Natera, Inc. ($NTRA)

Good morning, everyone. I'm Puneet Souda. I cover life science tools and diagnostics here at Leerink. And it's my pleasure to be hosting Mike Brophy, CFO of Natera. Mike, thanks for joining us. Thanks for being here. Great. So a lot to talk about. You obviously had remarkable growth in Signatera over the past few years, 2025 again. You have 100-plus publications, lots of clinical evidence there. You acquired the technology for PhasED variance. So that's enhancing sensitivity. There's a women's health business that's also doing well. You have 40% plus market share in NIPT. Competition is increasing, but you're taking it head on, and we'll get into some of the fetal focus in other discussions.

But maybe just staying on Signatera at first. When we think about the volume -- sequential volume growth, the number was 8,000 to 10,000 earlier when Signatera was growing strongly, it still is. But now that number is 20,000 sequential over the last 3 quarters. You're suggesting we look at the last 4 quarters average sequential volume growth, the right way to look at it. So maybe tell us your thinking behind that? And how should that inform the view on forward volume?

Yes. Well, no, thanks for having me. And you're right, we've been on a massive upward trajectory with Signatera volume growth. We posted 22,500 growth units last quarter, 225,000 units overall in the quarter. And so look, the question always comes, well, how do we model the next quarter as we're kind of on this ramp. I like the construct of the trailing 4 quarters average just because that does 2 things. One, it just normalizes the quarters in terms of seasonality and days available in the quarter and all those kinds of factors that really don't -- they can impact volumes quarter-to-quarter, but they really don't have an impact on the reason why you care about the number, which is sort of a metric for demand for the test. And secondly, it does give the effect of kind of the compounding that happens in the real world with Signatera because as you start more and more patients with Signatera, they're getting repeat monitoring tests. So you do have this kind of waterfall effect of volume growth. And so when you do kind of a rolling 4 quarters average, you do have this effect of the quarterly target kind of increasing every time we set a new high. And so I think that that's a decent framework to kind of to measure where we are. And it allows for quarter-to-quarter variability, which is always possible, although as we mentioned on the Q4 call, we are off to a fantastic start in Q1.

That's great. And I want to touch briefly on the ASP side as well. ASP growth has been strong. How should we think about the sort of the ceiling on that ASP for Signatera? And maybe walk us through the puts and takes for ASP. What needs to happen to get to that to the higher end?

Yes. So when reimbursed for Signatera, we're paid north of $3,000 on average. And the ASP is about $1,225 as of Q4. And so what's the difference? Well, there's a lot of commercial payers that don't cover Signatera yet. And we can get into what is the path to change that. We are covered fairly broadly by Medicare. Medicare is a little bit unique as a payer in that they certainly have a different set of incentives from the typical payer where typical payers, if you get sick, there's a decent chance you're going to change jobs and you're not going to be on that particular payer's roles in the next year. So there's a bit of a disincentive to focus on the kind of things that can improve the care upfront, the kind of preventive care, earlier care in the cancer patient journey, whereas Medicare has just the opposite incentive. I mean they know that when patients don't get the chemotherapy that they should, for example, they're very likely to come back with Stage 3 or 4 disease. And of course, that's a human tragedy, but it's also very expensive for the system. So Medicare is now kind of broadly reimbursing Signatera across a range of tumor types. And so that explains the difference between when paid and the average selling price. Reasonable people can differ on what is kind of the ultimate realized pricing for Signatera. I tend to think without trying to set too high a bar or make all kinds of aggressive arguments, I just sort of center on meeting in the middle, around $2,000 as an ASP. And so what that would mean is over time, you have contracted rates coming down as volumes expand into the millions. And the fraction of time you get reimbursed goes up. It goes to -- you get to 80%, 85% allowed. One case study that supports that would be the noninvasive prenatal test. I mean when we launched Panorama, we were getting -- the contracted rates were in that kind of $850, $900 range and the ASP was around $350. So kind of similar proportions. This is kind of when we went public in 2015. And more recently, I mean, the ASPs are above $400. So 10 years later, as the NIPTs are now kind of solidly within the standard of care, you have a higher ASP even though the contracted rates have come down. Why is that? Well, just the NIPT is just in the coverage policy for all of these payers. And so the fraction of time we get paid is in that kind of 80%, 90% range. So I expect as Signatera becomes the standard of care over the next couple of years, I think you'll kind of go on a similar trajectory. And that's why I think about that $2,000 ASP. Another case study that perhaps would be a more bullish scenario would be in the experience of Oncotype DX. I recall when the test launched in the mid-odds dating ourselves a little bit here because we remember that. There's a lot of people that we work with that. I have no recollections. But their reimbursement was around $3,000 at the time, and it's more than that now. Why is that? Well, they're just -- there's obvious clinical utility for the test. They have wonderful long-term outcomes data, and it's broadly covered. So that's certainly a potential outcome for Signatera as well.

Got it. That's great. And then in terms of just hopping back to sort of volume, but it is tied to the clinical evidence that you've built out for MRD. How should we be thinking about the clinical trial readouts this year? I mean, obviously, you have a number of studies in works on Signatera. Some even longer term. But maybe tell us for this year, what's -- what do you think are sort of key sort of catalysts or studies that investors ought to be paying attention?

Yes. I mean the interesting thing about Signatera is that it's not a biotech in the sense of we don't have PDUFA dates. We don't have clinical trial readouts that I would view are truly binary events. Instead, what we have is every academic conference quarter in and quarter out, we have a continued drumbeat of a broad base of compelling data across a range of tumor types. So just one case study from this year already is the ASCO GU conference. We had incredibly compelling data in head and neck cancer, okay? I don't know -- I wouldn't present that as a catalyst or some binary event to investors because it's pretty consistent, honestly, with the data that we've put up in head and neck cancer previously and data we've put up in other tumor types. But it does meaningfully expand the use case for physicians that are dealing with a very difficult disease. And we're going to continue to do that every academic conference, you're going to see us on podiums, plenary presentations, publications in major academic journals. The key focus of our very significant R&D investment is in data generation and particularly within Signatera, but really across the business.

And maybe tied to that is the Foresight acquisition, the PhasED-Seq technology, how you've incorporated. Maybe tell us, first of all, is it incorporated across -- which assays it is incorporated across as of right now? And in terms of that enhancing the analytical performance, but then more importantly, the clinical performance or the clinical evidence overall, when do we start to sort of see some of that come through and because that could be really powerful if it's in a prospective trial.

Yes. I mean the Foresight acquisition fits in perfectly with our pre-existing strategy to just be constantly improving the Signatera test. Another example from women's health is our Panorama NIPT assay. I mean, we're on version 10 something on that order. We've just continuously improved the test -- the technology and the algorithm that we use for NIPT now is just light years better than it was a decade ago. And yet physicians are ordering the Panorama test. I don't know if a lot of our customers would be able to give you kind of a detailed bridge of all the technology developments we've had over the last 10 years. I expect kind of a similar trajectory with Signatera, where the current version of Signatera has a huge base of outcomes data now to your point, there's a lot of clinical evidence that shows that if you just follow the protocols with your patients that we've established in these clinical trials, your patients are going to do better, okay? That's going to continue to be true even as in the background, we're continually improving the test, all right? So what are some potential routes to improvement? Well, one example is dropping in the phase and structured variants analysis into the algorithm, okay? We feel like one of the most promising routes to massively improved sensitivity in the assay over time without having to pay a big penalty in terms of false positives is this technology of PhasED and structured variants. We had a program in flight to add that to the Signatera technology stack. And we were impressed and heartened to see a scrappy company in Foresight that I felt like had a lot of the same kind of values and intensity that we like to think that we have as a management team. And they had a lot of interesting technology in the same area as well and made a ton of progress in specific tumor types of particular interest to us was lymphoma. So this was a great match in terms of like just the people fit, which sometimes it's easy from the outside to kind of discount that. But I'll just tell you, it's super important to kind of have that kind of cultural fit when having a business join us. And it's a seamless fit, I think, into the technology stack for Signatera. So in terms of when will you see more data? Well, you have analytical validity already, right? I mean we've got very impressive down below 1 part per 10 million, limited detection, 95% at 3 parts per 10 million. That is -- as far as I understand, that's just -- that's light years ahead of some of the analytic validity we've seen from others. But that's not really -- those types of studies are not really what matters to physicians, right? I mean physicians want the studies that show them how the test performs in the real world and how it can actually help them care for their patients. And that's coming. I mean, just gradually over time, as we fold in the technology, this drumbeat of clinical trial data that I've been referencing will increasingly incorporate outcomes data sets that have the phase variant technology folded into it.

Got it. Just staying just very brief a bit more on Signatera. You're expecting FDA-approved version of Signatera this year with the CDx or atezo. How significant is that both as companion diagnostics for muscle invasive bladder cancer and more generally from having an FDA-approved assay? And how should we -- if I go back to the CGP days, an assay was initially in lung, then it got in breast and then it became pan-cancer -- got a pan-cancer approval. How are you thinking about that?

Yes. So very excited about the IMvigor011 data in the New England -- published in the New England Journal of Medicine. Just as a quick background, this is the second Phase III study that we run with Roche with atezolizumab, where the first study, IMvigor010 Roche had run as an all-comers trial in muscle invasive bladder cancer 8-year, several hundred million dollar effort to get that initial readout. Signatera didn't exist when that study began. But before they read out the results for the first IMvigor trial, they prespecified an endpoint to evaluate how did patients do among the subset of patients that were actually Signatera positive, okay, meaning we thought that we could see that they still had residual disease and were in need of further care. Unfortunately, the drug did not work on all-comers. It's very difficult to get these drugs to work on all-comers, as we all know. But they had a massive treatment effect among the Signatera-positive population. And that was a significant proportion of the clinical trial population, it was something like 40% of the patient population was Signatera positive, okay? So that was 2021, something in that time frame. Roche and Natera rushed around, we immediately set up a second Phase III clinical trial IMvigor011, where enrollment criteria was benchmarked on whether or not a patient was actually Signatera-positive, okay? So all the patients IMvigor011 are Signatera-positive, then they're randomized plus and minus atezo. And we saw very happily in the prospective outcome study, we saw the very same effect, massive, massive improvement for outcomes in patients that got the drug versus did not get the drug, okay? So now that that's read out, there's a couple of things to do. One, there's obviously a path to getting FDA approval for atezolizumab. Usually, when a drug performs this well in a clinical trial, the drug can be eligible for priority review with the FDA. So hopeful that the drug can achieve that. If that's the case, then there's usually about a 6-month time horizon to getting FDA approval. We would be in the label for the drug. So we've been going through the process with Roche for years to have a version of Signatera that is FDA-approved Signatera. It's just a separate lane in our lab that will run when patients want to order -- if they care to order the FDA-approved version of Signatera in conjunction with ordering the drug for their patients. So how does that affect us? Well, one, I mean, I do think that there's something to the idea that there are some physicians that are heartened by the FDA-approved stamp and the quality process required there. So I think that you could have some demand just from that process. I think more importantly, we've already seen hospital systems, physicians come to us and say, "Hey, we're going to implement the IMvigor011 protocol for our muscle invasive bladder cancer patients in our practice or in our system," which is lovely. I mean that becomes incredibly important for their patients and obviously drives incremental demand for Signatera. The other thing that it does is if you're -- one of the things that I've been quite heartened by over the last, call it, year or so is the evolution of MRD and recurrence monitoring in the mindset of the academic and community physicians as something that we really ought to do. I think a lot more physicians now really believe that Signatera is pretty inevitable as being part of the standard of care. This is a new category of cancer care that everyone should get. Over time, I would love it to be, hey, it would be like getting a CT scan. If you had a loved one that had cancer and they said they've never gotten a CT scan, you'd be quite worried about what's going on. I think that's where Signatera goes. The way that we get there is by having data sets like this. As physicians and hospital systems integrate, they center on an MRD vendor. Data sets like this are compelling arguments to center on Signatera.

So shifting gears a bit, but maybe a bridging question to women's health business, maybe in terms of the overall $800 million R&D spend that you've guided to for this year, it's up 30% year-over-year, meaningful uptick there. Maybe just walk us through the spend priorities. I suppose a lot of this is still on Signatera, but just wanted to get your thinking in terms of how you're rank ordering the different priorities on the R&D side.

Yes, we're really excited about this. I mean we remain extremely ambitious in our goals in the R&D operation. There's a very significant effort in new product development across all of the women's health, organ health, Signatera. And we've got a huge investment in clinical trials for the existing franchises, okay? And I think if you just rank order the dollars, obviously, Signatera is going -- the lion's share of that clinical trial investment is going towards Signatera to push forward on all these data sets I've been talking about. I mean that's how we're going to be able to show up at every academic conference with a very fulsome set of new data points for physicians and their patients. Beyond that, I mean, we're making, as we've talked about on various earnings calls and other outlets, we're making a very meaningful investment in colorectal cancer, early cancer detection screening. So we've got the FDA-enabling FIND study now that's in full flight that's actively enrolling. And that's a very significant investment this year, and that stepped up meaningfully as compared to prior years on the back of some very strong preliminary data that we were able to generate. So those are the main kind of areas. I mean, product development across the portfolio, clinical trial efforts across the portfolio, both of which the dollars kind of center on Signatera, but there's important investments happening kind of across the business. I would also just mention alongside that very ambitious bump in R&D investment, overall operating expenses are going to grow about 9.5% at the midpoint this year, okay? And can there be plus and minus around that? Of course, there can. We're not going to shy away from making incremental investments if they have good ideas arise in the middle of the year, things like that. But I think you're all seeing on an overall OpEx basis that we're getting a lot of leverage on the business. SG&A at the midpoint is roughly flat, slightly down, same caveats, as I just mentioned. But the point is that we've been needing to make very significant investments in the commercial and customer service channels here just to be able to offer particularly Signatera, but all the products in a first-class way to every single American that wants to test, and increasingly more and more patients globally. We've gotten to a point now where we've got a critical mass of people in the commercial channel. And we've been continuing to generate -- to deliver, I think, operating leverage in the business over the last couple of years. And I think that really goes into stark relief with the guide this year.

Great. On the women's health business, Fetal Focus, we talked about quite a bit on the quarterly call as well. That's a product that you launched into the market. There is a competitive assay, mother-only assay that is in the frontline setting there as well. But maybe just tell us your considerations on marketing Fetal Focus. And one question we also get is, can Fetal Focus potentially cannibalize Horizon volumes? Or is that sort of more complementary to the overall portfolio?

Well, I think just to take your last question first, I mean, those types of questions are not really -- you might be surprised, but when we're thinking about new product development around the table inside the company, it's not really top of mind. I mean it's really -- you kind of have to start, as we've mentioned in many of these types of settings, you really have to start with what are the questions, what are the concerns, what are the problems that patients and physicians are having and how can we solve them? And if we can solve important questions, then you got to go do that. I mean I think that's got to be your North Star in terms of product development. Having said that, I don't think that there's -- it just happens that there's not kind of massive cannibalization between the carrier screening business and the Fetal Focus offering. If anything, it's incremental. I mean mom will get a carrier screening test. And if, turns out, she's a carrier for an inherited disorder, now she just has an extra option. We can evaluate the fetus for a selected number of inherited disorders or we can incorporate dad for a second carrier screening test. And either solution is great as far as we're concerned.

Got it. Just briefly on Panorama ASPs and costs. Wondering what levers do you have to push? At this point, you talked about reimbursement already being solid for this assay. You touched on that. But just what levers do you have to push ASP higher at this point and maybe costs lower in terms of sequencers or other chemistry, any scale improvements?

I think really across the business, I mean, I'm cautiously optimistic that we can continue to drive realized pricing higher. And as I described, maybe too long of a description earlier, but the different -- the point is that, that doesn't imply that we're rising our contracted rates or anything like that. We're just getting reimbursed for covered services a higher percentage of the time. I mean that's been a major driver for us for women's health even in the past year, very significant improvement in these, what really are kind of standard of care. If I had a better word than boring, I'd use it. But I mean, products that people are quite accustomed to using, we're still making meaningful improvements in the fraction of time we get paid when the test is already covered. I think that's -- obviously, there's a lot more green space to run in Signatera just because of the journey that we're on. I mean, right now, covered by Medicare, can get paid more broadly by commercial payers over time as we get into the guidelines. A couple of areas of just immediate low-hanging fruit there include Medicare Advantage plans. So Medicare fee-for-service patients when we have a covered test, we submit the claim to Medicare, the traditional Medicare program and we get reimbursed 99% of the time, like you would expect, like we should. When we submit that same claim to Medicare Advantage payers, the reimbursement rate is more like 80%, okay? So that's pretty disappointing. It's up from what it was 30% a couple of years ago. So we've put in a ton of time and effort, but there's still more effort that unfortunately falls on us to go and execute to go and just make sure that we're reimbursed for covered services. That plus kind of turning the same crank for commercial patients that live in states where there's a biomarker law in place. Those 2 factors give us a lot of activity for us to just continue to drive realized pricing by increasing the fraction of time that we get paid when we should get paid.

All right. Continuing on the women's health actually. But maybe actually an adjacent business to that is a rare disease for newborn testing, and you obviously had a product launch there recently. Maybe just give us -- how do you think about that market overall?

Well, I think it's a very interesting space. Our history has been one of kind of gradual expansion into adjacencies from areas of strength, either technological adjacencies or commercial adjacencies. So I'll give you an example of both. I mean, our first major kind of flagship product was this noninvasive prenatal test. And then we deployed really very similar technology to then launch what we think is a best-in-class organ transplant rejection monitoring test and the Prospera test. And then that is that core technology has a lot to do with how we ended up building Signatera, right? So there's technological adjacencies across each of these kind of flagship products. In each of these flagship products, there's actually also commercial adjacencies. So we have a very large carrier screening business. There are a number of -- there's a number of labs that offer excellent carrier screening products. We're a leader in expanded panel carrier screening because one orders the carrier screen test at the same time that one orders the NIPT often, okay? And so that's kind of a commercial adjacency. There's a potential for there to be a commercial adjacency in the rare disease space, particularly within hospital systems. We've had to get quite good at making our offering available to hospital systems for Signatera. And so then when you have a flagship product and you've got that conversation with decision-makers around the continuum of care, you have these conversations about what else can we offer? And what other problems do you have? Where can our technology be useful? We got a huge amount of history and experience in this type of testing. I mentioned the carrier screening product. Renasight is another important product that has some similarities with the rare disease space. And so that's something that we're actively working on. Once the -- we're continuing to move forward with that in the field. After we've kind of gotten through kind of a formal announcement of product launch, we're going to be excited to share more with the investment community on as well.

Got it. Okay. In the last minute we have here, maybe just coming back to the CRC screening, a large market, then there's MCED beyond that. Maybe just give us your view on this FDA approval timing for this. There's some competitive products in the marketplace. And how are you positioning for MCED given what we recently saw was a trial failure in the space?

Well, I think step one is to understand that the early cancer detection opportunity within colorectal cancer screening is itself a massive opportunity, and I think quite discrete from the overall MCED market. In colorectal cancer, early cancer detection screening, you got something like 40 million people that are just not -- they're just structurally, they're not going to get a colonoscopy and they're probably not going to get the Exact Sciences test, unfortunately. I'm 46. I had a colonoscopy for the first time last year. I now understand why that is. It's like an unbelievable deal. I work in a company that serves cancer patients, and I delayed my colonoscopy 3 different times. I just -- I had something to do that I couldn't reschedule and I made it happen. But I still had the privilege of being able to arrange my schedule so that I could take 2 full days off to get this thing done and then recover. And a lot of people, like very understandably just don't have that level of privilege, right? So they're going to need something more efficient. They don't -- they would rather not do nothing, but the current modalities just don't accommodate their needs, okay? So that's a huge and pretty distinct market. You need to test something like once every 3 years. So that's something like 13 million people a year that need a test that needs something that are getting nothing, right? They're defaulting to nothing right now because the form factors just don't accommodate them. These plasma tests are very important as a result. I mean they can make a huge difference to public health as a result. It takes an enormous amount of infrastructure, technical talent, grit and know-how just to be able to launch one of these products. I mean there's an enormous technological lift that we've had to go through. You've got to pre-spend hundreds of millions of dollars just to get to the end of an FDA-enabling study to see if your product works. So it's not something that really lends itself to small start-ups and you need to be kind of bigger companies. The companies that have and will have offerings in this space, kind of meet that criteria and so do we. I'm very excited to get to that FDA-enabling readout and launch a product here. I think that's one of the ways that we've driven a lot of shareholder value is we've been able to do this internal technology development in large markets and then launch. And when you launch into a large market and you're solving an important problem like that, you go from 0 volumes and 0 revenues to every dollar, those first couple of years that you're in that business, these are growth dollars. And so this would be another kind of secular growth driver for the company that just layers on top of all the other things we have going and really comes at a time in '28 when Signatera, I think, would just be hitting its stride.

Yes. Well, on that note, Mike, that was great. fabulous. Thanks for your time here. We're out of time, but thanks for all the comments.