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

I'm Kyle Mikson. I cover life science tools and diagnostics for Canaccord. Please welcome to a fireside chat with Natera here with us today. Natera is a leader in cell-free DNA-based testing for women's health, oncology and organ health. With us from the company, we have Mike Brophy, CFO. Thanks, Mike, for joining us.

Yes. Thanks for having me.

So we don't have a lot of time here. There isn't much to talk about after getting blowout second quarter. Let's not go through like the high-level kind of information. I want to dig straight into Signatera volume. So I think it was like 189,000 units -- total units in 2Q, growth of 20,000 or so from the first quarter. It's a record, a lot of new patient starts in there. Besides the new patient starts, what drove that sequential growth, we'll start there?

Yes. Well, maybe it's worth just characterizing exactly like just what the stats were just so everyone is kind of on the same page. So yes, thanks for having me. It's great to be here. So we did -- just on the clinical units, we did about 180,000 units, and that was 20,000 growth units just purely in terms of Signatera clinical units sequentially versus Q1, which is far and away a record for us. If you look at the preceding trailing 4 quarters before we printed the second quarter, the average growth units were something like 13,000 or 14,000 units per quarter, something in that zone. And then within that 13,000 to 14,000 growth units, on average, something like 1,500 or 2,000 of those growth units would represent new patient starts of the growth, okay? So given a 20,000 growth quarter, I would have expected new patient starts to be, I don't know, 2,500, something like that, something in that zone. And the new patient starts were more like 6,000. So it was a much, much bigger number just in terms of the new patient starts kind of contribution to growth, which is obviously a fantastic number, very welcome to see that. I think that the -- it's important to note that like the new patient starts will kind of bounce around quarter-to-quarter. So in any given quarter, something like 10% to 15% of the clinical volumes will be new patient starts. Sometimes it's 15%, sometimes it's 10%. And when you're going quarter-to-quarter, there can be quite a lot of just kind of total randomness associated with that. Again, on a rolling 4 quarters basis, you kind of see that trend just kind of going just as you would expect, kind of steadily up into the right as adoption improves. So what drove all of the interest? Well, obviously, there's a component of this where it's just time on task. We've got a fantastic commercial operation in the field, tremendous kind of customer service operation in the field, that operation kind of writ large is just really, really humming smoothly. And it's no small feat, but like turnaround times are very tight. The customer service response times are very, very tight. People are kind of getting exactly what they need out of the operation. The sales team is very comfortable in the role and they're executing very well. On top of that, we've had just an amazing wave of clinical trial data. We starting -- going back to last year, we had -- we were the first time ever we actually had overall -- prospective overall survival data in colorectal cancer. I think that was -- there was a subset of physicians for whom that was incredibly important. I mean, previous to that, we had compelling DFS data, but this is the first time we had OS data, okay? Then you roll the calendar forward to January and we had some incredible data, particularly in colorectal cancer, with the use of Celebrex, where there's long been a presumption that the Stage III colorectal cancer patients are having this polyp development driven by an inflammatory cascade. And then when you -- there's a strong temptation to try and knock down that inflammation with an NSAID. And yet when you run the clinical trial, it didn't work on all-comers. So that's very frustrating. The mechanism is more complicated than that kind of simple explanation. Then, if you just peel back the onion using Signatera and you're able to use Signatera to characterize who's Signatera negative, who's Signatera positive, the positives had a fantastic response to this, very inexpensive intervention, just give them Celebrex. And so that's a very satisfying result of the field because now you have a relatively inexpensive drug that you can then layer on to the treatment regimen for those patients and you can make a big difference for them. So when you get data sets like that, like that is a very clear call to action, I think, for not only kind of our existing Signatera users, but for a lot of physicians that hadn't yet had like the time or the incentive or whatever it is to kind of just get around to adopting Signatera at least for certain selected components of their patient flow. And I think we saw a good amount of that adoption here in the first half of the year. I think the other thing that's happening is somewhat to my surprise, I mean, in addition to kind of the major tumor types that have just continued to ramp, we've seen growth from Signatera kind of across the board, not just in like colorectal cancer and breast, but a broad swath of solid tumor types where we have excellent data -- and that -- the growth of those smaller tumors have kind of kept pace with the larger tumors such that now that you're kind of at a different scale than we were even a year ago, there's a lot of -- there's a large number of kind of tumor types that I would kind of characterize as the long tail, where we've got a real opportunity now to generate more and more clinical trial data in those areas, go and pursue Medicare reimbursement in those areas, and that opens up another ASP driver for us. So we've really had kind of an across the board, kind of very strong performance. Everything that we kind of hoped we could get done over the last 12 months and earlier basically is coming together right now.

Perfect. So given there's this like the new patient trend, let's say, there's some of these new patients possibly, maybe it's a new paradigm, let's say, it feels elevated in the past, even though you said it's going to be kind of bumpy like quarter-to-quarter. There's a lot of -- there's a few new MRD tests out there. There's the blood test for CRC that has like total reimbursement at this point, one tumor form that was just kind of announced and launched with reimbursement in CRC. There's others coming out, some in muscle invasive bladder cancer, some other breast cancer, one is reimbursement now. So it's getting crowded. And you're saying there's like more new starts, more patients out there. So what gives you confidence that, that incremental new patient is going to go to Signatera, not just like a competitor test?

Well, first, I mean, just a general comment on competition. I mean, I think we've always just kind of welcome competition. I mean this is good for patients, right? There's -- when we first launched Signatera, it was pretty lonely to try and convince investors and stakeholders that this is a good use of our time to even try to build a personalized cancer test that's tailored to each patient's tumor. And now you go to academic conferences, you come to investor conferences, there seems to be much more fulsome buy-in from the entire kind of spectrum of stakeholders from patients to doctors to investors that this is happening. Like this is a major, major sea change in the way that cancer is going to be cared for. So it's very gratifying, honestly, to see the competition come in. And they've got good ideas. These are good companies, and they're going to have different feature sets and different data sets that are worth considering. I think on average, I think having the consensus kind of evolve with more and more companies trying new cool things is good for patients and good for us, right? It's just good for the entire space. We're going to win our fair share. And I think the way that we continue to try and be #1 is we just -- we don't -- I'm not particularly focused on one competitor or another. We just try to stay focused on the patient. What are the needs of these patients and how can we be proactive in solving some of these needs that we didn't solve initially. So for example, just in this calendar year, we've had a couple of product launches, right? We've got the genome backbone version of Signatera that's available. If physicians want to avail themselves of that for selected patients, that's available to them. You'll hear more and more about the tumor-naive MRD assay that we launched -- we launched the data. We announced all the data here recently. So that's a very interesting product as well. So we're just trying to be proactive in terms of feature sets and products that we offer in addition to just turning the crank on clinical trial data, okay? So I mentioned a couple of the really impactful data sets we've had in the recent past. In the near future, I expect to have another set of very, very impactful data. I mean we have -- we've talked maybe one just to highlight because I don't want to drill on forever, but we've got the Phase III data coming with Roche and Genentech in the IMvigor011 trial for muscle invasive bladder cancer. This is a program that we've been involved in that's been on the come for 5-plus years. I mean it just takes a very long time to generate data of that quality. I'm excited to see the readout there as an example. So it's just -- look, I mean, competition is on the balance, good for everyone, most importantly, good for patients. We're launching new products. We're generating a lot of great data, and we're just trying to offer kind of best-in-class customer service and patient service.

Awesome. On the topic of like genome now the Latitude, which is the tissue-free test, the tumor-naive test, which has not been launched yet, I guess, what's your view -- what's your guys take on how to commercialize those tests, like when you would offer them? And then also the long-term like mix of Signatera volume between exome and genome and tissue free?

Yes. I'm totally agnostic on the volume mix. I mean you just have to -- you start with what is the challenge that the patient is facing and then you work backward from that. So I mean, one example would be if you've got a physician who is a consistent user of Signatera, but then maybe she has like an 85-year-old lung cancer patient show up in a clinic and the guy is just too frail to stick a large needle into his chest to suck out some tissue to then run a Signatera test, but she'd like to offer him something. I mean that is -- I mean that's a worthy use case for a tumor-naive MRD. We need to address that if we aspire to serve these patients and physicians. So that's just like one small example of where it might be relevant to have a tumor-naive MRD. One can think of a half dozen other use cases. And it's just -- you don't -- it's not really our job to dictate where to. That's up to the physician and our job is to offer options.

In terms of gross margin, though, I feel like the genome versus going to be higher COGS, you would think. I mean, how does that sort of compare?

I think over any kind of relevant time horizon, I think you're going to have to really squint to see the unit economics being massively different between these tests. I mean I was very heartened to see us launch the genome test, get the data out there, and then we very rapidly were able to secure just confirm reimbursement for the genome assay that's exactly in line. It's the exact same thing that we get for the exome backbone test. And it makes sense because it's effectively kind of the same workflow, and it's kind of -- both of those products are kind of within the Signatera franchise. But that type of thing, I mean, could you argue, could we've gone back and haggled for a few extra dollars, I think, perhaps. But having the same pricing makes life a lot simpler for us, for physicians, for payers, and it makes it simpler in terms of letting the physician just sort of make a choice. If you think about this franchise is not like a 1-year franchise, we fully expect to be running Signatera tests 10 years from now. The incremental cost of like one workflow or another, it's going to even out. I mean the cost can come down, and we've always done that. We've launched new workflows and then we invest heavily to reduce the cost of goods sold so that we can continue to offer these products sustainably.

All right. Great. And then another -- you guys kind of called out the opportunity of $250 million to $300 million in like, I guess, incremental revenue from new indications reimbursed by Medicare for Signatera. These are going to help you get to that $2,000 ASP as well. So maybe just like dive into that kind of like metric and how you got there, and what it looks like.

Yes. I mean there's nothing magical about that, and I kind of already touched on that in my preamble. So sorry to steal your thunder with that one. But like the -- look, the idea is that you have -- when we initially built Signatera, we built this as a workhorse tool for the workhorse oncologist who's going to see a bunch of different tumor types through the course of her day. And she needs a flexible tool that you don't need to have a grid that you've memorized and says, so you can you can use Signatera in this indication, but not that one. It's like you need to have data sets kind of across a broad swath of solid tumors since the physician can feel comfortable kind of using it in a similar way across kind of per book of patients. And that's kind of what you've seen play out in terms of our volume mix. So as I mentioned, one could have easily made the case, a thoughtful case that in 2021 that if you forecasted the 2025 volumes, the percent of volumes coming from the top 3 cancers would be even -- would be much, much higher, would be like 95% of the volume coming from the top 3 most common cancers. And that hasn't happened, like these slightly less common tumor types have continued to maintain a fairly consistent share of our overall volume mix. So now that we've grown, now that we're -- instead of 10,000 units a quarter, we're 180,000 units a quarter, on an absolute basis, these are huge opportunities in terms of just going and just submitting the data we've already generated to MolDx to generate reimbursement for those tests. And so that's why it's a bigger opportunity now and why it's worth highlighting.

And time line was like, I think it was like 12 to 18 months for these several?

Yes. I mean we're sort of on a kind of a rolling time line of submissions to MolDx, and they've been a very thoughtful reviewer of those submissions. And so you won't get all of that all at once. It will just come in a kind of a linear way over time.

And then how are we thinking about like ctDNA-based MRD in NCCN guidelines? Is this like an important catalyst at some point for you guys?

Yes. Look, I mean, obviously, the guidelines are completely beyond our control. The thing that we control is what we can do everything possible to support just truly excellent long-dated prospective outcomes data that any guideline committee would want to see when considering guideline adoption. One example, again, is I hope that the IMvigor011 trial would pan out in a way that would -- that could potentially be up for consideration for guidelines in bladder cancer. So I think over time, if the trend and the kind of the quality of the results holds, it's inevitable that we'll get into guidelines. I don't think that the strategy doesn't require that we achieve that goal by a specific date. It's more important that it happens rather than when it happens.

I want to just talk about screening a little bit, the early cancer detection business just briefly. So you have a bunch of trials like one PROCEED is going to read out in 4Q, FIND reads out in 2027. I guess, let's just say PROCEED is relatively successful. you'll move on to FIND and you'll kind of read that out. I mean, basically, is the thought -- 2 questions. First is the thought that you'll announce -- you'll launch an FDA-approved screening test for colon cancer in that 2028 time frame, you'd be up for USPSTF guidelines like being in that group of blood-based tests, let's say. And then number two, what are the costs associated with the trial? I think it's like [indiscernible] people.

Yes. No, those are great questions. So one, yes, I mean, I think that time line is roughly right. I mean, I think recognizing that it's 2025 and there are always uncertain -- when you're trying to do something new and hard like this, there always has to be error bars around those things. But yes, I mean, that's -- what you just articulated is what we're running towards, and that's what we expect to hit in terms of time lines. In terms of cost of study, I think this is actually kind of a nuanced point, and it's worth considering for you guys. When you think about returns associated with any particular project, whether it's an acquisition or R&D project or what have you, any kind of commitment of investors' capital, I'd like to think of this on like a return on invested capital basis, and that allows you to kind of compare acquisitions and internal development kind of on a level playing field. And so if you're an early cancer detection start-up and you've raised a bunch of investor capital to run at that opportunity, well, the denominator for your returns is all the money that you've raised and put in the years that you've put into developing the product, right? And then you've got to measure that against the revenues and the cash flows that you can generate, hopefully, if you have good data. For us, it's a little different because, one, we had to develop the technology platform, independent of making a decision about productizing an ECD product. We had to have that because we were going to launch a tumor-naive MRD panel, right? I mean that is an important -- it's probably a smaller kind of a niche use case, but nonetheless, that's an important need that our MRD customers have, and we've got to address that. So that's a given that's kind of separate -- that decision to develop the platform, the technology platform is totally separate from the ECD decision. Similarly, a huge cost component to this decision for most companies is you've got to hire some enormous primary care call point and then that's an enormous commercial execution challenge. It's quite separate from the amazingly hard R&D challenge that's before you. So those are 2 pretty hard and pretty disparate problems. For us, we do have a lot of experience in the primary care channel, obviously, with the OB/GYN channel. I think we have an excellent kind of hospital team as well. So we do have some initial kind of experience and initial port of call for commercialization that I think can be helpful. And so now when you're calculating returns for this and cost, you're really kind of thinking about, okay, take the technology platform and apply it in the ECD setting, so productize and then run the trial. So now like the cost of this investment really do come down to the clinical trial, and we've kind of characterized that as kind of circa $50 million. I think if you count -- if you're rigorous about counting like the productization and things like that and incremental studies, it's more than that, but it's still within a very kind of manageable level that I think is worth doing given the size of the unmet need, given the size of the problem and given kind of where we are in terms of kind of our track record of developing and delivering both in R&D and in our commercial approach. I'm hopeful that, that pans out, but we got to see.

Yes. And maybe like are there -- is there any read-throughs from having, I think, of huge NIPT database, maybe like helping you inform the assay on the ECD side? And then honestly, like what gives you confidence in the ECD business given competitor data that's been more or less kind of disappointing?

Yes. Well, it's easy for a company that hasn't yet read out the FDA data to make a bunch of noises about how they're optimistic and things like that. I think the FDA-enabling study is out there for a reason is that you've got to actually produce that. And so obviously, there's a lot of internal excitement about that. We have a sense of how well the technology platform performs based on the data we've already shared with you and also the experience we've had with the tumor-naive MRD. We feel like we've got something that is really working there. But ultimately, it just comes down to that -- the FDA trial, and we've just got to do it.

And then just on the financials. So one bright spot of the quarter was that you didn't -- you raised the revenue guidance by a bunch and you to be by a lot, you didn't raise the OpEx guidance, right? And you're still going to -- you're going to generate cash. You haven't put specific guidance around that, but still that's positive. So that's good. You called out some factors for driving the OpEx growth. That's commercial team expansion, new product launches and then clinical trials. Maybe just -- I think like kind of just talk about what's going -- like how we should think about operating expenses going forward. We talked about the trial though, but I mean, like why are new product launches expensive? Like just walk through kind of the puts and takes and why you didn't make -- didn't have to increase the guide for OpEx, even though you had a nice top line beat.

Yes. I mean the goal for this year, we could -- we just said over and over again in 2024. I mean the goal for '25 was going to be to continue to grow the business, make all the necessary investments we need to solve these problems for patients to continue to improve the offering that we have, but also not to burn a bunch of cash. We wanted to maintain at this level where we're sustainably kind of cash flow breakeven, cash flow generative. And you see from the results in the first half, I think we're well on our path to achieving that for the full year. As we talked about on the earnings call, the growth in the OpEx this year has nothing to do with the revenues in '25 or '26. We could have just not done any of that, it would not have changed the revenues for this year and next year. What we're doing with that growth in OpEx is we're investing in the future of the operation, '27 and beyond. And that includes having the right commercial scale to offer Signatera to a broad swath of patients in the United States and outside the United States. And it includes just a relentless commitment that we've always had to be -- run the absolute best, most thorough, long-dated prospective clinical trials we possibly can run. And there, we're still fully in investment mode. The fact that we've been able to generate cash and grow the business while being in investment mode should give you confidence. You should take heart from that. We can get -- we've shown you time and time again that we can generate kind of operating leverage on our investments, and we're doing that again this year.

Yes. So yes, $2 billion of revenue, you're still growing, I think it's like 28% normalized for the true-ups and stuff. So it's a pretty big story. When you think about just scaling and kind of getting into the -- truly being a profitable company, probably non-GAAP profitable as it is, but either way, could you get to, again, like push through 70% gross margin, get to maybe 35% operating margins. We haven't seen that in the diagnostics like Myriad, for example. So what do you think about the long-term profile of the company?

Yes. I mean we've talked about it in the past at a high level. I mean, we've talked about 70% gross margins as a target. I mean if you just look at the trajectory of the gross margins in this business over the last 24 months, I mean, that's kind of a less heroic move than what we've just accomplished. I mean we've just gone from 39% gross margins to 63% gross margins in about a 2-year time frame, maybe a slightly longer time frame. And so going from 63 to 70 doesn't -- off the cuff doesn't strike me as something that's impossible to do. It's going to require very good execution on our end. But it's important to us. It's important to us because obviously, it's important to shareholders. But what it also means is that if we're hitting those goals and we're going to get to serve patients. I mean that's when you're able to kind of generate cash, generate profit margins, that's what allows you to be kind of sustainably fulfilling the mission that we kind of have set out for in this company, which is to look after these patients, and I'm excited about being able to do that.

Yes. You keep generating cash. The question is like what are you going to use that cash for besides just reinvesting in everything. But at this point, you're kind of outpacing -- again, you're generating cash. So what are you going to use the cash for? You're not going to be taken out at this point, given you're like a $20 billion company, someone say, so are you going to acquire? How do you think about using cash?

Yes. We don't have some religious opinion about how one uses cash in the future other than to be a good steward for the investors' cash as measured by returns on invested capital. So what we have found time and again is we've bumped along, we've minded our own business. We've grown these franchises. And then high ROIC opportunities present themselves. Wonderful clinical trials that are obviously worth doing, present themselves and we need to invest in them. Opportunities to add to the product portfolio by building products that are complementary to our core products. These things present themselves because our customers tell us that they love the Panorama test, but they'd love to have -- they would also really like to have a carrier screening test as well. Well, that's a good idea. Let's launch Horizon. You know what I mean? So on and so forth, we've done this, Prospera, we have a bunch of nephrology customers that love the Prospera test, but they would really like to see a germline panel that helps evaluate their CKD patients. Well, that's a good idea. So let's launch the Renasight test. Over and over and over again, we've been able to find these opportunities where we really are pushing the envelope of helping patients while generating sustainable returns for the investors.

Maybe just finally, in looking at '26, what's like -- we talk about all these tailwinds and new products and stuff coming up. But like what's one area that investors probably underappreciate that could surprise people next year?

Well, you never know until you actually see the data, but I'm actually as strong as our clinical trial data has been, particularly in Signatera here in the last 12 months. I'm very excited about the slate of data sets we have coming. I think there's a further unlock to happen where you can see this already at the academic conferences. As I mentioned, there's this momentum toward enabling a smarter era of cancer care, more targeted era of cancer care that improves outcomes while also taking cost out of the system. And I think we're going to have some data sets that really show you, and we -- I won't belabor it here. We talked a lot about on the earnings call, treatment on molecular recurrence as a real opportunity, and we've got several data sets in that area coming that I think represent just a real shift change in how cancer is treated in the United States.

Awesome. Let's leave it there, Mike. Appreciate the time.

Thanks for the time.