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

Good afternoon, everyone. Thanks for joining us for the final day of the Raymond James Institutional Investor Conference. For those who don't know me, I'm Andrew Cooper, cover Diagnostics and Life Science tools for Raymond James. Happy to have Natera CFO, Mike Brophy, with me this afternoon. We're going to do a little bit of fireside chat, and then we'll head downstairs for a breakout in Amarante 1 afterwards. So please join us there.

But maybe just to start, Mike, can you give folks who are maybe a little bit newer to the story, a couple of minutes on just who Natera is, where you fit in the landscape and some of the topical items of late?

Yes. No, thanks for having me. So always great to be here. We just announced our Q4 results. So that's always a good call because it's a great kind of recap of 2025 and you get to set the guide and expectations for '26. I think that was very well received. Well we did it. I mean, just maybe just a quick summary. In the quarter, we had another fantastic kind of revenue growth quarter. Signatera volumes where you had another kind of record absolute quarter and also a record kind of just growth unit quarter as well. Gross margins were extremely strong in the quarter. All in, we were -- I think we're about 67% and then even backing up the true-ups, we were close to 64% for gross margins in the quarter. And that's about a 240 basis point climb just sequentially off of Q3. We had a couple of tailwinds and probably don't repeat every single time, but nonetheless, I mean I think that can have a big confidence that we're continuing to grind higher and higher on gross margins as the top line continues to accelerate. We actually came -- we actually generated net income in the quarter. I didn't really -- I didn't pump that as much on the call per se, there was like a -- we did an acquisition, and so that triggered like a deferred tax benefit that was more of an accounting thing. So -- but just -- I bring that up just to point out that we continue to narrow the operating losses and it was close enough to actually generate net income for quarter, which I think maybe we did that once in 2016 or something, but it's been a minute.

And I would just flag that's gap. If they made all the adjustments you see from some others, it's a little different number.

No, as a Charlie Munger fan, I try to just give you the numbers. And then I do talk to people about cash flows, and so I think that's a proxy for a lot of those of things. I think cash flow is a relevant metric, and we hit our target for the year. We generated more than $100 million of free cash flow, which we're very happy about. Going into '26, I mean, good kind of strong guide to start the year. Same kind of mindset that we've always had with financial guidance and that we want to set something that we think is a strong target, but it also strikes us as achievable. I think we did our best to strike that balance on the call. What's implied in that guide is another very strong growth year really across the portfolio, women's health, organ health and especially Signatera, continued pricing improvement sequentially for Signatera through the course of the year. Really just based on the couple of items we have more within our control in terms of activity around just kind of grinding higher on Medicare Advantage compliance for covered services. And I think upside to that would be broader coverage for Signatera, which we're working on as fast as we can. One other thing I'd point out on the guide is just on the OpEx guide, continue to keep our foot on the gas in terms of the R&D spend, very ambitious set of projects, clinical trials, new product development that we want to stay aggressive on. And the SG&A guide was actually implied at the midpoint basically stable SG&A year-on-year, which I think just at a high level, I think, gives you an indicative sense of kind of where we are in the cycle of the company, where the top line is just continuing to accelerate, you see continued progress on the gross margin line getting some leverage, getting some scale on the sales and general line while we continue to stay aggressive on R&D for the future. So really well positioned for 2026. I'm very excited about all the opportunities and happy to be here with you, Andrew.

Perfect. We're going to touch on a lot of what we just hit on there, but I want to start with Signatera. You guys pretty quickly got to 50% of oncologists ordering. So the kind of penetration is clearly starting to show. But I wanted to ask, when we think about the next, call it, 12, 24 months, how do you think about what's the bigger driver between indication expansion, penetration into the remaining 50% or depth of ordering across more of these folks who have already used it with the rest of their patients?

Yes. The good news is that 1 core set of activities operates on all of the vectors you just mentioned, right? So I think there is a very significant opportunity. Just to expand Signatera to physicians that haven't ordered the test yet, it's kind of amazing to think about because when you walk around the academic conferences now, I just can't tell you how different the tone is now versus even maybe even 2 years ago in terms of -- I think you'd be hard pressed to find a physician or scientists at those conferences that doesn't think that MRD and recurrence monitoring is an important part of the continuum of care now. And yes, obviously, there's a lot of white space out there for us to go and grow into in terms of physician adoption. I think that maybe even arguably a bigger opportunity is depth within a practice. And I think that's actually kind of happening kind of in real time. What we used to see with accounts that would start adopting Signatera is you usually start with colorectal cancer, some very discrete indication and then very gradually build. We're seeing a little bit more of a trend now where you see accounts adopting Signatera and just kind of dropping much more broadly in their practice. And I think that's just a function of the time that we've had available to us to make the case for the value Signatera and all the clinical trial data that we've been able to read out across a broad set of tumor types, really encourages that broad adoption. So like how do we move it forward from here? It's kind of -- I'm sorry to be boring, but it's kind of the standard playbook, right? It's -- have the best possible product we can have and we're going to stay very aggressive in terms of the product development cycle, particularly for Signatera, be very ambitious in the clinical trial program that you want to pursue. So not just in the biggest tumor types that we've all talked about. But beyond that, there's a large set of tumor types where there's 30,000 to 70,000 new patients every single year where Signatera has very strong data already. They are compelling use cases and we're running a lot of times what would be considered kind of the seminal or landmark trial for MRD in those tumor types. And just continue to turn the crank on all the other things. I mean, the operational execution required to deliver a test like this at scale is truly demanding. I think we're kind of at a place where we know how to do that. And it's honestly as just someone -- as an executive -- just around the company, it's just a pleasure to see us kind of operating at that tempo, and there's more to do there to just continue to delight customers with the customer service aspect.

Perfect. And maybe on new indications, I think the comment with earnings was 30% to 35% of volume is non-covered areas today and that a couple of hundred million dollars of kind of potential if those start to get covered, and it's not 1 thing, it's not 2 things, but a good handful. So maybe just give a refresher on what you have at MolDX today, how you think about that buildup. And I think in the back of our heads, there's a hope that at some point, this becomes more of a pan cancer versus every incremental indication as they get kind of smaller and smaller down the road. So just would love the latest there in your thoughts.

Yes. No, I think that's right. I mean I think that is a big opportunity. Just the volume that we deliver to Medicare patients where we don't yet have coverage from Medicare for that cancer type has been something that as the business has grown and again, growing kind of not concentrated in 1 or 2 tumor types, but grown kind of across the continuum of indications has become an absolute units, a really important target for us to run to is just to hit the marks. We've delivered a lot of the data, but then you've got to kind of go through that process. It's quite a rigorous process to go through with the MolDX program with Medicare to make the case for coverage in these various indications and different tumor types. Historically, that's the way we've done it. We've just grinded it out, tumor type by tumor type and now the most common cancers in the United States, we're very well covered by Medicare. And we are kind of in that next tier that I was alluding to in terms of incidence rates that we're pursuing coverage on. I think that needs to remain kind of the base case. That's my base case for the business. Is that going to just continue to interact in a constructive way with Medicare. And over second half of this year and first half of next year, you start to see more coverage, more indications covered, more announcements, just kind of flowing in 1 by 1. I think that would hold us in good stead, and that would allow us to meet all of our goals. And I think upside to that kind of base case would be if we can go faster in a broader setting, but we'll just got to see.

Maybe just on kind of the last point in mentioning time line a little bit, just to remind folks, the '26 guide, you talked about basically $30 of ASP still to come. It feels like most of that is, can you get paid a little bit better from MA as opposed to new indications. But I guess, is that the right takeaway? And how do you think about what's in the guide? And what's out there for you to win above that?

Yes. I do -- that is -- that's a great -- thanks for characterizing it that way. I mean the guide kind of implies we do -- we continue to execute and get coverage, get actually reimbursed from these Medicare Advantage plans, where we already have a coverage policy, and there's really -- the only reason why we're not going to pay some administrative reason that we're -- we've got to just work collaboratively with that payer and understand what is the disconnect and just fix it. And that's been a linear process for us. I mean if you rewind a couple of years, we used to get paid 30% of the time for Medicare Advantage plans and 85% of the time from Medicare fee-for-service. Now it's -- when it's a covered service we get reimbursed 99% of the time for Medicare fee-for-service and there's still that gap with Medicare Advantage where we're kind of up to 80%. But that just means that there's a long tail of smaller MA plans that we just got to engage with. We've got a lot of long history of doing that. As I mentioned, in a collaborative way, and we'll do that. So the $30 would be, hey, continued execution on that front. And then upside from there is, I think more progress in biomarker states, which I think we can have some of that this year and broader reimbursement just from the Medicare indications. Like I said in the prepared remarks on the earnings call, I'm a little bit biased to the upside on that guide if it'll had to lean 1 way or the other, but I think that's a good way to start the year.

For sure. Perfect. I want to talk about guidelines a little bit. I feel like we used to talk about it more. I still think they're important, but we haven't been kind of as front and center on them. So CRC is the 1 people are looking for. There's a lot of other cancer types. How do we think about what that progress looks like from here? I know we're waiting on the '26 update for CRC, but what should we expect in terms of the nuance and the wording? And then how impactful is it at this point, given you have the adoption you do even before that?

Yes. The guidelines are still very important. And I think the story will be different for every single cancer type for the immediate future here, where each NCCN guideline committee there's a specific 1 for each cancer. And these are folks that are obviously steeped in the care of that particular cancer type in the use case. So we've got a number of very compelling prospective outcome studies that I've already read out that 1 could argue, should be up for consideration for guideline inclusion. You mentioned CRC and then we've got another slate of large outcomes data sets coming over the next, call it, 18 months or 2 years between the escalation data in Japan and then readouts from U.S. circulate coming as well. So I'm cautiously optimistic that, like as those read out, I think we'll be able to make an even more compelling case for guideline inclusion colorectal cancer. But it's ultimately it's not really for us to decide for the professional societies and the guideline community decided that that's appropriate, that's the way it ought to be. Away from colorectal cancer, I mean, we did have a fantastic very large prospective Phase III readout in muscle-invasive bladder cancer that just based on the strength of that data, I think the kind of the consensus expectation among physicians, certainly among the PIs is that, that data was strong enough to merit an FDA approval for atezolizumab guided by Signatera with Signatera in the label. What usually happens in that scenario is that when there's going to be an FDA-approved drug, there's typically a guideline update just to accommodate the fact that there's a new on-label therapy available. And since we're in the label for the drug, I would anticipate some level of inclusion within most of it is bladder cancer. But there again, that's just -- that's not -- I'm not reflecting feedback that I have from anyone around the process, I just sort of outside looking in. Honestly, taking a step back on guidelines as a topic, they're critically important over the long-term vision for adoption of Signatera in clinical practice because you just got to have -- is this part and parcel with having the right data to have, 90% of physicians adopted the test. You just got to have the best outcomes data available that should merit guideline inclusion. I don't think that there's like a business case or an investment thesis that really hinges around specific timing, we've got to get a certain guideline inclusion by a certain time. We're content to just let the process kind of play out organically and play our role, which is to do what we can to support kind of the best available kind of outcomes data.

Yes. Perfect. Makes sense. I want to touch on the portfolio and how much it's sort of expanded within MRD in the last, call it, 12 months. So you've got Signatera genome. You've got Latitude. You're going to drop in phased variants here in pretty short order. I guess why is it important to have that breadth and to have kind of the approach that you do to have each of those? And then how do you think they all sort of shake out in the market from an adoption perspective?

Yes. One of the reasons why I like working here is that the my colleagues have -- and I have been together for a long time now. So this is year 11 for me at the business. And I'm kind of the newcomer among the management team, among our operating committee, I mean, the other guys have been here for a couple of years longer. I mean, Steve, our CEO, is the first commercial employee that was hired here back in 2010. And I think 1 of the things that Steve and both our -- Steve and our Chairman, Matt, bring to our culture is this intensity around understanding what are the problems that the patient and the physician are facing and solve those problems with a level of intensity, like really take it seriously, work backward and let the problems, let the unmet needs dictate what your product road map should look like. And when you do it that way, you don't have to be so smart about like what competitors are doing or any of the other things that are easy to get wrong. You can just ask the patients what they -- see what the physicians need and solve it. So 1 thing that we solved is on the tumor-naive MRD front. There is a niche, there's an application for tumor-naive MRD. I think rewinding the 2020 when MRD was just kind of launching like as a topic and we really created a category, there was kind of an open question as to whether or not physicians would be able to order a tumor-informed MRD like would it actually work? And could we logistically deliver it? I think what we've shown over the last 5, 6 years is definitively, the answer is yes to both, we can deliver it very seamlessly. And the data is kind of without comparison versus any other approaches. Having said that, you still have niche indications where getting access to the tissue to run a personalized MRD test is inconvenient. If you have an older lung cancer patient, you may not want to stick a large board needle into that person's chest and extract some tissue to then run Signatera, but you might like to offer that person an MRD test. Perfect case study for tumor naive MRD. Similarly, you can have physicians despite kind of the track record we've had with delivering Signatera over the last 5, 6 years. You can still have physicians that are kind of -- they're new to this and they're a little worried about the logistics. They're a little worried like can you really deliver a test that's personalized for every single 1 of my patients? What if it doesn't -- what if we run into some kind of issue? Well, with the existence of the Latitude test, the response can be, look, physicians, Doc, you can order the Signatera test. And if we run into some hold up with the lab -- with the pathology lab or we get an F50 block that has no tissue in it or -- these things can happen, we can reflex to the tumor naive test. It's an excellent test. The preliminary data is amazing. We'll continue to fill out the data over time. We'll deliver that. And in the background, we'll continue to work the problem. We'll get the patient on to the gold standard Signatera offering for the second time point. So I think like those are just 2 examples of questions or challenges that a physician and a patient might have that we're trying to proactively solve with the product launch. And so that's on the Latitude side. It's a similar answer, I think, on the launch of the genome product. If you look out into the future in the business, it's actually quite heartening to see that there's actually a chunk of the physician community that has totally buys into the idea that personalized MRD is going to work, and they're fully -- they've seen all of our data and they're convinced, they're so convinced that they're willing to say, "Hey, look like whatever you guys have as Signatera today, I just want something that has the potential to boost sensitivity in the future." So I think in the future, once it's fully characterized with outcomes data, I think that will be an interesting thing to see like can we actually continue to improve the performance of the test over time. That's always been our objective. And right now, the test is available if a physician just wants to kind of order the genome if they've already bought in, they have a particular patient that has a particular need where they might want to use a genome backbone test. Very soon to be able to have a genome backlog test that also has phased variants layered in that will be the most ultrasensitive tests as measured by limited detection that's available. And so it's just kind of on the other end of the continuum, just proactively kind of addressing a physician's question or need.

I'm going to ask when you may say you need to hold off for the answer because you guys don't tend to do your product development in public. But 1 thing just talking to some other companies and kind of hearing how they think about it, there's this talk of adding apps and adding extra kind of data points to reports. Just kind of curious how you think about that. And I think genome kind of opens up a little bit more of that potentially. So just would love sort of the view there and how you think about sort of the competitive landscape from the perspective of maybe not with Signatera or Signatera genome is today, but what it can be 5, 10 years from now when we have more of that data, more ability to kind of dig in on some of what's generated from what you're doing now?

Well, a lot of that type of stuff is available right now. I mean I love that. I mean I think like 1 of the real promises of MRD is all of the information that you can generate from the MRD test that you can then put into the clinical decision-making. And we've always trusted physicians to kind of take in disparate pieces of information that are available, and this is patient history, patients -- what are their personal needs and preferences going forward. What was the result from their path lab? How is their tumor graded? What does the CT scan look like? We ask the oncologists to kind of take all these things into consideration, leverage her, in many cases, decades of experience and formulate a plan with the patient, okay? So 1 of the reasons why MRD has gotten such dramatic uptake is that the residual disease test fits in perfectly into that care continuum to just add -- just empowers the physician with more and more information. So we give a ton of information. So it's not just -- when you get a test report on Signatera, you don't just get a positive or negative, you also get a quantitative score mutated fragment per mL of plasma. And we've actually published some very interesting data to show the outcomes can be pretty differentiated for patients based on how quickly that score is changing. So if you're a mutated fragment, your tumor load is kind of a proxy for what that score is, if that's increasing quickly, right, you're in a more difficult situation than if it's increasing more slowly. And we've kind of shown it a couple of different data sets. It becomes that patients really like to know. I mean the entire patient report becomes something that is quite user-friendly. I have this -- maybe you'll forgive me this like quick story. I'm on trip in Mexico with a high school graduate, a kid of mine just graduated from high school. We're doing a trip with some of the boys and some of the parents. I don't know all the parents super well. This is like why add some of the younger people, like, this is what you get into when you have kids like you get into -- thrown together with these people that you otherwise never hang out with anyway. And in that scale, these other adults that like I don't know that well. And I didn't know 1 of the dads and 1 of the reasons why I hadn't interacted with them is he had a terrible journey with colorectal cancer, stage III colorectal cancer over the preceding 2 years. And this guy is a pretty successful property developer in Austin and he's getting treated in the Anderson. And so I thought, well, this guy is definitely -- he's getting Signatera. But I just didn't want to bring it up. I just let it go. And I'm prompted the guy brings up his cell phone, shows me his Signatera result and gives me an amazing 5-minute elevator pitch on how important tests was and why he felt comfortable coming to Mexico is that their results were pretty good, and he's not going to have some kind of health emergency right now on this trip. So it's just like very heartening to see that and just also kind of gives you a sense of just how prevalent Signatera is becoming just among cancer patients and survivors today. So that type of data. I know it's a super long answer to your question. But like that type of data is we're delivering that right now, and the sky is the limit. I mean, there's more and more things that we can deliver, whether it's like particular resistance mutations, there's a ton of things that we can deliver that come off of the core conversation we're having right now with our customers.

Perfect. No, that was super helpful. I am looking at the clock now and I'm thinking maybe we need to move a little bit.

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No, that was fantastic. Maybe just to touch on women's health. I feel like it's an important -- a pretty big piece of the business still. So you still are looking for volume gains there, which I think, given where that market is, continues to be an impressive thing. I think you said mid-single digits for kind of this year is where the baseline is. What are the key factors that let that keep being the case in a market that we all feel like is pretty well penetrated here in the U.S.? So just a little bit of flavor for kind of how you think about driving that?

The business has done amazingly well. I think to set the guide. I mentioned, I think this is like a mid-single-digit volume grower. It probably grows faster than that on revenues, particularly in carrier screening. I think there's a -- it remains a huge opportunity as patients continue to avail themselves more and more of broader panels for carrier screen to understand like a broader set of conditions for which they might be a carrier, that's becoming increasingly of higher and higher interest to patients and physicians. We have a very ambitious plan in terms of product development and clinical trials as always with women's health. If you look back over our history, you'll kind of notice that once a year, once every 18 months, we have some major new feature launch, new product launch in women's health. I think the previous 1 might have been the launch for our RH test about 18 months ago, about a year ago. And now the most recent 1 is the fetal focus test. So it's just -- it's constant with the effort that we've always had there. It's -- we all know it's a competitively challenging market, lots of different entrants, lots of labs have kind of come and gone. The reason why I think -- 1 of the reasons why we've had amazing staying power in women's health is that kind of commitment to continue to innovate, to just always be launching cool new features and products that patients and doctors care about along with continuing to deliver kind of best-in-class kind of customer service. And letting people have the comfort in knowing that this is a test that has a very ambitious 7-year 18,000 to 20,000 patient outcomes trial that will probably -- that will just never be matched again. I mean just a huge undertaking. So that kind of commitment to data is what keeps us in the pull position there.

Maybe just on fetal focus. I mean I think when we look at the landscape, there are some players that are moving more towards hey, we want it to be a combined offering versus you took the approach of, you can always add it on, but it's a stand-alone test as well. What made that the right approach for you guys? And just kind of how do you think about that competitive piece of it?

Yes. So I just want to make sure that, that's clear, like the way the fetal focus gets offered on par with the way that the single gene is offered more generally in the market. So it's available as a frontline offering. The way that this will work is mom will get a carrier screening test. And if mom is a carrier for -- potential carrier for inherited disorder. She doesn't have cystic fibrosis, but she may be a carrier of the mutation, for example, then you have a conversation, right? I mean, historically, you might screen dad and we have dad get a carrier screening test. This is now a new option. You might avail yourself of a single gene NIPT. So the way that we offer the test is effectively frontline is just the exact same way that other labs would offer.

Okay. Helpful. We've got 2 minutes left. So maybe just a couple of finance questions since we do have the CFO here. You talked about positive cash generation without the prior period collections. Can you frame where the businesses sit maybe on an individual basis, meaning how profitable is women's health? Where is oncology in terms of -- obviously, you're investing a lot as I think you should be, which I'm going to ask a question about as well. But can you frame where you are in that sort of build to positivity in each of the businesses?

You can just see it just looking kind of at the total company, right? If you just look at -- pick a metric, revenue scaling, gross margin the -- compare that to the OpEx growth, I mean the gross profit dollars are growing much more quickly than the OpEx is growing. And what that yields is your losses continue to narrow. So I think we had a very narrow kind of EBIT loss even in Q4. So the way for us to get to kind of sustainable kind of earnings per share generation every single quarter, it's just to grow our way there. I mean I think there's like a whole range of companies that felt like they got to a certain level of spend, maybe post the pandemic, and they had to make a huge pullback, we never did that. We just said, look, we're going to grow our way to profitability because the products we have are so high value, that's really the way to make the enterprise work is just to really just grow the top line and grow the market opportunity.

And then since I said I would ask it, the R&D line is growing a lot. And I think it's the -- like you said, SG&A is going to be flattish. R&D is where you're growing. I think you still turn down a lot of opportunities for studies or at least some. So maybe just frame for us how you look at the ROI on a study-by-study basis and what makes the study that you're most excited about different from kind of the 1 that maybe you say, not so much. Because I think everybody comes to you and once they're on a study with you, right?

Well, everything we do here, every project within R&D, every -- if we look at acquisitions, everything you just kind of normalize all the different ways to deploy capital by looking at them on an ROIC basis. And really, our bias with respect to clinical trials is to be aggressive, right? If there's an ambitious clinical trial that we can run, that we can drive, we want to do it. Clinical trials that partners want to run are almost always fantastic. So I wouldn't say that there's like a some committee where we're turning down most of the clinical trials or anything like that, like usually, there's something to do with like, hey, we want to make sure that if we're going to put our time to a clinical trial that the endpoints actually inform standard of care in some way that's not already informed. I mean usually, we have some critique of like the design to make sure that it's going to be right. But honestly, rarely do we pass on a trial that we think has the right level of ambition for the company.

Perfect. We're a minute over, but I always like to end with if there's anything you want to leave the investors with or what you think is most underappreciated, the classic closing question.

No. Look, I think like -- honestly, I think the business is pretty easy to understand now. I mean you have a core technology, it drives 1 strategy that we deploy across these 3 different areas. We're going to be very aggressive in terms of having the best products, having the best data, having the best commercial channels and the resulting kind of scale in revenues and margins that we're rapidly generating allow us to get to a much, much higher revenue numbers over time on relatively stable OpEx growth. So I think we're at a pretty steady state place now.

Perfect. Thank you so much. And we'll head down to Amarante 1 for the breakout.