Welcome to Natera's 2021 Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will hold a Q&A session. [Operator Instructions] As a reminder, this conference call is being recorded today, August 05, 2021.

I would 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 second quarter of 2021. On the line is Steve Chapman, our CEO; and Paul Billings, our Chief Medical Officer; Solomon Moshkevich, General Manager of Oncology will be joining for Q&A as he's dialing in from overseas.

So Steve will give his prepared remarks today. 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 projections, our assumptions for that outlook, 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 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 we'll 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'd like to turn the call over to Steve.

Steve?.

Thanks Mike. Good afternoon, everyone, and thank you for joining us. Let's get into the recent highlights. As we covered in our pre-announce, we had another phenomenal growth quarter. Q2 was the fastest year-on-year growth for both volumes and revenues we've had as a public company.

And that's on a volume base that is now more than four times larger than when we went public. I'm pleased to announce that we've exceeded the top end of our pre-announcement ranges in unit’s processed, total revenue and product revenue. We processed 376,000 tests in Q2, which was approximately 61% growth over the same period last year.

Total revenues and product revenues were both up 64% and approximately 71%, respectively over the same period last year. That acceleration is being driven by continued strong growth in the Women's Health business and big contributions from oncology and transplant.

Those businesses are now large enough to contribute meaningfully and really shift our growth rates upward. Given all this momentum, we are excited to be raising the revenue guide for a second time this year. We started at $500 million to $525 million then upped that range to $550 million to $575 million in May.

We are now raising our guidance once again to $600 million to $620 million in revenues for this year, up almost $100 million versus where we started in March. As we are having success with our new product launches we are also needing to accelerate investments we had planned to make over the next two years, which we are very happy to do.

Mike will cover the full guide later in the call. We were also very excited to see the Women's Health business got to cash flow breakeven in the quarter. This was one of the top goals I announced when I took over as CEO in 2019 and I'm proud that our team achieved this while simultaneously hitting record growth rates.

In oncology, we've continued to generate high-quality evidence. We now have 14 peer-reviewed publications with many more on the way. We're also excited to see the quality of evidence is progressing, shifting away from validation studies and focusing on outcomes data like overall survival for example.

We recently had four newly published or presented prospective trials where outcomes data is available including three trials that measured overall survival and one that showed Signatera is predictive of treatment response.

We believe these prospective trials with outcomes data is a significant step towards full adoption of MRD testing by physicians and professional societies. These studies have taken years to reach this stage and we think this clearly differentiates Signatera in the market and lays the groundwork for broad reimbursement and adoption.

We were also very pleased to announce another high quality study yesterday that we think has the potential to unlock a new and large indication in breast cancer.

The first patient has now been screened in a prospective multisite definitive ZEST trial, a new Phase III study with GSK that will evaluate the efficacy of niraparib in 800 breast cancer patients that are being monitored with Signatera after adjuvant treatment.

Signatera received a Breakthrough Device designation from the FDA for this study and I'll go over the details of this trial later in the presentation. We've also made several key commercial strides with Signatera in the quarter. Our direct sales channel team is performing very well and the launch is accelerating.

We also launched with Foundation Medicine in the pharma sector and with BGI in China. Each of these partners enables us to impact patients in a way that we would not have been able to reach on our own.

Foundation Medicine currently has a substantial number of pharma partnerships and we believe is the market leader in tissue clinical volumes every year. BGI is a leading diagnostics player in China and has a formidable commercial channel and reimbursement expertise in that country.

Both of these commercial launches are in their early stages and will take some time to get going, but we think each can contribute to Natera's growth in the coming years.

We also had a major win on the reimbursement front, when we were awarded ADLT status for Signatera which moves our recurrence monitoring Medicare reimbursements from $795 per test to $3,500 per test. And finally, as most of you know, we've completed a follow-on equity offering that brought in roughly a net $551 million.

We launched with a $350 million offering. And we're able to substantially upsize the raise in the process, due to the strong response we received from investors. As we will describe, we think we have a lot of high-return projects to fund. And we look forward to putting the capital to work.

I'll spend more time on all of these developments later in the call. Okay. Let's drill into the unit growth on the next slide. I think this longer-term historical view is great, because it gives a sense of what our experience with Q2 has been in the past.

Q2 has historically been slightly down sequentially versus Q1, driven by the seasonality in the Women's Health business where Q1 is typically very strong and Q2 is a lot softer for our existing accounts. This year as you can see, in the Q2 bar on the far right something different is happening.

First, the growth in our Women's Health business has accelerated to a level that it has now completely overcome the negative impact of seasonality, we traditionally see in Q2. We are benefiting from our SMART trial data that was read out in January, which set a new bar in quality and science for NIPT validation data.

And we're benefiting from the joint ACOG and SMFM practice bulletin recommending NIPT, for all pregnant women. We think we're clearly in the early stages of expanding from roughly 1.5 million NIPTs in the United States, to what could be more than four million NIPTs overtime.

Second, the growth rates are compounded by the fact that our product launches in transplant and oncology are exceeding our internal expectations on a scale that is requiring us to accelerate capacity build-out and hire across the operations teams.

Signatera volume is growing nicely, as we add new accounts every month and initiate more new patients for CRC and IO monitoring. We look forward to highlighting a few case studies later in the call. On the next slide, you can see that the volume growth is clearly translating to revenue growth as well, particularly in product revenues.

We saw a nice increase in the blended ASPs in the business over Q1, which continues a multi-quarter trend going back to last year. While Women's Health ASPs were up modestly over Q1, most of the sequential improvement was really driven by the volume mix, since the transplant and oncology products have higher prices.

I think that's a good sign for the rest of the year. As Mike will describe later on in the call we still think there's room for NIPT, ASPs to improve in the second half, based on the broader reimbursement trends we are seeing, particularly as we make steady progress with state Medicaid plans.

Some of you will recall, when I was first named CEO in January of 2019, I said the top goal for the company was to get the Women's Health business to cash flow breakeven. Since then, we've been very, disciplined in our investments in that business. We've grown the ASPs. And we've reduced the COGS, while continuing to rapidly grow our volumes.

So despite all the upside, we still have ahead of us in Women's Health, we estimate that now we are sustainably cash flow breakeven in that part of the business. I think that's an important case study for the overall company.

We have now shown that once we make the necessary investments to establish the product and commercial channel, we can deliver continued growth, while optimizing COGS and being efficient with R&D and the sales team.

As the volume grows in the new businesses we continue to benefit from the cost synergies by tapping into the scale and expertise, across our broader company. In the future, we can also apply several of the same COGS and operational savings strategies to the new businesses as well. Okay. So now let me move to Organ Health.

We are tracking above our internal expectations for Prospera. And we believe the transplant market is still in the early stages of overall adoption, with a lot of room for future growth. In addition to growing our volumes, we're continuing to generate new evidence. Last week, a new study from UCLA was published in transplantation reports.

In the study, the investigators ran both, Prospera and a competitive test on 15 patients, six of whom ultimately experienced a rejection. Using the validated 1% cutoff, the Prospera test correctly identified five out of six rejections versus four out of six for the competitor.

This data is similar to a previously reported head-to-head study, where the Prospera test detected more cases of rejection than a competing test, using the validated 1% cutoff.

In addition to the recent head-to-head study, we were also pleased to see Prospera perform extremely well in a cohort of patients that received a Simultaneous pancreas and kidney transplant. They are often referred to as SPK patients.

It's important to perform well in this cohort, because multi-organ kidney transplants make up 8% of all kidney transplants. And these patients experience a 15% rate of rejection in the first year post-transplant. On the right side of the slide, is the data that was presented at the ATC Conference in June.

In a cohort of 39 simultaneous pancreas and kidney transplant recipients plus solo pancreas transplant recipients, Prospera performed very well across all testing metrics delivering solid performance across the board. Testing SPK patients allows us to help a new sector of the population, that's important to our transplant physicians.

In addition, this study is evidence that Prospera, could perform well in organ types beyond kidney transplant patients. For example, in this study, we performed well on solo pancreas transplant patients, in addition to the SPK patients.

As we talked about in May, we think the pathway to reimbursement in a broader range of organ transplants was substantially opened up by the CMS local coverage decision that was published in the spring. This is very important for us, because it lays out efficient path to gain reimbursement in organs beyond kidney.

As we showed above, we're now seeing early evidence that our test works well in other organs such as, pancreas transplant recipients. This LCD is expected to be active later this year and we're keeping our eye on what's happening here. All right. Let's transition to oncology. We've now published on Signatera in 14 peer-reviewed publications.

The validation data supports initial adoption and reimbursement, as we've now demonstrated the analytical and clinical performance of the test across a broad range of cancer types. I mentioned the shift to prospective studies with outcomes data at the top of the call.

This includes some very large prospective real-world interventional studies as well, like the CIRCULATE trial. The studies are critical differentiators, because they are larger, designed to change practice guidelines and they take years to mature.

It's important to see the test performance hold up in the prospective real-world setting, where the focus shifts to verifiable patient outcomes, rather than analytical performance metrics. We started these more significant trials years ago and we're now starting to see that work come to fruition, as they read out.

First, we were recently excited to present updated data at the ESMO GI Conference on the prospective real-world interventional CIRCULATE trial. There are now more than 2,000 patients enrolled in the study, with six months of follow-up available for the first 800 patients.

We've maintained the high presurgical detection and longitudinal sensitivity and specificity to relapse from our validation studies in this prospective real-world setting and we finally got a substantive look at the initial outcomes data, based on MRD status.

We are ecstatic to see that more than 99% of patients who are MRD-negative remain disease-free at the six-month median time point, regardless of whether they receive adjuvant chemotherapy or not. This is a huge step forward and I'll explain why on the next slide.

There's a key clinical utility question that needs to be answered in stage III colorectal patients. Can we avoid giving chemotherapy for MRD-negative patients? Today, in stage III colorectal cancer, nearly 100% of patients get adjuvant chemotherapy, but about 50% of patients don't need it, because they're cured by surgery alone.

One of the biggest objections we get from doctors is that, they aren't ready to stop giving chemotherapy to stage III patients which would be against the NCCN guidelines.

They agree, MRD testing today can be helpful in stage III colorectal to decide between three months versus six months of adjuvant chemotherapy, but what they really want is to confidently avoid giving chemotherapy to MRD-negative patients.

The CIRCULATE trial was designed to test this hypothesis that MRD-negative patients could safely be deescalated from chemotherapy after surgery. On the left, you'll see a diagram of the patient flow in the CIRCULATE trial. In the bottom arm, each MRD-negative patient is randomized to receive standard of care adjuvant chemotherapy or not.

We believe the study will ultimately show that there's no benefit to receiving adjuvant chemotherapy for patients who are MRD-negative. The interim disease-free survival data strongly suggests that we are on track to validating that hypothesis, which could be a game-changer.

This is a type of trial that can change guidelines and unlock one of the big clinical use cases that physicians are asking for, an indication where doctors simply won't use the test without this level of high-quality outcomes data.

Since this trial was initiated three years ago, we believe this data will further differentiate us from further entrants in the market. We anticipate the results of the MRD-negative stratification will be presented for the first time at ASCO GI in January of 2022.

If that reads out as we anticipated, that will be a defining moment for Signatera in colorectal cancer and we look forward to seeing the data. Deepening our data trove in colorectal cancer is one of our core strategies.

And in addition to the new de-escalation indication described above, we also recently published a prospective trial in stage IV colorectal cancer that showed excellent performance, including overall survival results, unlocking another layer of colorectal utility beyond stage II and III.

This paper published in the Journal of Clinical Oncology Precision Oncology was an analysis from the prospective PREDATOR clinical trial, following 112 patients with stage IV disease, who underwent surgery with curative intent. At the first time point, 30 days post-surgery, from a single time point alone, we had sensitivity to relapse of 72%.

This increased to 91% when we were able to test a second follow-up blood draw on those patients who did not receive adjuvant chemo. In addition, 96% of patients who were MRD-negative at the single time point after surgery were still alive at the end of clinical follow-up, which lasted up to 54 months.

That compares to just 52% overall survival for patients that were Signatera positive. The overall survival rate increased to 100%, when including patients who remained MRD-negative in the longitudinal setting. This paper addresses an important unmet clinical need.

Since guidelines are currently vague on which stage IV colorectal patients should receive adjuvant chemotherapy after surgery with curative intent, it's currently recommended to monitor these patients closely for early signs of recurrence.

On the basis of this publication, we have already submitted to Medicare to expand coverage under the current LCD to include stage IV oligometastatic patients, which we expect may come in late 2021 or early 2022.

As a reminder, the opportunity here is sizable, as we estimate there are about 10,000 new diagnoses per year in stage IV oligometastatic colorectal cancer with the testing frequency similar to CEA, leading to a TAM of approximately 100,000 tests per year, which is sizable from historical standards.

We're really proud of the studies we generated and we believe the shift to outcomes data, including prospective overall survival data, where we track patient outcomes for nearly five years and confirming one's validation data in a real-world interventional setting, is important to further penetrate the clinical market and get reimbursed at scale.

We were also proud to see another prospective publication, with overall survival data this quarter in Nature, with the excellent results from the Phase III IMvigor010 muscle invasive bladder cancer trial that we did with Genentech.

This trial was a major effort conducted over seven years to evaluate whether Genentech's immunotherapy drug atezolizumab could improve outcomes in the adjuvant muscle invasive bladder cancer patients.

Before reading out the data Genentech prespecified an endpoint to evaluate patient response -- patients who were Signatera-positive after surgery, in addition to the all-comers format originally designed.

When the trial failed to meet its primary endpoint in all-comers, we reported a significant treatment benefit in Signatera MRD-positive patients that received atezolizumab and no treatment benefit in the MRD-negative patients. This study showed that Signatera is predictive of treatment benefit in this setting.

This predictive claim is very difficult to make and it can only be achieved through a high-quality study such as this one. In addition to our predictive claim, we reported prospective data showing MRD-negative patients have a much better overall survival than MRD-positive patients.

Based on the strength of these results, Genentech has already started enrolling patients in a sequel Phase III trial IMvigor011 that will randomize to atezolizumab versus placebo among only those patients who test Signatera positive after surgery.

Demand is now growing quickly across pharma and academic consortia to incorporate Signatera as a companion diagnostic in their pivotal randomized trials. This week we announced our second major Phase III drug trial the ZEST trial.

This is a randomized multicenter placebo-controlled study sponsored by GSK to evaluate their PARP inhibitor niraparib in 800 patients with early-stage either triple-negative breast cancer or HR-positive HER2-negative BRCA-mutated breast cancer.

Patients who test positive after standard of care definitive treatment will be randomized to receive niraparib versus placebo. If this trial is successful, it could create a potentially life-saving new treatment option for patients who test MRD-positive in this setting.

Positive study results would provide support for doctors to prescribe this treatment in their office broadly which would be incredibly powerful for overall clinical adoption of Signatera.

Some indications like breast cancer are best approached through these types of pharma partnerships because the clinical utility in breast cancer recurrence monitoring depends on new treatments being administered at the time of molecular recurrence. And that's not something a laboratory can generally take on by itself.

So we're glad to be winning these types of big treatment on molecular recurrence trials which will unlock future clinical indications for Signatera.

This project was made possible by the strong validation data we previously published in breast cancer including both the paper in Clinical Cancer Research and the I-SPY 2 data published in Annals of Oncology. Okay. I'm staying on Medicare for another minute.

As we mentioned at the top of the call, we had a major breakthrough this summer when Signatera was awarded an ADLT status. Before this when a patient completed their adjuvant treatment monitoring period and entered recurrence monitoring our pricing for Signatera had been set at $795 per time point.

Now with the ADLT status the reimbursement rate is $3,500 per blood draw for Medicare patients and we think this could be relatively stable over time. Given the nature of the longitudinal monitoring, over time a higher and higher percentage of blood draws will fall into this category which bodes well for the overall gross margin in the long-term.

ADLT status is designed to reward innovation and the relevant statute requires several criteria to be met. A test must be unique in the marketplace satisfying a clinical need that no other commercially available test can address and also must employ a methodology that's based on a unique empirically driven algorithm.

Signatera met these stringent criteria and we believe it will be difficult for any other future MRD competitor to achieve this status adding to our first mover advantage.

This also gives us an important lever when contracting with commercial plans in the future and it helps our pharma business since Natera is extending its commercial leadership in MRD, which makes us more attractive as a companion diagnostic partner.

Finally, looking forward, we are eagerly awaiting the finalization of our draft LCD for immunotherapy monitoring, which we expect to come through sometime earlier this year.

We've been pleased with the initial adoption in this setting further validating our belief that Signatera can help inform difficult treatment decisions for patients receiving immunotherapy where standard imaging tools can be uninformative. The final slide highlights some of the near and longer-term indications we are targeting with Signatera.

In the past, we focused this side exclusively on the near-term indications on the left-hand side of the page. These are indications where we've already generated excellent data and the clinical utility and use cases are very clear and we have line of sight to reimbursement with CMS and commercial launches in the near-term.

Those near-term indications stack up about -- to about four million tests per year which is incredible from historical standards. This is roughly 10 times larger than the 400,000 tests per year in the traditional therapy selection market for example. However, despite this TAM being incredibly large from historical standards this is just the beginning.

With several pivotal randomized trials now underway in colorectal, bladder, breast and others sponsored by pharma and leading academic consortia and with a strong pipeline of additional trials that may launch in the next 12 months to 18 months it's clear that some very large opportunities are beginning to stack up in both the US and globally including in Japan.

We're simply looking at what we signed so far or have in front of us. We have a path to coverage of up to an additional nine million tests per year.

This is exciting because although we're having significant growth now and we have an excellent runway to success in the near-term I could easily make the case that Signatera is really only scratching the surface and just at the beginning.

And we could really hit full stride in the middle of this decade and beyond as these very large pivotal trials read out. So there's a lot of upside in the future.

Finally, not on the slide, but important to our mission we were proud this quarter as two patient case studies were reported out in the national media from different providers in different parts of the country. One colorectal case was reported on NPR's Here & Now broadcast and one breast cancer case reported on ABC's Good Morning America.

We want to thank those patients Bonnie and Mariel and their physicians for sharing how Signatera made an impact in their journeys. Okay. Now let me hand it over to Mike to discuss the financials.

Mike?.

Thanks, Steve. The next slide here is just a summary of the financial results for the quarter. Steve covered a lot of the trends on volumes and revenues. I'll just note again the acceleration we saw on the top-line. Our year-on-year volume growth rate was 48% in Q1 and now 61% in Q2. Product revenue year-on-year growth was 36% in Q1 and now 71% in Q2.

ASP stepped up in the quarter. And as Steve mentioned more of that increase was really driven by volume mix as the new higher-priced products start to have more of an impact on our blended average selling price. Women's Health ASPs were also slightly higher in the quarter.

And as Steve mentioned, I think we still have room to run over the next several quarters there. We got a substantial boost from improved reimbursement in our commercial insurance volumes if you compare where we are now on ASPs versus this time last year in the Women's Health business.

And we've had some positive contracting decisions that we think can benefit the reimbursement for example in our managed Medicaid volumes over the next few quarters in Women's Health. I think it's important to note that we think there is significant upside in the current oncology ASPs which can improve over time just as the product launch matures.

While the majority of our volume is in the colorectal cancer indication, we have seen many community oncologists really adopt Signatera for a broader range of cancer types. We are happy to see that because we think the data supports broad use.

And we think we have clear line of sight to reimbursement in additional cancer types via the umbrella local coverage decision from CMS. As we've discussed in the past, we anticipate getting coverage for immunotherapy response monitoring this fall when that umbrella local coverage decision goes live.

Then we think coverage in additional cancer types can come from a more streamlined process of just submitting the data. But for now, we're taking a lot of zeros at the moment as the launch progresses. We also haven't yet gotten the benefit from the ADLT designation which at least for our Medicare reimbursed volumes should be a lift in the second half.

The story on the cost of goods sold per unit is really very similar. The COGS for the Women's Health business are looking very good. For example, NIPT now is in the $160 range per unit and we see a path to NIPT COGS below $125 per unit over time. In oncology, we are just at the start of the road map to drive COGS improvements.

The first step is just to build out more capacity. We significantly brought forward investments to build out lab space to accommodate both the clinical demand and also specialized capacity designed to meet the needs of the larger Phase III trials, we are now running for pharma.

None of the scale-up work carries significant technical risk and the volume trajectory we are on makes the return on capital math very clear. It does however require significant near-term CapEx and hiring in both the R&D and lab operations areas of the business.

So, the gross margins in the quarter really reflects good traction in Women's Health and we will weigh down just a few points by the rapid growth phase we are in for Signatera. As we've discussed in the past, Signatera can of course be a higher-margin product than NIPT. So I view this very much as a temporary circumstance.

The R&D and SG&A lines also reflect a significant upfront investment we are making in oncology. In research and development, we are adding staff to execute on scaling the lab along with the fulsome slate of clinical trial work we are doing with academic and pharma partners.

We've talked a lot about the pharma partners today, but our recent publications have also generated a large volume of requests to support studies with KOLs in the field. This is the type of work that generates obvious long-term benefits even if it does not return cash immediately and we are staffing up to make sure we meet that demand.

Crucially, we are also finding more products and services that can be wrapped around Signatera much like carrier screening is in the Women's Health business and what we are seeing so far from the Altera tissue CGP.

While we occasionally evaluate small acquisition targets our history has been to avoid lots of M&A and invest more heavily in our own R&D efforts. That obviously leads to a bigger R&D line but we have found that approach to be much more effective and capital efficient in the past. One other line to note on this slide is the balance sheet.

Steve referenced the equity offering in which we raised roughly $550 million in an upsized deal. We raised that capital for one key reason. We have a lead in this very large recurrence monitoring market and we are going to make all the necessary investments in the near term to set us up for long-term success. Okay.

So, I think that gives you some background for the guide on the next page. We are significantly stepping up both our revenues and the investments for the balance of the year. As Steve mentioned, we are now guiding revenues about $100 million higher than when we started just a few months ago in March.

The main driver here is the volume growth that has continually exceeded our expectations even through this summer. We've remained cautious on the ASPs in the guide. We don't assume a big step up in any of our products aside from some modest improvement in Signatera driven by the ADLT and the umbrella local coverage decision.

So, for the revenues we are assuming continued volume growth across the business. In the new products, we are optimistic that our recent launch trajectory can continue in the near term. In Women's Health, we are seeing the continued momentum that Steve described. One note on the revenue map for the guide.

It's important to recall that we took a onetime revenue recognition a positive bump of $28.6 million in Q1 this year related to QIAGEN. So, if you're making the comparison between first half and second half revenues on the guide, I think it's worth stripping that out.

The result is you'll see the guide implies significant revenue growth in the second half of this year.

On the gross margin guide we bumped that up on our last call in May and we're going to leave that stable for now, given the additional expenses associated with the lab expansion that will run through cost of goods sold and the potential for additional volume growth in indications that are not reimbursed yet.

To balance that out there are some tailwinds associated with other COGS projects in the second half and both the ADLT designation and expected reimbursement for IO monitoring will help margins as well in the second half.

The SG&A, R&D and resulting cash burn line reflect the additional work we have planned to get done this year which is almost exclusively focused on the oncology drivers I described more lab capacity, accelerated clinical trials in large indications, accelerating projects designed to reduce cost of goods sold per unit and exciting new products to pair with Signatera.

The last line on the slide is the cash flow breakeven goal of women's health. Steve talked about how we've been able to get scale in women's health. And I think that's an important case study to visualize how we can get leverage on the oncology investments.

As we expand into pan-cancer, we can leverage the same operating expenses we've built out for the colorectal cancer launch. So with indication expansion, increasing volumes, reduced COGS, and broader reimbursement, we are following much the same playbook to get to cash flow breakeven that we followed in women's health, but on a much larger scale.

So it's an exciting time for Natera, and we are very excited to have been able to share these results with you.

Operator?.

Thank you. [Operator Instructions] Our first question comes from the line of Tejas Savant with Morgan Stanley. Your line is open..

Hey, guys. Good evening and congrats on a nice quarter here again. Just one question here on Signatera, Steve. On the ADLT code upside, you're expecting a nice bump here on your Medicare volumes. But at some point I believe next year at the end of the first quarter that trend will normalize under the PAMA process yet you've got offsets to that.

So can you just walk us through the longer-term ASP trend dynamics here? And also how getting that ADLT code can help with the competitive moat within MRD for you?.

Yes sure. That would be great. So the ADLT is a very significant advantage and it's only available to the first mover who has an innovative test on the market.

So we're very glad that we were accepted into the program, and we were able to increase that recurrence monitoring price from $795 now up to $3,500 because over time as the flywheel effect of getting patients into recurrent ordering program occurs, you're going to have more and more and more of the patients at that recurrence monitoring time point.

So it's critical that you maintain a high ASP in that time point. Now the way the program works is there's a time period. I believe it's roughly nine months where they look at your commercial claims. During that time period, you get paid the list price of $3,500.

And then after that they look at your commercial claims and they'll reset your price based on the median weighted reimbursement from commercial parties. Now the good news is that we've been very strict about how we negotiate with private payers and we've successfully negotiated rates that are at or above this $3,500 price point with private payers.

So we don't expect to see any price reductions on an ongoing basis through the PAMA process. Of course, it has to pay out -- play out over time, but at this stage all the rates we've negotiated are at $3,500 or higher and we expect to maintain the price point or have an increase..

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

Hey, thanks. First question on the back of the financing and congrats on getting that done.

Can you just talk a little bit more about the MRD road map for multi-cancer? You talked about four million tests in the near term 9 million longer-term? But maybe just talk a little bit about use of proceeds and how quickly you think you can scale up some of these efforts. .

Yes. So there's a lot of work, I think to roll out each of the different indications. The good news is that the most important thing to being successful in the Signatera market is generating the right data. And we started that process of generating the data a long time ago five years ago roughly.

You look at some of these trials, they were ongoing for that period of time. We had teams of people out hunting for clinical trials that we could get into five years ago. So now the studies are reading out and they're being published.

That's the most important thing in order to unlock usage in a particular tumor type and to unlock reimbursement in a particular tumor type. So when we look at where we are in colorectal today stage II and III we're seeing a lot of volume come in.

We're seeing a rapid increase in ordering on the clinical side, which is great and in line with our expectations. We've now generated this data in oligometastatic stage IV colorectal deepening our penetration in the colorectal space and that data looked excellent.

I mean, really good data with overall survival as well, which is really the next step down in kind of raising the bar for what type of data is required to move the needle. I think we're going to continue to penetrate colorectal. We're on market with an immunotherapy monitoring product, which is going very well.

We're seeing increases consistently in the usage there. We've also shown muscle-invasive bladder, lung, neoadjuvant breast, ovarian, multiple myeloma. Now we just had a publication in esophageal cancer. So all those areas where we generated data and we have published data, I think over time we'll be rolling out those indications.

We're actually seeing usage today in a lot of those indications even though our sales team is not promoting. We're just getting inbound requests where doctors read the paper and then they want the test or patients hear about it and they want the test.

So we are seeing usage although the vast majority of our business, today is colorectal and immunotherapy. So, that's sort of one sector that the near term kind of 4 million tests per year opportunity. Then there's the bigger sector that's unlocked through these partnerships by pharma -- with pharma.

And we think that's like breast treatment on molecular recurrence for example; lung treatment on molecular recurrence. And these big Phase 3 clinical trials take time to read out, but when they do read out, they're going to be massive market-moving guideline changing trials.

So, it's kind of a great setup where we have this significant amount of growth and work that we can do in the near term. And then when we get to the kind of mid to upper-2020s, we have the second wave of extreme growth that's unlocked by the investments that we're making today in the trials. So that's sort of how we see it playing out.

And the other thing that I think is good about these big trials like, for example, the breast one that we just announced, once the competitive landscape is established here and there's maybe a handful of folks that are participating in these trials. It's going to be really hard for others to come behind.

I mean these are seven-year -- five to seven-year prospective clinical trials. These are the type of things that really truly build a competitive moat that make it very difficult for others to come in behind. So we feel like we're in a good position in the short-term and to tap into that very significant upside that's going to come in the future..

Thank you. Our next question comes from the line of Catherine Schulte with Baird. Your line is open..

Hey, guys. Thanks for the question. I guess first just on the guide, you mentioned being cautious on ASP outlook and not baking in a significant increase in NIPT.

I guess in theory shouldn't we see this bump up as some of the plans that updated their policies last year moved to accrual accounting? And when do you expect that that might happen in a more meaningful way?.

Yes, we -- yes, yes I was going to say -- Mike why don't you take that?.

Yes. No. Thanks Catherine for the question. Yes. So, we have seen some of that benefit. You kind of -- if I look back to kind of NIPT ASPs prior to any of those coverage decisions last year versus now, we have gotten a good step-up on the NIPT contracts in terms of the fraction of times we've gotten paid.

I think that's true primarily in our commercial business although it's starting to look more and more, true through the Medicaid volumes as well. I do think that there is still room to go on the NIPT front in particular.

Just as I look at the fraction of claims that are still unpaid for some reason like a prior authorization policy that we think can get removed or myriad other rationales that payers may have state Medicaid plans that aren't yet adherent to the new ACOG practice guideline for example. So, I think there's room for that the NIPT ASP to improve.

I think there will be some benefit just by debt of the accrual as you mentioned. Just as you get more history with more and more payers, there is a kind of a natural momentum to that. So there is some modest ASP improvement in the guide there.

A lot of that though in terms of kind of impact to ASPs on a blended company basis just comes from the fact that hey, we didn't have the ADLT really in a meaningful way in Q2 and we'll have it in Q3 and beyond. And to the extent we've got Medicare volume in Signatera colorectal cancer stages 2 and 3 then we'll get a bump from that.

And the other piece is that on the Signatera ASP that there's kind of a natural progression where now that we have this ADLT the ASP -- the blend of ASPs that product can improve as you get more and more patients into the kind of the longer tail of recurrence monitoring tests versus kind of the upfront test as well.

So that's a trend that can start to benefit us in the second half. All this requires a certain amount of forecasting. And as most of you know who followed the company for a while, we're just trying to be on the side of caution when it relates to the guide and in particular forecasting ASP. So, somewhat more of a philosophical point than anything else..

Thank you. Our next question comes from the line of Mark Massaro with BTIG. Your line is open..

Hey, guys. Thanks for the questions and congrats on the quarter, the raise and all the data that you've been publishing.

I guess a couple of weeks ago when you guys did the deal the financing, you indicated that you expected to make some significant announcements in the organ transplant business and potentially beyond, which I believe might be screening. Today you talked about simultaneous pancreatic-kidney transplant.

So, I guess I'm just curious, if you could elaborate on any potential plans for expansion beyond kidney testing, would that obviously include pancreatic and some of the others? And then, any thoughts you have on early cancer detection? Just the development work you've been doing and I think previously you talked about plans to do colorectal cancer screening..

Yes. Thanks Mark. Yes. So on the organ health side things are going really well. I think we're beating our plan, as we said, ahead of our expectations. We're starting to see some good data come out.

We show this head-to-head study, which I think is now the second head-to-head study that's been performed where we've outperformed on the detection of rejection using the validated 1% cutoff. We showed now I think that our platform test works well in other organs. So the simultaneous pancreas-kidney pancreas alone transplants which is good.

I think that essentially shows that we're going to be able to transport into other organs. And now that this LCD has been put in place, which is essentially an umbrella LCD that will allow us to go get reimbursed, if we choose to go into other areas. So I think the groundwork is all there. The sort of proof of concept is there.

And I think we'll be in a good position to sort of make those moves in the future if that's an area that we decide to go into. I think when we look sort of across business, we have to kind of decide where we want to make the investments and so forth. But, certainly the kind of framework is in place there.

On the early cancer detection side, we've basically said that we've developed a platform. We have some data that looks good. We have access to a significant number of samples and we're going to package all that up and describe it to everybody in the future when we're ready to. We just haven't done that yet.

And so I think, that announcements will be coming where we're going to describe, what we're doing, what we have so far, and what our plans are. But we're just not rolling that out today. But we feel very good about the opportunity we have..

Thank you. Our next question comes from the line of Dan Leonard with Wells Fargo. Your line is open..

Thank you. This is Lou on for Dan. Just a quick questions on the organ, and then also oncology part. I think in the prepared remarks, you were talking about there is like -- you started to see contribution from those two business.

Can you quantify, a little bit in terms of the volume or the type of revenue? And then also on the Women's Health I think you also mentioned the share gain. Can you also like talk a little bit more about the share gain opportunity, especially after one of your competitor exited the market? Thank you..

Yeah, sure. So why don't I talk about the share gain, and then maybe Mike you can talk about like, how we're managing breaking stuff out. So, on the Women's Health side, we have been just crushing it. I mean, we're accelerating. You can see the growth over the last couple of years, and sort of what we're doing now.

I mean, it's a whole definite level of growth. So we're in a fantastic position. We've got a great technology. We've made significant improvements to the technology that have been launched this year with Pano AI that's playing out very, very well in the field. Great customer feedback.

We've now got the largest prospective trial that's ever been done in the field of NIPT, where the results in a real-world setting held up and actually were better than our validation data. So that's super strong.

I think some of the big academic centers and maternal-fetal medicine practices that hadn't been using us before considering a switch are now looking at the data. And they're excited about it, because this type – this quality of data just hasn't been produced before. So yeah, we are having competitive wins, but we're also seeing the market penetrate.

And so those two things simultaneously happening are causing an acceleration in the Women's Health growth. The market today, we believe is about 30% -- maybe 35% overall penetrated. So there's a long way to go just simply riding the wave of penetration in the market.

And even, if we weren't seeing competitive wins our business would grow just simply from penetrating that market. We think in the next three years that NIPT market is going to get to 90% growth – or excuse me, 90% penetration. So that's a very significant growth. But on the competitive side, we're outpacing everyone else from a growth standpoint.

We're taking business from competitors. You saw one main competitor exit the market and they were a very strong competitor for a long time. When they announced our sales team went to work and we've done exceptionally well. I think converting that business to Natera.

Based on the numbers we're seeing, we believe we got more than our share of that business. So we're feeling very good about that. I think we're in a good position.

So Mike, do you want to maybe comment just on how we're breaking out organ health or oncology from a unit and revenue standpoint?.

Yeah. So our current plan has been just to describe the business on a total company basis now. That's largely for competitive reasons as it relates to the new product launches.

We've had the experience in the past of giving very, very granular disclosure, which is easier for us and easier for you all, I appreciate, but we've seen it time and again actually harm the opportunity as competitors are able to kind of dial in for exactly how well we're doing and then redouble their efforts.

So we're not inclined to give that at the moment. I think the other piece is that, we're still relatively early in these launches. I mean, we're a little over a year and little over six months in Oregon Health and Signatera respectively.

And so we're still getting a handle on exactly what does the launch trajectory what does the growth curve look like in these businesses ourselves. And so I mean, over the relative near term, I think we'll be in a position to give more color there. I think on a total company basis, so you can kind of – you start to see some of the impact.

I mean, a lot of the beat – well, all of the businesses are growing kind of ahead of our internal expectations. You don't raise guide from – $100 million from $500 to $525 million to over $600 million for total revenues without some new products really launching above your expectations.

And so I think, you can see that in the guide and also just as a product revenue growth year-on-year. So clearly, it's having an impact on the business and stay tuned..

Thank you. At this time, I would now like to turn the call back over to management for closing remarks..

Great. Thank you very much for joining the call today. We appreciate it. Take care. .

Thanks everyone. Cheers..

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect..