Hello. Welcome to Natera's 2023 First Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, May 9, 2023. I would now like to turn the call -- conference call over to Mike Brophy, Chief Financial Officer. Please go ahead..

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our first quarter of 2023.

On the line, I am joined by Steve Chapman, our CEO; Alex Aleshin, Chief Medical Officer, stepping in for Solomon Moshkevich, who wasn't able to join the call today due to company business; and John Fesko, Chief Business Officer. Today's conference call is being broadcast live via webcast.

We will be referring to a slide presentation that has been posted to investor.natera.com. A replay of the call will also be close to our IR site as soon as it's available. 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 hiring future products, including product capabilities, we expect to release dates, reimbursement coverage and related effects on our financial and operating results.

We caution you that such statements reflect our better it based on the factors currently not a and 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 forward-looking statements. Forward-looking statements made during the call are being made as of today, May 9, 2023.

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

We will provide guidance on today's call, but will not provide any further guidance or updates on form during the quarter, unless we do so in a public forum. We will quote a number of numerical 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. As you can see from the highlights, we are off to a very strong start as we continue to drive robust financial performance maintain our leadership position in cell-free DNA analysis and achieve important milestones across the business.

We process roughly 626,000 tests in the quarter, up 28% from Q1 of last year and 12% sequentially versus Q4. We generated $242 million in revenues in the quarter, which was a major increase, both versus Q4 and year-on-year. We also saw strong volume growth.

We performed 71,000 Signatera and Altera test in the quarter, which is more than 100% growth versus Q1 of last year. We saw a very strong step-up in clinical volumes over Q4 of last year and is generating continued momentum this spring. As a result, we are pleased to be raising our annual revenue guide that we just set two months ago.

We are moving to a new range of $995 million to $1.015 billion for the year. The rest of the elements of the guide will remain the same for now. We are on pace to hit our margin target of 41% to 44% and hit our reduced cash burn target of $300 million to $325 million.

You will see our quarterly cash burn in Q1 cut almost in half versus Q1 2022, and we feel we're on track for our 2024 cash flow breakeven goal that we previously announced. In addition, we've been conservative with the impact of guidelines for 22q and expanded carrier screening and MRD testing in our ASP forecast.

Note that these guidelines are not necessary to achieve our financial goals. We continue to extend our leadership position in women's health with two significant NIPT publications in a third paper that has been accepted for publication.

We now have more than 40 published peer-reviewed papers highlighting the performance of our Panorama NIPT including the landmark SMART study. We think this clinical differentiation continues to be an important volume driver as the NIPT market continues to grow. Of course, we've had a string of wins for Signatera this spring as well.

We continued our data leadership with several presentations at AACR, and we are very excited to announce two oral and 12 poster presentations that are out of this June.

In addition, a new study demonstrated Signatera's performance in Stages three and four melanoma and the expanded I-SPY 2 study demonstrated the value of Signatera for breast cancer patients in the neoadjuvant setting. We think the neoadjuvant breast setting is important, and we will dig into that later in the call.

After securing Medicare coverage for breast cancer in March, we were pleased to receive the major commercial coverage decision for Signatera with a pan tumor coverage policy from Blue Shield of California. In Oregon Health, we secured Medicare reimbursement for Prospera in heart transplantation. We haven't included this in the guidance originally.

So this is a nice win. In kidney, in line with our expectations, we are seeing some modest disruption of the updated Medicare policy. But as you can see from the results in the guide, this isn't making an impact in the context of our overall business. especially with the upside from heart reimbursement now coming in.

I'll get into more details a bit later in the call. Okay, great. Let me get into some of the business trends. We've more than tripled the quarterly volume since the beginning of 2019 and our growth rates remain in the mid-20s despite the significant increase in the scale of a business.

I think that gives a sense of the commercial execution track record and shows that we are offering critical services is in very large patient populations. You can also see that Q1 historically represents a big step up over the prior year and 2023 has proven to be no different.

This is driven in part by the seasonal patterns of NIPT favor in Q1, but also shows our ongoing success in taking market share and represents a continuation of the broader shift from maternal serum screening to NIPT. As a reminder, we think NIPT is only about 50% penetrated today.

This year, our Q1 volume growth was further amplified by three strategies we have been pursuing that increased volume for the long term but we expect it would impact gross margins this year.

One was our decision to continue operating in California and to participate in the prenatal screening program and into effect last fall when most lab providers opted to not participate. California initially required patients to go through the state program.

Despite the low margin of the state's limited NIPT offering, we thought it was important to provide access for this patient population. However, after a legal challenge, the courts have now allowed NIPT to be offered outside of the state program, enabling us to regain some of the lost margin while increasing our volumes.

So we're optimistic that we made the right decision to stay. The second was our decision to serve many new carrier screening customers after competitors exited the space last fall. Many of these customers are high-volume accounts and they have a preference for the broader carrier screening panels that currently have a very low margin profile.

We opted to take on many of these accounts because we feel the clinical utility and guideline support for broad screening is strong, and we hope to see reimbursement rates improve as we go into 2024.

The third is our decision to continue driving Signatera volumes because of the growth ramp and the upfront expense, Signature's margin profile is lower than our overall company margin. However, we expect that delta to narrow as we continue to lower COGS and increase ASP through various initiatives.

Obviously, growing Signatera is the right decision as we are still in the very early days in oncology. We have established a strong competitive advantage for Signatera, particularly with the extensive body of peer review data we generated, which is now leading to strong uptake and more coverage.

With each of these strategies, there was a trade-off between short-term gross margins and the future upside potential. Despite these volume bets, we've significantly improved our cash burn trajectory by continuing to grow top line revenue on top of now much lower operating expenses. You see this happening with our net cash burn reduction in Q1.

Our aggressive cash burn goal is remaining intact and our strong gross margin guidance of 41% to 44% for the year. And again, we've been conservative with the potential upside for future society guidelines, which could boost things further. The next slide demonstrates the strong volume trends are translating into revenue at roughly the same pace.

And as we just mentioned, we think there is upside on 22q broad panel carrier screening and Signatera clinical volumes. As we described in detail in March, we were very pleased to see strong updates to the ACMG guidelines on 22q. On ACOG guidelines, we think the data published in SMART are compelling.

We're hopeful for a positive update soon, but of course, we don't have direct insight into the guideline process. With carrier screening off the back of favorable existing ACMG ACOG guidelines, we're seeing payers start to change their policies, which we think is a good sign.

In oncology, we are very pleased to see sequential progress in our Signatera clinical ASPs moving from the mid-700s in Q4 to the low 800s in Q1. This trend was driven largely by incremental progress in our Medicare and recurrence monitoring mix with a smaller benefit coming from breast coverage.

So for Signatera, we are ahead of schedule on our reimbursement trajectory, and we remain optimistic that we can see continued improvement over the course of '23.

For clarity, we're not dependent on NCCN guidelines to give the ASP to a much stronger place Also, the signatory gross margin benefit from improvements in ASP was offset by the fact that we haven't yet gotten the full COGS benefit on the tissue exome, which is a benefit we expect to realize this year progresses.

The next slide gets into the compelling new publications on our Panorama NIPT. As a reminder, Panorama represents around 50% of the NIPT market in the United States with differentiated capabilities, they're supported by more than 40 peer-reviewed publications.

This includes SMART, the largest prospective multicenter NIPT study, where we clinically validated Panorama's performance in over 18,000 pregnancies with genetic outcomes confirmed for all samples analyzed in the study. With recent publications, we are continuing to add to the body of evidence.

The first published in obstetrics and gynecology evaluated patients who receive a rare Panorama result that could indicate suspected material malignancy. We show that when Panorama sees a very specific type of DNA pattern, more than two third of the time, these patients have maternal cancer.

The PPV of 67% is quite high, so doctors seeing this result are advised to investigate further. It's an extremely rare finding but one that could provide important and potentially life-saving clinical information for these patients and their doctors. The second is a new publication from SMART published in [indiscernible].

This publication found that in a subcategory of about 1 in 200 patients, Panorama was able to determine a significantly increased risk of adverse pregnancy outcomes. These patients were 4x more likely to have preeclampsia and 4x to 10x more likely to have preterm birth.

In these patients, panorama may provide important information about increased risk for adverse outcome which could ultimately help doctors to more closely manage these pregnancies at high risk. Finally, we learned that another publication was accepted from SMART by genetics in medicine.

This is the largest prospective clinical validation of screening for sex chromosome and employees with NIPT across over 17,000 pregnancies in a real-world setting, Panorama's performance when screening for sex chromosome aneuploidies was excellent.

As we are seeing, the SMART study continues to yield critical new insights about NIPT and the real-world performance of Panorama. As the market expands, we think our strong data leadership continue to differentiate Panorama from other NIPTs. Okay. Let me transition over to Oregon Health.

As I mentioned, we were pleased to secure Medicare reimbursement for Prospera in heart transplant. We hadn't originally included this in our guidance because we can't always predict when coverage will come in. Many of you will recall that we launched Prospera in heart ahead of reimbursement.

So now that we're covered, we're already off to a running start with a nice volume ramp. We also have additional data count from the NIH-sponsored prospective DTRT study, which we think will be published later this year. So we're feeling really good about our trajectory in parts.

Also in heart, but extending to kidney as well, we were pleased to see medical society endorsements of donor-derived cell-free DNA testing from the ASTS and AST in addition to recent endorsements from ISHLT and ESOT. These guidelines and statements could serve as the basis for further volume growth where today, the markets are very underpenetrated.

On kidney, we've seen modest disruption in the transplant volumes as physicians worked out how to implement new Medicare policy. Some of the disruption is based on confusion surrounding the policy, which we think will resolve itself over time and some represents a slight shift in ordering patterns.

The magnitude of the addition is in line with our expectations and it's offset somewhat by the upside from our heart coverage. As you can see from our raised revenue guidance, this isn't making a material impact on our overall trajectory. Looking ahead, the recent society endorsements provide a potential path to expand access and increase penetration.

Plus, we've got new data from the now fully enrolled proactive trial that we think could help further expand patient access. The first readout will be at ATC in June. We think it's impressive data that can benefit the entire industry in support of donor-derived cell-free DNA testing, so we look forward to sharing it with the community.

Now let me turn it over to John Fesko, Chief Business Officer, to give a few additional updates on chronic kidney disease in oncology.

John?.

Thanks, Steve. As a reminder, we also have a chronic kidney disease genetic testing product line, Renasight. Renasight looks at conditions like polycystic kidney disease, or Alport syndrome, in germline DNA of those patients who have already been diagnosed with CKD.

In the future, we think every patient who is diagnosed with CKD could get genetic testing. The market opportunity is potentially very large because over one million patients in the U.S. are diagnosed each year, and there are about 37 million patients in the U.S. living with CKD.

To help define the clinical utility of genetic testing in this context, Natera sponsored the definitive RenaCARE study. We started working on this in 2019 and collaborated with leading investigators from Colombia, Yale, Penn, UPMC, NYU, Mayo, Cleveland Clinic and others to design the study.

We completed enrollment last year with more than 1,600 patients from over 30 centers. The RenaCARE study is designed to eases the incidence of genetic conditions in the CKD population and then importantly, how Renasight's genetic findings could impact clinical management. Some have asked us what success looks like in the RenaCARE state.

While we're waiting to publish the results, the best proxy we found is hereditary cancer testing. We talked about this last quarter, but I think it's an instructive comparison. The previous large study of nearly 3,000 cancer patients published in general oncology, 13.3% of patients had a pathogenic germline variant indicating hereditary cancer.

Of those patients with a high penetrance variants had resulting treatment modifications.

At RenaCARE reached out, we will be looking at these same metrics, including the fraction of study participants who have a pathogenic variant associated with CKD as well as what fraction of patients who test positive had their treatment modified after the pathogenic variant is discovered with Renasight, stay tuned for more information over time.

Okay. Let's dive into some of the oncology trends on the next slide. We covered the strong overall volume growth at the top of the call. The growth in our clinical oncology volumes in Q1 is actually masked somewhat by a lumpiness in our pharma volumes that favor Q4.

Typically, pharma companies will order a larger number of tests in Q4 and as they need to utilize excess budget for the year. Our clinical volumes were actually up roughly 17% sequentially just since Q4 of 2022, and we've seen continued strong momentum so far in Q2.

We are continuing to concentrate on the core indications where we have Medicare reimbursement. More than 80% of our volumes are now coming from covered indications.

We were also really pleased to see ASPs make a meaningful step up in Q1 from the mid-700s to the low 800s, which we estimate was driven by the mix of time points ordered and some incremental benefit of breast reimbursement.

Looking forward to the rest of the year, we think there are some opportunities to improve our collections within covered indications, expanded to new indications and drive more commercial coverage as well. On that note, our first commercial coverage policies in March.

The recent decision from Blue Shield of California is a good case study for the kind of progress we are making with commercial plans for are increasingly appreciating the clinical and economic utility that Signatera offers.

The fact that this was a pan-tumor coverage policy highlights the breadth of our data across a number of cancer types, which we think is a key differentiator.

In addition to Blue Shield of California, we also secured coverage from Blue Cross and Blue Shield of Louisiana for serial testing with Signatera for plan members diagnosed with colorectal cancer, muscle-invasive bladder cancer and pan cancer IO therapy monitoring.

We think there's momentum on commercial coverage, and we look forward to seeing how things progress. Right before I turn it over to Alex, I want to briefly touch on our IP portfolio. As we've discussed in the past, we have a broad portfolio of MRD IP, only a small portion of which has been deployed in litigation.

The remainder is not yet in play as we assess how things evolve. With that, I will now turn it over to Alex to review our oncology data in more detail.

Alex?.

chemotherapy, endocrine therapy, targeted therapy or immune therapy. The purpose of neoadjuvant therapy is three. The first is to decrease the risk of distant recurrence; the second is to downstage the tumor to allow for more effective surgery; and the third is to assess treatment response in order to guide adjuvant therapy.

However, there are several unmet clinical needs in the neoadjuvant setting. Namely, it's hard to know if the adjuvant therapy is working and if certain patients can avoid or shorten the duration of toxic chemotherapy. The NCCN guidelines themselves state explicitly that accurate assessment of response to new adjuvant therapy is difficult.

So there is an opportunity for Signatera to fundamentally change management here. Now let's go over the data. In the study, 28 patients with over 1,000 plasma time points were analyzed.

TTA status and trajectory during neoadjuvant therapy were found to be significant predictors of metastatic recurrence or death in HR-positive, HER2-negative as well as triple-negative patients.

As you can see on the slide, patients who have a CTA negative after neoadjuvant therapy, has improved survival even when a residual disease was detected at the time of surgery. This is a big deal. Since these patients are being treated with aggressive adjuvant regimen, in the postoperative setting, which may not be necessary.

Additionally, in triple-negative breast cancer, this effect could be observed even earlier.

As soon as just a few weeks after neoadjuvant therapy was initiated, suggesting that if a patient was to clear their CKA after just one or two cycles, they may be eligible for deescalation of their neoadjuvant regimen and potentially avoid certain forms of additional adjuvant chemotherapy.

The second significant finding was that patients were CTA negative at tZERO. This is a time point before new adjuvant therapy was initiated, had exceptionally favorable long-term outcome with significantly improved relative distant recurrence free survival compared to patients who are Signatera-positive at that time point.

This is very powerful, indicating that CTA negativity and diagnosis may identify a favorable subgroup of patients that in the future may be managed much less aggressively in terms of the intensity of their chemotherapy, surgery or their radiation treatments.

We believe this data can support reimbursement in the neoadjuvant setting and help accelerate the general adoption of neoadjuvant treatment for breast cancer patients. It also enables an earlier entry point for patients into the Signatera ecosystem, right at diagnosis, which then allows for seamlessly monitoring these patients after surgery.

The data you're seeing today is the result of an incredible amount of time and effort as we initiated our relationship with I-SPY Consortium way back in 2015. As a next step, we are now coordinating with the I-SPY team. to make Signatera a prospectively integrated biomarker in their future studies.

Finally, we've kept a busy academic conference schedule this season with a number of key studies being presented at AACR last month, and more being planned to be presented at ASCO in June. Let me highlight a few significant data sets that may be of particular importance for our program going forward.

At AACR, we have five poster presentations including new data in esophogastric as well as muscle-invasive bladder cancer, highlighting the utility of Signatera in the neoadjuvant and adjuvant leadings. At ASCO, there will be significant new data spanning across two oral and at least 12 poster presentations.

I want to highlight just a few of these studies. The first being a poster discussion of the INTERCEPT program being conducted by MD Anderson. This poster reports on the clinical utility Signatera in the surveillance setting of CRC.

Additionally, we look forward to the readout from the Empower 1 study being sponsored by Regeneron in non-small cell lung cancer, which we think will demonstrate the predictive nature of CTA dynamics in patients receiving immune therapy.

We know that non-small cell lung cancer remains the largest market for immune therapy use with upwards of 60% of non-small cell lung cancer patients. receiving an IO containing regimen.

Lastly, updated data from CIRCULATE Japan, including a focus on the role of CTA dynamics in predicting an adjuvant therapy benefit and risk of recurrence will also be present. Finally, I want to provide a brief update on our ECD program.

We continue to make good progress in developing blood-only early cancer detection assay, first for colorectal cancer and later for multi-cancer. We are completing a case-control study that should read out by the end of the year with a presentation to follow thereafter.

We remain committed to prudent investment into this program, as we've said before, we will provide updates if and when a significant inflection in spending is warranted. With that, let me hand the call over to Mike to review the financial results.

Mike?.

Thanks, Alex. The next slide is just a summary of the quarterly financials versus last year. Steve covered the encouraging revenue and volume trends and the three market share initiatives that we've been taking to set up the business future growth at the cost of short-term gross margins.

Even with those initiatives underway, I was pleased to see our revenue growth tracking in line with volume growth, which speaks to some of the progress we are making with average selling prices across the business, particularly in Signatera. Average cost of goods sold per unit picked up modestly in the quarter versus Q4 last year.

This was expected given the continued significate volume ramp, and we expect to get some additional cost savings from those COGS in Signatera later this year as more of our exome volume continues to be brought in-house. I wanted to emphasize the point Steve made earlier on the call with respect to seasonality in health business.

Q1 is usually our strongest quarter, and I think that trend was really amplified in Q1 this year with California NIPT and carrier screening volume gains taken off in November and December last year.

When we have had these really big first quarters in the past, women's health volume has been flat to something down sequentially and then returned to sequential growth in the second half of the year. If that was the case this year, we would still be in a great position for an excellent 2023 overall.

Of course, Signatera appears to be in a secular growth phase as we continue a significant ramp in volume growth, as we talked about earlier in the call. Last point I'd make here is the noticeable gap between revenue growth and expense growth.

We've spent a lot of time on prior calls laying out this strategy, build best-in-class commercial channels that can win and then hold that expense base steady while the revenues and volumes continue to scale.

We've done that once before when Natera was really just a women's health business, and we are really pleased to be showing that we are now achieving scale again after a few years of building the organ health and oncology channels. The next slide, I think, gives you a sense of the operating leverage we are starting to see in the business.

We've burned a little more than $160 million in Q1 last year, and that is down to about $86 million in Q1 of this year. I will caution you that cash burn will have some swings in the working capital, CapEx and other factors. So we may not have just a linear progression downward on cash burn quarter after quarter.

And just to keep things simple, this cash burn metric is just the change in cash and equivalents and short-term investments. So it includes some modest impact of unrealized gains and losses from our investment portfolio. The overall trajectory is quite clear in my view.

The key from my perspective is driving strong revenue growth on flat or low growth operating expenses. I was also pleased to see DSOs trend down once again the second consecutive quarter despite very robust revenue growth. That's a function of us getting some return on our revenue cycle operations focus.

We hope to shorten the cash collection cycle further as we continue to gain experience with the nuances of Medicare and Medicare Advantage plans for Signatera reimbursement. Another opportunity for upside is gross margin traction driven by broader reimbursement win.

Steve talked about the fact that we could yet see some movement on 22q and carrier screening this year, which would be significant wins given the volume scale we are operating in now, and I think we are showing very encouraging progress on the Signatera ASP.

Even without some significant benefit from improved clinical practice guidelines, we continue to think that we are on track to hit our previously stated cash flow breakeven target next year based on our Q1 performance and our outlook for the rest of the year. . Okay. So on the next slide, let's talk about that revised outlook.

Steve mentioned we are moving up our expectations for revenues versus the guidance we provided two months ago. Those of you that have followed the company for a while know that we prefer to be cautious with these razors earlier in the year.

I think the strong win has helped performance in Q1, driven by account wins, sets us up for a great year -- but as I mentioned, we're going to monitor the impact of seasonality in the summer months, especially.

The guide assumes steady ASPs in NIPT, some continued erosion in the carrier screening ASPs and the ASPs for kidney transplant and modest improvements from here in Signatera clinical reimbursement. That leaves plenty of scope for these assumptions to be conservative over the course of the year, but we think that's the appropriate forecast for now.

We are leading the rest of the guide element and change. On gross margins, we are comfortable that the ASP trajectory and cost savings expected this year will bring us into the guided range of 41% to 44% for the full year. The operating expense plan remains on track, and cash burn is really similar in concept to the revenue guidance.

We think there is certainly scope to outperform, and we want to see a progress come in on a couple of our initiatives this year before getting more aggressive on for. So in summary, we think we are off to a strong start this year and look forward to taking your questions.

Operator?.

[Operator Instructions] Your first question comes from the line of Tejas Savant..

Maybe I'll start with 1 on the Signatera guideline decision commentary here, Steve. You talked about sort of the committee not sort of fully considering the CIRCULATE data.

Can you just share some color on what sort of drives your confidence around that? And more importantly, the degree to which you're viewing the time lines for that guideline inclusion as a swing factor in your medium-term Signatera CRC estimates?.

Yes. Thanks, Tejas. So first, nothing in our guidance. We're really in our path to cash flow breakeven includes that we're going to get an NCCN deadline for CRC. So I mean, we're trucking ahead. We've got a lot of momentum both on volume and on ASP without having that upside in.

Now with that said, of course, we set ourselves up here in really, I think, a very nice position with all of the data that Alex outlined. I think a lot of people probably didn't realize that we have randomized trials that are going to be reading out sort of towards the end of this year.

And then the Altera trial, which we think is going to be reading out in 2024. I mean, certainly, that will put us in a very, very strong position.

As far as the 2022 vote is concerned, we've confirmed that at the time of the CIRCULATE study, the GALAXY study was not considered but it was included in the discussion section, which was written several months after the vote occurred.

So I think that's sort of in line with what we expected as we realized that the GALAXY study wasn't going to be published before the August 2022 meeting, that's what we've been saying, I think, now in the last 3 earnings calls with respect to timing. . Now what happens going forward from here? We do know there's another meeting in August.

We can't say exactly what's going to happen out there, meaning it's good that GALAXY is now published and can be formally considered. But certainly, we've backstopped future decisions with all of the new data that's coming out and the suite of randomized trials..

Your next question comes from the line of Puneet Souda..

So first one is on ASP and maybe Mike can address some of this. Mike, could you talk a little bit about ASP both on the women's health side of the business as well as Signatera. Sort of what are sort of the trend lines here in terms of improvements? We were seeing some impact on carrier testing. So maybe just talk about that.

And how should we think about the ASP overall?.

Yes. Thanks for the question. So first on Signatera, we're ahead of schedule put simply on the ASPs.

We've talked a lot in the past about what are the components for drivers of the Signatera clinical ASP and it's always a function of that product being -- so pretty early days in launch and that ASP being quite immature relative to the price points that we for the product.

So I think previously, we had set the expectation that we would kind of exit this year with an ASP for clinical Signatera in the 800s or will be in front of us. We actually got there in Q1, as I think Steve mentioned in his prepared remarks. So from here, not it's not really a reason in our mind why we would see that retrench.

I think the guide contemplates kind of modest improvement from here. And we hope that we can keep that traction billing for all the reasons that we've talked about on this call and previously. And it's principally volume mix between initial and recurring time point.

increasing concentration of our volumes in these tumor types but we have a Medicare reimbursed speechead, increased traction of the business coming from Medicare reimbursed patients, particularly in colorectal cancer. Just to name a few, in addition to the kind of new reimbursed tumor types and now getting some commercial coverage.

So lots of good drivers there. On the women health side, ex California, and I think ASPs were strong. They were -- we sequentially grew them in the quarter. So I was encouraged by that.

We knew and Steve talked about this prepared remarks that in order to stay in California, we would take -- we would take a penalty on blended ASP there, but we wanted to stay in the state because we feel like the long-term rationale for being there, both clinically and for the business.

And as Steve mentioned, that we're cautiously have to be taken off the way that has trended so far. The guide contemplates a little bit more erosion on the care screen front. And that just goes back to the fact that we've actually kind of leaned into this previously talked about headwind that we're seeing on the care reimbursement.

As a few competitors have exited the market, we've actually opted to take share there because we think the clinical utility and the guidelines are actually quite strong and it's table for us to improve the reimbursement profile in that business. And that's something that we'd like to see progress on here in the calendar year.

So I know that's a lot, but those are kind of the main drivers of [indiscernible] in Natera. Overall, I'm encouraged about the ASP trajectory in this business as you look out '23 into '24..

I'll just add too, even with the best that we've taken in sort of some of the temporary initiatives where we traded off volume for margin, we're still keeping our guidance intact for margins for the year of 41% to 44%, which we think is very strong. So things are actually looking very positive..

Our next question comes from Catherine Schulte..

This is actually Tom Peterson on for Catherine. Good to hear about progress with commercial payers on the Signatera front.

I guess what additional progress are you contemplating for the remainder of the year? And have you made any additional progress in States where we've seen genetic testing legislation in past?.

Yes. So I think one of -- there's definitely a big opportunity in commercial coverage for Signatera that we think is going to come in over time. It all starts with having very strong peer-reviewed data. And that's where we really have an extensive leadership position, I think, now with more than 40 peer-reviewed papers.

And you can see from some of the slides that Alex showed -- it's not just expansion into commercial payers for colorectal, but we still have a long way to go with the MolDX program and with Medicare. I think we've said we might be able to do seven or eight new MolDX submissions this year based on the strength of the data that we're putting out.

So certainly, that's an expansion opportunity as well as what we're seeing on the commercial side. On the commercial side, I think it's great that we are seeing this traction and we're seeing some of the bipartisan legislation supporting expanded access for everyone. We've seen several more states now sort of put this legislation in place.

I think the kind of back end of us filing the appeals and getting paid is still at the very early stages. So it's hard to really comment at this point on what the impact is going to be overall in the commercial plans. But the good news, the legislation continues. I think we're seeing progress.

We're seeing an increased number of states adopting the positive led solution. And then again, we see plans like Blue Shield that have done their own economic analysis and determined that it makes sense to add coverage for Signatera, which is great, and I think there'll be a little bit more of that as well..

Our next question comes from the line of Julia Qin..

This is Marta on for Julia.

I just wanted to ask, you recently got the CMS coverage for Signatera in breast, have you seen any meaningful impact in terms of uptick testing volume from that extension? And if not, when do you expect to be in? And how should we think about it for the rest of the year?.

Yes, that's a great question. So we've actually been seeing an increase in breast at the kind of proportion of the business for a while because there's first breast is a very big opportunity. When you just look at the number of patients that are available. Second, we think there's very high clinical utility.

And third is we have incredible performance data, very, very strong performance data in breast in both adjuvant and recurrence monitoring setting and now in the neoadjuvant setting in both of those settings or all of those settings, we have initially published a smaller data set, and we've now followed those initial publications up with extensive data sets that include roughly 300 patients and well more than 1,000 time points.

So this very strong data, combined with the coverage, combined with the operational execution is leading to an increase in the number of tests that are coming in. I think that's a very good sign..

Our next question comes from the line of Dan Brennan..

Great. Maybe two parter. Just on the neoadjuvant opportunity, it sounded like the I-SPY data, you kind of commented could generate reimbursement, but I know you also cited your coordinating with the team there to make Signatera prospective biomarker in future studies.

So can you just kind of give us a sense of what the plans are for finally for coverage in neoadjuvant in terms of timing and data and kind of what the impact could be? And then just secondly, on the women's side, just on 22q in carrier screening, can you just remind us like -- I know they're not in guidance, but assuming if they were to come through, how do we think about the potential impact when that happens?.

Yes. So on the I-SPY study in the neoadjuvant setting, I think it is definitely one of the settings that we think has a very high clinical utility where we have very strong data now with new publication with 283 patients and 1,024 plasmic time points.

So this is one of the biggest breast studies that's ever read out for donor-derived cell-free DNA, and we do plan on submitting this to MolDx for coverage in the very near future. When it comes to the opportunities in women's health, look, I think we sort of look at this as an opportunity to expand access to more patients.

And any time you generate the type of data that we've generated that shows exceptionally high clinical utility for tests.

Like, for example, in the SMART study for 22q, we showed that we could with very high sensitivity, very high specificity and a positive predicted value, which was really incredible to sort of 50% range, we could test for this disorder that affects roughly one in 1,500 pregnancies.

So any time you're generating that type of data it is the type of thing that guideline committees are going to look at. And we think that's great because it expands access for patients and I think helps bring the test to those patients that may not otherwise have access. ..

Our next question comes from the line of Alex Nowak..

All right. Great. I was hoping you could expand a bit more on the kidney headwinds you're facing the MolDx coverage change. You said physicians are working through it. The headwind is tracking to your expectations.

So I guess just to expand on how is the reimbursement change just impacting testing in the field? What would the guidance have been without that headwind? And then, just how does this long term change your outlook on the viability of the transplant testing market?.

So I think anytime there's a change or clarification coming from Medicare? It just causes some sort of confusion with respect to what it actually means, what physicians should do? Do they need to make any change at all. And I think there's a sort of swirl of misinformation out there. Of course, that just causes some volume disruption.

And I think as we're kind of working through that we're seeing that maybe things have been misinterpreted in various places. And I think the good thing for us is, I guess, one of the biggest changes that was announced was that you can't get reimbursed for RNA and cell-free DNA testing at the same time on the same patient.

And that was never part of Natera's strategy. And I think that's probably the biggest change that has occurred. And so we weren't impacted by that at all.

So we're really just impacted by this sort of slight volume disruption, I don't know I'd say maybe in the kind of 15% to 20% range of where accounts have sort of just kind of stopped ordering or temporarily push pause while they sort of work through things.

Now for us, the revenue from donor-derived cell-free DNA testing, kidney business, I think is sort of mid-single digits when it comes to kind of the overall book of business. So it's a very tiny fraction of our overall revenue.

And I think that disruption is offset now by the new revenue that we're seeing coming in from Prospera heart in many ways, not completely offset, but we do have a nice ramp in heart now that that's reimbursed that is helping to offset things. But of course, you're seeing that we raised our guidance.

So overall, the broader company is growing nicely even though we did see the sort of 15% to 20% pullback in the kidney claims..

Great..

Sorry, there's a second part there. I think what do we think overall about the business. Look, we have a lot of different opportunities organ health that we think are very positive. I think the proactive trial is reading out in June. I think that's going to be good for the entire industry. There's going to be some great information there.

that support donor-derived cell-free DNA, overall. I think all these new guidelines that have come out like really in the last six months, we've now seen four strong society guidelines that didn't exist before.

And I think that creates an opportunity to expand volume, I think, potentially of coverage reassessed and maybe get into sort of commercial coverage in the future. And then, of course, in the last couple of calls, we've been talking more about Renasight.

We think that's a great opportunity to really change how chronic kidney disease patients are treated, and we think that potentially could have very high clinical utility, and we're looking forward to the readout of the RenaCARE study later this summer..

Our next question comes from the line of David Westenberg..

Hi this is Johan[ph] on for Dave.

Can you give any comment on what the gross margin might have been if accounting for the California NIPT and the expanded carrier screening headwinds?.

Mike, do you want to take that?.

Yes sure.

So -- yes, I think gross margins would have been at least higher without those, but I think it's a little bit hard to just separate out those two things because those two events have also caused some disruption in the marketplace I think is temporary, and we are kind of leaning into that as one of the market leaders is going to take a share.

So it's hard to take credit for some of the account wins and then turn around and say, well, yes, you would have gotten the gross margin? I mean there's a penalty to be there. And so we're going to now in return for to have a longer-term benefit that we think that you can see as early as they were this year and going into next year.

So we feel really good about that play. I mean I think without those and maybe I'll just include kind of the third kind of the press onwards with continues to impair growth. I think gross margins would have been kind of in the range that you've seen in the last year so from us.

So it's very intentional move on our part, and we think it's quite constructive for the long term of the business..

Our next question comes from the line of Liza Garcia..

So congratulations for another great volume print on Signatera. So another Signatera question for you. But you guys have been doing really, really well. It obviously plans to kind of ad indications, which kind of drive new volumes with that, I think, more exome testing.

And so if you can just kind of see qualitatively to kind of how to think about that on the margin side? And obviously, you alluded to how still you're not really getting that exon benefit, right, from the shift in kind of how you're doing your exome testing and really kind of how to think about the 2023 margins and kind of heading into 2024 on the oncology side, that would be great, kind of in there a little bit..

Yes. So I'll comment first and then maybe, Mike, you can jump in. Yes. So on the exome side, any time we get a new patient for Signatera, we've run an exome and that's one of the more expensive parts of the protocol that does lead to increased COGS.

And we've had various projects underway to reduce the COGS but still deliver the same very high-quality information for physicians. And we're kind of midstream on that. I think most of the work there is going to be executed in sort of the '23 time frame, but there's still going to be some opportunity there as we expand beyond that.

But look, I mean, the volume is growing very quickly. And you also have to focus on scaling up, while at the same time, you're focusing on COGS reduction. Across the company as a whole, we have an extensive amount COGS reduction projects that are underway. And I'll just give you sort of some basic insight on some of these.

I mean, one is as simple as moving the Panorama tabs from the NextSeq to the NovaSeq, right? So that obviously saves a decent amount on a per sample basis. That's a project that now is going to be applied across more than 1 million Panorama tests that are being run.

So obviously, as we get sort of per sample savings because we do sequencing costs that's applied across the very large base of NIPT samples. So there's all types of projects like that. We have 4 or 5 pretty big COGS projects that each are in the range of sort of $5 million to $20 million in savings on an annualized basis.

And executing those, none of which really require like an extreme amount of sort of new research, they really just require kind of the development work of integrating things within the LIMS system, doing the standard kind of verification validation studies and then launching, those are all part of our road to getting the business to cash flow breakeven.

Again, on the margin side, it's sort of both COGS and ASP. And you can see some of the card projects are hitting this year some of the ASP projects are hitting this year, and that's how we're getting into that range of the kind of 41% to 44% by the end of the year.

And then just as a reminder, in order for us to hit that we really don't need any of these big milestones that are out there like getting 22q guidance from ACOG or getting NCCN guidelines for colorectal or really seeing a sort of drastic improvements on expanded carrier shrink..

Thank you. And that is all the time we have for questions. We would like to thank everyone for their time today and have a pleasant rest of your day..