Welcome to Natera’s 2023 Second Quarter Financial Results Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference call is being recorded today, August 3, 2023. I would now like to turn the conference call over to Michael Brophy, Chief Financial Officer. Please go ahead..

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our second quarter of 2023. On the line, I’m joined by Steve Chapman, our CEO; Solomon Moshkevich, General Manager of Oncology; and Alex Aleshin, Chief Medical Officer. Today’s conference call is being broadcast live via webcast.

We will be referring to the slide presentation that has been posted to investor.natera.com. A replay of the call will also be posted to our IR site as soon as it’s available. Starting on Slide 2.

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, August 3, 2023.

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

We will provide guidance on today’s call, but will not provide any further guidance or updates on our performance during the quarter unless we do so in a public forum. We’ll 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, we had another very strong quarter. Volumes were up more than 23% versus Q2 of last year, with all products delivering strong growth. Revenues grew even faster, up 32% versus last year and 8% sequentially.

We paired that revenue growth with continued COGS improvements to achieve a gross margin just above 45% compared to 39% in Q1. This, combined with stable operating expenses, led us to deliver another significant reduction in our quarterly cash burn.

We were pleased to be significantly increasing the revenue guide this quarter to a midpoint of $1.025 billion, and we remain on track for our OpEx and cash burn reduction targets in the guide. We believe we are on track to hit all the financial goals we set for this year and beyond. We also continue to strengthen our leadership in data generation.

In June, we attended the American Transplant Congress and unveiled key data from the ProActive trial, showing the value of our Prospera test in kidney transplant rejection. ProActive is proving to be a pivotal trial, and I’ll share some of those findings here shortly.

In women’s health, we published the fourth paper from the SMART trial in the Journal Genetics in Medicine. This study was the largest prospective clinical validation of screening for sex chromosomal aneuploidies with NIPT.

We were pleased to earn additional peer-reviewed recognition for SMART, further demonstrating the strength of our data and the clinical value of our Panorama test. In oncology, we crossed a key milestone in the quarter with the publication of more than 50 peer-reviewed papers.

We also had a substantial presence at ASCO including readouts on key Signatera data in collaboration with some of the most well-respected healthcare institutions in the country.

We shared excellent performance in the EMPower Lung trial demonstrating the utility of Signatera in lung cancer, where IO is the standard of care, which supports our on-market and reimbursed IO monitoring indication. And in CRC, we had key readouts from the GALAXY arm of CIRCULATE-Japan and the INTERCEPT trial from MD Anderson.

Coupled with the completion of the enrollment in the ALTAIR trial, and several other prospective randomized studies underway, we continue building a robust platform to demonstrate the prognostic and predictive value of Signatera in CRC.

Altogether, we think these trials continue to build a strong case for future NCCN guideline inclusion, which Solomon will cover later in the call. In terms of other key updates, we recently announced two very significant litigation results in our favor.

First, a jury in Delaware reached a unanimous verdict in favor of Natera in the patent infringement lawsuit filed against ArcherDX and Invitae. The jury found that all of accused products, including personalized cancer monitoring used for MRD indication infringed three of our patents and that all three patents are valid.

The jury also awarded a $19.35 million award in past damages including lost profits and a royalty of 10%. At a future date, a judge will determine whether to grant an injunction against ArcherDX and Invitae’s personalized monitoring MRD test. If that is not granted, we will ask the judge to award ongoing royalties at a rate higher than 10%.

And second, we also announced in July, a favorable decision in the false advertising case brought by a competitor. The court reversed findings returned by a jury in March of 2022 and overturned the previous damages award, thereby reducing it from $45 million down to $0 [ph]. Great.

So with that, let’s get into some of the business trends on the next slide. We had another strong volume quarter, growing more than 23% versus last year. This represents strong year-on-year growth across the business and another particularly strong Signatera quarter.

We saw our typical trends in seasonality in process units in the women’s health business, where Q1 is usually our biggest quarter and Q2 is slightly down.

This trend was amplified this year because we made a concerted effort this spring to reduce volume from some of the larger accounts that we’re not generating an adequate margin and didn’t have a clear path to improvement.

Given our scale, we think that’s a sensible exercise, and we’ll continue to look for opportunities to improve women’s health product margins in the second half of this year.

Having said that, we are still committed to the initiatives we discussed earlier this year where we’ve taken our lower margin volumes in exchange for future upside, which we’ll touch on later. Overall, in volumes, we’re in some very large markets that are underpenetrated, and we think there’s a lot of opportunity for growth.

particularly in Signatera given the huge market size in the very early stages of penetration. Speaking of Signatera, the next slide shows yet another very strong year-on-year volume trend, almost doubling in size once again.

Compared to Q1, we saw an acceleration in absolute units and the growth engine really continues to be in clinical indications where we have Medicare reimbursement. That trend was also apparent in the Signatera clinical ASP, which were once again well ahead of the schedule.

Recall the Signatera ASPs were in the $500 a couple of years ago and that progressed to the mid-700s in Q3 and Q4 of last year. We were very pleased to be in the low 800s in Q1, and now we’ve progressed again into the mid-800s ASP range.

At the same time, we’ve made some meaningful COGS progress on our tissue exome workflow and reducing supplier costs in some places, which further pushed up our gross margin for this product. There’s still more progress to be made, and Mike will get into some more details on the drivers of these trends later in the call.

The volume, ASP and COGS achievements helped to drive our revenue and margin outperformance in the quarter. I’ll touch first on revenue on the next slide, which highlights our sequential revenue trends over the last five quarters. I highlighted the sequential trend from Q1 to Q2 of last year compared to this year.

As you can see, we saw an acceleration of revenue growth between Q1 and Q2 of this year despite the disruption in the transplant business that we noted on the last call. The revenue growth was driven by Signatera clinical, pharma and women’s health, which Mike will discuss shortly in the call. Finally, on gross margins.

This quarter, we had an excellent margin of 45%. This was amplified a bit with some onetime events. So on a normalized basis, we think margins would have been around 43% in Q2. This is a big step up from our 39% in Q1, and Mike will go over a few of the sustainable areas that led to our significant margin improvement later in the call.

Our strong execution enabled us to overcome the negative impact that some of the bets we made where we took on lower margin volume in exchange for future opportunity. We believe these bets are on track.

First, the California prenatal screening program volume is now largely shifted back to Panorama versus Vasistera, which has helped us on both margin and revenue. Second, we still believe there’s upside opportunity on expanded carrier screening as coverage improves in the future.

And finally, of course, we believe in growing Signatera, despite it dragging down the margin. As Signatera margins improve, which they have been, the margin drag impact will reverse.

While these still have room for upside with our strong COGS and ASP execution, we feel very good about continuing to deliver our strong gross margins around the middle of our guide range for the rest of the year. Okay, now let’s move on to women’s health. We now have more than 80 peer-reviewed publications in our women’s health business.

As a reminder, one of those, the SMART study is the largest prospective NIPT study ever performed with greater than 20,000 patients enrolled across 21 global centers. All Panorama NIPT results included in the analysis were confirmed with molecular diagnosis as clinical truth.

As I mentioned, the recent Genetics in Medicine paper is the fourth from the SMART study was published officially in May. This real world data confirmed Panorama’s excellent performance when screening for sex chromosome aneuploidies across over 17,000 pregnancies, and all screening results were validated with clinical outcomes.

This is the largest prospective clinical validation study of NIPT for sex chromosome aneuploidies. In addition to this latest publication on sex chromosome aneuploidies, we also studied the performance of Panorama to detect common aneuploidies such as Trisomy 21.

Our results showed a very high sensitivity and specificity resulting in a 95% positive predicted value for Trisomy 21, which is very strong. One of the most significant aspects of the SMART study are the results on 22q.

The 22q results demonstrated a high prevalence for 22q of approximately one in 1,500, a high sensitivity and a low false positive rate of 0.05% resulting in a positive predicted value of 53% or approximately one in two.

This PPV is excellent and as a comparison, it’s more than 10 times the positive predicted value of maternal serum screening of Trisomy 21, which is an approach ACOG still endorses. We feel the data supporting the performance in clinical utility of 22q screening is very strong.

Shifting gears to carrier screening also in Q2, the FDA approved the first gene therapy for pediatric patients with Duchenne muscular dystrophy who have a confirmed genetic mutation in the gene. DMD affects roughly one in 3,500 boys causing progressive muscle weakness, heart issues, and breathing difficulties.

One of the most important benefits of carrier screening is early diagnosis for conditions like DMV, so that families and doctors can prepare for and have the earliest possible access to treatments like the one that just got approved.

Our Horizon carrier screen includes the option to screen for DMD along with many other conditions with treatments that are either FDA approved or currently in trials.

So we think this strengthens the case for broad panel carrier screening where we think the clinical utility is strong with a positive ACMG guidelines supporting expanded carrier screening 2021 and a positive statement from the National Society of Genetic Counselors earlier this year.

We are hopeful that these and other changes can allow us to help more patients and pave the way for improvements in reimbursement rates moving into next year. As many of you know, ACOG held their annual meeting in May, which led to the scheduling of two prenatal committee working groups, one in June and one scheduled for September.

Based on that timing, we anticipate having more information later this fall on any changes to future guidelines. Okay, moving on to Oregon Health. Earlier in the year, we discussed the negative impact of the recent Medicare change and the change is now fully reflected in our guidance.

As we said before, the impact was offset somewhat with our receiving heart reimbursement, and now that we’ve seen some of the lost kidney volumes come back as well, we think we’ve come out the other side well positioned.

In addition, we’ve taken steps to realign the Oregon Health business where we are now in a position to drive volume and revenue growth while keeping our expenses stable. I wanted to start with a few key stats on clinical adoption and volume growth.

On Renasight, which is our test for chronic kidney disease, we’ve continued to demonstrate strong clinical utility, including data that was presented at the National Kidney Foundation Conference in April. We’re looking forward to the publication of RenaCARE study, which we think can provide strong support going forward.

In heart and lung, we’ve continued to have productive dialogue with our customers, including at the recent Annual Meeting of the International Society of Heart and Lung Transplantation. Thus far in 2023, 50% of the top 20 transplant centers have used Prospera Heart and 50% of the top 20 transplant centers have used Prospera Lung.

In addition, the number of active users of Prospera Heart has nearly doubled in the past 12 months where the test volume has more than doubled. Of course, we were pleased to receive Medicare coverage and heart transplantation earlier this year, which provided some nice upside on reimbursement.

We also look forward to the Prospera Heart data we expect will publish later this year from the prospective DTRT study sponsored by the NIH. In early June, we had a strong presence at the American Transplant Congress meeting showcasing the utility of Prospera and kidney and heart transplantation.

This included three oral presentations and several posters in a symposium led by medical experts in the field. I’d like to spend a few minutes on the ProActive data that was featured. As a reminder, ProActive is a large prospective multi-site donor-derived cell-free DNA study in kidney transplant patients.

The study has enrolled renal transplant patients from 54 participating centers that are being followed over three years. At ATC, we outlined several highlights from the interim analysis of the first 1,600 patients with 18 months of follow-up data.

Importantly, the data demonstrates that Prospera Kidney is a leading indicator of rejection, predicting antibody mediated rejection up to four months, and T-cell mediated rejection up to two months in advance of biopsy.

This evidence is impressive and highlights the value of Prospera as a tool for rejection that can provide early insight to graft health when used as an ongoing monitoring tool.

This ProActive data bolsters recent sentiments from leading medical societies and organizations like the American Society of Transplant Surgeons and the European Society of Transplantation who have endorsed the use of donor derived cell-free DNA surveillance to rule out subclinical rejection.

We look forward to publishing data from the ProActive study as early as the end of this year in sharing additional readouts in the future that we believe will help transform the current standard of care for kidney transplant patients. We think the evidence will help bolster the case for coverage of Prospera in the surveillance setting in the future.

Now, I’d like to hand the call over to Solomon to cover our recent progress in oncology.

Solomon?.

Thanks, Steve. The oncology team had a great quarter with strong growth in test volumes and ASP improvements in our turnaround times, the publication of several new peer-reviewed papers and strong showing at ASCO with over a dozen posters of presentations.

We were highly energized by the feedback at ASCO, particularly from clinicians who believe that now is the time to be implementing MRD assessment into routine clinical practice. This was a sentiment we heard a number of times during the conference, and we are seeing it reflected now in the volume growth as well.

Let’s take a deeper look now at two key studies from ASCO. The first one I’ll cover is the EMPOWER-Lung 1 trial. This was a Phase 3 registrational trial sponsored by Regeneron, which helped to support FDA approval in 2021 of their immunotherapy agent cemiplimab for first-line treatment of advanced non-small cell lung cancer.

Using banked samples from that trial, Natera measured ctDNA at three different time points, pre-treatment, week three of treatment, and week nine of treatment. The analysis validated the predictive nature of ctDNA dynamics in lung cancer patients receiving immunotherapy.

Specifically, patients with an early increase in ctDNA had the highest risk of death and patients who achieved ctDNA clearance or a deep production of at least 90% had significantly improved outcomes.

This study was well received as it was a focused assessment of IO monitoring, specifically in advanced lung cancer, and one of the largest data sets of its kind with 175 patients.

With Medicare coverage already in place for IO monitoring across solid tumors including in lung cancer, we believe this data can help support broader adoption and perhaps broader reimbursement.

As a reminder, non-small cell lung cancer is the largest patient population where immunotherapy is currently utilized with we believe upwards of 150,000 patients now eligible per year. The second study from ASCO we want to highlight is the INTERCEPT Study.

INTERCEPT is an independent program of the MD Anderson Cancer Center, which integrates MRD assessment into routine clinical practice for all patients with resected Stage 2, Stage 3, and Stage 4 colorectal cancer, and if funnels patients into clinical trials if they test positive in the surveillance setting without radiologic evidence of disease.

In this report at ASCO, the group shared analysis from over a thousand patients demonstrating the feasibility and utility of routine surveillance with Signatera. The two key findings were first of the patients with ctDNA detected during surveillance.

Nearly half or 49% were found to have radiologic evidence of disease, though in many cases the diagnosis required reflex imaging with MRI, PET CT or biopsy, not just a standard surveillance scan. This created the opportunity for early intervention into metastatic disease before it became symptomatic, which is known to improve outcomes in CRC.

Second of the ctDNA positive patients who were without radiologic evidence of disease, 59% were successfully enrolled into ctDNA guided clinical trials, gaining access to novel cellular therapies, cancer vaccines, and other novel treatments. This report is making waves in the GI community because it helps answer some key outstanding questions.

Is there utility in ctDNA-based recurrence monitoring and what does one do with a positive result? This study indicates strong clinical utility enabling early therapeutic interventions for patients with metastatic disease, as well as enrollment into clinical trials, and it sets an example for the whole community in how to successfully adopt Signatera into routine practice.

In the surveillance setting, we look forward to more data and insights from the INTERCEPT program in the future and to other leading cancer centers being inspired to replicate this model. Also in CRC, we completed enrollment in June for the ALTAIR trial.

As a reminder, ALTAIR is part of the CIRCULATE-Japan platform, which includes three prospective arms as shown on this slide. First, the observational GALAXY study plus two randomized Phase 3 studies ALTAIR for treatment escalation in the MRD positive population and VEGA for de-escalation in the MRD-negative population.

With ALTAIR, we aim to establish the utility of extended adjuvant treatment as well as treatment on molecular recurrence in MRD-positive patients. We know there is a significant percentage of MRD-positive patients who will not respond to standard adjuvant chemotherapy and who we believe may benefit from a drug called TAS-102.

Given that TAS-102 is already approved for use in the metastatic setting when chemotherapy has failed.

In the trial MRD-positive patients or randomized to receive TAS-102 or placebo after completing standard chemotherapy, it's important to note that for anyone who was initially MRD-negative and who entered the VEGA trial, if follow on Signatera testing changes to ctDNA positive within two years, they can switch out of VEGA and get randomized into the treatment arm in ALTAIR.

This may definitively show the benefit of treatment on molecular recurrence for CRC patients that are being surveilled with Signatera. We believe this trial will demonstrate how Signatera can improve outcomes for CRC patients with detectable ctDNA before it becomes evident on imaging.

We expect primary results on ALTAIR to be available mid next year, and given the randomized nature of the study, we believe a successful outcome can be definitive and practice changing. ALTAIR and INTERCEPT should be considered in the context of Natera's broader clinical roadmap in CRC one of our most important areas of investment.

With the GALAXY study, we look forward to presenting updated data in an oral presentation at the ESMO Conference this October, now with disease-free survival data up to 24-months, and we are submitting our published data for review by the NCCN Committee.

The work on these studies has been underway for many years with multiple readouts expected between now and 2026.

We expect the results will continue to demonstrate both the prognostic and predictive value of Signatera and given the scale and quality of these studies, including upwards of 15,000 CRC patients across different settings of care, we think this pipeline creates a significant competitive advantage.

We plan to follow the same playbook and multiple other disease indications, particularly in breast cancer. Our first study in breast cancer was the Coombes paper published in 2019, which helped us secure Medicare coverage for Signatera uniquely across all subtypes of the disease to achieve adoption.

However, into practice guidelines and broader reimbursement from private payers, we believe we need to generate more evidence including additional high quality biobank studies as well as randomized clinical trials. For example, we have spoken before about the EBLISS [ph] expansion cohort.

This will have three times more patients and five times more plasma time points than what was previously published with significantly longer follow-up beyond five years. We presented the results at ASCO in 2022 and looked forward to the publication of this expanded cohort.

In addition, earlier this year, we published new data from the I-SPY 2 trial, which examined patients in the neoadjuvant setting before surgery. We're now building on our partnership with the I-SPY 2 trial consortium, integrating the testing prospectively into their platform.

The use of neoadjuvant treatment in breast cancer is growing in popularity, and there are several unmet clinical needs where we think Signatera can help.

For example, can certain patients shorten the duration or skip chemotherapy altogether and proceed faster to surgery? Conversely, if a patient has rising levels of ctDNA, should they switch earlier to a different type of therapy? Across all of these settings, neoadjuvant, adjuvant and surveillance, we have multiple Phase 2 and Phase 3 studies in the pipeline across all subtypes of disease, but with extra emphasis in HR-positive HER2-negative disease.

Given the size of that population, the only studies that have been announced to date are DARE and LEADER, which are ongoing, and which as a reminder are Phase 2 studies that monitor HR-positive HER2-negative patients in the surveillance setting and offer treatment on molecular recurrence.

This clinical pipeline gives us multiple shots on goal in breast cancer and with co-sponsorship from our pharma and academic partners, the investments are efficient enough to work within our financial goals. We look forward to announcing more details in the future about all of these studies on this page.

In summary, we believe the quality of our clinical data, the breadth of our Medicare coverage, the volume and speed of test adoption and the strength of our research partnerships will allow us to continue extending our first mover advantage in breast cancer. With that, I'll turn it over to Mike Brophy to discuss our financial results and outlook.

Mike..

Thanks, Solomon. Okay, the next slide is just the standard results slide. These covered the volume and revenue trends and how we're seeing strong momentum in each. Revenues were up significantly with the majority of the outperformance driven by growth in Signatera clinical and also pharma.

We also saw women's health revenues come in ahead of expectations, and that benefited in the quarter from a surge in carrier screening volumes we received late in Q1 and resulted out early in Q2, so we had those units in our Q1 test process number, but they were accrued as revenues in cause [ph] when we read the results out to patients results early in Q2, I'd estimate that to be about a $4 million revenue benefit in the quarter.

Steve noted the excellent gross margin performance, and while we did have some one-time benefits in the quarter, we also saw substantial organic margin growth driven by COGS improvements, vendor renegotiations, continued Signatera ASP traction that we think can be sustainable and a shift in the Signatera mix to more recurrent monitoring units.

It's also worth recalling that we've intentionally penalized gross margins this year to pursue three core volume-based initiatives that Steve described earlier.

We've benefited from volume mix shifting back to Panorama in California, but the other initiatives are not fully realized yet, so getting into the mid 40s gross margin at this early stage, I think is a very encouraging sign.

Total OpEx was down slightly in the quarter compared to Q1, and the balance sheet remains very strong as we can see on the slide. All those trends contributed to another significant reduction in our quarterly cash burn, as you can see on the next slide.

As Steve mentioned, we believe we are on track to reduce our annual cash burn this year by roughly $150 million. As we've discussed in the past, we're driving these cash burn reductions as we get operating leverage of the commercial infrastructure we built up most recently in the oncology space.

We continue to make significant investments in our COGS reduction activities, including switching our core women's health products to more efficient sequencers and driving additional savings from improvements to our Signatera and carrier screening workflows.

We saw another modest sequentially quarterly reduction in our DSOs versus Q1 as we continue to get more efficient in our revenue cycle operations, particularly for Signatera.

I've described in the past how cash burn and DSOs can vary quarter-to-quarter, but we have seen a linear improvement in these last four quarters, so I think that's good evidence that we are on track to reach cash flow break even in a quarter in 2024. Based on the volume ASP expense trends we're expecting.

As we said before, that forecast leaves aside any significant investment in early cancer screening. We remain on track to deliver preliminary data early next year. We'll share that data with you before we make decisions on further investments. Okay, good. Let's move on to our revised guidance on the next slide.

As Steve mentioned, we are pleased to once again be raising the revenue guide for the year driven by stronger volumes and Signatera ASPs. Previously, the guide was $995 million to $1.015 billion and we're now completely resetting the range so that the previous top end is now the bottom end of our guide range.

Given the significant step up in Q2 revenue plus the one-time impact described above, I think the pacing for the year implies a stable Q3 with a larger step up in Q4 revenue.

I think the gross margin results this quarter highlights that while gross margins will bounce around quarter-to-quarter, we think this range is clearly achievable on a full year measurement.

We're also modestly bumping up SG&A for the year to account, in part for some non-cash expenses incurred in the first half of this year, but total SG&A is still expected to be down versus 2022, and so accordingly, the cash burn guide remains intact, and we feel good about reaching our targets there, as Steve and I discussed.

So with that, let me hand a call over to the operator for questions.

Operator?.

[Operator Instructions] Your first question comes from Tejas Savant from Morgan Stanley. Please go ahead..

Hey guys, good evening, and thanks for the time here. Steve, I want to start with the, the reproductive health business and gross margins. You talked about, California volume largely having migrated over to Panorama now and also the exit of certain accounts where there wasn't enough margin upside.

So, in light of that dynamic, why wouldn't sort of 45% sort of be the floor for gross margins for the rest of the year? And does that sort of number contemplate the impact of bringing in exome sequencing in-house for Signatera as well?.

Yes, so I guess first I'll say, we did benefit, from both of those, on a certain basis. But, I think as Mike mentioned in the gross margin, there were some onetime events, that I think accounted for, something like 250 basis points, that I think hit us in Q2, but won't necessarily be there in Q3. So we do expect, margin improvement as the years go on.

But I think, Mike, you might be better to kind of get into the details on this.

Mike?.

Yes, so in addition to the California initiative pages, there was there's two other big initiatives, right? One is, the growth in extended care screening volume that we described in the past couple quarters, and that that's been really, we've had a had a big step up in volumes there and then also the strategy to continue to grow Signatera, and while the gross margin there is currently improving, it's still, still dilutive to the kind of the corporate gross margin.

So those two tend to have, what we think is a, as a temporary drag on gross margins. Now, we did some cost cutting beginning of the year to kind of make you net neutral on the EBIT line for that. But those are still kind of temporary drags on gross margin, but both, I think are pretty bullish signs for the future.

So that's, one out of three so far and we're making good progress on the other two obviously..

Got it. That's helpful. And a quick follow up on Signatera, I think Steve; you talked about sort over 30% of U.S. oncologists ordering Signatera, now.

Can you share what proportion of those accounts are still exclusively using Signatera for MRD and where, physicians are sort of dabbling across other providers as well? I mean is there evidence for sort of that sustainable first mover advantage is essentially sort of staying intact for you particularly, as other sort of competitors make a concerted push and does that some of the litigation that you guys mentioned here potentially delay sort of competitor entry into that market?.

Yes, that's a great question. So we've seen continued growth in the number of accounts that are using us and particularly in the accounts that are using Natera in a sort of sustainable way. Our account retention rates have been very high, and I think that has to do with sort of the stickiness of the product.

I mean once you do whole exome sequencing and set up a patient for MRD, it's not going to make sense to go back and sort of redo the exome sequencing on that patient and set them up again for MRD testing.

So I think we really haven't seen any of the tumor-informed MRD companies out in the marketplace, if they have, it's been on like an extremely limited basis. I think, of course, Guardant and the Reveal products are out there, we see them from time to time.

We do know there are some accounts that sort of use both products, but there's always going to be competition. And I think this is a very large market.

And we think particularly in this setting, because of the stickiness dynamic that I described and because of the extensive leads that we have in peer-reviewed publications and coverage and just setting up our infrastructure, that the first-mover advantage is going to be incredibly important here.

From the IP standpoint, as we've said before, we have a very strong portfolio of intellectual property related to cell-free DNA particularly in the field of oncology. And you're seeing, I think, the first of those wins now with the suit that we described – the win that we described. And I think there's other ongoing suits.

If someone's infringing on our IP, we intend to defend ourselves..

Very helpful. Thanks guys. Appreciate the time. .

Next question from Catherine Schulte from Baird. Please go ahead. .

Hi guys. Thanks for the questions. I guess first, just blended ASP took a pretty big jump up in the quarter, even if I back out the $4 million benefit that Mike called out. I know Steve already talked about Signatera ASPs.

But could you just talk to the ASP trends within your women's health business in the quarter?.

Yes. First, I'll make a couple of comments, and then maybe, Mike, you can kind of get into the details. And so I think there's opportunities that we've talked about before on improving ASP that come from just sort of turning the crank on some of the billing operations things and improving our processes and protocols.

And obviously, we're working on those. In addition, we're also seeing, I think, the kind of first beginnings of some good coverage for expanded carrier screening. I think that's still very early and there's still a lot of opportunity there to improve the ASP, but certainly, there's some upside.

Mike, do you want to talk about any of the specifics?.

Yes, sure. I mean, I think in addition to the drivers that you mentioned, the Signatera ASPs were up again [indiscernible] up again in the quarter. And we had a modestly stronger kind of pharma contribution this quarter, which if you're kind of measuring this on a total revenue basis. We tend to amplify ASPs.

I think in terms of like on a per unit kind of revenue divided by test reported basis, I do feel like the step-ups we've seen here look sustainable to us. These are fairly organic moves other than the one kind of timing benefit we got on carrier screening. We feel really good about kind of the organic drivers for Signatera clinical ASP, for example.

So really pleased with the results..

Okay. Great. And then the FDA is expected to put out a proposed rule on LDT regulation this month.

Have you guys had any conversation with the FDA around that potential and any other thoughts you have there?.

Yes. I mean the way that we've kind of set this up is we've tried to thoroughly validate all of our tests and deliver very high-quality peer-reviewed publications. And in the event that there is some change from a regulatory standpoint, we think we're very well positioned there.

We're obviously in touch with various agencies and governing bodies and doing, I think, what we can to try to stay informed on what's happening to make sure that we're prepared. But the key is you have to have very thoroughly validated products an extensive peer-reviewed publications, and we have that.

And that puts us in a great position should the guidelines change in anyway..

All right. Great. Thank you. .

Next question from Rachel Vatnsdal from JPMorgan. Please go ahead Rachel..

Great. Thank you. So first up on women’s health, you mentioned that ACOG had prenatal meeting scheduled for June and September, I believe expanded carrier screening and microdeletions were on the agenda for that June meeting.

So can you tell us if you have any information regarding how that meeting went? And then when – how quickly could we see ACOG endorse 22q, could it come right after the September meeting or just updated time line expectations there?.

Yes, that’s a good question. I mean, look, we really don’t get any information with respect to kind of what happens in these various meetings or even details, all the topics and things. So, I think, we just kind of take a step back and look at kind of the trends that are happening from a bigger picture.

What are the topics that ACOG might be interested in? And I think, certainly 22q given the SMART study and expanded carrier screening given that significant portion of the community is now doing expanded carrier screening or topics that I think would be of interest.

What we focus on is publishing data like we did in the SMART study, largest prospective trial that’s ever been done in NIPT, excellent performance specs for 22q, both on disease incidence, sensitivity, specificity, positive predictive value. And we think it meets all of the criteria that one would need to issue coverage.

But again, we don’t really know exactly what’s happening. We just see that the meetings are occurring and hoping that they’re discussing. If they do put out a guideline, I would imagine that we would find out more information kind of late fall on the status and what the funnel timing is going to be..

Great. And then a follow-up here, just shifting over to oncology. Can you give us an update on your latest conversations with private payers? I understand you have Blue Cross Blue Shield of California on that pan-cancer assay, which is a positive.

But how are those conversations evolving, especially ahead of some potential updates from the NCCN guidelines? And then also, I know that American Cancer Society is still trying to push in a lot that commercial payers should offer the same Medicare testing.

So can you just walk us through your latest expectations there? Really, what could that mean for the Signatera business? Thank you..

Yes. So American cancer study has really been leading the charge in a very bipartisan way on their biomarker bill. And from what we understand, it’s going well. I think they now have 10-plus states that have adopted it into law. I think from our side, it’s still early.

Once the bill goes into place, then you have to see if they’re going to pay and kind of what the hoops are that you have to jump over. But it’s certainly creating discussions with payers, and I wouldn’t be surprised to see some additional commercial coverage come in from other regional plans, maybe national plans in the near future..

Next question comes from Puneet Souda from Leerink Partners. Puneet, please go ahead..

Hey guys, thanks for taking the questions. This one is more broadly for oncology. I mean you had CRC first and then the adjuvant settings and then you had IO indication also now you have breast.

Maybe can you talk about the sort of the trajectory for indications? And when do you think we can get a pan-cancer indication here? As you know, that happened in CGP as well. It took some time. You obviously have been leading this market for some time.

And so I just want to get a sense of when do you think you can – we can reach that? And if there are Solomon and Alex on the line, would love their thoughts, too..

Yes.

Solomon, why don’t you take that one?.

Happy to. Hey, Puneet. So yes, we’ve – obviously, we’ve enjoyed some good success with Medicare thus far. And we have multiple additional submissions that are planned for this year, one under review right now. I think you can look at the data that we’ve generated and see where the validity is shaping up to support coverage decisions.

We’ve discussed before. We think we have strong data in gastro and esophageal cancers in melanoma and looking forward to generating and publishing that data in pancreatic and lung and recently a paper in Merkel cell carcinoma. So I think there’s a very nice pipeline shaping up.

Keep in mind that I think that’s – each one of those is going to add a smaller and smaller percentage of the patient population that we test as well. So the coverages we’ve gotten thus far have been super important, especially with breast cancer coming in uniquely across all subtypes.

To your question about pan-cancer coverage, at this point, we are really planning for generating the relevant data indication by indication. And if we see an opportunity to make that inflection we’re definitely going to do that. But we know how the NCCN guidelines committees operate as well. They’re also structured and organized by indication.

And so we think the smart thing to do is just continue generating great evidence..

Got it. That’s super. And then maybe for Mike, or Steve, as you look at the carrier testing business, obviously, you had one of the competitors that exited and you have benefited from the volume.

I just wanted to get a sense of sort of majority of the volume migrated at this point? Or do you expect to continue to see benefit there in the rest half of the year? Thanks..

Yes, I think – sorry, Mike, go ahead. Yes, I was just going to tell on the volume standpoint, I think that the volume kind of shifted over in sort of late Q4 and Q1. But go ahead, Mike, if you want to comment further..

Yes. No, that’s exactly what I was going to say. I think you had kind of a bolus kind of shift over Q4, Q1. I think you do have some – you got some seasonality here in Q2. And I expect to see some – just continued growth in that business in Q3 and beyond, particularly in Q4 as per our normal pattern..

Great.

And then do you expect any ASP improvements there too on ECS side?.

Mike, do you want to take that?.

Yes, sure. So just on the carrier ASPs, I mean, the guide actually implies kind of a modest erosion and the carrier screening ASP is consistent with what we talked about on the prior people in the Q4 and the Q1 call, and that’s really just out of kind of conservatism from our perspective and just, I think, a prudent way for us to plan the business.

I think what we’re looking for there to get sustainably higher ASPs than the care screening business is to get that guideline that Steve was referencing earlier, until then, we’re kind of in a holding matter and hoping to see that improve over the next few quarters..

Got it. All right. Thanks guys..

Next, Matthew Sykes from Goldman Sachs. Please go ahead..

Hey guys, this is Prashant [ph] on for Matt. Congrats on the quarter and thanks for the question.

Given the Dobbs versus Jackson Supreme Court ruling enacted in Mississippi in June of last year, how do you see that impacting your women’s health segment test volumes, if at all?.

Yes. I mean there’s been various Supreme Court rulings that have come out. And I think we haven’t seen any impacts in the areas where those have come out. I appreciate the question..

Okay. Got it. Thanks.

And then what is the current mix shift of private practices and hospital systems using NIPT versus maternal serum screening? And how do you see this evolving over the next six months to 12 months?.

Yes. We think NIPT is around 50% penetrated now overall. So obviously, there’s still a lot of room for growth there. There’s a certain portion of patients that never get screening. And so they’re not going to be eligible. So you’re never going to get to 100% penetration.

But we’ve said over the next two years to three years that this can get up to kind of 80%, 85% penetration, something in that range. And we do think there’s continued shift away from maternal serum screening toward NIPT..

Got it. Thanks a lot..

Next question is from Dan Brennan from TD Cowen. Please go ahead Dan..

Great. Thank you. Maybe just one on the guidance. I think on gross margin, Steve, I think you mentioned kind of middle of the range is kind of fair for the second half.

So should that be the base case in terms of gross margins and maybe if you can walk through the puts and takes around that? And then just on revenues, really strong quarter, and it looks like you raised the midpoint by about $20 million, just – which is about the level of the beat versus consensus.

So is that kind of conservatism? And maybe how should we think about Signatera and women’s health kind of in the back half of the year?.

Yes. Mike, why don’t you talk a little about the margin consensus and sort of revenue guide. And then I’ll make a couple of comments on just COGS and ASP overall that I think can help improve the margin, but go ahead..

Yes, I mean, I think, our approach to guidance remains the same as it’s been the last eight years, which is we try and both guide and forecast the business with what we hope becomes a measure of conservatism.

So I think what there’s certainly upside to the guide that we put out here, and we’ve talked about some of the potential drivers of the upside on the call, and Steve can list a few more when he gives some details. But that’s kind of standard playbook for us on the revenue guide. I think this year that also really applies to the gross margin guide.

Gross margins of this business as you guys know, those of you who have followed those story for a long time know that gross margins can bounce around paramount quarter-to-quarter. And you’re certainly seeing that here in the first half. But I do feel like the range we’ve given now is a safe range for us to get through when measured on a full year.

I’d expect that to be kind of as you exit this year and going into next, I feel like several of these drivers are going to continue to push that gross margin up. So I’ll pause there.

Steve, did you want to add some more color or detail?.

Yes, I just wanted to kind of jump off on some of the longer-term opportunities as well. I mean, look, we said 45% gross margin this quarter with a couple of those percentage points from one-time events. So kind of net at around 43% sustainable. Now, there’s a lot of opportunities to increase that as we go forward.

I mean, there’s significant COGS reduction projects that we’re working on right now. So moving to higher throughput sequencing instruments, we’re at the tail end of finishing some of those projects.

We’ve identified three – potentially four logistics based COGS improvement projects that we can, we think we can save $10 million plus maybe $20 million on the COGS line as we move to implement those.

And then there’s still room to run to bring additional tissue sequencing in-house and negotiate certain aspects of the business with suppliers at a deeper level.

And then lastly on Signatera, as more and more and more volume moves to the recurrence monitoring setting, which is the shift that we see occurring as the business gets bigger, of course, more people are staying on the test and they’re moving, shifting to gross margin, the COGS go down, so that improves the gross margin.

And then on the other side of things, you’ve got ASP improvement opportunities. And so we have just turning the crank on billing operations and just getting better. And I think that is going to help in the future, and we haven’t really seen the impact to that yet. But there’s been a lot of work that’s done there.

And then we have getting paid for a higher percentage of the tests that we perform, of course, in Signatera every time we get one of these commercial policies, every time we get a new Medicare policy that helps with expanded carrier screening as payers come on and start paying or as guidelines come out that helps.

There’s things like 22q if that does come into guidelines that could make a significant impact. So the range that we’re in right now while we’re seeing improvements and we – it’s sustainable, we’ll see continued improvements.

There’s a lot that we can do that we are doing over time that are going to put us in really very strong position in the future..

Great. Thank you for that. I know NCCN is not included in your guidance, obviously, and you’ve talked about being an upside driver, but just kind of remind us in terms of like, timing and when we’d hear on this and kind of how you guys are feeling about it right now? Thank you..

Yes. I’ll make a couple comments and then maybe Solomon. So I think this is really the first year that we have a shot at NCCN guidelines because I think we were very kind of clear leading in last year that, hey, if the Galaxy paper’s not published, it’s not going to be considered. And in fact, it wasn’t considered in the vote.

So this is really the first year with Galaxy being published that we have a chance to be considered in the vote. There’s different levels of guideline and kind of what we’ve said is, we think we can be potentially included as a footnote which would be where they list out the major prognostic factors for colorectal cancer.

And so I think getting in there as a footnote where Signatera is listed that would be a win. And then, maybe down the road being listed in the official algorithm recommendation table. Now, they’ve also kind of highlighted a couple things where they said, hey, these are areas where we’d like to see the additional data.

One was randomized trials, and Solomon just described the ALTAIR study.

I mean, it’s incredible that we have completed enrollment on a large scale prospective randomized study looking at extended adjuvant treatment and escalation for MRD positive patients and treatment on molecular recurrence for patients that start off negative and become positive on surveillance.

So the fact that the randomized trial is done enrolling is an enormous step forward, and we plan on reading that data out next summer. The other area where they said, they wanted to see data was on the clinical value of surveillance.

And the great news is the INTERCEPT study, which we weren’t even involved in, we just ran the testing for MD Anderson showed two very significant paths for clinical utility for patients that are positive with surveillance. So we think both of those are very good signs. And then, it’s also you have to think beyond CRC as well.

I think, there’s other products and other indications where we have good data and course we’re kind of looking at opportunities there as well..

Next question comes from David Westenberg from Piper Sandler. Please go ahead, David..

Hi. I got two questions. I’ll just ask them both up front. In terms of your progress in carrier, has it been renegotiation of expanded carrier or has it been a little bit more conversion of carrier to maybe the more basic panel? And then just on my – actually I’ll pause and I’ll ask the second one..

Yes. So I would say, initially what happened when one of our competitors, I think closed up shop we saw big influx of very low margin business coming in. And we kind of swallowed that in Q4 and then in Q1.

And what’s happened since then is that we – there’s been a – there’s been some payers that have revised their policies and started paying in addition to I think us improving the sort of operations and appeals with some of the other payers that maybe already had a policy in place or that would consider paying on a case-by-case basis.

So we have seen, I think we’re at the very early stages of kind of turning the ship here and obviously getting a new guideline in place from ACOG I think is going to help. The existing policy from ACOG is helpful and that’s why we have seen payers change guidelines.

But if something more definitive came out, obviously that would kind of be the tipping point. There are some customers as well where we’ve kind of said, hey, look, certain payers may not cover this test, and then we kind of reeducate them on what might be covered. And in some cases they make a decision that they want to order a smaller panel..

Got it. Very appreciated. One last question here. I didn’t see where you recognize the 19 million legal payment in the quarter. So I was just wondering if is that going to show up when you publish cash flow statement where it shows up? And congrats on a great quarter. Thank you..

Yes, it’s not going to show up yet. It’s not a cash payment. It’s a judgment. And so there’s a few more steps to go there as Steve described. So right now it’s a judgment, but it’s not something that is accrued for in the financial statements..

Ladies and gentlemen, that concludes today’s call. Thank you all for joining and you may now disconnect..