we would go through and get an FDA approval alongside the drug and then have it be available both as kind of like a companion diagnostic for the particular drug, but then also, of course, I think there would be a lot of interest in ordering Signatera for these patients, and probably, you do get some halo effect because it's such an impressive outcome, if we get it. And this is why you run the Phase III study is that you have to actually deliver the data. So let's see what the data says.

And so that's -- so if I just to size it, if you look at the bladder cancer and remind me of the population, what the immediate opportunity is if all of those patients were to get the Signatera?

Yes. I mean it's -- estimates are going to vary. So it's 20,000 to 30,000 patients get this every year. So it's not -- on its own, it's not some enormous patient population, but it's a very acute unmet need for this population. There are a lot of these types of opportunities within oncology where, of course, you can't make the investments that we've made to kind of build Signatera just to build the operation without having the very common cancer types like breast cancer or colorectal cancer. But since while we're here, we're uncovering that we have incredible utility in these specific niches within oncology that you wouldn't otherwise be able to make that investment in if you weren't kind of leveraging a broader investment. So like muscle-invasive bladder cancer is a shining example of that, where if we're showing excellent utility in that particular tumor type, one could imagine you could get meaningful penetration relatively quickly in that niche. There's many other examples like that. I won't bore you with another recap, but in -- we did it on the earnings call, if anyone wants to look at it, we kind of talked about sarcoma as like a new tumor type that we haven't really talked about before, we think there's a lot of efficacy there. There's a number of these types of niche indications where Signatera just works beautifully. We're in the guidelines, for example, in Merkel cell carcinoma because of the utility in that. And these types of clear use cases only help the overall franchise kind of gain adoption.

So that's great. I appreciate all that color. So if you think, okay, maybe 20,000 to 30,000 patients in the drug selection side, but it gives you more -- better entree into the oncologists that aren't ordering and does it potentially make Signatera in the MRD setting more powerful? And I mean, would this help potentially drive deeper adoption in that $15 billion TAM with MRD? Because now you've got more oncologists that are aware of the test, know what it does, and they're going to see, oh, look, I can also order the test for this.

Yes. I think that's possible. I mean I think any time when we ran that first IMvigor study, we noticed a big halo effect in the volumes overall because it was such a compelling kind of proof point for a number of physicians that just wanted to see the assay perform in the hands of a large pharma company in a rigorous kind of Phase III FDA-enabling setting. And so I think those types of -- that's the type of data that is now just the table stakes for adoption. Rewind to 2019, and this is like a brand-new concept, we're kind of creating this category of cancer care. We're coming to people with sample banks and prospectively collected, retrospectively run studies, which can be powerful. And we are getting kind of early adoption for Signatera. Now the game has changed. Because we've produced so much data, physicians need and want kind of prospective outcomes data that shows them that if I use the test as described in the study, does the study show that my patient actually does better in a prospective like outcomes-oriented way? That is now the level of data that you got to be able to deliver, and it takes years to deliver that data. So because we started this process in 2017-2018, I mean, I told you the story about the first Phase III trial. I think that was like 4 years -- I mean it was a long time ago that we read that out. Now we're in a place where we have a drumbeat of every year we kind of have this type of data reading out. So it's a very powerful position to be in.

And is that the barrier to entry that you mentioned you were anticipating some competition perhaps in the MRD space, but, one, you've got -- once you get the oncologists on board with Signatera, they know based on the results of that, it's going to change their treatment paradigm. Is that the barrier to entry that you've developed and are continuing to develop that makes it very difficult for other liquid biopsy companies to come in and potentially take share? And then one other question on that and one thing that -- another barrier to entry I wanted to highlight is just on the MRD, there's a little bit of a retesting component where once the patient had a Signatera once and they continue to have the surveillance, I'm assuming that creates a barrier to entry where those patients aren't going to switch. So is that kind of where you see this going? Is this is all creating a big moat for you guys that's easy to defend?

Yes. I mean the way that we think about these things philosophically is we just try to think really hard about what is the problem that the patient and the physician are having. And if you just focus on that and really solve an important problem, things like competition and barriers, they tend to take care of themselves, right? So like -- I mean, as many of you know, I mean, we just about went out of business trying to set this up. It's very expensive and painful to set up the service, to deliver the data, to be able to actually execute with high fidelity, a repeat monitoring test and diagnostics, which has not really ever been done. And then, of course, because we're leveraging kind of the core technology that we developed here that we think we're better than anyone else in the world, and we've now delivered that in NIPT, in organ health and now in oncology, that kind of core technology is what informs the performance of the test and also sees us in a very strong IP position. So a lot of these kind of things kind of flow from focus on a big audacious problem and then try and solve it. And when you solve those problems, like the commercial factors tend to take care of themselves.

Great. Looks like we're out of time. But Mike, really appreciate your time, and I appreciate everyone that could attend, and thank you.

Yes, it's fun. Thanks for having me.

Yes. Of course.