Welcome to Natera's 2022 Third 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, November 8, 2022.

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 third quarter of 2022. On the line, I'm joined by Steve Chapman, our CEO; and Solomon Moshkevich, General Manager of Oncology. 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. Starting on slide two.

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, November 8, 2022.

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?.

Great. Thanks, Mike. Let's start with our Q3 highlights. As you can see from the press release, we had another strong quarter in Q3. Revenues grew approximately 33% over Q3 last year and we processed 518,000 tests this quarter growing 27% year-over-year. We're seeing strong momentum across all product lines and I'll spend more time on that in a moment.

We are pleased to be able to once again raise our 2022 guidance to $810 million to $830 million. At the midpoint, this represents an increase in our revenue guidance by over $40 million, compared to our initial guide in March and this new range implies annual revenue growth of 37%, excluding the one-time QIAGEN milestone in 2021 of $29 million.

We are exercising caution in forecasting some of the early results from the launch of the California prenatal screening program. There have been a few legal developments with the program in the last few days and we are evaluating the impact. But for now, we are being careful with our forecast.

In addition, we've recently integrated our Empower and Signatera sales teams to focus on centers where both Signatera and Empower in demand. I'll get to the expected benefits of that move later, but we are being cautious with the guide to account for the disruption in the immediate term.

One of the key reasons for the revenue raise is the strong momentum we are seeing with Signatera, which is performing well above our internal volume forecast for the year. We processed roughly 132,000 oncology tests this year, and we think we are on track for roughly 175,000 units this year. We will expand on our Signatera volumes further in a moment.

The breadth and depth of our data generation for Signatera across multiple tumor types is a key competitive advantage over others in this space. In fact, we now have 35 peer-reviewed published studies, with 13 publications so far in 2022 and several more coming soon.

We were pleased to publish our first validation study in ovarian cancer in the Journal of Gynecological Oncology. In addition, our large-scale gastroesophageal validation study, which includes over 900 timepoints, was just accepted in JCO Precision Oncology.

Finally, we are pleased to announce that the CIRCULATE study, now with 18 months of median follow-up, has been accepted in Nature Medicine, which has an impact factor of 87. And we look forward to its publication shortly. Our Organ Health products were a strong contributor to both volume and revenue growth this quarter.

We announced the second publication from the Trifecta study in Transplantation. This publication demonstrated our Prospera Kidney test was superior to the current standard-of-care donor-specific antibody in predicting antibody-mediated rejection. I'll spend more time on this data in a few moments.

Finally, we are pleased to share that an independent committee of our Board of Directors has completed a detailed independent investigation into the allegations made in the March short seller report.

The Board was assisted in this matter by WilmerHale, which as you know is a leading international law firm with deep experience in investigations like this. The WilmerHale team had access to company executives, personnel, communications and other company records.

Based on the investigation, the independent committee, on behalf of the Board, has concluded that the allegations of wrongdoing against the company in the report were unfounded. We weren't surprised with the findings.

As you recall, we had a very detailed response and open Q&A the next morning where we reiterated the strength of our compliance program. And following that call, based on our confidence in the company and the belief in our compliance program, members of the executive team bought stock and took salary in the form of equity for the remainder of 2022.

It's great to have this investigation completed as it involved a substantial amount of time and energy from our team to support the activity on the outside law firm, but we were happy to do the additional work to respond to all of their requests.

Of course, given the high profile nature of that short report and some of the accusations made about the NIPT space in the January New York Times article, we weren't surprised to receive inquiries from regulators, which we have responded to. There have been no specific claims or allegations made, just a customarily broad request you would expect.

As we said from the outset, we feel we have a very strong compliance program in place, and I think wrapping up the Independent Board investigation, which involved a detailed review of the allegations and found no wrongdoing by the company, represents an important milestone. Okay, great.

Let's get into more of the detailed business trends on the next slide. As I mentioned, volumes grew rapidly once again in Q3. As a reminder, in Q3 of 2021, we got a big one-time bump from a key competitor leaving the market, so despite that big base of volumes, we continued to deliver rapid growth.

The Women's Health business continues to expand and we continue to get balanced contributions from NIPT market expansion and competitive wins. I'm not going to go into detail on Women's Health on the call today, so I'll just spend a moment on that opportunity.

First, we think the NIPT market is only about 45% to 50% penetrated, so there's still a large opportunity to help more patients.

Second, we think Natera is well positioned going forward, given our clinical differentiation and our leadership in peer-reviewed evidence, including the SMART trial, which is the largest prospective trial ever done looking at both common80-20s and the 22q microdeletion.

Finally, we think it's possible there may be some critical milestone opportunities ahead where societies may advocate for expansion of prenatal genetic testing. So there's a lot of great things happening behind the scenes. Okay, back to volumes.

In addition to our Women's Health growth, the Prospera transplant test continues to ramp significantly in kidney, and we are now also seeing traction in heart and lung transplants.

The positive volumes in heart and lung are leading indicators that they aren't yet contributing to revenues, and we are working to get reimbursement in those segments in the future. Finally, our largest contributor to volume growth has been the increase we've seen in Signatera clinical volumes.

The next slide gives you detailed historical snapshot of the traction we're seeing with Signatera. In Q3 of 2022, we performed 53,000 Signatera and Altera tests, representing growth of 153% year-over-year. For 2022, we expect to perform 175,000 Signatera and Altera tests for growth of approximately 130%.

The volume growth at this stage is coming from both increases in repeat ordering from the base of patients that started with Signatera previously, and a rapid increase in the number of oncologists that are ordering Signatera and adding new patients.

For example, we estimate that roughly 25% of the 12,000 community oncologists in the United States have ordered a Signatera test in the past quarter. I think that's a strong testament to how quickly we think Signatera is becoming integrated into the standard-of-care.

A little more than half of these volumes are Medicare reimbursed indications like colorectal cancer and IO monitoring, and a significant chunk of the remaining volume is in indications where we have strong data and are actively pursuing Medicare reimbursement.

We had previously committed to breaking out these volumes annually, but I wanted to share these numbers a quarter early, because this slide is important to understanding our growth strategy of Signatera.

Given the volume and the reimbursement traction we are seeing, we think it's clearly the right strategy to continue to establish Signatera as a standard-of-care for MRD and recurrence monitoring, even if the unreimbursed volume growth pressures our margins in the immediate term.

Mike will get into our guidance later in the call, but the rapid growth in Signatera volumes, particularly in the areas that aren't reimbursed today, but we believe we have a near-term opportunity for coverage, is one of the reasons we're increasing the cash burn forecast for 2022.

We continue to expect a major reduction in cash flow in 2023, followed by a path to cash flow breakeven, even with the rapid increase in Signatera non-covered indications that we are seeing now. This next slide shows you that volume growth is translating into revenue growth.

Total revenue growth of $210 million increased 33%, which is a larger increase in our volume growth of 27%. As critical to Signatera volumes growth, the ASP progression is particularly important to the overall model. Clinical Signatera ASPs continued to increase from about $500 last year to over $700 last quarter, and are now over $750 in Q3.

We believe our ASPs will continue to improve, driven by greater coverage. And in the near-term, the mix of Medicare reimbursed tests is improving, and an increasing proportion of our volumes are starting to come from the recurrence monitoring indication, which is reimbursed by Medicare at the ADLT rate of $3,900.

In transplant, we are seeing some limited pressure on ASPs as we see the mix shift to currently uncovered heart and lung tests, although we've submitted for coverage for both of those indications.

In kidney we haven't been impacted by Medicare Advantage or commercial mix shift as our payer mix has remained stable and we've always incorporated those factors into our ASP.

In addition, we've seen some pressure on germline ASPs, but there's a handful of opportunities we're working, including possibly gaining increased coverage with forthcoming guidelines. In Organ Health, we continued to make progress on several key initiatives.

We now have a significant volume of peer-reviewed data across kidney, heart and lung indications. In fact, we published 13 publications in the past 12 months alone. I'm going to highlight on the slide here our second publication from the Trifecta study.

The study demonstrated that donor-derived cell-free DNA testing was superior to the standard-of-care donor-specific antigen.

Both components of Prospera's algorithm, donor-derived cell-free DNA fraction and estimated quantity of donor-derived cell-free DNA, outperform DSA and predict the AMR with an AUC of 0.84 and 0.85 versus the current standard-of-care having an AUC of 0.66.

We expect the continued drumbeat of strong data across our Organ Health franchise to continue in 2023. We're very pleased with how we're doing and of the great work our team has done to help physicians and patients. Now before I turn it over to Solomon to discuss Oncology, I want to talk about our early cancer detection efforts.

We continue the development of our DNA methylation platform from both colorectal and multi-cancer early detection products. We remain on track to present initial case-control performance data for our CRC ECD assay in 2023. On the regulatory front, we continue our discussions with the FDA and are hoping to receive final feedback in 2023.

During our first pre-submission meeting, we had a productive discussion with the FDA with two pathways emerging. The first path includes using the oral health samples for the FDA validation study, followed by a post-market surveillance study.

The second path could use the oral health study for the initial validation, while we're conducting a new prospective study for the FDA. While we await the final feedback from the FDA, we are finalizing the design for either option. We are excited to provide additional information about our ECD program in 2023.

With that, I will now turn it over to Solomon to review our Oncology results in more detail.

Solomon?.

Thanks, Steve. Today I will touch on some of the key drivers of our commercial success in Oncology; highlights from our clinical data pipeline; and I'll dive a bit deeper on the key investments that we're making for the future. Steve described the incredible growth that we've observed with the Signatera MRD test.

As a reminder, this personalized tumor-informed test has been shown to detect cancer recurrence in many months earlier than standard diagnostic imaging. It can help inform treatment decisions and monitoring the quantitative dynamics to help identify early whether a treatment is effective.

The product has been very sticky for both physicians and patients with high rates of repeat testing. We believe our commercial success is attributable to four key strengths.

First, we have a large industry-leading team of tenured sales professionals, and we combine that with a team of more than 50 in medical and scientific affairs, including four board-certified physicians, who've practiced oncology.

This team is calling on oncologists and surgeons, and we've recently started to gain momentum with large strategic accounts around the country, including the VA and other leading groups. We are really very proud to have been selected as a partner to the veteran community, especially heading into Veterans Day later this week.

Number two, our market access team has a strong track record of execution with MolDX, as we've repeatedly secured both coverage and good pricing. For example, our colorectal coverage includes both adjuvant and recurrence monitoring, rather than being limited to just adjuvant. In bladder, it includes neoadjuvant, adjuvant and recurrence monitoring.

We think these distinctions are important and are a competitive advantage. On pricing, we've received ADLT status, which is hard for other MRD labs to replicate. And the pricing we've secured this past quarter for the IO monitoring service is at $7,489 per patient.

Number three, strong user experience with mobile phlebotomy, physician portals, fast turnaround times and electronic medical record integration.

For example, our national partnership with Epic, where access to Signatera is already pre-installed in the latest version of their EMR software, this experience is further enhanced by our portfolio of oncology tests. For example, Signatera and Altera testing from the same tumor and blood specimens. We're always striving to get better.

With this infrastructure in place, we believe that we're poised to scale quickly and sustainably as we prepare for several key milestones ahead, including potential inclusion into the NCCN guidelines, expansion of coverage by Medicare and private payers and readout of several key clinical studies.

And that's the fourth major advantage, our data leadership. Given the significant time it takes to collect longitudinal samples and gather long-term clinical follow-up, this may be one of the biggest advantages that we have.

I'm very proud of the execution of our team, which includes 13 peer-reviewed publications thus far in 2022 and 35 overall across more than two dozen different cancer types. We have 10 additional manuscripts in submission right now, so our evidence generation continues to move at a rapid pace.

In the past three months, we published our clinical validation study in ovarian cancer, a Phase 2 study in uveal melanoma, and we had two oral presentations at the European Society for Medical Oncology Conference in Paris in colorectal and breast cancers. Touching on a few highlights here.

In the multi-site ovarian study, we analyzed 163 samples from 69 patients. And with serial testing, Signatera detected recurrence with 100% sensitivity and 100% specificity, with an average lead time of 10-months versus standard imaging.

There are approximately 20,000 new cases of ovarian cancer diagnosed each year in the U.S., and we believe Signatera can help inform treatment decisions for many of those patients.

In early-stage triple-negative breast cancer, the BELLINI study presented at ESMO demonstrated the power of monitoring ctDNA dynamics with Signatera during neoadjuvant immunotherapy.

This builds upon the significant base of evidence that Natera is already developing in breast cancer, with published studies from the I-SPY2 consortia in the neoadjuvant setting, and the University of Leicester in the adjuvant and recurrence monitoring settings, plus additional manuscripts already submitted for publication, plus the ongoing Phase 3 trial in triple-negative and BRCA-mutated breast cancer, plus the additional studies in the pipeline, which have not yet been announced.

We are deeply committed to proving the utility of Signatera for patients with breast cancer. Finally, in colorectal cancer, leading GI oncologists presented real-world data from over 16,000 Signatera patients with Stage 1 to 3 disease at ESMO.

The results were in line with prior evidence, showing that MRD-negative patients showed no significant benefit from adjuvant chemotherapy. This will be submitted for publication in the near future and will be a great addition to the existing body of evidence.

This sets the stage for our next major readout from the CIRCULATE consortium, with clinical follow-up now extended to 18-months, which has been formally accepted for publication by Nature Medicine.

And in GI cancers beyond CRC, we had another validation study recently accepted for publication in gastroesophageal cancer, coming from a multi-site real-world study with over 900 plasma samples collected from over 200 patients.

We believe this is going to pave the way for Signatera to help inform management in this challenging disease, which is the sixth most common type of cancer in the U.S., affecting approximately 47,000 new patients per year. This one is somewhat personal for me as we lost my father to esophageal cancer last year.

Additionally, we were pleased to see a recently revised practice guideline from the Japanese Society of Medical Oncology, JSMO, providing what appears to be a strong recommendation for the use of serial MRD testing in colorectal cancer. We think this is a great step forward for MRD.

This clinical evidence often drives payer coverage directly or in some cases, it generates data that's required to inform the design of definitive Phase 3 trials.

At some point in the coming years, we believe there will be an inflection point where Signatera will be fully adopted and reimbursed in pan-cancer fashion, much like CT scans, without the need for separate trials in each indication. But we are not quite there yet.

Our current approved indications in colorectal, bladder and immunotherapy response monitoring represent an estimated addressable market of up to 2.5 million tests per year at full penetration, giving our commercial team plenty to do as we work to expand coverage even further.

Finally, to achieve our long-term vision, we are making several substantial investments in the business. Number one, we're expecting and processing tests ahead of reimbursement and expanding our footprint and lab staff. This sets us up to be in an excellent position in the future where we're already scaled for success.

Number two, we are investing heavily in clinical trials to establish pan-cancer clinical and economic utility for Signatera. Number three, in addition to the current LDT version of Signatera, we're developing an IVD version of the product.

This is to support global expansion into Japan and Europe, which require regulatory approval in order to gain market access, and approval by the FDA as a companion diagnostic and eventually, as a surrogate endpoint.

Number four, we're expanding our menu and expect to add a liquid biopsy therapy selection assay to the product menu in the future in addition to what we think is a promising early cancer detection program. Plus, we're advancing the Signatera technology, which we think is going to pay dividends in the future.

Finally, we're building out a promising new data service.

Several of our research partners have already started to access our real-world database with its unique combination of tumor and germline exome data, with serial ctDNA dynamics and clinical outcomes, which together can generate novel insights to inform the development of new therapies and new biomarkers.

By the end of this year, we expect to have run over 250,000 cumulative Signatera tests. So it's not unrealistic to think in the future, we will have over a million Signatera test data points in our database, which we think creates a great opportunity.

Although these are capital-intensive investments, we think they're the right things to do for the long-term future of the business. Now I'd like to hand over to Mike to cover the financials.

Mike?.

Thanks, Solomon. The first slide is just our standard view of the Q3 results. Steve covered the key trends on volumes and revenues. Our Q3 gross margins were similar to our Q2 levels.

Steve touched on the fact that we were able to deliver strong revenue growth despite some headwinds in transplant and germline ASPs, and the fact that we are blowing out the Signatera volume forecast this year.

With the strong volume growth we've had, we continue to experience some backlogs and test sessioning, although we do expect to have that fully resolved during Q4. All of those variables together modestly held down gross margins in the quarter, compared to what we think they can be in the future.

R&D expense was lower in the quarter, due to a change in accounting treatment of expenses related to the small technology acquisition we made last year. But pro forma for that, operating expenses were basically flat sequentially. Since the last quarter, we fielded a few questions on our increase in receivables this year.

For context, if receivables trends had remained constant to Q4 2021 levels, we would have collected roughly $80 million in additional cash by this point in the year.

We think about $50 million of this cash can be collected between now and Q1, and the remaining $30 million would flow in over time as we collect from Medicare on a longer collection cycle. To provide a bit more detail, there are two primary drivers for the increase in receivables.

One, is the temporary issue we described on the Q2 call in which we held a one-time bolus of accrued Women's Health claims in our system prior to submitting to payers for reimbursement. That initially represented about 60,000 claims, all of which will be billed out by the end of Q4.

We estimate those claims could yield roughly $25 million in cash, and we expect that cash to flow in between now and Q1 next year. The second driver is caused by the dramatic increase in Medicare-reimbursed Signatera revenue we have accrued this year.

We now have almost a full-year's worth of IO monitoring claims that we have accrued as revenues, but we were waiting for final pricing and Z code confirmation prior to submitting for payments. Now that we have those details, we will start to bill those claims out to Medicare.

We've learned this year that at least in the near-term, our Medicare cash collection cycle will be slower than what we experience in our commercial insured business.

At present, it takes us about 10-months to get from test support to the cash collections from Medicare, because Medicare patients require additional manual processing, which takes time to complete. Over time, we think this process can get much faster as we implement more automation, but that will be a very gradual path to improvement.

I'll also note that DSOs increase slowed between Q1 and Q2 and DSOs increased very modestly in Q3, 105 days to 110 days or so, so that's two quarters of DSOs stabilizing out. Okay, we've covered a lot of ground today. And I just want to summarize where we stand strategically, especially for those of you that are newer to the story.

We've already established ourselves as a market leader in multiple large and growing markets. We've got a significant lead in generating data and frontloaded our investment in commercial infrastructure. We are reaping the benefits as the volumes come in and the revenues continue to grow.

Because of that we can generate significant returns on invested capital by according these established products onto lower cost sequencers and scaling our cost-efficient Austin lab. So just that base case drives clear visibility to cash flow breakeven.

Steve referenced the integration of our hereditary cancer commercial team within our oncology sales team. That strategic change, plus a small workforce reduction resulted in an elimination of about 115 employee positions this month as part of our 2023 budgeting cycle, with the primary driver being efficiencies we identified during our review.

With that move complete, we think we're in great position to drive growth next year, while holding operating expense growth in the low single-digits. That combination will allow us to very significantly reduce cash burn in 2023, and we still have line of sight to a cash flow breakeven path thereafter.

Of course, we have a number of potentially meaningful catalysts that we think can be achieved in the near-term, as you can see on the right hand side of the page. One or more of these could be achieved as early as this year.

Any one of these catalysts would represent another step function change for the company, and we've spent a lot of time describing why we believe we're in a great position to achieve each of them. Okay, good. Let's get to the next slide and the updated guidance for the year.

Steve touched on the update to the revenue guidance range for the rest of the year. We are seeing strong volumes and positive ASP trends in Clinical Oncology. We are slightly adjusting our gross margin target based on where we stand on a year-to-date basis to 44% to 47%, with stronger Signatera volumes being dilutive to gross margins currently.

The good news here is that there is a path to getting paid on a much broader array of our Signatera claims in the near future, and I expect everyone would agree it wouldn't make sense for us to shut off CRC claims ahead of a possible NCCN guideline change or shut off breast cancer test ahead of, for example, possible coverage for Medicare in breast cancer.

In addition, we do see a path to improving ASP on some of our germline testing through anticipated guideline changes, and we do think there is a path for us to get coverage on heart and lung in the transplant business On our cash burn guidance, we now expect to be at roughly $450 million in 2022 with significant improvement in ‘23 and beyond.

As outlined, this was caused by an increase in DSOs and some pressure in germline ASPs that we think is fixable. As Solomon mentioned, there's always strategic changes we could make if we wanted to reduce cash burn further.

For example, we could limit volumes in uncovered Signatera indications or reduce our clinical trial spend; although we don't think those are smart decisions, given the growth opportunity ahead. And so with that, we're very pleased to share these results with you today. And let me hand the call over to the operator for questions.

Operator?.

Thank you. Before opening the lines for questions, I would like to turn the call over to CEO, Steve Chapman.

Steve?.

Yeah. Thanks, operator. Just one quick clarification, so earlier in the call on the prepared remarks, I said that we expect to do about 175,000 Signatera tests this year. It was actually meant to be greater than 185,000. And I just want to reiterate that we're expecting to see robust quarter-on-quarter growth between Q3 and Q4 in Signatera. Thank you.

Let's open it up for questions..

[Operator Instructions] Your first question comes from the line of Puneet Souda with SVB Securities..

Yes. Hey, guys. Thanks for taking the questions. So a couple of questions. The first one on the 53,000 oncology test, I mean, that was well ahead of us. And more than 185,000 that you are guiding to here and that implies 145% growth year-over-year.

So real -- the first question really is how do you think the ASP growth is going to trend now as a result of the ADLT Medicare payments that you're getting obviously different payments, different indications? So how should we think about ASP? That's number one.

And then number two is really, I think the big question here is given one year of experience that you have had with this assay and the remarkable growth that you're seeing here sort of how should we think about the 2023 growth here? Because obviously, you -- this is -- you have a leadership position here and you're continuing to grow very meaningfully in this market..

Yes. So let me make a couple of comments, and then I think Mike you can dig into the ASP and, I think ‘23 growth trends. But I'll just say, first of all, we're obviously very pleased with the rapid growth and the uptake that we've seen both in colorectal and then in indications beyond colorectal. And we think this is just the beginning.

I mean, if you look at the momentum that we have, I think we're really building a great flywheel here, especially with the data. So we've got a lot of opportunity ahead of us. And we certainly are seeing a shift over time into that recurrence monitoring indication as you'd expect, it's more and more patients come into the pipeline.

But at the same time, we're also seeing very robust growth in that initial time point for new patients coming in. So as we mentioned in the prepared remarks, last quarter, we had 25% of U.S. oncologists to order the product. And I think that's really incredible based on where we are now. And I think that's going to continue to get better over time.

So as more patients shifting to recurrence monitoring as we start to get commercial coverage, as we start to get a broader array of coverage beyond colorectal, IO and bladder. I mean, all of these things can have a positive impact on ASP. So Mike, do you want to touch maybe briefly just on some of the ASP trends and then on ‘23..

Yes, sure. Thanks, Steve. And thanks, Puneet.

Just to level set, like where we've been and where we're going on Signatera ASPs, we started last year with the $500 on ASP and we've rapidly grown that ASP as we've gotten coverage for Medicare and the mix shift has continued to improve, both in terms of mix of Medicare reimbursed CRC patients and also a steadily improving mix recurrence monitoring patients as well.

I think that mix shift is something that's a pretty durable trend into next year. So we exit 2022 in that mid-$700 range. I think there's room to grow another $50 to $100, just purely on the mix shift dynamics alone.

And then beyond that, Solomon touched on, the favorable reimbursement we've now formally secured in terms of pricing on immunotherapy response monitoring. So we'll start to build out those claims as well.

And then we've got a lot of opportunities to significantly broaden reimbursement both in terms of, for example, breast cancer reimbursement for Medicare's a possibility as a broader commercial reimbursement in colorectal cancer. So a lot of really positive drivers that I see as kind of multiyear drivers for the ASP..

Got it. That's helpful. And then on the early screening programs, Steve, I mean, I appreciate the RS data and the FDA discussions which you've had. But this market already has two liquid competitors. There's this tool competitor that could also launch a liquid test. And so just help us think about how do you want to position in this market.

And obviously, that -- my assumption is that, that will involve addition to cash burn. So what does that mean for then for 2023 when you are expect to moderate that cash burn in ’23. So just walk us through how that's going to happen. So thank you. Thanks for taking my questions..

Yes, thanks. So I think, look, we've been in a position before where we're not the first entrant into the market. And I think we did really well in that position.

I think there's an opportunity, I think, now to kind of take a step back and look at the landscape and what's happening as different products get commercialized and then tailor our launch strategy to that.

And that includes I think some things on tailoring the road map and sort of doing the design in a way to pick up certain aspects of the detection that I think would be important. So in some ways, there's an advantage to being in the position that we're in. I’ll also just sort of reiterate, we do have a big one sales team.

I think somewhere kind of in the range, commercial team members all in, I don't know, maybe 300 people or something like that. So we're covering a broad swath of the primary care practices, because most women see their OB-GYN for primary care. We think that's an opportunity for us as we look to commercialize product in the future.

But when it comes to kind of figuring out the trial plan and the opportunity for us there and which path we're going to have to go down we've already gotten that sort of built in to our budget plans over the next couple of years.

So when Mike and I talk about a path to cash flow breakeven that had a very significant reduction in ’23 that includes the necessary spending on the clinical trial that we think we may end up ultimately having to do in early cancer detection. So we've already been built in.

And I think we -- you just have to kind of stay tuned to the data as it reads out, and we'll go from there..

Your next question comes from the line of Tejas Savant with Morgan Stanley..

Hey, guys. Good evening. So sticking on the cash burn theme there, Steve, just beyond the pan-cancer push for Signatera and the bets you laid out in oncology here on this slide.

Is there anything else we need to be keeping in mind? And how are you thinking about that mid-‘24 sort of breakeven time line? Is there any sort of like slippage there? Or do you still feel really confident that you can hit mid-‘24 for breakeven?.

Yes. So maybe let me make a couple of comments and then I'll turn it over to Mike. And as I'd say, first, when you look at the projects that we have to get executed, to get to cash flow breakeven, I think, first of all, we're taking cost management very seriously. I think many of you saw we recently had a workforce reduction, probably about 115 people.

And we've looked at ways to create synergies across the business by integrating the Empower sales team with the Signatera sales team. So we're taking this initiative very seriously.

We also have many COGS reduction projects that includes things like building out new lab capacity in Austin that includes things like moving to more higher throughput, lower cost sequencers. So these are projects that aren't difficult to do, they just have to be done. And they just take manpower and time and planning development work to get done.

So we could see that path pretty clearly ahead of us. Then there's the execution on the ASP, there's things like getting more indications covered for Signatera, getting commercial coverage for some of the colorectal tests that includes improving ASP coverage in other areas of the business.

So as all these things come together, there’s obviously some puts and takes, and there are some things that are directly within our control and there are some things that are a little less within our control, what we've set up, I think, nicely for.

And when you put all that together, I think we expect to see a very significant reduction in cash burn in ‘23, followed by a very clear path to cash flow breakeven. We do think that, that 2024 time line is achievable. I think mid-‘24 is achievable and we're putting all these pieces together and kind of seeing where we hit on that road map.

If we did get in a position where we wanted to accelerate things, there's a lot of levers that we can pull some of the big bets, I think they that Solomon outlined. I mean look, we're doing a lot of things that cost a lot of money, because we think they're important for the future of the business.

Now if we said, look, we want to pull in getting cash flow breakeven by one quarter or by two quarters. We could pull a bunch of levers and we can do that very quickly, but we don't think that's the right move necessarily.

We think being prudent sticking to the plan, executing the COGS, executing the ASP, keeping the expenses relatively flat is the right strategy, and it's good that we're seeing this line of sight in our model clearly at this stage.

Mike, do you want to add anything?.

No, that was quite comprehensive. Thanks, Steve..

Got it. That's helpful. And then one on Signatera for me. Steve, can you give us a sense of, 185,000 tests that you hope to do this year. How are you thinking about the fraction that you anticipate sort of getting paid on at the moment? Obviously, it's going to go up as reimbursement broadens and you submit these -- the prior claims to Medicare as well.

So curious on that bit. And then on the NCCN process, given that you have this Nature Medicine paper here, are you still feeling good about the sort of April, May time frame next for guideline inclusion.

And do you think it should be a relatively straightforward process now that you have this marquee publication out there?.

Yes. So maybe let me comment on NCCN. And then Mike or Solomon, you guys can talk a little bit about sort of the mix that we're seeing between covered and non-covered indications. So on NCCN, I think we all know that they sort of met in August. We haven't seen the readout from that meeting. We think it will come out in the near future.

But I think the unfortunate part was that the circulate paper wasn't included, obviously, because it wasn't accepted and pure reviewed at that stage. So now that it has been accepted in Nature Medicine, which is one of the highest impact journals in existence in the entire field of medicine, I think that being very prominently featured.

I think we'll obviously allow that to be included in future reviews of the guidelines. So we just kind of have to see how things go. But I think the results of the August meeting, just unfortunately are going to be including that publication in a significant way.

I do think there's line of sight as we turn the corner into next year, but we really just have to kind of see how things pan out. Then one, I think, really big upside surprise that was a big win for us was to see these Japanese society and medical oncology guidelines come out.

I think this is a great step forward to see a national guideline like this be formally put in place. And obviously, I think it's something that committee members around the world will be looking at. And I think that's a great step forward. And I think there's a positive read-through there as we look for the future of MRD testing.

Mike, Solomon, do you want to cover kind of what we're seeing from a indication mix, which we covered and non-covered?.

Mike, do you want to take that?.

Yes, sure. So I think that the overall mix is roughly stable to what we've talked about previously. I mean, I think there's kind of some modest improvement that we are glad to see on a sequential basis. So what that means is roughly half of the volumes are falling into indications where we have a Medicare coverage.

Now, that doesn't mean that half of the volumes are reimbursed, because not all of those patients are obviously Medicare patients. For example, what we're seeing in the colorectal cancer indication is something like high-30s percent of those people are actually Medicare reimbursed patients.

And we've seen some really nice progression there from the low-30s to the high-30s over the last year. I think there's potential scope for our Medicare mix within colorectal cancer to continue to improve.

So that's one way to think about mix and the way to think about mix is upfront testing versus serial monitoring, and that's progressing really nicely, perhaps as you'd expect.

We had a really strong launch year where a lot of people got their initial Signatera tests and set up last year and then they're coming back, they're staying on protocol and getting repeat monitoring tests. And so that mix continues to improve in our favor.

So that's kind of a high-level view of the mix, and those trends are modestly above, I think, where we would have hoped to be at this point..

Your next question comes from the line of Max Masucci with Cowen..

Hey, thanks fior taking the questions. First one, just curious, what are the key time lines or checkpoints that we should keep on our radar for the build-out, the refresh of your internal sequencing infrastructure and capabilities.

And I'm curious if the mid-2024 profitability target assumes that the updated or enhanced infrastructure is in place or if you're still outsourcing a bit?.

Yes. So let me comment there first and then we can open it up further. So there are several projects that we have right now that include both, kind of, scaling up our lab infrastructure, particularly, I think, our tissue infrastructure and then also moving up to more high throughput, scalable sequencers for Panorama.

For example, there we're still wanting despite the number of Panorama tests we're doing, we're still running on the next seat. So advancing the sequencing system there, obviously, is a pretty straightforward project. There's other areas where we have significant COGS reduction opportunities in the range of $20 million plus per project.

Now the vast majority of these are in progress right now and are going to be the primary projects that we work on throughout ’23 along with several technology advancement opportunities. Actually, we've got some really exciting stuff coming as well. It's not just COGS reduction.

There's some really, I think, cool technology advancements that we're working on as well. But I would say these things will, kind of, come in more towards the end of ‘23 and as we kind of turn the corner and then in the beginning of ‘24, just given the scale and the size of some of these projects.

Now some of them are, kind of, hitting right now and will be phased in throughout the course of ‘23 and get up to full capacity by the end of ‘23. But then many of the other ones will, sort of, hit in that kind of late ‘23, early ‘24 time frame.

Mike, do you want to add anything further to that?.

No, I think that covers it..

One moment. Your next question comes from the line of Julia Qin with JPMorgan..

Hi, good afternoon. Thanks for taking our question. So on cancer screening, you know that the two potential FDA approval pathways.

Could you talk about kind of the pros and cons for each and what the product's competitive positioning would be under each pathway? Obviously, the two scenarios would have very different cash burn implications as well? So when you said earlier that your current cash flow expectation already fully invest that investment, are you referring to the more cost-efficient scenario using the oral health data with those market studies? Or are you embedding a potential need for a prospective trial before the product launch? And how should we think about the general time frame on that side?.

Yes. Thanks for asking further there. So I think from a -- look, from a positioning standpoint, it's always been our focus to lead with technology and lead with performance. And that's what our goal is here as well.

As I mentioned, we have an opportunity to kind of take a step back and see what's important, adenomas, for example, that maybe if those that started the development multiple, multiple years ago, didn't really kind of have that opportunity to kind of take a step back.

So we're designing our product in a way that I think leverages the strength of our core technology and the capabilities that we have, but also what we know about how the market is developing. And then also the unique data that we have access to.

Now we have 50 plus thousand tumor exons that we ran uniquely early-stage tumor excellence that we can leverage as far as mining data and understanding what's important. So we think leading with technology and leading with performance is always a great way to go.

Of course, COGS and distribution is also important to him, and we'll be focusing on that very clearly.

So when we look at the different pathways, I think that one pathway of running the oral health samples as the FDA validation study and then doing the post-market surveillance study or the other is running oral health as sort of an initial validation and then doing the prospective FDA level study.

Actually, the cost associated with both of those, we think, will be roughly about the same. I think in both cases, we'd be enrolling kind of similar number of patients and we expect the enrollment to take kind of a similar amount of time.

And actually, I think as we start to kind of look at the landscape and some of the newer ways of doing studies, there's been some companies recently that have done prospective trials in the range of 10,000 patients that are, sort of, matched with gold standard colonoscopy and they've executed those studies in the range of, kind of, $15 million to $20 million and took in the range of kind of one year.

So I think there's some newer designs and newer ways to do studies that we intend to, kind of, leverage some of these newer trends, and we think we can do it in a pretty expedited manner in a pretty cost-effective manner. But either way, it's going to cost us kind of roughly the same amount..

Got you. That's very helpful.

And then another one on Signatera, does your current guidance assume any meaningful contribution from the VA contract and the IO monitoring reimbursement? And if not, it's still how much? And how should we think about the magnitude of those incremental revenues going forward in ‘23?.

Yes. So I'll just mentioned briefly, we do include IO monitoring, that's something that although we just got the pricing in. And I think, obviously, there's actually some upside in the pricing versus what we had initially expected. I think there's some -- I think that is generally part of our guidance, and we're seeing good growth there.

The VA is really a new win. And this is something that I think does represent upside.

It's not something we had kind of plugged in Solomon, do you want to talk about the VA and kind of what our expectations are there?.

Yes. So we're really excited about working with the Veterans Administration. This was a public RFP process that was initiated earlier in the year. It was a competitive process that Natera was selected through.

The process was narrowed to only labs, who had a tumor-informed test were eligible, which I think was a good signal of kind of where the market is going with its perception of tumor-informed testing as the standard -- as the emerging standard-of-care. And so we were selected for this contract.

It is sort of as many testing contracts with the VA have gone, it's an initial step. It's in the range of $5 million to $10 million in size, and we expect that Natera is going to provide great service as we have to our other customers and that that's going to lead to re-up opportunities in the future. The contract does cover serial testing.

And it is pan cancer in nature. However, we do expect the initial rollout to be heavy on colorectal cancer, as we've seen with many of our other customers.

And I think the VA is an important example of strategic account adoption that we're seeing with many other leading large oncology groups around the country and I think it's going to contribute to our -- achieving the mission and to our first-mover advantage..

Your next question comes from the line of Catherine Schulte with Baird..

Hey, guys. Thanks for the questions.

First, for the IO $7,500 pricing, how many tests on average are you seeing in that bundle as we try to think about the impact there? And then can you just give an update on where Signatera COGS stand today and the path forward for that?.

Solomon, do you want to take the first one?.

Sure. Yes.

I don't think we've previously talked about average number of tests per patient, but what I can say is that the pricing for that service does reflect an expected higher testing frequency and slightly longer time frame on average than what you would see with the service that was priced for patients with colorectal cancer, for example, for Signatera, where the pricing was just under $6,000.

So that's what the pricing did reflect. Now I think we'll -- when we're announcing more information, more granular data about average test per patient and then we will be able to give more detail on that..

Yes. Let me comment on the COGS question. So just on a blended basis, our COGS, again, just a level set. Historically, we had COGS upwards of $600 on a blended basis per unit that's dropped down through the course of ‘22 to now that's kind of in the low to mid-$500s here in Q3 and expected in Q4.

And then based on some of the improvement projects and in-house projects that Steve was -- we're seeing earlier in the Q&A, we think that can drop down below -- lower again to below $500 on a blended basis per unit next year and just going to continue to get lower as your mix continues to shift towards repeat monitoring, and we just continue to get more efficient..

Got it.

And then for the California NIPT program, if it turns out that, that program is not allowed to stand, are you locked into your pricing with the state? Or is that something you can renegotiate?.

Yes. Let me kind of talk on that. So I think the program, the way was kind of initially devised, there was an RFP process, and we were selected, I think a lot of companies applied and they all had to make decisions about what they thought was best for them.

But in the end, it was Austin and Quest, we're the only ones really allowed to offer NIPT testing in the state. We thought that, that would be, I think, okay, given that we're taking a lower price and we're expanding the volume and there's some opportunities to cross-sell other products. So we decided to go ahead and participate.

Now obviously, it's a lower margin opportunity. It wasn't ideal, but we decided to kind of go ahead with it because we thought it was important to be in California. Now with this recent legal happening where there's an injunction that's been given against the program that prevents them from, kind of, implementing certain aspects of the program.

I think it's not clear exactly we're still, kind of, understanding what that means. So that I think one of the likely path is that we kind of go back to the way things were. And that's, I think, frankly, a positive for us. But we're also fine being in the program. So I think we just have to kind of see how things pan out.

For us modeling goes, we've obviously been very conservative in our guidance both for the, kind of, rest of the year and as we turn the corner into ‘23, assuming, sort of, the worst-case scenario. So any improvement to that worst-case scenario would be upside..

All right, great. Thank you..

We have reached the allotted time for questions. This concludes today's conference. You may now disconnect..