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

So I am going to go ahead and kick it off. I'm Tycho Peterson from the Jefferies Life Science team. We're pleased to have Natera with us today. We've got Steve and Mike here.

Maybe to kick it off, could we just do a quick look back at 3Q record clinical MRD volumes. Talk a little bit about some of the momentum you saw coming out of the quarter.

Yes. Thanks, Tycho. So we had a great quarter across the board in all product areas, but particularly in Signatera, where we saw record growth from a net unit standpoint quarter-on-quarter versus Q2. And that very strong momentum has sort of continued into the beginning part of Q4, as we mentioned on the call. So what we're seeing is continued interest from physicians in ordering the Signatera test on new patients and then also ongoing monitoring and surveillance of existing patients or patients that are potentially at risk for recurrence. The growth is being driven by clinical data. So we had an excellent new publication that came out IMvigor011, which is an muscle invasive bladder cancer in addition to strong colorectal data that was read out earlier in the year. That, combined with continued execution and interest from physicians is driving a lot of the growth.

And we tend to get a fair number of questions just kind of on penetration where we are today, kind of low single digit today. CRC, obviously, the most penetrated. So maybe talk about momentum in other indications and I guess, how you think about the different subsegments evolving?

Yes. So initially, when MRD testing -- when we started doing MRD testing, it was largely focused in colorectal cancer, and that's where we had the most data. But over the last several years, we've now published more than 100 peer-reviewed papers, and we started to generate a lot of very good evidence in the pan-cancer setting, a lot of different histologies. So now we've seen really strong growth in breast cancer, bladder cancer, pan-cancer immunotherapy monitoring, ovarian cancer, lung cancer, those are all areas where we have coverage. And then there's a long list of other cancers like pancreatic, uterine, gastroesophageal, renal, areas where we're starting to see a lot of interest. We're seeing volume grow. We're in a position to submit for Medicare coverage. And I think that could drive a lot of the growth as we move into the future.

And you mentioned IMvigor earlier and I guess, coming out of that readout at ESMO. Can you just talk about the importance of the clinical utility data and talk about the path to potential companion diagnostic?

Yes. Do you want to take that?

Yes, sure. I mean -- so the data from IMvigor011 was kind of a landmark publication, not just for Natera, but for the MRD space. I mean this was -- I think this is really the first truly prospective interventional outcomes trial that's run in the space. We ran this in partnership with Roche for their drug atezolizumab just kind of a high level of how that works. So Roche had actually run a previous Phase III trial with atezo in muscle invasive bladder cancer that read out in something like 2021 and 2020, something like that. And before they unblinded that data, they prespecified an endpoint to see what was the treatment response for the fraction of patients that were Signatera positive. That was about 40% of the patients. And in that first Phase III study, unfortunately, the drug did not meet its primary endpoint on all comers, but had an enormous treatment effect in the Signatera positive population. So we partnered with Roche, we rushed around. We launched a second Phase III trial IMvigor011, where entrance criteria for the randomization was being Signatera positive. So these are muscle invasive bladder cancer patients. They are getting serially monitored with Signatera. When they turn positive, then we randomize them plus and minus atezo, so placebo versus atezo. And then that's what just read out at ESMO. And the results were incredible. I mean the study was really only powered to show a disease-free survival result, and we were able to show an overall survival result in a very short period of time. Patients had a fantastic response that were Signatera positive on the drug. And the Signatera positive patients who were given placebo did very poorly comparatively to the atezo arm. So landmark study, publication in the New England Journal kind of headline data set coming out of ESMO, lots of interesting subcuts of that data. For example, patients are getting serially monitored before being randomized. And so one of the open questions historically has been, well, what if you have a patient who turns positive not immediately after adjuvant treatment or whatever the previous treatment was and they're negative and then they turn positive Signatera later and then you try and treat them. Are there any impacts to that patient? Do they pay a price for waiting for delaying their treatment? And the answer in this bigger study was no. Indeed, those patients who were negative for a period of time and then turned positive and they were randomized, they actually did better. And that's probably a function of them probably being low-risk patients within this cohort. But nonetheless, that was a very, very powerful kind of piece of the readout for us. And it just really highlights the clinical utility of Signatera to help guide treatment for patients, both in terms of escalating them to a drug like atezo, but also there's an element of deescalation in that data where you can just monitor these people, see when they turn positive, then intervene and they do quite well. It married up quite well with the data set that we had earlier this year at ASCO in colorectal cancer with Celebrex, which is just a very inexpensive NSAID that's offered routinely in that setting. Historically, there's been broadly supposed that patients who have Stage III colorectal cancer have that disease because they have some kind of inflammatory response that's just gotten out of whack. And that inflammation is what's causing their polyp development. So the thought is, look, we'll give them an NSAID, we'll knock down that inflammation response and they'll do better. So unfortunately, when you give -- there was a prospective clinical trial run, gave Celebrex to all-comers, it didn't work on all-comers. It sounds familiar, right? It sounds kind of similar to the IMvigor story. When you just rerun that analysis to see -- to separate responses between Signatera positives and negatives, it's two totally different stories, okay? So they had a wonderful treatment, like a 40% treatment effect among the Signatera positive patients. So there, again, you show that you can really -- you can delineate these patient populations and deliver a huge amount of clinical utility and get them the right treatment if you just know who's positive and who's negative. So from the Celebrex data in ASCO, which I think led to a huge step-up in volumes here in the summertime. Now we've got this in a truly prospective interventional study. It just shows the kind of the momentum that we have going with the clinical trial and data development and it sets us up really well for '26.

And how does this play into kind of the broader discussion around guidelines? I mean everyone is kind of focused on NCCN. How do you think about guidelines coming? Will it be indication by indication or kind of more broad sweeping?

Yes. So I think from a guideline standpoint, the goal is to just generate Level 1a evidence like we did with IMvigor and then submit that to the guideline committees, and we'll be doing that with bladder. Certainly, we've got a lot of other data that has come out and will be coming out in colorectal, breast cancer, other indications. Now with something like bladder cancer, where there's a drug involved as well, I think there's a path for FDA approval potentially of the drug and then for guidelines to sort of come into play around the therapy that would enable the use of Signatera as well. So there's a couple of different paths. But the good thing is we're on the right path, and we don't necessarily need guidelines in order to be successful because we're seeing an enormous amount of demand. We're seeing a demand in pan-cancer, and we're starting to get reimbursed both for Medicare and now from commercial payers because of some of the biomarker bills. So when guidelines do come through, that will be kind of the cherry on top. But I think we're already going to be in a great position.

And you -- on the 3Q call, talked about seven additional MolDX submissions for uncovered indications. Can you just talk about how you think those ramp? What can you say about the indications? And then you've talked about this $250 million to $300 million incremental revenue target. How do you think about those contributing?

Yes. So when you look at our volume today, and we talk about our average selling price, which I think was $1,200 or something in that range. So what that includes is a bucket of tests that we get paid for and then another bucket of test that we just get 0 on, right? And the average there across all those tests is around 1,200. So if you look at the tests that we're not getting paid on today from Medicare, that's probably about 30% of the volume that we're running. And we think we have a path to get reimbursed on that long tail of indications today that we're running and not getting paid on. Seven of the indications we're now in a position to submit and those are sort of mostly the larger indications covering that 30%. So if we can submit those Q4, which we think we can do, and those flow through to getting coverage, which there's no guarantee, but I think we've done a pretty good job generating coverage because we have good quality data. We think that can be worth a couple of hundred million dollars in revenue and gross profit based on our current run rate trajectory on an annualized basis. So there's opportunities to improve the average selling price and the gross margin through gaining coverage through Medicare, but also through these commercial plans.

You guys have been busy in the meantime, you launched Latitude, right, tumor naïve and then whole genome. Maybe talk about each of those independently. Why is there a need for you to be in whole genome in tumor naïve and think about -- and maybe just also touch on how you think about those contributing to revenues.

Yes. So I'll start off with tumor naïve MRD. And tumor naïve MRD is something where the tissue is not available, which is a pretty rare circumstance, I think, maybe around 5% or something in that range. then the doctor may want to option to reflex to a tumor naïve option. Now we can offer the test as sort of an upfront option. If you don't want tumor-informed, you can just choose it or we can offer it in the setting of if you order tumor-informed and we're not able to obtain the tissue, we can use the tube that you sent and reflex that for tumor naïve. So it's actually been quite successful. The data looks really good. We had a pretty solid large-scale study there that data looks very strong. We've had good uptick. But we are seeing that most people prefer the tumor-informed version if they're able to get access to it. But it's great that we have this for the physicians that do want it. Then on the Genome side, historically, a lot of the Signatera testing was done off of an exome backbone. And what we do is, we sequence a whole exome and then we select specific targets that we want to go after, and we use a multiplex PCR capability combined with next-gen sequencing. And that allows us to go extremely deep at each particular variant that we're going after. So incredibly low limits of detection at each individual variant. So we think it's important to pick the right variants and go extremely deep, like 150,000-plus x coverage at each location. Now one option that we've looked at is doing that entire Genome as the input sequence rather than an exome. And when you do the Genome, you actually have more variants to choose from to go into your input assay. But you don't just test every variant that you find, you still have to be highly selective with the variants that you're detecting. So we take the same approach. We sequence the entire Genome. We have a very well-selected variant set that we choose, highly curated. And then we go extremely deep at each particular variant, like in the range of 150,000x to maximize both sensitivity and specificity. Now that's different than what a lot of the competitors are doing, where maybe they'll do a Genome and maybe look at 3,000 variants, but they sequence each one at a very low coverage level, and they're may be less discriminate when they select variants. So we think our approach is the right approach. And it's -- we're pleased to see that when we run clinical trials, that the performance data looks incredible and physicians are very happy with what they're seeing in clinical practice.

You noted ASPs earlier. Mike, you talked about, I think, $50 in Signatera ASP growth next year. Just talk a little bit about the contributors there. Is it biomarker bills? Did you bake anything in for guidelines? Is it ADLT dynamics? And what are the kind of issues around PAMA if that does come?

Yes. Nothing baked in for guidelines. I mean I think Steve touched on the one driver, which is we've got a whole swath of additional tumor types that we have excellent data for, and we're submitting to MolDX for coverage on. So I think that's step one. For our currently covered tumor types, when we submit a claim to Medicare fee-for-service patients, we get paid almost every single time like we should. Disappointingly, when we submit those same claims to Medicare -- for Medicare patients who have Medicare Advantage, we only get paid about 75% of the time. So there's a gap. And so -- and we've moved that gap from 30% to 75%, but there's still a meaningful hole to close there. You mentioned the biomarker state laws. I think Q3 was the first time that we actually had measurable in my view, kind of contribution from biomarker state reimbursement included in the ASP build for Signatera. So all those three trends are really the things that will kind of continue to mature in 2026. Longer term, you've got some important drivers launching in Japan as a potential driver where that obviously would be accretive -- would grow your volumes, but we think it could well be accretive to ASPs. And then ultimately, guideline inclusion is, in our view, inevitable, and it will come at different points for different tumor types, and it's kind of fine when it comes, as Steve mentioned. The things that are baked in for next year are really just, hey, reasonably good execution on those kind of first three objectives that I mentioned.

Maybe on early cancer. So you had CRC readout. Maybe just talk a little bit about that, how we should think about AA degradation as you move forward with the FDA-enabling study with FIND?

Yes. I'll make a couple of comments, and then maybe, Mike, you can jump in. But we started working on early cancer detection several years ago as we were working on our tumor naïve assay. And I think initially, the idea was to kind of have just a very targeted program until we met certain performance milestones. And part of that was us collecting this fully prospective trial, the PERSEE study, where we collected about 5,000 colonoscopy matched samples in the same way that you would do in an FDA-enabling study. And the idea was if we could run that and get good performance, then that would give us the confidence to move to a more expensive FDA-enabling trial. So we've kind of hit every single milestone. The data looks really good on colorectal and advanced adenoma. So we've moved on to now, which is recruiting today, the 40,000-patient FDA-enabling FIND study. We expect to have that finished recruiting in 2026 and then be in a position to submit to the FDA in 2027. We've taken a lot of steps to reduce degradation. I think some of the groups that have kind of read out before us had seen where their case-controlled studies had one metric or one performance metric. And then in the definitive trial, they saw a reduction in performance. So number one, we collected all the samples in the PERSEE study in the same way that you would in an FDA-enabling trial. So rather than using patients who already symptomatic and drawing a blood draw maybe post colonoscopy, all the patients in the PERSEE study were asymptomatic and the blood was drawn pre- colonoscopy. So that's one example. I think the second is when we developed the test, we were able to develop it knowing that advanced adenoma performance was important, whereas I think maybe that wasn't sort of part of the thinking many years ago when others kind of had to lock down their assays. So we definitely did have algorithms that were built specifically for advanced adenoma performance and then importantly, we have this enormous database, several hundred thousand patients where we've done whole exome or whole genome tumor sequencing, and we have longitudinal monitoring on those patients. So where we're able to do development work using samples from our clinical trials, for example, like some samples from the CIRCULATE-CRC study, we actually have Signatera blood draws at some of the matched locations where we were using blood draws for development work where we can look at the VAF levels and we can confirm that actually what we're seeing with the early cancer detection development assay sort of matches what we're seeing with Signatera. And I think that's unique to us, and that's really helped us, I think, to get where we are today. So -- right now, it's full steam ahead on this CRC test. And we think we're going to be one of the top players in the space when we get on the market. And this is going to be an enormous growth opportunity for Natera as we get into 2027.

And assuming you can kind of maintain 20% on AA, I guess, is that good enough for USPSTF? How do you think about guidelines there?

Yes. I think we'll be in a good position. I mean if you look at some of the other competitors kind of in that range of like 84% sensitivity on CRC and maybe like 13%, 14% on advanced adenoma. That seems to be where kind of the competitive competitors are that are on market or have completed their FDA-enabling studies. So we'll have to see where we ultimately pan out. But if we're in that range or we're better, we're going to be in a very competitive situation.

And maybe just touch on the decision to go indication by indication as opposed to broader panel. And then how do you think about what channel you're going to need? Do you need to expand the PCP sales force significantly?

Yes. I think the use case and the reimbursement in colorectal already sort of exists. And so that's sort of an easier area to come into the market, which is why you've seen others do that as well. Of course, I think over time, like the ability to do an MSA is important. And we obviously have that capability and are continuing to build that capability, although the first initial focus will be on colorectal screening. I forgot the second part of your question.

That was on the channel. How big a sales channel do you need? Or do you partner?

Yes. So there, I think we have options. I think for some of the groups that have been kind of watching the space and kind of seeing the different performance readouts, we have had some inbound requests groups that said, hey, we may want to be a distributor or be the primary channel to the primary care. We have to kind of see how that's going to pan out. But the way we usually do things at Natera is pretty efficient with regards to thinking about spend and approach. And then once we find something that works, we really put a lot of energy behind it. So I think we'll have to cross that bridge when it comes.

Mike, maybe just to touch on the path to profitability. You talked about 10% OpEx growth next year. [ Street's ] got 16% or so revenue growth. And how is the $200 million cost-out program that you kind of launched in 2Q tracking?

Yes, striking well. I mean I think the fundamental way that we will kind of grow into being a sustainably profitable company is the same way we've grown into a business that sustainably generates cash flows. So many of you will recall, we set out a target, I think, in the middle of '22 in a quarter where I think we burned about $100 million in cash in the quarter. And we said, look, we're going to be -- we'll be cash flow breakeven by the middle of '24. And we're not going to do that by cutting. We're going to grow into generating cash. And if you look at operating expenses now versus the operating expenses are much, much higher than they were then. And yet we're -- we've guided to generate full $100 million in free cash flow this year. So I think investors ought to be able to take heart in that trajectory, and we've now done that several times over -- in the history of the company where we've kind of built up a commercial and lab infrastructure and then gotten scale in that infrastructure. It's arguably easier to do that with a repeat monitoring test than it has been for any other test in the history of diagnostics, certainly easier than any of the products in which we've gotten scale on previously. So our basic strategy is to continue to be disciplined allocators of capital to high ROIC organic projects, not to have a ton of waste, but just to fund the things that matter for top line growth, make sure that we get paid for covered services, keep the cost of goods sold lean. And then I think on the commercial operation, it's -- there's a natural kind of scale to these things. You don't need 5,000 sales reps for -- to cover 11,000 oncologists, so just you kind of level out at a rational level, and you can continue to grow the revenues quite rapidly for years after you've kind of gotten that scale. So I feel great about our current position and our ability to ultimately kind of get to profitability.

Maybe just in the last minute, I want to make sure we hit on NIPT, launched the new 20-gene fetal focus assay a couple of weeks ago. You had a V1 in August. So maybe what is the right time to kind of launch a new assay? And just talk about the EXPAND trial as well.

Yes. So this is actually a really exciting innovation in our women's health side. So traditional carrier screening looking for inherited disorders in pregnancy, you screen the mother. If the mother is positive, then you screen the father to determine the risk for the fetus. Now one of the challenges is that the father is not always available for screening or they're not -- they don't show up or perhaps don't know who the father is. So we developed a new technology that enables you to detect inherited disorders directly from the cell-free fetal DNA. This is called fetal focus. And effectively, where the father is not available, you can still screen the pregnancy for these inherited disorders. So we're seeing a lot of interest here. Many companies in the space don't have this technology. So we think this will help us drive share.

Great. Thanks for taking the time.

Thanks, Tycho. Thanks, guys.