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

Good afternoon, everyone. Thanks for joining us. My name is Robby Bamberger, senior research analyst, Life Sciences Tools & Diagnostics at Baird. I'm pleased to have Mike Brophy, CFO, here with us.

Yes. I guess before we get into specific segments, it would be great for you to just giving a quick snapshot of the company coming off of Q2 print, what went right in Q2? Anything you'd point out to investors about this quarter?

Yes. I mean we had a very strong quarter, all-time record revenue growth. We had -- we grew something like 40% year-on-year on the top line, which is quite amazing just given the scale of the revenue that we're at now. Another strong gross margin quarter made progress on kind of leverage on OpEx, record units kind of across the board, had a very strong women's health quarter. Usually Q2, as many of you know, is a softer quarter for us seasonally. And NIPT was up mid- to high single digits year-on-year. Carrier screening was up low double digits year-on-year on volumes. And both -- on both metrics, we did a little better than that on revenues. So that was a really outstanding outcome driven by a couple of key product features that we've launched over the last year. Prospera, the transplant business continues to ramp, continues to be kind of a secular transition in our favor in favor of cell-free DNA testing for transplant patients. And then, of course, Signatera had an all-time record growth quarter. The prior sequential growth units quarter had been Q1, and we did something like 25,000 growth units, 24,000 growth units, something like that, and we did 34,000 growth units in Q2. That was somewhat aided by weather. The compare versus Q1, Q1 was a little bit deflated just by some bad weather in the Midwest in Q1. But even taking effect of that outstanding momentum in that business, fueled by all the things coming together. I mean you've got outstanding clinical trial data continuing to read out, getting into guidelines in muscle invasive bladder cancer. And then just more generally, I think we're benefiting from a -- from a generalized wave of adoption for MRD as it increasingly becomes part of the standard of care for cancer, which is very gratifying to say as I've been coming to the Baird conference for 11 years. And so -- and we've gone from this being a glimmer of an idea to being a reality. So happy to be here.

Yes. That's a great overview. Maybe focusing on Signatera units, which is what everyone has been focusing on. You added 34,000 tests last quarter sequentially against the prior record of 25,000 tests. You told us the right way to model this is use the trailing 4-quarter average of sequential adds, and it's now 25,000 to 26,000 sequentially. Is that the right bar for us going forward? And how do you think about the shape of that from here?

Yes, I think that's the right bar. I mean I think that that's the way that we measure things internally. And the reason why we do the rolling 4 quarters average is that just smooths out all these kinds of random events in terms of number of receiving days or holidays or weather or anything like that. If you're willing to do that, the growth in units seems very smooth. It looks like it's just kind of up and to the right. And it does give effect for the fact that this is a repeat monitoring test. So you have this kind of installed base, new patients starting every quarter, but then they stay with you for a number of years and deliver repeat tests over time. And so that rolling 4 quarters average continually gets bigger, and I support that. I mean I think that's something that the business can continue to clear that bar, but it does kind of smooth out randomness quarter-to-quarter, as I described.

And you flagged weather depressed first quarter a little bit of the base, and that's why 34,000 looked a little bit larger. So stripping out weather, what would you call clean underlying adds for this past quarter?

It's hard to measure weather exactly. It's kind of -- it's a judgment call. Is it 5,000, 6,000 units that we missed in Q1 that we ended up showing up in Q2. It's something on that in that range. So that does kind of get you back to the bar -- a good bar, I think, being kind of the rolling 4 quarters average again.

And then you attributed Signatera drivers in the quarter to a few things. It was FDA halo effect, 2025 commercial and medical affairs hires reaching productivity there and then the cadence of data readouts, a little bit of weather benefit as well. And then if you had to rank all of those, how would you essentially rank them by what contributed the most to the quarter?

It's hard to know because when the units come in the door, they don't come attached with the note describing which of those factors drove the order. I mean you have -- I'll just summarize a couple or expand on a couple of those drivers. So at the beginning of 2025, having been intentionally subscale in the commercial business in the commercial kind of sales staffing effort, we decided to go on a large sales force expansion. So we had something like 150 to 200 reps, something in that ZIP code, selling Signatera, and we're now north of 300 reps. We got most of those people hired in the first half of 2025, and we take a long time to have these -- to see these -- the reps kind of get to full productivity. It takes 9 to 12 months. So that just means that Q2 of this year is the first year -- first quarter where we really had fully productive quarter with the sales rep. So surely, that was an important driver. In addition to that, last November, we were in the New England Journal of Medicine, along with Roche in the IMvigor011 study in muscle invasive bladder cancer. That was a landmark study for us. I do think that there's a halo effect that happens when you have outstanding data in Signatera in a particular tumor type. I think that does kind of drive kind of general adoption across the franchise, which I can get into more. And then we've just continued to have a drumbeat of additional tumor types getting submitted from MolDX and a bunch of other things happening in the business, additional feature sets getting launched. We finally -- we did get into the clinical practice guidelines, the NCCN guidelines for muscle invasive bladder cancer, but that really didn't happen until June. So I think that was probably a modest benefit in Q2, and hopefully, that can help us in the back half of the year.

Yes. And as of the end of Q1, you had talked about 50% to 75% of sales force was ramped up. Now it seems like Q2 is fully ramped on your sales force. Looking forward, is there another commercial expansion plan? Or is the current team that you have right now in terms of reps, what you need going forward?

The current team is what we need. We're always running experiments. We're always plus or minus 10 or 15 reps trying to run experiments and see what works. But in terms of an intentional very large sales force expansion, that's not something that you want to undertake all the time. I think it's the type of thing that we've seen a lot of different companies in our space and adjacent spaces they'll do a big sales force expansion, and it's actually a negative for a period of time. I think the commercial execution has been so smooth here that we kind of take that for granted, but it was a great achievement by Steve, our CEO, and the sales team to get that done. It's not something you want to do every quarter, though.

Can you talk about just the average patient and quantify for every new patient that comes on, roughly how many surveillance tests does that generate over the following 12 months?

Well, so over the course of a cancer patient's journey, we generally see that they end up ordering about 10 Signatera tests over the intervening 5 years once they start with us. That's -- the number of tests that they get is supposed to kind of match up with their normal clinical workflow for that cancer type. And so the numbers can vary tumor type by tumor type. And one thing we're not trying to do is to change that pre-existing clinical workflow. We're not trying to have the patients run a bunch of additional Signatera tests beyond what their normal checkup workflow would be. We just want to -- we want to slot in there with the existing workflow. And so that's been quite sticky and quite consistent for us really from the get-go. I mean, really from 2020, 2021, we've seen a very consistent utilization on a per patient basis. What we've also seen is really from the beginning, we've had excellent retention of these patients over time. What we found is when we build a blood test that's specifically designed for an individual patient's tumor and we deliver that report to the patient, that's a very valuable piece of information that the patient really cares about. Then they get these longitudinal reports from us over time, and they use these reports to help kind of triage what progress are they making? And so there's a lot of demand from the patient along with the physician to stay with us as they go into remission to continue to monitor just how they're doing in their life.

So Signatera ASP, it's moved up about $25 per quarter for 3 straight quarters. You're at $1,275. The 2026 guide assumes flat from here, maybe $25 of upside. Given everything you've described on coverage, why is the guide flat? And what would have to happen for that ASP to move up for the rest of the year?

Yes. I think when we set out the model for the beginning of the year, I mean, we were hoping to get to $1,250, and we're way ahead of schedule with being at $1,275 by Q2. Molecular Diagnostics is a tough business, and it doesn't always work out that you just get $25 as an entitlement as a bump to ASP every quarter. There's always puts and takes when it comes to realized pricing even in something as well validated as Signatera. I still think that the longer-term kind of realized pricing potential is still very much in place. And we've talked about getting to kind of a $2,000 ASP over time. That effectively means very significant kind of list price erosion over time. So we'll see if that actually happens. But I think that we can get there as Signatera becomes more and more kind of a boring part of the standard of care and gets more broadly into clinical practice guidelines.

How many quarters from when a coverage decision happens to when it shows up actually in revenue with an ASP?

Well, for example, when you get MolDX coverage decisions, it should show up the following quarter because those are set up to turn on immediately upon the decision.

Yes. So then you have 7 MolDX indication submissions in. How much of the $725 ASP grind from $1275 up to $2,000 longer term comes from those 7. I guess I'll start off with that.

Yes. So we've quantified that previously. I mean we -- it's a judgment call because it depends on the evolution of your mix by cancer type. But I'd estimate that roughly $150 to $200 of ASP would come from just getting a broader swath of coverage decisions across a broader set of tumor types from MolDX. Beyond that, there's additional opportunity in driving those same coverage decisions to get compliance for commercial patients that live in a state where the state mandates that commercial payers offer their commercial patients the same level of care that Medicare patients get. So you'll hear that referred to as a biomarker law, state. So that represents additional upside. I think from the $1,500 range to the $2,000 target, to make that second move, I think you're going to need to get into some additional clinical practice guidelines. So muscle invasive bladder cancer is a great start. It's actually our third tumor type in which we're included in the guidelines. It's probably the largest to date. But I think to come over the next couple of years, we'd expect to get into the guidelines in colorectal cancer and in certain areas of breast cancer. So I think if you got those 2 things, along with the momentum from coverage decisions from Medicare and broader clinical adoption generally, I think that more than supports a $2,000 ASP.

And which of the smaller indications do you think becomes the next $100 million opportunity?

I don't think that there's any one indication per se that's particularly hot to trot as far as physicians are concerned. Our vision for Signatera is that you end up using it very much like a CT scan. If any one of your loved ones was undergoing cancer treatment and they made a comment to you around like, "Hey, you know what, I've never gotten one of those CT scans before." So looking at that you'd be quite concerned with like the level of -- I mean, of course, you're going to get a CT scan. We need to check on how you're doing as you go through your cancer journey. And we view Signatera very much the same way. It's increasingly becoming that in particular cancer types. So what we're seeing in terms of the adoption of the product is much more generalized adoption in the clinic, where it used to be very rifle shot, hey, we've got this new Stage III colorectal cancer data. And so that's going to drive adoption in that specific indication. We're seeing much more general adoption where the doctor kind of understands how Signatera works. They've got some familiarity with it. It's the same assay. It's a pan-tumor assay by definition. They understand the patient reports. They understand how it works. And so they're using it more generally in their practice, and we're seeing that come through in our volume mix.

Yes. And then in June, the Japanese PMDA approved Signatera for patients with colorectal cancer. You expect a commercial launch later this year, pending pricing. I guess where does that stand? And then what should we be assuming for Japanese pricing going forward?

Yes. The next step -- so it's taken us something like 5 years to get from the starting point to getting to a Japanese FDA approval. It's an enormous amount of data that we had to generate. Very proud of the team for reaching that milestone. The next step now that we have the FDA approval is to be priced by the Japanese Health Ministry. So that's an ongoing process right now. I expect to have the results of that for colorectal cancer this fall. And then that would support a launch early next year. So we're amazing, we're right on track relative to the schedule, I think we laid out several years ago for our plan in Japan. Very excited about that launch. It's surprising to me but continues to be confirmed that the number of new colorectal cancer diagnoses in Japan is very similar to the number of diagnoses in the United States, even though they have about 1/3 of our population. So obviously, colorectal cancer is a very serious problem in Japan. You can see the urgency with which the problem is being tackled in part by how quickly Japan has embraced Signatera in its clinical trials. So a lot of our best outcomes data in colorectal cancer is actually Japanese data because the KOLs in Japan were very keen to adopt Signatera and incorporate Signatera into the CIRCULATE trials in Japan very early on, 2018, 2019, 2020. And so that's given us time to get some big prospective readouts. There's already -- even though we're not yet on the market, there's already a very strong clinical practice guideline in favor of Signatera in Japan. And we've got a lot of experience running the CIRCULATE trial there with a bunch of different centers. So all that augurs very well for being able to have a big impact on colorectal cancer in Japan. One note of caution is that I would just remind you that this is a new territory for us. There's a lot of different variables in Japan that we're going to have to learn about. I'm sure we don't even know what the challenges -- what some of the challenges are going to be. We're going to have to tackle those. So if you're looking at this over the next couple of years, I think Japan can be an outstanding opportunity. And '27, I view this as there's a lot of upside opportunity, but it's also a year where we've got to learn and figure out a new market.

And you have a strong partner in Japan. You're also adding direct sales. How do those economics work across those 2 channels? And does Japan carry a different gross margin than the U.S.?

Well, we'll have to figure out the pricing first before I understand what the gross margin is. I mean, historically, Japan has priced these molecular diagnostic tests roughly in line with the way that they're priced in the United States. And so that's our hoped-for outcome, but we're going to have to see where we go on that. I think in terms of the commercial effort, you should consider it a direct effort from us in Japan. We'll have our own direct sales reps. We're very happy to be partnered with SRL in Japan also, which will help us with a bunch of logistics as well. So happy about that. We feel like we're well set up to get a good launch going there.

And then what's your timeline and path forward for bladder in Japan?

Yes, great question. I mean now that we've gotten the Japanese approval for Signatera, we hope that our cycle time for incremental tumor type coverages can be faster. So hopefully, next on deck can be the bladder cancer approval. I'd love to have that next year, and I'd love to stack on additional tumor types in the relative near term.