Natera, Inc. (NTRA) Earnings Call Transcript
May 30, 2024
Earnings Call Speaker Segments
All right. Welcome, everyone. So my pleasure to be hosting CEO, Steve Chapman and Chief Business Officer, John Fesko from Natera. Glad that you guys can join us at the conference.
Thank you. Thanks for having us.
Okay. Absolutely. So maybe I'll kick off with you, Steve. First quarter performance, really an impressive one. You were expecting some sort of contribution from some of the accounts that you had acquired. These were some of the [ meta ] accounts, but still the beat was sizable. Maybe just walk us through all of the things that were positive surprise? And maybe just touch on the sort of catch-up or true-ups as well? I mean, sort of what should be the expectation on sort of true-ups going forward?
Yes. So yes, first, thanks for having us. We saw very strong revenue growth in Q1, that was driven by volume outpacing our expectations in both Signatera, where we saw record growth, women's health, where we saw one of the best growth quarters we've ever had as a company and in Oregon Health, where we also saw very strong growth. We combined that volume growth with improvements and continued strength in average selling prices, and that resulted in the upside that we saw in revenue. I think the -- there was also another kind of major readout in the quarter, which was that we got the cash flow breakeven, and that's been a goal for a long period of time. So it's good to see that along with the very strong gross margin that we saw. But one of the things I think that's most exciting, though, is that we've gotten the cash flow breakeven, while we're continuing to invest in the company. For example, you saw that we increased our guidance for operating expenses as we're putting our foot on the gas and adding additional commercial strength, particularly in the Signatera space. We're continuing to invest in research and development. And then we still have several of the large catalysts remaining in the future that I think could provide upside to the business, for example, the readout of the Altera study in Signatera or the 22Q guidelines in the prenatal business.
I want to touch on the women's health volumes you talked about, I mean significant increase there. I think 85,000 year-over-year increase in first quarter. Consensus seems to be assuming first quarters by far the best quarter of the year, and that's usually not the case with Natera, just in terms of the way the next few quarters should work out. But so maybe just talk to us -- what's driving that conservatism versus was it just sort of onetime things that came in that give you more confidence about first quarter and then the rest of them still moderate from there.
Yes. So we saw really robust volume growth and revenue growth in the women's health business. And some of that growth was driven by the acquisition of the Invitae business. But actually, the vast majority of the growth was organic from our existing accounts and from our direct sales team, which I think is a good -- good sign overall for the health of that business. Generally, in women's health, and maybe this is -- because we don't really break out the volume necessarily for women's health temporarily. But usually, what we see is Q1 is the strongest or near the strongest for the year. And then we see a dip down in Q2 because there's seasonality. There's just fewer people reaching that screening window during the quarter. And this has been the case for 10 years. And then we see in Q3, things start to shape back up and then kind of Q4 will back up again and then Q1 is always really high. So it's not surprising to maybe some conservatism that Q1 would be modeled as sort of the highest quarter for the year. But I think with the stuff that we have in the pipeline right now and the new Rh testing launch I think that could be conservative.
And what -- was there anything fundamental behind the -- just the organic growth that you saw in women's health? Was there any other unique driver to it? Is it just certain additional sales reps on the commercial side? Or is there anything else that you point it to?
Yes. I think what we're seeing is that existing customers are using the products more and that we're growing new customers and retaining business, and we've improved on each of those metrics. And so -- of course, as we've been in the business for a long time, we generated a lot of data. And I think that strength of the data and significant amount of peer-reviewed evidence, the unique differentiations of the -- both on NIPT and our interior screening, where just clinically, we have highly differentiated products, driving a lot of the decision making from physicians.
Switching gears to Signatera, obviously a major topic of interest for investors. Another strong signature quarter in the first quarter, I think, 115,000 volume, 60% year-over-year. I mean I appreciate the guidance is assuming sort of maybe high single-digit thousands in sequential volume growth per quarter. But what's -- maybe just help us understand, given the momentum you have, the number of indications that are in place, the number of -- I mean, you have good reimbursement as well. Clinically, the product is getting more understood out there, penetration is low. So just help us understand sort of what should be the growth trajectory here for either on a sequential basis or year-over-year?
Yes. So Q1, we had a really strong quarter. I mean I think of the oncology business overall, we grew sequentially versus Q4 2023 by 17,000 units, which is a record, and we're seeing a lot of continued interest in Signatera. Particularly, I think, coming out of the ASCO GI conference, which is the time for physicians in the colorectal setting to kind of reset and take a look at additional data and technologies that are out there. We saw a nice increase in new physicians using the product and also increasing depth within the existing customer base. So today, about 35% of all physicians, oncology physicians are using Signatera, we think as Altera reads out as we continue to educate doctors through our medical liaison team and medical health team, we'll see increases in utilization in new accounts. We're also in a position, where we have a lot of data beyond colorectal. We're seeing additional submissions go into MolDX. So there's a lot of upside opportunity, and we're excited about the trends that we're seeing now.
John, maybe I'll ask you on sort of the -- on the reimbursement side, engagement with the commercial payers. What are the next steps for Signatera?
Sure. So most of the power behind the ASP today is from Medicare and commercially administered Medicare Advantage plans. The Medicare Advantage plans, it takes some time to dial them in for any new product or technology. And so we're seeing a ramp, which is probably the biggest driver of commercially administered Medicare Advantage, and there's good runway there still to help drive ASP. Separate from that, on the commercial side, we've had some plans that have adopted coverage policies, largely regional blues. But sure California was the first to do that based on the health economics behind CRC and Signatera and cost savings associated with chemotherapy avoidance. But we also have this trend of state mandates coming through, where I think 15 or 16 states have now voted to require commercial plans to match what Medicare is doing or what's recommended by guidelines. It's very early days in terms of how that's getting implemented, but we have seen policies tick on with Blue Louisiana, Georgia, Asia, CN, Texas, Uruguay as a result of those state mandates. And we're just starting to pull payment through with some of those regional plans, which will have a positive effect on ASP as well. Another nice thing about the way Signatera is structured is with the commercial plans, we're pricing based on our ADLT rate per 9 point. So the pricing with the commercial plans is better than Medicare on a per test basis.
Got it. And in terms of the ASP pick up, how much of that would you say is still sort of indication dependent or the mix of patients that -- commerical versus Medicare mix, and that's shifting more towards Medicare. So there's a bit of an ebb and flow there before you get to more commercial correct?
I think you see slight differences in mix. It's not that meaningful. For example, bladder has a much higher older population than breast, which is many younger patients, but largely the mix is similar.
Yes. I think the mix of kind of commercial versus Medicare Advantage versus Medicare has been pretty consistent over time. And one of the things that we're seeing is that each indication is kind of growing proportionally because physicians, when they start using the product, they -- they like the product. And so as breast grows and colorectal also grows in most of these bladder also grows in immunotherapy growth. So that the difference in sort of proportion of the mix across the business is -- is similar as the volume grows.
Got it. I have to ask the question because I mean you -- a number of companies point to, well, Natera has done a phenomenal job with MRD. But then they have their -- then they talk about their own product that is launching in the market place. And there are multiple companies attempting to enter the market. Obviously, you have some litigation ongoing, and there are other ones that are looking at maybe whole genome and other approaches and whatnot and are entering this market. How do you think about sort of overall the competitive landscape? You have a strong clinical evidence stack already. Maybe just help us understand how should we -- what are the things that you're watching out for in the competitive landscape and the actions you're taking to stay ahead?
Yes. So I think, first, we've been in an environment, where we've been in very competitive fields, where we've always done really well. And I think you have to focus on clinical data development, innovation within the portfolio, having a strong commercial and medical affairs team, and then having a very good user experience. And so we combine those four things together and that sort of the internal algorithm for how we're successful. But I think here, we've got a unique advantage in that we've generated so much data, 50, I think, plus peer-reviewed papers at this point. Multiple indications that are covered. But we're not done there. We have many randomized trials that are going to be reading out. And so I think when competitors come in and they have an analytical validation or maybe a kind of a just a standard clinical validation, and we have randomized outcomes data, interventional randomized outcomes data, I think, it's going to be challenging for them to compete with that. In addition, I think we've built out the commercial infrastructure and just the logistics and operational infrastructure in a very significant way. We have 250-plus commercial employees in the field. We have full team set up to procure tissue and mobile phlebotomy samples or EMR systems were in network with all the insurance companies. So there's a long way to go from having analytical validation to actually getting a product reimbursed and getting the product on the market. In addition, we have multiple different submissions that are in MolDX to continue to expand our indications. And then we've got a robust research and development pipeline as well. Where we're -- I think we're at peak levels of R&D spending now. Despite getting to cash flow breakeven, we're still spending a lot of research development in -- and that's going to scaling, reducing costs, but mostly to clinical trials and innovation in the core business, MRD, women's health and Organ Health -- not sort of side projects but really making sure that we're ultimately the winners in this individual spaces.
If you look at the -- just a quick sort of question that I get from just based on the first quarter growth for Signatera, can you maybe just describe the demand you're getting from the existing oncologists versus neuro-oncologists and sort of same-store sales versus new accounts?
Yes. Yes. So -- these are metrics that we track, obviously. We look at within the existing accounts when they start using us, are they continuing to use us and what the scale of the utilization -- and then what pace are we able to bring on new oncologists. And I think what we see is when doctors start using the test, generally, they continue using. And what happens is they get comfortable with one indication or maybe one use case within a particular indication and then they expand that utilization. And so I think that's a trend of continuing to for physicians to offer the testing to more and more patients within their practice. There's also a trend of starting off in, say, colorectal and then expanding community practices, where they're seeing multiple different tumor types, expanding to maybe breast or lung, for example. And then I think, when it comes to closing new business, certainly, there's opportunities where there's doctors that are maybe waiting for data or they haven't started the testing yet. And generally, the reason why we're seeing 35% or maybe now 40% of the doctors using Signatera is because they're waiting for the randomized outcomes data. And the good news is that we have randomized data coming and prospective randomized outcomes data. And actually, Altera is going to be read out in about 90 days, and so it's coming very soon. But we're also doing many other randomized studies in colorectal, I think we have four randomized trials underway. In breast cancer, we have multiple randomized studies and in muscle invasive bladder. We have two randomized trials that are underway, one that's actually going to read out in 2025. So again, just going back to how do we move the market forward and how do we expand the utilization. I think the data reading out serves to not only be a competitive differentiator, but also to help us further penetrate the market and improve reimbursement.
Just staying on Altera, maybe just help us understand what -- again, remind us the trial how is it different versus the GalXC data, what -- how to think about sort of some sort of benchmarking and when this data does come out -- so overall, it does look -- appears to be meaningful, but maybe just walk us through how the setup is for Altera?
Yes. So the Altera study is part of the CIRCULATE-Japan study, where we rolled more than 5,000 samples -- or 5,000 patients total, we're monitoring the patients for several years, and we're looking at clinical outcomes up to 2 years. And so initially, we read out the results of the GalXC arm, which is the observational study, where we look at the patient was MRD positive, were they more likely to recur if their MRD negative? Were they less like they recur? And then the patients that are MRD-positive, if they got adjuvant chemotherapy, we were able to show that the Signatera was predictive of who would benefit from adjuvant chemotherapy. For the patients that were MRD negative, we were able to show that there's no benefit of getting adjuvant chemotherapy in that cohort. Now that was an observational study perspective, but observational. Thing about Altera it's now the randomized arm. And it's looking at particularly at MRD-positive patients and escalating them to get additional treatment versus placebo, where they wouldn't get any additional treatment. And so the fact that it's randomized outcomes data done in a prospective manner makes it unique versus any data set that's been presented before. I think, in fact, this might be the first readout of data of this quality in the MRD setting. So there's a lot of excitement about it. And I think it does have the capability to -- if the readout is positive to make a significant impact in the sector.
Yes. And I look forward to that data set. And what does it mean for NCCN guideline inclusion, obviously, NCCN historically, they have seen that they look for totality of the data, so to speak. But obviously, with an evidence like this, what's your expectation for NCCN?
Yes. So we were really pleased with the NCCN guidance that came out earlier this year that was supportive of Signatera. I think, obviously, when you have a randomized data reading out of this scale, that's going to be considered by the committee. Look, we we're getting close to the readout of the data. So I think we have to see how -- what it looks like and assuming that it's positive, I would imagine that that's something that would be taken under advisement by the committee. But we have a lot of data that's being generated now a lot of randomized studies in CRC. And I think certainly, that's all pointing in the right direction for getting deeper and deeper into the guidelines over time.
Okay. Another catalyst that you guys talked about is American College at OB-GYN and ACOG. So in the 22q micro-deletion there. any updated thoughts on when we can potentially see that? And again, remind us on the potential for upside there?
Yes. So 22q is a very important disorder. The incidents in the general population about 1,500 pregnancies. We invested into a 7-year clinical trial, which was called SMART study, and we were able to show that we can detect 22q with very high sensitivity and a good specificity and high positive predicted value. We believe the American Congress of Obstetrics and Gynecology is reviewing the data and will determine whether they think evidence meets the requirements to put out a society guideline. And certainly, kind of -- on the surface, it would appear that it does meet the criteria, but we have to see where the committee comes out. But if there is a positive guideline, I think Natera would benefit from that. Our test is highly differentiated. There's sort of two types of tests. There's the SNP-based microdeletion test which has a very high sensitivity, high detection rate and a very good positive predicted value particularly in areas, where there's ultrasound findings, we've seen in some studies, 100% positive predictive value. Then on the other end of the spectrum, you have the load detection rate 22q tests, which are from some of the other competitors that are out there. And I think the physicians you understand the differences of low detection rate, 22q assays versus what we're doing with the SNP testing. And I think ultimately, that's going to be a competitive differentiation as well.
Got it. I just want to touch briefly on ASP again, and maybe John can chime in on this as well. When we look at the ASP increases here, we saw in carrier screening, but we're not necessarily going back to the levels or maybe we can to the -- when things were reimbursed for enhanced carrier screening, but ASPs come down meaningfully since then, but now it's recovering. Maybe just tell us what's your expectation for ASP recovery on the horizon side and panorama?
Yes. On the Horizon side, I think you have to remember that ACOG, in our view, has a positive guideline already. And for many years, the Blue Shield Association has a positive recommendation on expanded carrier screening. We've seen more state Medicaids begin to cover expanded carrier screening. Independent of any kind of recent guideline change we've seen plans tick on by instituting a positive medical policy. So there's been a steady kind of climb from that. There's a few holdouts in the national plans that are claiming to want an even stronger guideline, even though there are guidelines in place from ACMG, from NSGC, from ACOG. And we've heard that one of those may be in the works. But independent of that, we've just seen a drumbeat of plants putting on positive policy and I think, we've also benefited from some operational improvements in terms of our procedures for collecting medical records and other information necessary to get claims paid. So those are the real drivers behind the lift in carrier ASP.
Okay. And I know there was some lift from prenatal from the California program coming out of that. So that helped, but overall, how should we think about just the ASP improvement in the prenatal business leaving ACOG aside?
Yes. I think there's been stable improvements now. It's kind of a trend we've seen. And we think there's some continuation there. As Mike indicated on the earnings call, the guidance that we put out assumes sort of kind of roughly flat, stable ASPs prenatal. And I think there's some opportunity to improve on that. Of course, we're doing a lot of things to both work with payers to improve the operations and also expand coverage Altera said that today, maybe we're not getting paid. And so I think there is upside.
Okay. I want to touch this on the point of CRC screening was in topic last week, there was an ADCOM meeting and discussions around that investors had a lot of questions. This is a market that does get a lot of attention doing just the sheer size of the market. Maybe update us, where you are in your thinking in how you want to position in this market? Any sort of early data sets? And when can we potentially see those data sets?
Yes. So -- what we said previously is we think soon now probably this quarter or maybe early Q3, we'll be in a position to release some case control results, but -- and I would say we'll be building on that with an additional readout in the fall, which will include probably like around 1,000 prospectively collected samples with matched colonoscopy results. And the collection dose is already well underway. And what we've done actually is we've designed this trial in a way, so that it can just roll into an FDA enabling trial. And so should the readouts from case control and then this follow-on more definitive readout, should they be positive we can sort of flip the switch and move into the FDA enabling trial. I think the question is going to be, what does the performance look like? And is it worth us to continue on? And I think we're just going to have to let the data readout and then decide, where we are from there. But certainly, given our cash trajectory now, even if we were to invest in the FDA enablement trial, it would have no impact on our ability to be cash flow breakeven and to continue the generating free cash flow at the scale that we're looking at as we move forward. But with that said, we're being cautious because we want to continue to invest heavily in MRD and to keep our focus on MRD, which we think is a main driver of growth for the business. And so unless we see clear opportunity, we're going to keep our investment limited.
Okay. And another topic, Renasight. I think there were some guidelines there. KDIGO guidelines came out. Maybe just talk about that. What is how relevant is that? What does that mean for overall clinical adoption and the growth you expect for that business?
Yes. So Renasight is a germline test for patients that have been diagnosed with chronic kidney disease. And in 2019, we kicked off a large-scale prospective clinical trial that looked at using Renasight prospectively in practice and then managed outcomes and looked at what interventions doctors were taking, not only the results of the Renasight test, but what interventions did doctors take as a result of getting the Renasight test back. And what we saw is at about 25% of chronic kidney disease patients have a genetic etiology and that when the doctor receives a result back that's positive, about 75% of the time there's some change in care and about 33% of the time, they actually physically change the treatment that the patient was on. So those results -- Steve very well, KDIGO, which is one of the largest governing bodies similar to ACOG, I guess, I would say, but more global in nature, they put out a guideline that suggested that genetic testing can be used to determine the cause of chronic kidney disease and they listed out a bunch of different indications about when it might make sense to use the test. So we went through those indications. And when you add them all up, it actually comes out to probably 60%, 75% of all chronic kidney disease patients are eligible for getting a test out of the guideline and as a reminder, there's 40 million Americans that are diagnosed with chronic kidney disease, and there's about 1 million patients per year that are newly diagnosed with chronic kidney disease. And so our goal is to help people keep their organs. When you look at our donor-derived cell-free DNA business, we're helping people try to keep their transplanted organ, but then with our German test Renasight, we want to prevent them from losing their kidney in the first place. And I think we're really moving the science forward and there's some opportunities to expand the market there, especially as now as the NKF guidelines might follow suit with KDIGO, we'll see.
Okay. Just wrapping up the last question around and maybe I should have asked it before, but in terms of -- and you think about product launches. You've talked briefly about it, but can you just outline, are you thinking more on the oncology side, the MRD side? Or is it more on the women's health side? Maybe just help us contextualize?
Yes, I think we're looking across all the different business units and opportunities to support the core portfolio. And what we're -- what we're not doing is going and doing a bunch of things that are separate that are outside of the core business with the exceptions of the investment that we're making in ECD and some of the investment we're making in other areas, but largely MRD core women's health and core organ health of the areas that we're investing.
Okay. Awesome. Well, this was great. Thanks for being here and thanks for taking the time.
Thank you. I appreciate it.
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