Welcome to Natera’s 2020 Third Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, November 5, 2020. I’d now like to turn the conference call over to Michael Brophy, Chief Financial Officer. Please go ahead..

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our third quarter 2020. Also on the line is Steve Chapman, our CEO; Solomon Moshkevich, General Manager of Oncology; and Paul Billings, Chief Medical Officer. Today’s conference call is being broadcast live via webcast.

We will be referring to a slide presentation that has been posted to investor.natera.com. A replay of the call will also be available at investor.natera.com.

During the course of this conference call, we will make forward-looking statements regarding future events and our anticipated future performance such as our operational and financial outlook and goals; our assumptions for such outlook and goals; the impact of the COVID-19 pandemic on our business and operations; market size; partnerships; clinical studies; opportunities and strategies and expectations for various current and future products, including product capabilities, expected release dates, reimbursement coverage and pricing and related effects on our financial and operating results.

We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. Please refer to the documents we file from time to time with the SEC, including our most recent Form 10-K or 10-Q and the Form 8-K filed with today’s press release.

Those documents identify important risks and other factors that may cause our actual results to differ materially from those contained in or suggested by the forward-looking statements. Forward-looking statements made during the call are being made as of today.

If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. Natera disclaims any obligation to update or revise any forward-looking statements.

We will provide guidance on today’s call, but will not provide any further guidance or updates on our performance during the quarter unless we do so in a public forum. We will quote a number of numeric or growth changes as we discuss our financial performance. And unless otherwise noted, each such reference represents a year-on-year comparison.

And now I would like to turn the call over to Steve..

Thanks Mike. Good afternoon, everyone, and thank you for joining us. Let’s get into the highlights. Q3 was another very strong quarter for Natera. The work we’ve been doing for the last 5 years has really started to deliver results. I will just hit the high points on this slide and then get into more detail on each of these topics on the call.

In Q3, we processed 262,000 tests, which represents 31% growth versus last year and 12% versus the second quarter of this year. This is a record quarter in several respects. For example, this is the best sequential quarterly growth we’ve seen in Q3 since 2015, when the business was a small fraction of the size we are today.

We generated revenues of $98.1 million, which is again a record and is up 13% from Q2 2020 and 26% from Q3 2019. This revenue growth was largely driven by product revenues, which was up 39% year-on-year. As most of you saw, after years of effort, we were very pleased to see a position statement from ACOG and SMFM supporting NIPT in all pregnancies.

The statement included a table highlighting the superior performance of NIPT, and specifically, highlighted unique aspects of the SNP-based technology, including the detection of triploidy and zygosity in twin pregnancies.

We have already seen a significant amount of momentum among payers adding average-risk NIPT to their coverage policies, and we could see significant additions to that list in the near term. This development aligns nicely with the timing of the completion of the SMART trial.

The SMART trial is a prospective 20,000-patient multisite clinical trial with newborn genetic outcomes, and that has taken 5 years to run. We think a study of this magnitude and scale will never be repeated, and therefore, could become the gold standard in NIPT for the foreseeable future.

The data has been unblinded to us and to the investigators in the trial. And we believe the results have the potential to further drive market share in NIPT and may unlock guidelines on reimbursement for microdeletions, which is already more than 100,000 units per quarter for Natera.

We expect the data to be presented at the SMFM conference early next year. We have continued to make excellent progress in the transplant space. We executed our full commercial launch this summer after securing a final reimbursement in May, and we have continued to develop compelling data on our Prospera test.

In Q3, we published a clinical utility study, and we announced a unique program highlighting the overlap of cancer and transplantation. We have recently made significant strides in our oncology business as well.

We received a positive final coverage decision from Medicare for Signatera in Stage 2 and 3 colorectal cancer and we received another draft local coverage decision for our immunotherapy monitoring indication we just introduced on the August earnings call. Together, these indications represent nearly 2 million Signatera tests per year.

Additionally, we continue to see growth in our pharma business. For example, we are excited to announce a trial with Pfizer and another with Novartis, where Signatera was selected to evaluate patients receiving CDK4/6 therapy in early-stage breast cancer.

If successful, we expect that positive data from these and other trials would continue to expand the addressable market for Signatera. Finally, we continue to build on our leadership position in published data.

We expect to present four posters at the SITC conference in November, followed by significant new data in an oral presentation at the ESMO IO conference, with two spotlight poster presentations at San Antonio Breast in December as well. These datasets have all been submitted to top journals for publication next year.

Based on the success we have had in Q3, we’re excited today to significantly raise our 2020 revenue guidance. Mike will get into the specific details of that at the end of the call. Okay. Now let’s get into some of the business trends. The next slide shows our volume progression over time and highlights a large acceleration in volumes we saw in Q3.

This was a blowout quarter for us. We are pleased with the initial volumes in organ health and in the pre-launch phase of Signatera. Those launches are both on track and doing very well. The bulk of this performance comes from the core reproductive health business hitting on all cylinders.

Post-ACOG, we are seeing an uptick in accounts ordering average-risk NIPT, and we have continued to benefit from closing new customers as well.

Also, as you would expect, when the clinic starts ordering Panorama from us, we have an opportunity to educate the practice on our carrier screening offering, which serves to amplify the effect of these trends in our business. The next slide shows our total revenue progression, and a lot of the same trends are at work here.

In addition to accelerating top line revenue, as you can see, product revenue growth compared to Q3 of last year was also very strong. Q3 saw revenue contributions from our new businesses as well.

As I said in the introduction, this is the time we’ve really been working for over the past 5 years, where the success that we’ve had in organ health and oncology has now started to contribute to revenues.

We’re not breaking out the new businesses for competitive reasons here, but it’s exciting to see some of the green shoots in these very large markets. The next slide is our standard average selling price per unit and blended COGS comparison. On the ASPs, you can see again the business is going very well.

We have continued to grind upward in the women’s health business, and we’re starting to see some of the benefits of average-risk reimbursement coming in. And as I mentioned, we had a small but noticeable contribution from the new business units as well.

We are pleased to see blended COGS dip back down again in Q3 as we got some scale benefits on infrastructure investments we made in Q1 and Q2, like expanding our lab footprint in Austin. This chart was historically a great metric for tracking our path to profitability in the women’s health business.

Given our volume growth, ASP and COGS execution, we now see a clear line of sight to reaching cash flow breakeven in the women’s health business in the first half of 2021, which is a major achievement for Natera. It’s gratifying to see the key pieces of our long-standing plan come together like this.

Now that the product mix is shifting a bit, this blended ASP and COGS approach is going to lose some relevance as a way to track our progress in women’s health.

For example, even though we keep making progress on NIPT and carrier screening COGS per unit, we expect blended COGS to move up in Q4 because we are going to be running a lot more exomes for the first time point in Signatera patients.

We’ll continue to talk about ASP and COGS, and we will comment on how it’s going in women’s health, but we will be moving away from these blended metrics. Okay, next slide. Speaking of average-risk NIPT, I wanted to spend another minute on some of you – for some of you that might be newer to Natera.

So this next slide shows the practice bulletin that came out in August. This statement from ACOG and SMFM supports aneuploidy screening in all patients regardless of maternal age or baseline risk and highlights, for the first time that NIPT can be performed in twin pregnancies.

The bulletin also highlights unique aspects of SNP-based technology, including the detection of triploidy, use as early as 9 weeks and the ability to assess zygosity in individual fetal fraction when testing twins. As the only SNP-based NIPT available today, these advantages are unique to Natera and help us differentiate in the market.

As a reminder, the U.S. market for NIPT consists of about 4 million to 5 million pregnancies per year and is very underpenetrated in the average-risk setting, which makes up 80% of those pregnancies. So we still have a significant room to run in the NIPT space.

We think the ACOG statement is already having a positive impact on NIPT volumes, and we are seeing momentum with payers changing coverage policies for both average-risk and twin pregnancies. The next slide shows some of the progress with payers in more detail.

The acceleration we’ve seen in 2020 is really incredible, and it’s picked up even more since the ACOG bulletin. Notably, we were very pleased to recently see payers like Humana and Centene join the majority of payers covering NIPT for all women. Payers with positive coverage policies now in place comprise more than 200 million covered lives.

There are still some notable exceptions, of course, like UnitedHealthcare, but it’s been important to see a wave of very large and prominent payers quickly changing their coverage policies post the ACOG.

In addition to the average-risk changes, some new policies also now include coverage for twin pregnancies as well, which provides additional upside for Natera. Now moving on to organ health, as I mentioned, we executed our full commercial launch of Prospera in Q2 of 2020.

We’ve been pleased with our performance, thus far, and have continued to make meaningful relationships with top key opinion leaders in key centers. In Q3, we published new data showing the clinical utility of Prospera.

The study concluded that practicing nephrologists who used the Prospera test detected more cases of rejection and made better clinical decisions than physicians in the control group. The study evaluated kidney transplant patients at typical scenarios seen in routine practice.

We think continued data generation is important for the overall donor-derived cell-free DNA market, and we are very pleased with how this study read out. In addition, in Q3, we announced an expansive program to improve care for organ transplant patients with a history of cancer.

The goal of this program is to understand how Signatera and Prospera can be used together to improve clinical decision-making and respond to the unmet medical needs within these communities. We look forward to giving further updates on our progress in the future.

Now I would like to hand the call over to Solomon to cover some of the recent highlights in oncology.

Solomon?.

Thanks, Steve. The next slide should look familiar. This is the same pathway to reimbursement that we started presenting when we first received the draft local coverage decision last year in colorectal cancer. As a reminder, there are roughly 145,000 patients in the U.S.

diagnosed every year with colorectal cancer, and about two-thirds of them have Stage 2 or Stage 3 disease. So with the repeat testing described in the Medicare coverage policy, this would imply roughly 1 million tests per year as a total addressable market.

As we expected, we now have the final coverage decision for this indication from Medicare, which went into effect on October 18. We are continuing to work with CMS to finalize pricing, and we are nearing the finish line. The process for pricing is company- and assay-specific, and the final pricing will not be publicly posted by the agency.

So for competitive reasons, we do not plan to disclose final pricing when it is completed. We think we have a good sense, however, on where we are likely to land. And we are pleased that the pricing is likely to be consistent with what other companies are receiving for MRD testing in oncology.

We expect to be able to bill for patient volumes starting as of the October 18 effective date. As a result, we are now moving into the formal commercial launch phase for Signatera in the clinical setting for colorectal cancer, and we plan to build on the momentum we’ve seen in the pre-launch phase.

As Steve mentioned, we are also significantly ahead of schedule with our immunotherapy response monitoring indication that was just introduced on our last earnings call in Q2.

More than 200,000 patients are estimated to receive immune checkpoint inhibitors every year across a range of cancer types, and that number is growing with every successful new pharma trial. While immunotherapy has revolutionized cancer care in many ways, it is expensive, and the majority of patients do not respond to this type of treatment.

One particular challenge is how to determine whether the treatment is working after it has been initiated and when it may be appropriate to discontinue or switch treatment strategies. For example, if a patient is not responding to treatment, you would expect the tumor to get larger over time on a scan.

However, up to 1 in 10 immunotherapy-treated patients see their tumor get bigger on a scan before it gets smaller because it’s being filled with lymphocytes and swelling up under attack from the immune system. With a CT scan, this swelling looks like disease progression, which is why it’s called pseudo-progression.

As a result of these types of uncertainties, as illustrated in the graphic, current treatment guidelines for immunotherapy suggest that physicians continue treating beyond progression until they see confirmation of progression in a follow-up scan, approximately 6 to 12 weeks later.

This extra treatment can significantly delay sick patients from switching to other available lines of therapy that may be more effective or it can also result in premature discontinuation for a patient who may actually be responding to the treatment.

Based on the data that we published just this summer in Nature Cancer, we think a serial testing protocol with Signatera could help improve this picture, setting a baseline ctDNA measurement before treatment and then following up regularly in conjunction with imaging to help identify true disease progression earlier and to help identify exceptional responders who have achieved ctDNA clearance and who may be eligible for a drug holiday.

So if you assume about 4 Signatera tests per year for over 200,000 patients, we think the addressable market for Signatera in this indication could exceed 800,000 tests per year, as we described in August.

The next slide summarizes the favorable draft local coverage decision that we received in response to our application to Medicare in IO monitoring. We submitted the dossier for reimbursement to Medicare this summer, just after we published the Nature Cancer publication. And we received the draft LCD ahead of schedule in September.

And we were very pleased that Medicare proposed coverage for IO monitoring across solid tumor types based on the strength of our data. We now expect to get final coverage and pricing in 2021, previously, we had not planned to get there until 2022. I also want to give a quick example of the type of work we are doing with pharmaceutical companies.

This slide describes the DARE study, where we are working with Pfizer. In this study, Signatera will be used for patient selection and ongoing monitoring in early-stage, ER-positive breast cancer.

Patients who test MRD-positive by Signatera will be randomized into an active arm in which they get palbociclib plus fulvestrant or into a control arm, where they get the standard-of-care endocrine therapy.

If studies like these are successful, it would pave the way for Signatera usage in the large early-stage breast cancer recurrence monitoring market. Pharma demand has been growing rapidly for us.

We continue to win business from new customers, and our repeat business from our largest pharma clients is continuing to grow, consistent with trends we described in August.

Finally, as Steve mentioned, we look forward to Signatera data being presented in three different conferences before the end of this year, including new breast cancer data at the San Antonio Breast Cancer meeting in December and new bladder cancer data in an oral presentation at ESMO IO, also in December.

These data will be really novel and will contribute meaningfully to the data leadership position we have developed in MRD. Now, let me hand the call over to Mike to cover the financials.

Mike?.

Thanks, Solomon. The slide here is just a summary set of results for the quarter. Steve covered volumes, revenues and COGS. Product revenues really drove the quarter, and the revenue recognition we were getting from – as we signed the partnership deals with BGI and Foundation Medicine was significantly lower in Q3.

That development-related revenue recognition has largely run its course as the projects shift toward commercialization in the future. So despite that transition away from partnership revenue recognition, which is very high margins, overall gross margins still managed to increase meaningfully over the last year.

This speaks to the improvement in average selling prices and cost of goods sold per unit that Steve presented.

A couple of other items to note on the expenses side, when we spoke in August, we described that our business has responded really well despite the pandemic and we are scaling up, particularly in our pharma operations channel to meet increased demand.

We have accelerated our plans to support that growth, and that has started to be noticeable in our operating expenses. That increase in investment has been balanced against improving cash flows from the business. So as I will talk about on the next slide, our cash burn range for the year is actually poised to be better than our previous guide.

As many of you know, we were very pleased to execute a follow-on equity offering in the quarter, where we took net proceeds of roughly $271 million and now have a total cash and investment position of over $800 million.

This cash position, along with our expectation that the women’s health business crosses over the cash flow breakeven threshold next year, means that we are very well situated to make the investments necessary to support the new products. Okay. Let’s go to the next slide and the revised guide.

From the left to right, you see how the guide has evolved from the beginning of the year, which we set out before we had any inkling of the impact of COVID-19.

Despite the pandemic, we were one of the few companies in our space to reinstate a substantially higher guide on our Q2 call, as you see in the middle of the page and now we are raising again as you see on the right column.

The new revenue guide of $380 million to $390 million incorporates the strong volume performance through the first three quarters of the year and anticipates that the underlying trends in the business remain stable.

The high end gives room for continued acceleration in ASP and volume trends, and the low end of the range acknowledges the possibility that volumes through the year could be a bit lumpier. And we still, of course, have a lot of unknowns in the environment as we are watching the COVID case counts seemingly accelerate here more recently.

Gross margins imply that we are comfortable in this mid-40% range for now. Again, there could be some lumpiness with more Signatera exomes getting run in Q4. So that is why we left some range in the guide there. But we do feel comfortable enough with the full year results that we could tighten to the upside, as you see on the page.

OpEx investments will continue, as we described and we are pleased to tighten the cash burn guide below the high end back into our original range for the year, as I talked about. So overall, we are very pleased with all the momentum in the business, and we really appreciate everyone’s support.

With that, let me hand it back to the operator for questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from Doug Schenkel with Cowen. Your line is open..

Hey, good afternoon. This is Subbu on for Doug Schenkel. Thank you for taking my questions. First, on Signatera, the draft LCD mentioned the possible use of Signatera for other solid tumors.

Is this tied to patients who have been treated with IO drugs or is it different? And if different, how much more addressable market would that add? And I have a follow-up..

Yes, thank you for asking that question. I really appreciate it.

So I would say, first, we are super excited about the final LCD that we have just received for colorectal, which is an enormous market, over 1 million patients per year in Stage 2 and 3 and there is an opportunity to expand that further, for example with some advanced colorectal cancer patients on the oligometastatic stage that we published this summer at the ESMO conference.

So we look forward to getting that under coverage and expanding that indication. For IO monitoring, the initial coverage that we submitted just for that IO monitoring indication is an additional 800,000 patients, so again, like massive expansion of the market.

There is an opportunity for us to expand it further into other tumor types even beyond IO monitoring. And we think that, again, we’re well positioned to take advantage of that. The most important thing is generating data. And as you’ve seen, we – now we have 5 or 6 marquee peer-reviewed publications.

And we have two more very significant datasets that are, I would say, on the order of magnitude of our Nature Cancer publication that are going to be reading out initially at some of the conferences later this year and then published in the first half of next year. So we do have a path to expand to other cancer types.

And that’s how we really tap into that $18 billion TAM. So getting the data is super important, and that’s an area where we now have a lead with the publications that we’ve put out.

And I think we said before, we have 25 additional biobanks that are in-house that we are going to be running and publishing additional data on over time, and then at least two of them that we think will be very significant and published in the near future..

Got it. That’s really, really helpful. The second one is on the sales strategy for Signatera, you have had 25 sales reps. And then with the recent financing, you were planning to expand your reach.

How is the hiring progressing? And where do you think you’ll be in early 2021? And at a very high level, what would be your sales strategy, because you aim to penetrate this big market? Is the focus to – is the plan to focus on the 250 Tier 1 or 2 institutions or is there another way to think about the market pyramid?.

product life cycle; clinical data generation; clinical trials, like you have seen with the big prospective BESPOKE registry study that we’ve announced; society and KOL relationships. So there is a lot of investments across the business and across each functional area going into oncology that go well beyond just sales.

Certainly, our strategy is to make relationships with top academic centers and key opinion leaders, and then in addition, cover the community oncology practices. And we are looking to be in a position to execute that and continue on the success that we’ve had. The early evidence is looking very, very good. We are pleased with how we are doing.

And I think we are executing on all cylinders on the clinical launch..

Thank you so much. Thank you, guys..

Thank you. Our next question comes from Tycho Peterson with JPMorgan. Your line is open..

Hi, thanks. This is Eleni on for Tycho. Congrats on a strong quarter. My first question is a follow-up on Signatera, good to see the final LCD and commercial launch in the quarter.

But I was wondering, can you give us more color on expectations for the Signatera ramp in 4Q and possibly an initial sense of the ramp next year? I believe The Street is modeling about $5 million to $10 million in sales for Signatera in 2021. And with only 1% penetration of the MRD market, you – it’s closer to $30 million to $50 million.

So a question we have been getting is how quickly can you ramp and how can we start to think about that?.

Yes. So I will make a couple of comments. And then Mike, maybe you can jump in.

Yes, so if you go back and you look at any other specialty diagnostic company that has launched a novel product, back – when Foundation Medicine was launching the conference on genomic profiling or Guardant launching liquid biopsy, there’s a pretty kind of similar cadence of what the penetration looks like over the first couple of years.

And you have to go out and really train the physicians on a novel concept and a novel product, and that doesn’t flip on like a light switch overnight. A lot of times, they want to trial it out. They want to see what the KOLs in the area are doing. They want to see some data.

So there is a lot of effort that goes into building the market and getting the ramp. We published some great initial commercial experience data.

If you go back and look at what was available at ASCO or the summer at ESMO, you can see some of the engagement we have in the commercial – in the early pre-commercial launch with some of the top key opinion leaders. So we’re excited about how things are going.

We think we’re going to be kind of right in there with the ramps of some of these extremely successful companies like Guardant and Foundation when they went out, and we’re expecting to have a kind of similar type of penetration over time to what they’ve been able to do. And frankly, that’s what we’re seeing right now.

Mike, you want to comment on that?.

No. I think you covered it well..

That’s very helpful. Thank you.

And then my other question is as we think about sort of penetration in the average-risk NIPT market going up from where it is today, around 15%, how confident are you that you can maintain the – your level of market share? I believe you have stayed at around 55% or so in the past or how should we think about you potentially gaining share in this environment?.

Yes. So that’s a great question. And so this is effectively the moment we’ve all been waiting for on average-risk.

I mean, for years, we’ve been behind the scenes, doing the clinical trials, putting the teams in place, building the user experience capabilities, logistics capabilities to be able to expand in this very large underpenetrated average-risk market. So today, there’s 3.2 million pregnancies every year that are average-risk.

And despite NIPT now being available for 8 years commercially, that average-risk market is only about 25% penetrated. We believe we have slightly more than 50% of the market share.

And we’ve continued to gain share and grow that business, both from expanding average-risk usage in our existing customer base, and especially, we’ve seen that actually accelerating in the last month or so, 1.5 months post the guidelines, but also competitive takeaways.

And when you look at the unique clinical aspects that Panorama offers for noninvasive prenatal testing and you combine that with the massive data trove that we have that really dwarfs the clinical data than any other NIPT has on the market.

Just that package, combined with our seasoned sales team and our extreme focus on user experience, is playing very, very well. And we’re seeing a lot of receptivity.

And also note that, really, for the first time, we saw ACOG and SMFM actually call out the unique benefits of the SNP-based technology, things like triploidy that none of the other technologies can test for or things like zygosity on twin gestations that none of the other technologies can test for.

Now, those are actually now written into the guidelines as advantages of the SNP-based platform. So it’s rare that you see that type of thing, but we’re super excited that, that’s now been incorporated in the guidelines.

So we’re in a position to continue growing and maintaining our share and riding the wave of NIPT expansion as the market becomes much more penetrated over the next several years..

Great. That’s helpful. And then just one last question, can you update us on your partnership with BGI? And what is the latest on the time line for the launch of Signatera in China? Thank you..

Yes. So we actually have a couple of really fantastic partnerships in Signatera. One, with Foundation Medicine, where they’re going to be designing personalized monitoring off of a baseline of FoundationOne CDx. And we think that’s a great opportunity for us in both biopharma and the clinical setting, where they are really in a dominant position.

And then we’ve announced our partnership with the Beijing Genomics Institute in China. So BGI is the dominant cell-free DNA and sequencing provider in China. They’ve done more testing than anybody. They’re going to be launching Signatera onto both clinical setting and then also as a pharma service provider.

So we’ve seen with big multinational pharma companies that they want to get their drug on the market in China. And in order for them to get the drug on the market, they have to run trials in China. And that means you have to have a partner on the ground in China. So we think this is an advantage.

We’ve signed very good global pharma trials that include a China arm with BGI, and we look forward to them launching and servicing those trials. So we’re ready this year to start servicing those customers. And we think some of the sample flow will really start to ramp up as we go into 2021..

Great. Thank you..

Our next question comes from Tejas Savant with Morgan Stanley. Your line is open..

This is Yuko on for Tejas. Thank you for taking our questions.

For Prospera, can you update us on traction among transplant centers now that things have sequentially improved relative to the COVID pandemic? Are there any centers where the volumes are on par with your closest competitor? And what do repeat ordering patterns look like at this early stage of the commercial launch? Heading into 2021, how should we expect adoption curve to accelerate as you launch your quantification ability as well as the PEDAL study reads out?.

Yes. So yes, those are great questions. I think our hypothesis going into the transplant business was that we could compete very well with the incumbents. And I’m pleased with the performance of our team. So we are meeting our plan despite the impact of COVID.

We’re seeing very strong receptivity, expanding our relationships with many centers and many key opinion leaders. You can see from some of the press releases that we’ve done around our data that we’re generating at conferences that we’re working with really the A-list of key opinion leaders. So I’m pleased with how we’re doing.

We do think that we’re going to continue to grow that business as we turn the corner into next year. I think we have a couple of new data points that just read out actually. We announced this summer that we could quantify the background DNA and that could have an impact on the donor-derived cell-free DNA.

And then just last week at the ASM conference, we had major key opinion leaders talking about the clinical utility of testing for background DNA. And one really amazing example was that we were able to identify patients, who actually had COVID, who had a 57x background DNA.

And that’s the type of thing that you can really now only get with the Prospera product. So we’re excited about what the future holds. We’re bringing our innovation and expertise that we’ve developed over the years in cell-free DNA to bear in organ transplant to help patients. And we’re very pleased with the performance and how we’re doing.

And I think now you can – I mean, if you look at our revenue numbers and volume numbers, we blew it out this quarter, right? And some of that revenue increase, like we said, from the first time now, we’re really seeing the impact of these new business units. And so we’re pleased to see that happening as we thought it would..

Great. Thank you so much..

Thank you. Our next question comes from Puneet Souda with SVB Leerink. Your line is open..

Hey, guys. Thanks for taking the questions. So I just wanted to get a sense on – and I apologize if this has been covered, in terms of Signatera, pricing updates, if you can provide? And in terms of IO indication expansion, that was great to see.

But just wanted to get a sense of anything else, any other studies that you are planning here in terms of indication expansion with – on the Signatera product?.

Yes. So I will make a couple of comments and then maybe Solomon, you can jump in.

So first, on other indications and other data sets, I would strongly recommend you tune into the ESMO IO conference and the San Antonio Breast conference because there’s going to be some very compelling data there, and we think it – on the level of the data that we’ve published in Nature Cancer and some of our other marquee publications.

So the key to generating additional opportunities and unlocking additional opportunities is data, and that is an area that we have a very significant leadership.

Now with 5 to 6 peer-reviewed publications in top journals and a big trove of additional papers that are going to be reading out over time, we have roughly 25 additional biobanks that are in-house that we’re going to be publishing on and reading out over time.

And then we have two very significant prospective studies that we’ll be reading out this year, and they’ll be discussed at these conferences, and then they should be published next year. So I mean we’ve – this is just the beginning. Although I want to reiterate, colorectal and IO together make up around 2 million tests per year.

If you compare that to some of the other oncology diagnostic opportunities that are out there that are in the range of, say, 400,000 tests per year TAM, I mean, we’re talking about orders of magnitude bigger than anything else out there and it’s covered, and it’s just the beginning. So we are super excited about that.

Now on pricing, we are in the process of wrapping things up right now with Medicare. The discussions have been going very well. We expect to have it wrapped, I would say, probably in the next 2 weeks, roughly. And it’s exactly sort of in line with where we thought it would be.

We’ve said now on this call, because of the uniqueness of our product and the unique situation of doing recurrent monitoring of cancer patients and the bespoke nature of our test, that we have some unique pricing strategies.

And we’re not going to actually publicly announce anything because we think it’s confidential to us, and we don’t want to give our playbook away to all the competitors. But we’re very positive about the way things are going.

And we should have it wrapped up in the next couple of weeks and then be able to bill retroactively back to that October 18 start point.

Solomon, do you have anything to add to that?.

I think that was a great answer. I will just add that we have been really pleased to partner with Medicare on this. And they’ve really been supportive of the pan-cancer nature of the product, which is what you’re seeing with the new draft LCD. So we’re excited about the future here..

That’s great. And then, Steve, if I could ask a broader question. You guys have published early data sets and lead in this market in MRD setting, in CRC and then expanding beyond that into IO.

Just sort of when you look at this market potentially 5 years out with a tumor-informed assay in hand, and there are competitors that have tumor-naive assay, other products are emerging in the space.

Sort of give us a sense of how do you think this market is likely to play out longer term? Because, obviously, you’ve operated in competitive markets before, but this is one where there is a significant amount of Greenfield opportunity, and you are ahead in that pack.

So maybe just give us a sense as to how you see this market longer term? Thank you..

Yes. So look, we think that this space of MRD and recurrence monitoring and therapy effectiveness monitoring is very large, $18 billion of pan-cancer opportunity. And we think the personalized approach is the right approach in this space. And that’s now being validated by the major key opinion leaders and by the data that we’re seeing come out.

So of course, there’s going to be competition going in – coming in when you have a market of this size. But our plan is to win.

And we think we’re putting in place the right strategy now where we’re combining significant focus on data generation, doing the right clinical trials, expanding into multiple indications, making relationships with key opinion leaders and societies and then building out that commercial presence.

And we are excited about some of the early indications that we see. We have outlined before the benefits of the personalized approach versus the static panel and sort of tumor-naive approach.

And so I won’t go into that, again, other than to say some of the data that we’ve seen coming out with other tumor-naive products, where they are doing monitoring, I think, is not as good as what we’re seeing now with Signatera.

Solomon, anything to add?.

Okay..

Yes. I will just say our vision is that in this decade, MRD testing serially will become standard of care across solid tumors, the same way people think about a CT scan today. And that will come out over time as we generate more and more data, validating the use of the product.

But in terms of whether tumor-informed method is going to become the gold standard, I think we’re basically there at this point. I mean using information from the tumor and from the germline DNA, which is also really important, essentially allows us to cheat, right? I mean we know what we’re looking for in the blood.

And that just allows us to achieve a much higher performance with sensitivity and specificity, and that’s just being replicated over and over again..

Great. Alright. Thank you, guys..

Yes. Thank you, Puneet..

Thank you. And your next question comes from Catherine Schulte with Baird. Your line is open..

Hey, guys. Thanks for the questions and congrats on a really impressive quarter.

I guess what was the volume growth just at the core women’s health franchise in the quarter? I’m just trying to get a sense of how much the underlying growth trends are accelerating in that business? And what you think the major driver of that acceleration is? Just given the timing of ACOG, I’d assume that didn’t have a huge impact on the third quarter.

So just curious what’s driving that?.

Yes. So we’re actually seeing really an impressive growth, I think, both in the core women’s health business and then also in the early stages of launching in oncology and then in the organ health business. So I’m not going to break out the specifics of each at this point, but I’ll describe some of the dynamics.

So in women’s health, there is a couple of things driving growth. There is, I think, COVID underpinning this transition from doing procedures in the office, moving to a simpler solution of just doing blood draws rather than having to do ultrasounds or diagnostic procedures.

And that’s now being – that transition is now being amplified by the payer changes that we’ve seen over the course of the year. Aetna, I think, earlier, maybe in Q2, was pretty quick to announce coverage for average-risk, and now we’re starting to see Centene and Humana. And then we saw the big ACOG, SMFM guideline.

So when we go back and we look at the percentage of our business that’s average-risk or high-risk, we’re seeing this kind of this slow tick-up and then an acceleration toward average-risk.

And I think that, that’s evident that more and more physicians are starting to adopt and met some of these payer policies and society statements are making an impact. Now in addition to that, we have competitive takeaways where we’re constantly winning business and adding new customers to the fold.

So we look every month at how many new customers we’ve won. And we look at the growth from those new customers, and we look at the growth from our existing customers, and we look at our lost accounts. And what we’re just seeing right now is we’re winning customers faster than we have. Our account retention rates are at a peak level.

We’re losing very few customers. And we are seeing same-store sales and expansion into average-risk driving that base of growth. So we’re firing on all cylinders there.

And again, I think a lot of it is just – we are focused really on improving NIPT and really on improving carrier screening and delivering awesome user experience, tons of new data, tons of new features.

And we’re really making investments in making the women’s health franchise the leading franchise, and we’re seeing some of that, I think, play out competitively now. Some of the things we’ve done over the last couple of years to put ourselves in a position to win are playing out.

And I also didn’t – I guess we’d mentioned it briefly on the call, but we’re also tracking the women’s health business towards cash flow breakeven. And that’s been a goal of ours. And now we’ve gotten the COGS down and continue to do it. And that’s been a goal of ours.

And now we’ve gotten the COGS down and continue to grind on that ASP and have relatively stable operating expenses. So while we’re winning and making investments and improving the product, we’re actually running toward breakeven. We’re going to hit that in – somewhere in mid-2021, which is awesome.

Then when you look at organ health and oncology, those are both at very earlier – obviously much earlier stages. And there, we have certain ramp expectations that we want to hit. And we are looking at the volume basically every day and every week.

And we are looking at what sales reps are delivering, what customers are sending, fluctuation patterns, if they are already within those customers, if there is reps that are not performing or are performing. And we tune that up the same way that we have always done. And we have a good formula that, I think, works.

And so we are pleased with the ramp that we’re seeing there, but it is very early stage. Although for this quarter, some of the revenue impact that you are seeing is from that – those new businesses. And this is really, I think, the first quarter, where it’s had a nice impact, which is why we have highlighted it..

Alright, great. Super helpful commentary.

And then is the Foundation partnership still on track to launch the pharma companies this year? And is that offering something that you’re already discussing with potential pharma partners, such that once you are ready to launch, there could be some pent-up demand there?.

Yes. So the partnership with Foundation’s going very well. They are a great partner. We really have a ton of respect for their team, both commercially at the executive level and their scientific team. And so it’s been really a pleasure to be partner with them.

We – what we’ve said is that there’ll be a sort of a pilot launch to pharma and discussions with pharma starting this year. And that’s actually ongoing right now. And those discussions have been very positive. And we’ll be moving towards a more kind of a hard launch at some point later in the future and kind of later in 2021.

But the initial interest has been very positive, and everything is on track. And there are deals that are being signed right now..

Okay, got it. And if I could sneak one more in on carrier screening, I think back in September, you had Evidence Street come out with a positive recommendation for expanded carrier screening.

As we think about the percent of volumes that get paid today on the expanded carrier screening side, I guess, what’s the revenue opportunity if those were to get fully reimbursed?.

Yes. I think there is – the opportunity there is really twofold. I think one is on pricing, and then the other is just on expanded coverage. And I don’t have that kind of broken out right now to go through in detail, but there are certainly some payers where putting that formal policy in place, I think, would help us significantly.

And if you look at the Medicare rate for broader panels, I think there is an opportunity for us to improve the ASP there. So it’s something that we are excited about..

Great. Thank you..

Thank you. Our next question comes from Max Masucci with Canaccord Genuity. Your line is open..

Hi, thanks for taking the questions and great quarter. First one for Mike, it is great to see the raised guidance.

Can you just walk us through some of the embedded assumptions just for COVID-19 resurgence, how quickly you can get paid following several commercial payer policy updates? And then any early volume tailwinds just related to an increased willingness to order NIPT following ACOG’s update? That would be great..

Yes. Thanks. So we gave a range for the rest of the year, which is really a Q4 guide. And the reason why we gave a range is because, as you pointed out, there are some variables there that – there is potential for some volatility.

I mean I will tell you that the underlying trends in the business so far in the quarter are quite strong, and we are feeling very comfortable with what we’re seeing so far. And frankly, the guide itself implies continued sequential growth in the business over and above this very strong Q3 that we had.

So I think the baseline expectation is that the trends in the business that we are seeing so far this year remain stable.

And then the top end gives basically some room for incremental acceleration beyond here, and the bottom end gives some room for there to be a little bit of lumpiness in the volumes or the case counts to – on COVID to perhaps slow us a little bit with the holidays and things like that.

So I think the baseline is – trends stable, and we are feeling very good at where we’re at..

Great. And then in May, you announced a settlement with your – the large sequencing provider should set you up for COGS improvements, I believe, in October and beyond.

So can you just highlight what you consider the biggest needle mover in that settlement? If you are seeing any impact and just how this plays into your expectations for gross margins?.

It’s not going to be something that really impacts the 2020 guide. I think that’s something that – again, I mean, very favorable settlement. Great to get that behind us and it’s something that, I think, can generate savings for us as we grow volumes.

So I think it’s just kind of a linear tailwind as volumes grow the per unit COGS will continue to benefit us. And I think that, that will be a tailwind over a couple of year time frame..

Great, that’s it for me. Thanks..

Thank you. Our next question comes from Alex Nowak with Craig-Hallum Capital. Your line is open..

Great. Good afternoon, everyone. You have had Signatera in the market for a few months.

Sounds like the launch is going well there, just can you explain what the sales process is like to get a new doctor sign up? Is it rather complex or is the sales team finding that Signatera gets bolted on and trialed with a CEA test relatively easy And maybe just expand on how is the test being used so far in the first couple of months? Is it just a straight addition to CEA? Is it ordered alongside a CT scan or is it confirming another sign of a recurrence just any thoughts there?.

Yes. So appreciate the question. I think the sales strategy is really similar to just other sort of diagnostic products. I mean we have the team. They are convincing a physician to trial it out. They are – you talk to the nursing staff. They fill out the form or they order online. They place the order. We draw the blood.

They are – we are getting the tissue from the pathology lab. That’s a process that, in the first couple of weeks, really, couple of months, I would say, when we were – back when we were in the pilot mode, we had to kind of work through. But that’s all resolved at this point, and that’s working like clockwork.

And the providers are very comfortable with this sort of releasing tissue. It’s something that they do all the time for Genomic Health or Foundation Medicine in any of these other tests. So it’s pretty straightforward.

We are seeing use cases vary from this MRD time point, somebody who’s just entering into that adjuvant window, and the physician wants to make a decision about adjuvant treatment or they want to inform the adjuvant treatment, we are seeing a lot of use there as we thought we would.

And multiple time points, so we are tracking how many time points we are getting and so forth. And it’s sort of tracking roughly in line with what we thought we would expect. And then there is actually some patients that are actually coming into the fold post the adjuvant window.

So these are people that are – we like to think about it as the backlog from the account or the prevalent population that had previously been diagnosed. They previously had surgery. They probably may or may not have received adjuvant chemo, and now they are in remission.

And we’re seeing a good chunk of patients that come in and enter the protocol at that time point. So the doctor sees value even though they are in remission of going and having us run the exome, design to personalized primers and then start monitoring. So it’s a little bit of a mix of those. I think we are also seeing usage in other GI cancers.

And then we are – although not all of it’s reimbursed, we’re accepting tissue – we’re accepting samples on a limited basis in other cancer types as well.

There’s been a couple of pretty good early-stage clinical experience posters out there at ESMO and then at ASCO, we’d be happy to kind of shoot out to you as well, that highlight some of the initial experience with a couple of the top academic centers, but a little bit of both MRD and recurrence monitoring exactly as we had expected..

That’s great. Very helpful. And then we have seen some big news here with early cancer screening with the background of some others. Not to take away from the huge opportunity in MRD and recurrence, but I think Natera knows cell-free DNA better than anyone.

Can you morph that Signatera technology into an early cancer screen? And perhaps the better question is, would you want to go after this market?.

Yes. So obviously, we have been aware of what is going on in the space. And we – at this point, we’re really staying focused on this MRD recurrence monitoring, therapy effectiveness. But I do think that expanding into other opportunities is something that would make sense for us to do and to leverage our commercial team.

I think that by nature of it, Signatera technology is not something that can be used for early detection. Tumor-informed requires one to have been diagnosed previously. But certainly, we have, as you mentioned, a large expertise in cell-free DNA, and we have a very big team.

And if we wanted to look at things like early detection, we would have the right team in place to be able to do that. But again, it’s not – that’s not our main focus right now.

We are pretty laser-focused on this enormous opportunity ahead of us in the MRD space and getting our share of these 2 million tests per year that we think will already be reimbursed, and then expanding into that $18 billion TAM..

Yes, understood. And then just last question.

Can you expand on what the ACOG guideline does here for Medicaid from both a pricing standpoint, a coverage and a usage among state to state, just any thoughts there?.

Yes, yes. So I think we have shown on one of the slides. So the state Medicaid programs have now doubled the number that we’re offering at average-risk NIPT. That was really low before, it’s almost nonexistent, and now we’re seeing that ramp up. So I think that’s a good sign because a good portion of pregnancies in the U.S. today are covered by Medicaid.

And I think there’s a path to reimbursement there. We think that guideline will unlock both additional reimbursement and additional usage. NIPT in the average-risk setting today is only about 25% penetrated. So there’s a lot of room to run there.

And we are going to be riding that wave of expansion, and that includes both in the commercial covered lives and also in the Medicaid business..

I understand. Appreciate it. Thank you..

Alright. Thanks..

Our next question comes from Mark Massaro with BTIG. Your line is open..

Hey, guys. Congrats on a great quarter. I wanted to ask a question similar to Alex’s, which is your technology platform for years, has been quite versatile, starting in NIPT, transplant, cancer.

I guess my question is from a technological perspective, is there a tweak you would have to make from your tumor-informed strategy to enable asymptomatic cancer screening? It’s more of a technical question than it is any type of other question..

Well, I think the – I will make some comments, and then Solomon, feel free to jump in. I think with asymptomatic screening, you have to know what you are looking for, right? And I think – I guess with our technology, we speak with the tumor. We find clonal variants, and then we design multiplex PCR assays to those specific variants.

So when we are not able to sequence the tumor tissue, we don’t know what to go look for. Now are there other markers or other areas of genes or certain methylation markers that we could go out and look for? Yes, and I think, we are aware of different techniques that are out there.

Our core Signatera opportunity would not – or our core Signatera technology would not just put over, but there are ways that we could be successful in that early detection space.

Solomon, do you want to add any comments there?.

Yes. I think there is sort of a two part answer here.

So if you are doing early screening in a patient who is asymptomatic, the smart set here in the industry is taking multiple approaches to that, right? Folks are adding proteomics or they are adding methylation or they are adding other capabilities that improve detection, which you can achieve – you cannot achieve with just looking for DNA mutations alone.

And so you have to do that because you don’t have any other way to inform your test, right? So Natera does have a lot of the tools, if we decided to make a move in that direction, to be able to compete. And we have been actually spending a good amount of time investigating some of the other technologies.

And we think we have a good handle on the pros and cons there. That being said, there’s such an enormous opportunity right now with building out the MRD and monitoring market. We think we’ve got a great leadership position there.

And looking back to a question that was asked previously about whether the tumor-informed method is going to be the one that wins out. In this case, if you have got a patient with cancer, the tumor is accessible.

It’s – at this point with the data we presented, it would be hard to convince a patient not to use that information in diagnosing whether that cancer is gone or whether the treatment is working in an MRD or monitoring setting. So we’re focused on that $18 billion TAM, and we think we’re in a great position to succeed..

Yes, super helpful. Microdeletions is a huge opportunity for you. So it looks like the SMART study will read out at the end of January. Then I believe you’re expecting a publication.

How soon do you think that publication might hit? Is that maybe Q1 of next year? And then when I look at your numbers, if you’re doing 100,000 microdels a quarter, 400,000 times, even $400 ASP, would get you to an incremental $160 million a year.

Am I crazy to think that, that is your possible run rate when revenue trickles in? And related to that, I believe the AMA awarded you guys $802 a few years ago for microdel.

So can you just help us think about your pricing for microdels?.

Yes. That is exactly right. I mean we’re doing now over 100,000 microdeletion tests per quarter. We’ve put into work – we sponsored a 5-year prospective multisite study of 20,000 patients. It will never be repeated. It’s the gold standard in NIPT and the gold standard in microdeletions. The results have been unblinded. We have looked at them.

We think they are strong enough to change society guidelines and to drive payer coverage. We have gotten a price of roughly $800 from Medicare on the clinical lab fee schedule. And if we got even a fraction of that, on average, it would be hundreds of millions of dollars to the bottom line of the business.

So we are in a really, I think, incredible position if we can execute on getting that coverage because we don’t really have to grow any additional tests. We just have to get paid for the tests that we’re already doing. And the usual thing that drives coverage is studies – clinical data and studies. And we’ve done it now.

We did the work, and it’s reading out at SMFM. So this is – this could be a just really incredible opportunity for us that, frankly, we haven’t really spent a lot of time talking about just because it’s been going on for so long and we have so many other awesome things happening within the business, but it’s an enormous opportunity..

Yes.

And then just for housekeeping, do you expect a publication soon after the SMFM annual meeting? And do you expect commercial payers to evaluate this and maybe come on some time in 2021?.

Yes. So the publication will be in first half of 2021. It could be shortly after SMFM or maybe slightly after. But I think the data is going to be out there. The main – I think, the folks that are the key drivers of the decision-making within the societies are the same people that are involved in the paper, and they’ve seen the results.

And all I can say is that we think it’s data that is strong enough to change society guidelines. And if you look at commercial payers, the only thing they really care about is society guidelines. So I think we’ve shot our shot here, and this is probably the best possible outcome we could get as far as setting up to get coverage.

I mean a 20,000-patient prospective multisite trial collected over 5 years with genetic outcomes has never – nothing even close to this has ever been done before. And to have the results come out and have them be strong, I think, will be a very significant readout.

And the folks that are driving the society guidelines are the ones that are involved and around the fringes of – around a group of people that are involved in the study. So it’s a great setup. It could – it obviously takes time once society guidelines change to have that revenue come through.

You need to have the paper published, and it doesn’t happen overnight. But I think it is something that will be impacting us in the future. We just can’t say exactly what the time line is going to be..

Excellent. If I can ask one last one. So it sounds like you are sitting on pretty good data for breast and bladder. Have you seen that data yet? You’ve called it very compelling. So I assume you have seen it.

But when that data reads out at ESMO and San Antonio, is it reasonable for us to think that you could potentially announce Signatera expanding to both breast and bladder on a standalone basis?.

Yes. We think the data that we will be reading out is extremely compelling and is of the quality that could drive additional reimbursement decisions. And we think the way the current draft coverage decision reads would allow us to submit this and get coverage.

Now we have to have the decision go to final, and that’s not going to happen until some midpoint of next year roughly or something in that range. But certainly, these are 2 areas that we will be able to pursue based on the strength of the data..

Thanks very much guys..

Thank you..

Thank you. And I am showing no further questions at this time. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect..