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

Next up, we have Natera. We're lucky to have with us Mike Brophy. Mike, welcome.

Thanks for having me.

Mike, I'll start off. You just reported Q3 results. I'd ask perhaps you can reflect back on performance and what were the highlights.

Yes, had a very strong Q3 result, $592 million in revenue. That's year-on-year growth of 35%, which is actually faster than what we've grown in the year-on-year over the first couple of quarters of 2025, even though the business has continued to ramp. I mean the comps get much, much tougher and yet the growth rate was still higher. Another kind of fantastic volume quarter really across the board. I'd call out women's health had a very strong kind of sequential quarter as we had hoped and expected. Organ health continues to be on an absolute tear and then you have the Signatera results. So 202,000 units in the quarter, fastest growth -- sequential unit growth quarter ever, 21,000, 21,500. So a big step-up in Signatera. That implied another massive quarter for new patient starts and a continued drumbeat on the -- on people staying with us through recurrence monitoring. Gross margins were excellent in the quarter, 64.9% was the printed gross margin, again, is the best ever, 61.3% ex the true-ups. So very strong, more than 100 basis points. I think it's like 120 basis points sequentially kind of more on the organic gross margin improvement just over Q2. So continue to have very lean COGS and continue to progress on the ASP front. On the clinical side, of course, we had some amazing data at the ESMO conference. We had data that was published in the New England Journal of Medicine, a very proud achievement for us, prospective interventional outcomes trial in bladder cancer with Signatera. I'm sure we'll get more into that, partnered with a drug that unfortunately, did not meet its primary endpoint when evaluated in all-comers several years ago, '21, I think, '22, something like that. And then paired with Signatera had a fantastic treatment effect, actually delivered a positive overall survival result, even though at this stage of the progression of the trial, we're really only powered for a disease-free survival outcome. So a very, very strong result there, strong result across the board across a range of different data sets at ESMO, very good momentum that we've seen so far in Q4 across the board. On the guide for the year, we're able to kind of massively step up the revenue guide, bumped the gross margin guide once again. And then on the bottom line, we've said previously that we hope to generate free cash flow through the course of the year. And we bumped that guide to -- we're going to -- we think we can generate about $100 million of free cash flow for the calendar year 2025. So that should give you some confidence that even as we continue to just deploy investments in to grow the top line that we're really getting scale on the business. So I'm really happy. This is -- as we've talked about, this is year 10 for me here, and it's a lot of the hard work that we've been putting into this business over a period of time is really bearing fruit right now. We've got a very exciting kind of 2026 setup. So...

Well, a lot going on. Let's start off trying to unpack that Signatera sequential ramp, if it's even possible, right? I mean you've had a lot of different announcements over the past 10 months or 9 months, which could have contributed to that sequential acceleration. When you talk to your reps, what do they attribute the strength to?

Well, I think that the -- it's interesting. I think it's hard to ascribe the success of Signatera to like one particular driver. I think it's really kind of the confluence of events. I mean, one is the operations are really humming. So in terms of people's turnaround times, their ability to kind of get the result when they need it kind of in the flow of their kind of typical clinical decision-making, that is just -- that's -- we're just really firing on all cylinders there. So very pleased to see that. I think the reps have continued to progress in terms of their ability to describe all the different ways in which Signatera can deliver clinical utility. And one of the ways that they've been helping that is that we have had a drumbeat of amazing clinical trial results. One example from earlier in the year was the CELEBREX data that was presented, I believe, at ASCO early in the year, where -- maybe I'll just give a quick summary of that. I mean -- I think the presumption among physicians in the field is that a lot of patients with Stage III colorectal cancer, they have this polyp development in their colon because they have some kind of inflammatory cascade that's gone awry. And so it makes sense if you knock that down with an NSAID that you ought to be able to help these people. And yet when the prospective study is run, frustratingly, the mechanism, obviously, is multifactorial, and it doesn't actually work on all-comers, okay? But you know that it has to be working on some people, but you can't just give it to everyone absent that data because you -- there's a fear that you will kind of create bleeds for these patients if you're kind of chronically dosing them with CELEBREX, for example. Then you just rerun that study, very similar setup to the IMvigor study I just described. But now you just parse the patient population by who is Signatera negative and who is Signatera positive. And when you just look at the response to CELEBREX among the Signatera-positive patients, there's a wonderful treatment response because that's a very practical, easy-to-understand use case for using Signatera to help triage your patient, help manage their journey. And I can't prove this to you because there's a bunch of different data sets that have also been amazing, and the team has been kind of congealing quite nicely. But I personally think that, that was -- that's an important driver for why we had record new patient starts here in Q2 and Q3. So that's just one example. It's important to kind of continually have this kind of drumbeat of data, which rewind 5 years ago, you'd hope to have one readout like that per year. And now because we've been continually investing in the development of the evidence, now you kind of -- this IMvigor data, we started working on this in 2018, 2019, and now it's reading out. So almost every major conference that we have will have this kind of a drumbeat of very interesting data sets that can continue to highlight the utility of Signatera in the field.

Got it. And you opened up talking about your operations. Can you quantify turnaround time? Where has it been? Where have you taken it to as a contributing factor?

Yes. I mean the most common turnaround time is for the plasma test, and that's -- I mean, you're within the window I mean you're within typically a week of order to getting the result back, which fits in nicely with the clinical workflow. For the initial time point, you're kind of inside that, call it, month to 3 weeks error bars around that. But it just -- that fits in very well with when the physician needs to engage with the patient on the next step in their journey. I mean typically, a patient will have a surgery to have a tumor removed. And they don't decide on a chemotherapy like that within the next couple of days, they go home and rest. We see how they're doing. We -- there's evaluation of the tumor in the pathology lab. There's all kinds of other kind of clinical workflows going, but then you have a follow-up meeting with the patient, call it, 30 days out. And it's nice to have the result within that kind of decision-making window, and we're well within that clinical decision-making window, the vast majority of the time we're finding.

And were there times in the past where you weren't and that's incrementally improved?

I don't think -- I mean, we got to a place where we -- these turnaround times were pretty tight and within this decision-making window reasonably quickly. Of course, I mean, you rewind 5 years going back to the launch. I mean this is something that's hard to get right kind of right out of the box. And so we've had to make very significant investments in order to get that whole operation going. I mean -- and you probably recall this, I mean, one of the main pushbacks that we had when trying to raise money to create this new category of cancer care was that this is too hard to do. It's too hard to execute. It's going to be too finicky to like get the tissue from the path lab and build a personalized test for each cancer patient. No one's ever done that before. So we decide whether or not it will work and you just won't be able to execute it. And so showing now that we really -- we can execute this at scale, I think, is absolutely critical to bringing the technology and bringing the utility to a huge set of patients, and we can clearly do that now.

And how would you describe the trend in rep productivity?

Yes. I mean I think it's -- one of the interesting things about rep productivity in the space is that we -- unlike any other diagnostic test that we've offered or I've been associated with, you do have an ongoing relationship with each of these patients in a way that you don't quite have the same level of that in other areas like in women's health, for example, where this is a repeat monitoring test, okay? So you deliver a result and you're going to interact with that patient again 3 months later. And so there's an element for the sales rep where the service itself has ongoing utility. And so that tends to enhance the rep's productivity because they're really a service provider. I mean they're like a problem solver for the office rather than like a traditional sales rep. I mean they're there to like provide information and make sure the service is working as expected and to coordinate questions and things like that more than they are trying to like make sure that the doctor order the test. The ordering patterns and the volumes are really flowing to us as a function of people's kind of emergent need for the test versus like a sales rep -- sales activity per se.

Got it. Okay. And what feedback are you hearing from your team on the competitive environment and your competitive win rate for Signatera?

Yes. I mean there's been -- for the full kind of 5 years that we've been in the market, there have been very impressive companies that are buying to be -- to offer their own solutions. I think particularly once we show that this market can exist, and this is an incredibly -- can be an incredibly important kind of category of cancer care, start an influx of competitors in the 2020, 2021 time frame. So competition is nothing new. And I mean, it's to be welcomed. I mean it's good for the system to have a bunch of different companies, smart people trying to come up with incremental new ideas or new ways to help these patients. So that's been fantastic. In terms of the competitive response, I mean, it's really -- it's not even really how we even think about it. I mean we just try and just lock in on like what are the use cases or unmet needs that the physician and the patient have and just really trying to be as aggressive as we possibly can be in trying to solve those problems for the patient and the doctor, right? And if you're doing that, the competition question kind of takes care of itself because you're always going to be running into other companies that are also trying to do that as well. So the result of that so far is that it's been relatively muted in terms of other players generating meaningful volume. I don't expect that to be the case forever. I mean I think it's just too important of a use case. I think there's lots of interesting companies that are trying to do interesting studies and things like that. And I think that's all to the good. I don't think that is harmful to our investment case whatsoever.

Has your team had to play the Signatera genome card to any meaningful degree?

Well, I mean, again, I mean, it's not like a card that one has to play. It's something that's part of our offering. And it's something to let physicians and patients know about if they'd like to avail themselves of the genome. And there's arguments for and against, and every physician has got to kind of make that decision with their patients. So it's something that we're very happy to offer and proud to offer. The early data looks amazing on it. It does not have the same level of validation as the exome and nor could it because I mean we just launched it fairly recently. I think what's more of the trend is less about having some opinion about one aspect of the workflow or another and just wanting to order Signatera. So like if we updated our PCR primer design, like that could potentially have implications for assay performance and yet you'd never have physicians or customers really worrying about like what version of the assay or the PCR primers are getting. They're just getting Signatera, right? And it's kind of backed up by that data. And I think that's kind of similar, whether it's exome or genome. people just want Signatera. It's priced the same. So I think that's -- it's interesting because like I think investors because of the companies that are available for them to diligence, they want to zero in on like the sequencing backbone, but there's a million variables that affect performance that ultimately, you just got to prove out the data.

Well, I don't anticipate I'll be diligencing PCR primer design.

Well, I would welcome it. I mean it's -- I mean I make that one up, but like -- I mean, improvements to the algorithm. I mean it's something that we care about. It's something that we monitor and we learn by watching outcomes for patients as they flow through our system. Hey, like we don't -- we may not understand mechanistically why one potential improvement to an algorithm might be advantageous, but it looks like it would be. So we just -- we make the improvement. And so that's a way for the product to continuously improve, and that's what we love.

You mentioned you've had a couple of record quarters now of first-time patients for Signatera. Can you bring us current on what proportion of your Signatera volume is first-time patients versus recurrent customers?

Yes. I think this number would be variable quarter-to-quarter. Like for example, in a given quarter, something like 10% to 15% of the total volumes are typically initial time point patients. And sometimes it's 15% and sometimes it's 10%. And I honestly think that there's just a little bit of randomness in there just because it's not a huge number as a percent of total, and it's just the vagaries of the calendar are when people showed up. I think that the total volumes are kind of instructive of what's happening. You see them ramping and a function of -- that's a function of 2 dynamics. One is, obviously, you do have a continual flow of new providers and new patients coming kind of into the top end of the funnel, if you will. And then because we're doing a good job for these people, there's an interest in staying with us and having multiple Signatera tests delivered over the course of their cancer journey because the Signatera test can answer different questions as you progress in your journey. So you got to have very high -- we want to have very high kind of continued ongoing volumes with patients for whom we've got them started on Signatera. And we've got to continue to deliver data and make the arguments to physicians and patients to have more and more people adopt the test. I mean something -- we've quoted this stat historically, but I think the last time we quoted, it was like a little less than half of the oncologists in the United States, we estimate had ordered a Signatera test in the last quarter. And that number, I think, can continually go up so long as we're just continuing to deliver data and continue to show people how -- what the utility is of the test.

Okay. So there's nothing proportionally changing between first-timers and recurrent. It bounces within a band and it's part of the overall trend.

Yes. I think that it's -- from my perspective, it bounces within kind of an expected zone so far quarter-to-quarter. And I think that you do have -- you will have occasional quarters or outliers and then you see it kind of come back in the next quarter. So I've been very pleased with that. The total number of new patient starts obviously keeps going up. I mean -- and that's -- you can see that in the total -- the volumes keep going up.

What about your mix between adjuvant and surveillance? Where does that stand?

Same answer, and it's really a function of the same dynamics. And like it's a function of that, I think for modeling purposes, I mean, I think historically, we've talked about the adjuvant treatment volumes being about half of the volumes and the recurrence monitoring volumes being roughly the other half. That will also bounce around quarter-to-quarter. When I'm trying to model this business, I try and think about it as being roughly proportional. Over a longer term, one would expect, just given the momentum of the math of people staying with Signatera over the course of their cancer journey, one would expect the mix to shift more and more toward recurrence monitoring. So I wouldn't be surprised if that happens. If anything, we try and forestall that with all these activities I just described to make the case for new cancer patients starting with us at the beginning of the journey.

Sure. And then one of the things that struck me from your bigger presentation was the disclosure that in muscle invasive bladder cancer, you have less than 10% penetration. What is that penetration figure across your bigger tumor types, colorectal, lung, breast cancer?

Yes. Well, so to calculate a penetration, first, you need a denominator. You need some kind of estimate of like the total addressable market. And here, I think thoughtful analysts can come to different numbers. And so I'm not trying to ascribe like, hey, this is the right number. I'll just share how I think about it. And I think the reasonable people can have different takes on these variables. One is like what is the incidence rate of a cancer, which is due in the United States to make it easy on me. I think that the incidence rate for colorectal cancer, for example, is something like 200,000 new patients a year. Then you need to make an assessment of what fraction of those patients are relevant to Signatera. I would argue that a very high proportion of those patients would have a disease that is relevant for Signatera. Maybe it's 150,000, just again, rough justice. If you came up with a different number than that, then I wouldn't necessarily push back. Now it's a repeat test. It's not just a onetime test. How many tests are patients going to get over the course of their journey? We're seeing, on average, they get about 10 tests over the course of their whole cancer journey. And once you have enough years of patients starting on Signatera, if you think about what my quarterly volume is a blend of all of these different patients that have started using Signatera at different years, okay? So it does kind of -- it does start to look like a waterfall if you think about kind of building the volumes on an Excel spreadsheet. And over time, I think we're kind of there now. You can start to sum the columns, right, which are kind of the years and you also get to about 10, okay? So also because I like to have easy math to do, I think about taking the incidence rate, assessing what fraction of the patients are relevant to Signatera and then just multiplying that by 10, not as like an iron number, but just like a rough directional justice of what the TAM might be for volume TAMs every -- volume TAM every year. So that -- in my example, that would be 1.5 million tests per year. About half of our volume is CRC volume these days, roughly half. So that would have been 100,000 in the quarter. So run rate that, which kind of overstates where we are, but just to be conservative, let's run rate that. So that's 400,000 a year on 1.5 million, that's about where we are, and that's by far the most penetrated tumor type. I mean breast cancer is nowhere. So I think the other tumor types are very, very small. And the net of all that is the kind of the single-digit penetration that you've heard us talk about previously. Just in colorectal cancer, I would also point out, we're pursuing FDA coverage in Japan, which would effectively double the number of patients that are available to us as a TAM for colorectal cancer. So still very early days in this market.

Sure. And sorry to make you do math on stage.