Thank you for standing by. My name is Greg, and I will be your conference operator today. At this time, I would like to welcome everyone to the Natera, Inc. Q1 Earnings Conference Call. [Operator Instructions]..

I would now like to turn the call over to Mike Brophy, Chief Financial Officer. Mike, please go ahead. .

Thanks, operator, and good afternoon. Thank you for joining our conference call to discuss the results of our first quarter of 2024.

On the line, I'm joined by Steve Chapman, our CEO; and Solomon Moshkevich, President of Clinical Diagnostics; and Alex Aleshin, General Manager of Oncology and Chief Medical Officer; John Fesko, President and Chief Business Officer, is also on the call and will be available for Q&A. 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 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 and expected results, 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, May 9, 2024. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. Natera disclaims any obligation to update or revise any forward-looking statements..

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

And now I'd like to turn the call over to Steve.

Steve?.

Great. Thanks, Mike. Let's get into the highlights on the next slide. We had an excellent quarter across the board, and I'm very pleased to share that we met a major milestone in the life cycle of the company and reaching cash flow breakeven in Q1, significantly ahead of schedule.

Revenues were up 18% sequentially versus Q4 of 2023 and up 52% compared to Q1 of last year driven by record volume growth and improving ASPs. Volumes were up over 17% sequentially versus Q4 of 2023, which is the fastest sequential growth rate we've seen since 2021, when the volumes were less than half the size they are now..

We had record volumes across oncology, organ health and women's health. In oncology, we performed 115,000 units in the quarter, representing sequential growth of 17,000 units versus Q4 of last year, a record growth quarter for the company. Women's Health was also particularly strong, up more than 85,000 units versus Q4 of last year.

Improving ASPs and continued execution on cost reduction drove a record gross margin of 57% compared to 39% gross margin in Q1 of 2023. All of this momentum puts us in a great position to significantly raise every aspect of the guide for the rest of the year..

We are now expecting revenues of $1.42 billion to $1.45 billion, which is $100 million above the midpoint of the range we provided in February. We are also raising gross margins from 50% to 53% to a new range of 53% to 55%.

And importantly, even as we increase investments in commercial operations and R&D, we are significantly reducing our cash burn guide for the year. Our previous range included a burn of $75 million to $50 million, and we are now projecting to be cash flow breakeven for the full year, plus or minus $25 million..

We've also had a full slate of clinical and product announcements, including the launch of our fetal RhD test. The vast majority of the NIPT labs do not offer this type of testing and we are particularly pleased to be serving a critical unmet need given the shortage of RhIG treatments available right now in the United States.

In Oregon Health, many of you saw the updated KDIGO guidelines that support genetic testing in patients with chronic kidney disease. This was great to see, particularly after the release of the excellent prospective results we read out last year with the RenaCARE study.

More recently, we were thrilled to see the publication of our ProActive study in a top journal, which represents the largest perspective donor-derived cell-free DNA study published to date in the kidney transplant space. We think we have strong momentum in organ health and we're excited about driving this forward this year..

In oncology, we are very encouraged by the analysis released in the randomized prospective Phase III IMvigor011 trial in bladder cancer in which patients that remain negative on serial Signatera testing had excellent outcomes.

This is meaningful as it suggests that these MRD-negative patients may be able to forego treatment in favor of Signatera surveillance. This is also being explicitly evaluated in the modern trial which we discussed last quarter. We also had several additional data readouts that we will cover today.

We've got a full agenda for the call, and I'm excited to get into the business trends on the next slide..

The first slide shows our sequential growth in volume between Q4 and Q1, both this year and last year. We had a very strong Q1 for women's health. We saw a nice lift from the Invitae accounts we picked up in January and February, and the transition has been a success, and we're pleased with the results.

We also had success organically growing the business. In fact, the majority of our growth in Q1 came from organic new account wins and growth within our existing women's health accounts. Our core advantages continue to shine in the field, and we've got a lot of traction with the launch of our RhD product, which we'll discuss later on the call..

Organ Health was also a bright spot this quarter. We saw strong sequential growth in Prospera on the back of the ProActive publication and Renasight grew nicely as well, which is promising given that the updated KDIGO guidelines came out very late in the quarter. And in oncology, we delivered our best quarter ever for Signatera unit growth..

Double-clicking on oncology volumes on the next slide. We typically see our oncology units grow between 7,000 and 10,000 units quarter-over-quarter. In Q1 oncology grew 17,000 units overall, with most of these units coming from the core Signatera clinical business.

We are seeing significant gains and new physicians and new patient starts in addition to recurrence monitoring. We think customers came out of ASCO GI excited about the galaxy data in CRC and that helped the quarter, along with the quality, the size and the breadth of our clinical trial data, which is resonating with physicians.

We're off to another strong start in Q2. But with that said, we have, of course, see fluctuations in sequential growth as we've seen in the past..

The next slide shows the significant step-up in revenues we've seen over time, similar to the volume story. We had 18% sequential revenue growth over Q4 of last year and 52% compared to Q1 of last year.

This represents some of the fastest revenue growth metrics we generated despite the fact that the revenue base has more than doubled in the last 3 years. In addition to the volume growth, we continue to see ASPs significantly outperforming across all of our major products.

Women's health and organ health ASPs were up and Signatera ASPs were above $1,000 in Q1..

We continue to make progress on Signatera reimbursement, and we think we have a line of sight to continue ASP expansion through the rest of the year. In addition, the rapid improvement in ASP has driven about $34 million in revenue true-ups this quarter.

I think that's a very healthy sign for the business as it indicates that cash collections are exceeding our prior estimates. Our growth trends remained strong even when stripping out the true-ups and those don't happen every quarter..

On the next slide, you can really see the impact of our improving ASP and COGS on gross margin over the last year. Obviously, 57% is a huge number. But even if you strip out the revenue true-ups, we estimate the underlying repeatable gross margin would have been roughly 53%, which is well ahead of our expectations and drives the increase in the guide.

We put a ton of resources and management focus on improving ASPs, but I'm equally excited about the COGS execution we generated recently. We have had several internal projects launched, including moving to higher throughput sequencers in both Austin and San Carlos for our prenatal business. .

In addition, we are still expanding our exome capabilities, which will likely drive some short-term increased cost in Signatera COGS, but we are already below our goal of $450 based on the scaling benefits that we expect to stay there for the rest of the year.

We are also now getting large rebates from vendors as we hit higher volume tiers in our contracts. We've historically poured a meaningful percentage of our R&D spend into cost reductions and now those lead costs are really paying dividends..

So all these trends sum to the results on the next slide, which shows our cash burn reduction over time. We set a cash flow breakeven target on the Q1 earnings call about 2 years ago, and we're pleased to have met this goal significantly ahead of schedule. We've been very consistent about the strategy to get here.

We've ramped volumes and revenues, increased ASPs and lowered COGS, leading to increased gross margins, and we've done that while maintaining ambitious levels of investment in R&D and commercial activities.

We think this formula will allow us to continue delivering excellent financial results while maintaining our leadership position in clinical data generation, new product launches and patient experience..

In addition, we've achieved this cash flow breakeven goal without the help of any upcoming potential catalysts such as 22q guidelines or NCCN guidelines. Those would still represent further upside along with continuing to execute the core strategy in very large underpenetrated markets.

Going through the rest of the year, we may bounce around between positive and negative cash flow quarters depending on the working capital variables, like the timing of insurance payments, timing of CapEx and the lab and other factors.

But fundamentally, we think we're in a position to continue to serve more patients and grow the business and drive innovation without continually burning cash..

And with that said, let me turn it over to Solomon.

Solomon?.

Thanks, Steve. On to some of the highlights from our clinical and product road map. In April, we were pleased to mark that we surpassed over 200 peer-reviewed papers as a company.

This chart highlights that we have pursued the strategy throughout the history of the company across all key areas of focus with more than 85 papers in women's health, more than 75 in oncology and MRD, and more than 40 in organ health.

We've also been published in some of the most highly respected journals in the world, including science, nature and nature medicine.

These papers include major breakthroughs in patient care, such as the SMART trial with Panorama, the GALAXY study with Signatera in the proactive trial with Prospera, the latter which was the paper that brought us to the 200 mark.

We look forward to growing this even further as we continue generating meaningful evidence to support our road map and our mission..

In women's health, as Steve mentioned, the launch of our new fetal RhD test was a major advancement in prenatal care and one that really differentiates Natera. The test can be performed alongside Panorama as early as 9 weeks gestation and is designed to determine the fetal Rh status from a maternal blood draw.

The launch is particularly timely right now as OB/GYNs are currently facing limited supplies of medication that are traditionally given to RhD negative women to prevent potential complications during pregnancy. The FDA warned about the shortage earlier this year.

And following suit, ACOG came out with a statement just in April that supports the use of NIPT for fetal RhD testing essentially to help conserve medication supply. We are proud to offer this test at a time of critical need in the prenatal community..

Beyond the shortage, we view this launch as a key differentiator for Natera on several fronts. First, the vast majority of other NIPT labs do not offer fetal RhD assessment with only one other test on the market in the U.S.

Second, Natera's test is backed by a large validation study that included fetal RhD status confirmed via newborn serology, which is the gold standard, in more than 650 RhD negative pregnancies. This is roughly 10x more patients with confirmed outcomes than validation studies from other labs.

The performance was also outstanding, resulting in 100% sensitivity and 99.3% specificity. We believe these differentiators, coupled with the highly validated SNP-based technology that's already built into Panorama will allow us to expand our reach into new physician practices..

Moving to organ health. We had some key announcements during the quarter for both Renasight and Prospera. Starting with Renasight, our genetic test for chronic kidney disease. We are pleased to see a recent guideline update from a leading medical society in nephrology. KDIGO, which stands for kidney disease improving global outcomes.

KDIGO updated their clinical practice guideline for the evaluation and management of chronic kidney disease. This is significant as the guideline had not been updated in more than 10 years. .

The guideline now includes a specific section about the use of genetic testing in CKD and offers a broad range of support, including, number one, stating that genetic tests should be used, among other factors, to establish the cause of CKD; number two, noting that genetic testing can impact the clinical management of CKD patients just as we saw in the RenaCARE study; and number three, recommending a list of clinical indications where genetic testing is particularly informative.

And that's the list, which represents the vast majority of CKD patients..

The updated guideline makes it clear that genetic tests like Renasight are an essential tool for a nephrologist in the management of CKD patients. We believe this was a key milestone for the field of renal genetics, and we expect this guideline to have a positive impact on clinical adoption of Renasight testing.

In April, we also published the first major readout from the ProActive trial, which was the largest prospective donor-derived cfDNA study in kidney transplantation with data from the first 1,600 patients approximately. .

The data demonstrated for the first time that Prospera is a leading indicator of rejection as donor cell-free DNA levels were significantly elevated up to 5 months prior to antibody-mediated rejection and up to 2 months prior to T cell-mediated rejection.

These results show the value of using Prospera as an ongoing surveillance tool to detect rejections earlier, not just in scenarios that are for cause.

Further, the ProActive data once again highlights the outstanding performance of Prospera with an area under the curve of 0.88 and a negative predictive value of 98% in line with performance as published in the previous studies. .

In a pretty short time, Prospera has established itself as the premier choice in transplant monitoring. And based on this strong clinical evidence, we see growing momentum behind Prospera among transplant physicians in the market. Finally, in oncology, on top of the record volume growth that we generated during the quarter, as Steve outlined.

We had a steady drumbeat of trial announcements and publications that continue to demonstrate the clinical value of Signatera across tumor types..

I'm going to hand it over to Alex to provide color on our progress in colorectal, bladder, breast and uterine cancers, starting with an update on the ALTAIR trial where things are on track.

Alex?.

Thank you, Solomon. I'll start with colorectal cancer, in particular, the ALTAIR study, where we have an exciting few months in store. As a reminder, ALTAIR is a treatment on molecular recurrence randomized, placebo-controlled Phase III study in colorectal cancer that is part of the ongoing CIRCULATE-Japan study.

We've been working closely with our partners in Japan and are looking forward to approaching the key milestones you see outlined on the slide here. First and foremost, we recently surpassed the prespecified target of 190 events for the trial, which is a key step in getting to the next phase of statistical analyses for the readout..

After completion of data analysis by our collaborators in Japan, we plan to announce top line results in August. We expect to present the complete analysis including primary and secondary endpoints at a major conference in the fall. And by the end of the year, we plan to submit the study for peer-reviewed publication.

We're very excited to share these results with you as we do believe that this study, if positive, may be one of the most impactful readouts in early-stage CRC in quite some time..

Also in colorectal cancer, we recently announced in March our participation in the CIRCULATE-France trial which is another randomized Phase III study.

We were pleased that Signatera was selected based on the well-validated asset performance characteristics for patient enrollment into this study, which is the only ongoing randomized trial dedicated to studying the benefit of ctDNA testing in low-risk stage II colorectal cancer.

It complements our data generation in both CIRCULATE-Japan and North America trials which are also studying MRD guided treatment in colorectal cancer, but in a higher risk population..

CIRCULATE-France specifically addresses the need for a personalized approach in a population who currently does not receive chemotherapy as the standard of care and with over 44,000 people in France diagnosed with colorectal cancer each year.

We believe this trial has the potential to improve outcomes for many of these patients and pave the way to adoption and reimbursement of Signatera in France and possibly the European Union.

We also had compelling data released in bladder cancer from the ongoing IMvigor011 trial, which is an international randomized Phase III trial being conducted in collaboration with Genentech..

This is the first time that prospective Signatera data from an ongoing Phase III global study was presented, a milestone for our evidence generation strategy.

The first analysis was presented in March at the European Association of Urology Conference and included post surgical outcomes of 171 patients with high-risk bladder cancer, which serially tested negative with Signatera.

The analysis showed that patients will remain Signatera-negative without treatment at disease-free survival rates of 92% at 12 months and 88% at 18 months. Furthermore, the overall survival rates were 100% at 12 months and 98% at 18 months.

This was a significant improvement versus the baseline expectations set by prior biobank studies, which further underscores the importance of prospective evidence generation..

These results have been generating interest in the medical community and give us increasing confidence that patients were Signatera-negative after surgery and remain negative under surveillance, might be able to be spared from adjuvant therapy which is the current standard of care for high-risk patients with muscle invasive bladder cancer.

This concept is being formally evaluated in the randomized NCI-sponsored MODERN study, which we discussed in detail during the last earnings call..

While this first analysis covered only MRD-negative patients, the MRD-positive arm of the trial, which is investigating the efficacy of Genentech's atezolizumab, drug versus placebo is expected to read out early next year.

That trial result is expected to serve as the basis of our first FDA submission for Signatera for companion diagnostic label in bladder cancer.

We are optimistic on what this data could mean for the role of Signatera in clinical practice as well as the potential to tailor treatment and improve outcomes for the more than 150,000 muscle invasive bladder cancer cases diagnosed globally each year..

Moving to the next slide. Here, you can see meaningful data we've generated in common cancers affecting women. Earlier this year, we had a new publication in Gynecologic Oncology, validating the use of Signatera in resected uterine cancer. This is especially timely and important as new diagnoses are rising in the U.S.

and mortality rights are also increasing, which is at least partially due to an increase in diagnosis of the more aggressive subtypes of this disease. .

In this study of real-world Signatera utilization, we looked at 267 plasma samples drawn after surgery from 101 women with uterine cancer. As you can see from the Kaplan-Meier curve on the left, the results demonstrate how Signatera is a powerful postsurgical predictor of recurrence.

All patients who were Signatera negative after surgery remain recurrence free. All Signatera-positive patients had a 15-fold worse recurrence-free survival. .

Moving to breast cancer. We announced the publication of an expanded cohort from the EBLIS study. The original cohort of 49 patients was published in 2019 with up to 5 years of clinical follow-up. The new expanded cohort had Signatera monitoring in 156 patients across all subtypes of breast cancer with over 1,000 plasma time points being analyzed.

It also had clinical follow-up of up to 12 years, which we believe is the longest in the field of ctDNA monitoring. Samples in the study were collected every 6 months starting after the completion of definitive therapy..

Patients who were Signatera-positive had over a 53 fold increased risk of death compared to those who test a persistently negative on Signatera. The diagnostic lead times were also longer than before with Signatera detection of recurrence up to 3 years before imaging being observed with median lead time of 10.5 months.

Altogether, these findings bolster the evidence for long-term monitoring of breast cancer patients who often face late recurrences. These publications build on our commitment to be a leader in women's health. This includes our recent MolDX approval in ovarian cancer as well as our expansion of breast cancer coverage to the neoadjuvant setting..

Lastly, we continue to make progress on our early cancer detection program with judicious utilization of resources and a data-first strategy. We are completing a large case control study, and we plan for the data to be announced in June.

In addition, as we stated before, we are prospectively collecting a large screening cohort of colonoscopy matched blood samples, and we plan to share the results of that study in Q4..

With that update, let me hand the call back to Mike to cover the financials.

Mike?.

Great. Thanks, Alex. The next slide is just a summary of the P&L in Q1 and the year-over-year progress we've made. Steve covered the key points on revenues and margins, so I won't repeat them here. On the expense lines we've made several growth-oriented investments in SG&A over the past year.

For example, picking up the women's health sales team from [ Invitae ] and doubling down on our staffing and technology investments and revenue cycle that we've described previously. We also had some elevated litigation expenses in the quarter given all the activity we had on the IP front in Q1..

We stepped up R&D modestly in part with the goal of accelerating several product launches in the near future. The first of which is the time-sensitive Rh launch Steven, Solomon described earlier.

I think each of these investments are delivering strong ROICs as evidenced by the significant bottom line improvement year-on-year in EBITDA, EPS and of course, cash burn where we burned $86 million in Q1 last year and broke even in Q1 this year..

I was particularly pleased to see us breakeven on cash flow this quarter given the disruption to the entire health care payments that's been caused by the Change Healthcare Cyberattack.

Change is not a direct vendor to us, but the attack nonetheless cost several weeks of confusion and delayed claims submissions as changes of very large claims and payments clear in-house. So I still think the impact is ultimately immaterial to our results.

We are still dealing with backlog responses from payers and I think the cleanup will last well into Q3 at least. The good news is that our team is able to move quickly, find some alternative pathways to get claims submitted and responded and our overall positive momentum on volumes and ASPs allowed us to deliver above plan. .

Okay. Good. Let's get to the revised financial guidance on the next slide. On revenues, we are now expecting $1.42 billion to $1.45 billion for the full year 2024. This represents a bump of about $100 million at the midpoint as compared to the roughly $20 million beat in the quarter when we're moving the revenue true-up Steve talked about.

The annual revenue guide now implies about 33% revenue growth versus 2023. We experienced a huge organic step-up in women's health, as you saw in the earlier slides which was further amplified by the Invitae addition in Q1. As a reminder, there's a pronounced seasonality in our women's health volumes.

So we wouldn't be surprised to see some modest pullback in Q2 volumes as we've seen in previous years then see sequential growth in the women's health business again in Q3 and Q4..

We are off to a strong start again in oncology volumes in Q2, though I wouldn't expect the same kind of step-up we saw in Q1. We've got great momentum going in Signatera and expect continued sequential growth in Q2 and beyond this year. The guide implies ASPs remaining stable at these levels across women's health and oncology for the rest of the year.

We think that's appropriate because there can always be quarter-to-quarter fluctuations in ASPs, but if we can continue to drive them higher, as Steve described, that would be a source of upside to the guidance.

So the revenue guide implies that we will build on the strong volume base we've established in Q1 and continue to benefit from the ASPs we are seeing now at this level..

As Steve mentioned in his section, we are already ahead of schedule for our COGS forecast, and so the guide implies stable COGS for the remainder of the year.

We've got a number of products and lab workflow launches planned for this year, which usually generates some temporary transition costs, but I think those can be balanced out by the efficiencies we've already achieved in Q1. So those are the assumptions driving the increase in our gross margin expectations for the year..

The operating expense guide implies that quarterly expenses will remain relatively flat compared to Q1 for the rest of the year.

This should allow for room to make incremental growth investments in sales and operations and R&D as a chunk of the Q1 SG&A spend went to all the IP-related litigation activities and a onetime noncash true-up related to stock-based comp. While we will continue to defend our IT, I don't expect that level of legal activity to repeat every quarter.

As Steve described, we are in position to keep making investments to stay in the lead and still grow revenues much faster than expenses. You can see the result of that formula on the cash burn guide, which now has us cash neutral at the midpoint of the range. .

Now that we are operating at this breakeven level, it's important to understand that we will expect to have fluctuations in quarterly cash burn due to timing of capital expenditures and working capital, as Steve described.

The timing of reimbursement from payers can easily vary in a given quarter and the changed health care breach is a good example of how that can happen. So I fully expect to have a quarter where we have negative cash flow and others where we are positive and the guide just represents the full year results.

The income statement, of course, is less prone to these swings. And so I expect our losses to gradually narrow through the course of the year..

Okay. The next slide we'll do quickly. I was looking back at the Q1 2022 earnings call's deck while preparing for our call today. And I thought this long-range model from that presentation was an interesting slide. This is the exact slide we used when setting the goal of getting to a cash flow breakeven quarter in '24.

And you can see that our results this quarter mirror very closely what we had forecasted back then. Specifically, we thought we could get to roughly $1.4 billion in annual revenues at mid-50s gross margins on stable operating expenses in 2024, which is essentially what we're showing today.

I think most investors discounted this target at the time as being overly aggressive, but we have a lot of conviction in this model because starting with Steve, our executive team spends a lot of time and effort forecasting the business..

One final slide on the next slide, just to summarize a few of the potential key catalysts to watch more for the remainder of the year. Of course, we will remain focused on driving quarterly results and hope to have more earnings calls like this one.

As of today, we've been able to deliver strong results without the tailwind of updated women's health guidelines in carrier screening or micro deletions. As usual, we don't include any guideline expectations in our guidance because the timing of these updates are completely out of our hands and hard to predict.

Still, we continue to expect updating guidelines in both [ micro dels ] and broad panel carrier screening and wouldn't be rise to see one or both of them arrive in the near term..

The ALTAIR study continues to progress on schedule.

And while the time line is ultimately in the hands of the investigators, we continue to expect top line results to be released in August, subject to variances caused by investigator data analysis and the embargo requirements of various academic conferences where the data may be presented? We've got a number of additional cancer types in the pipeline for MolDX coverage, and we hope to be able to announce several additional coverage decisions this year.

We also have submitted an LCD for Renasight and hope to report on further progress on that later this year..

We spent a good amount of time on biomarker estates during our Q4 call, so we didn't want to rehash that content again today. But we are pleased with the early traction we are seeing.

We continue to think that while the positive impact is most likely to be seen in 2025, progress through the course of this year on biomarker-related reimbursement would further enhance our results.

Finally, we are pleased to be able to announce our first major product launch of the year with [ RSV ] testing, and we've got several more slates to launch later this year and look forward to announcing those as they go live..

Okay. With that, let's open it up for questions.

Operator?.

[Operator Instructions]. It looks like our first question comes from the line of Dan Brennan with TD Cowen. .

Maybe just the first one on Signatera kind of volume and price. Steve, I think you talked about the GALAXY impact.

I would love to hear you elaborate a little bit on that in terms of new docs, existing docs and what you're seeing in Q2 from that? And then on the pricing side, Mike, I think you heard -- I heard maybe flat pricing from here on Signatera, sequentially, just wondering why it couldn't keep ticking up throughout the year?.

Yes, it's a great question. So when you look at growing, I mean, really with any clinical diagnostic, you want to add new physicians, new accounts and then within the accounts you want to grow the business to increase utilization with the existing physicians. And so with that exactly what we're seeing is once doctors start using Signatera.

They tend to increase their utilization and continue using it. And then once one doctor starts within a practice, it tends to sort of spread within the practice. So obviously, ASCO GI, we had some great additional data coming out of the GALAXY study. We think that was received very well, and we're seeing that lead to increased growth..

Mike, do you want to talk about ASPs?.

Yes. No, thanks for the question. So Signatera ASPs are above $1,000 in the quarter. As I look at the more recent fundamentals on Signatera ASPs, I mean, I think there is scope for the ASPs to continue to increase through the course of the year.

Specifically, I'm just looking at payment rates and trends from Medicare Advantage payers as they continue to come online and some of the early green shoots from the biomarker states that we're talking about in the prepared remarks.

And really, these accruals quarter-to-quarter really come down like a judgment call, like how much history do you want to see before you step up the accrued ASP again? And it may turn out, we were a bit cautious on this accrual, but I just want to see some more history there..

So I feel pretty good about our ability to grow ASPs for the remainder of the year. So that maybe begs the question on the guide, why hold ASPs steady at these levels? And it really goes back to that kind of precaution.

I just want to see enough history with new payers coming online to see that stable trend within a given payer before starting to accrue. But the underlying fundamentals look great for the Signatera ASPs, I think. .

Great. And then maybe I just want to follow up on gross margins, really strong. Even ex the true-up still beat us by over 300 basis points. So I think you discussed COGS reductions, ASP and then also cash collections beyond the true-up. So just did I hear you guys right, you're thinking gross margins flat from here.

I'm just wondering some of the benefits you had in the quarter, like I would assume there's possibly further tailwind from those.

So maybe just speak a little bit what really drove the beat on gross margins and how we think about that going forward?.

Yes. I mean on gross margins, I mean, just to clarify, I mean I think the guide now is 53% to 55% and organic implied like 53%. So the midpoint to guide now implies sequential improvement through the rest of the year, so it's like your total year would end up higher, although 53% in the guide.

The reasons for that, again, I mean, there's some caution that's warranted as it relates to forecasting gross margins in this business quarter-to-quarter just because the ASPs can fluctuate quarter-to-quarter, right?.

We also don't -- in the guide, we just presume that there's no true-ups kind of in the guide. And of course, if you had true-ups through the course of the year, that would tend to be upside to the guidance. So what that guide is intended to do is to express confidence and our ability to modestly improve the gross margins through the rest of the year. .

And our next question comes from the line of Tejas Savant. .

Maybe just a math question for you, Mike. You beat by $50 million, including about $34 million and true-ups, but you're raising your guide by a $100 million, right? So as we try to build that bridge in terms of incremental upside.

Can you just help us parse it out between Signatera? You've got the Renasight, KDIGO update and any incremental Invitae upside as well versus the $20 million to $25 million that you had baked in earlier?.

Yes. Yes. So ASPs across the board were holding relatively stable in the guide through the rest of the year, there's some modest improvements in the guide in women's health that we feel quite good about. But overall, it's really stable in the guide for ASPs.

So that leaves volumes for you as the major source of upside kind of across the products which we think makes a turnaround sense just given that we've seen this big step-up in Q1, and now we feel like we're in a position to grow from this base understanding that there is some seasonality to be seen in some of these businesses, particularly in women's health.

.

What we've seen historically is that you have a big Q1 and then you're kind of sequentially down a bit in Q2 and then you grow the remainder of the year, just like we talked about in the prepared remarks.

And then in Signatera and Prospera where, frankly, we're just expecting continued sequential quarterly volume growth in each of those businesses, probably not at the level that we saw in Q1, just to be cautious about that. I mean that was a massive outperformance on Signatera volumes although we are off to a good start so far in Q2.

So that's some kind of flavor on where the raise is coming from. It's primarily volume based. And it's really sorry for the boring answer, but its kind of volume from across the board is really contributing to that. .

Got it. And a 2-parter for my follow-up here. So starting with Renasight, following KDIGO, have you had any sort of discussions with the National Kidney Foundation.

Is that something that we could see in the summer year? And can you share some data on just how the conversations have gone since KDIGO went into effect? Are you starting to see that nephrologist penetration go up from the 50% who use the test? And are you starting to see repeat use come through as well?.

And then, Steve, one for you on just screening, right? We've had some competitor readouts here. We've got an FDA AdCom coming up as well.

So I'm just curious as to whether you still think that better performance versus those tests that have read out in blood is good enough? Or has the goalposts shifted in your mind a little bit and you expect sort of step function better performance particularly in advanced adenoma as the threshold for Natera to go after that indication. .

Yes. That's a great question. So I'll comment briefly on KDIGO and Renasight and then Solomon if there's something you want to add. So certainly, we've been having a lot of conversations with physicians about the guideline and those -- it's being very well received. I mean, there's a lot of excitement about the updated guideline.

So I think there is a lot of opportunity here to more deeply penetrate this market, which there's, I think, maybe 40 million Americans or something in that range that are sitting with the diagnosis of chronic kidney disease. So there's a big opportunity here..

Really, I think the goal is not necessarily to go get more and more physicians ordering the test. It's to increase the utilization within the accounts, and that's what we're working on now. We do think that the NKF will be coming out with an updated guideline at some point in the future. We hope that comes this year.

We don't know exactly what it's going to say. But I think they're obviously working closely with KDIGO and looking at all the new data coming out. So that's exciting..

And on [ ECD ], I think, obviously, we've got a readout coming pretty soon. So I'll probably just defer comments there until I think we said in June when the case-controlled study reads out. .

I think you hit all the key points, nothing to add there. .

And our next question comes from the line of Puneet Souda with Leerink Partners. .

I guess the first question is the contribution that you saw from Invitae accounts, how is sort of that likely to fall through the rest of the year? I mean it appears that you had a bolus. There are some organic account wins in the quarter.

Could you talk about deepening of those accounts and further account wins that you haven't had so far may be falling into 2Q. And also, some of these accounts were maybe patient pay or no pay account.

So talk to us a little bit about sort of cleanup of those accounts and how sustainable is the ASP trend going forward?.

Yes, it's a good question. So I think when Invitae, last announced the numbers, I think, which is maybe in September 2023, things changed quite a bit between that time frame and when we took over at the end of January. And I think they had gotten -- really gotten rid of a lot of that cash pay business in that lower margin business.

So when we came in the January generally it was sort of the higher-margin business, except for some of the international where we got what we could, but some of the lower-margin business there, just we weren't able to participate it. .

But most of the business came is on now that we're going to get. And I think a tiny amount in January, a little more ramping up in February. And then I think March was almost a complete month there, but we did really well. So you'll get the kind of full pacing of that quarter of the Invitae volume in Q2.

But we did really well based on where we started in January, we got the majority of the business converted over, and we're feeling good about that. But again, there was a pretty significant step down from where we started in January to where they last reported. .

With that said, also you asked about organic growth. The majority of the Q1 volume growth in Women's Health, which was incredible, the 85,000 units I think that is one of the fastest-growing sequential quarters we've ever had in the history of the company. I've mentioned before that we were seeing record units per receiving day in December.

There's just a lot of momentum with, I think the differentiators that we have at Natera, I think the data that we've put out, we're starting -- continuing to see, I think, a significant interest from physicians, and that's driving a lot of the organic growth. .

Got it. Super.

And then on the oncology side, if I may ask, if Salmon or Alex could cover this, could you just update the latest thoughts on sort of the timing of NCCN and sort of what is required there, and how essential is the success of ALTAIR to that?.

Yes. Solomon, do you want to make a couple of comments and then maybe Alex, you can jump in. .

Sure. Good question, Puneet. I think no change to our discussion back in San Diego at the conference where we expect that the CRC committee for the NCCN meets regularly once a year, usually in that late summer time frame. And we think that given the timing of the readout that we just described on the call.

There's a pretty good chance that they incorporate some of the data that's reported from ALTAIR and we're optimistic that we see something early next year based on the regular timing. We do think the ALTAIR readout is pretty critical for that.

But as a reminder, we're seeing really strong adoption and trends in the marketplace based on the existing evidence that we have..

So Natera being able to achieve its goals in oncology, kind of happen independent of that, but it certainly provides a significant catalyst.

And that, together with the expected readout in muscle invasive bladder cancer from the IMvigor011 trial, which should independently, assuming that's a positive readout, which remains to be seen and that would lead to a separate NCCN committee review as well. .

Great Solomon. Few words to add to that, yes. So we did surpass the 190 events. So now the data is really being analyzed. So in August, the results will come out at a top line level. I think there's been a lot of questions about what good looks like? And I think we've previously guided to the MOSAIC study.

Obviously, we do not control the guidelines, but we do control generating the data, right, to provide the evidence for those guidelines to hopefully be updated. .

So I think in terms of the guidelines timing, I think let's see what the results look like. And I think at that point, we can kind of provide some more guidance. .

And our next question comes from the line of Doug Schenkel with Wolfe Research. .

As a rule, in all these years, I don't think I've ever congratulated anyone on a quarterly performance, but I will at least say I can tell you, given how the market has been recently, we all appreciate a nice, clean and robust beat. So with that said, let me start with some model questions.

On guidance, first, I don't think you're assuming improvement in Signatera ASPs even though coverage expanded at the beginning of the year.

Is that just conservatism? And I'm sorry if I missed it, but what is now in guidance for Invitae contributions?.

Mike, do you want to take that?.

Yes. So on the ASPs, the operative one is stable. So I don't expect extremely meaningful ASP bonds to the guidance, this is not dependent on massive outperformance versus Q1 ASPs, and we've got some modest ASP improvement for Signatera in the back half of the year.

I think that's pretty achievable and that would contemplate some contribution from the expanded coverage we saw early in the year. But again, I think there is -- if we can do the things that we're trying to do internally, I think that's a potential source of upside versus the guide today, which I think that's the appropriate way to do it..

In terms of the Invitae contribution, we had initially with only the benefit of a few weeks operating in those accounts. I mean we had initially carved out something like $20 million that we had in revenues this year that we attributed to the Invitae accounts. We think we're modestly exceeding that now.

Although I would highlight that as Steve mentioned this in his prepared remarks around that we really had a very meaningful step-up in the women's health volume sequentially over Q4, which was really quite ratifying to us. .

And when we peel back the onion on that, I mean, the vast majority of that is coming from organic sources, which I think kind of speaks to the strength of the franchise and our ability to just kind of continue to grow the market and win share. And the Invitae added accounts are really just their additional momentum on top of that.

But I think fundamentally, this is a strong underlying performance. So it's above, I think the Invitae is above expectations and that's incorporated in the size of the raise. .

Okay. And I'll try to be quick with the follow-ups. First, as a rule, how long would you expect it to take going from guideline expansion to actually seeing ASP increases on the women's health side. And then the other one I just wanted to touch on as a cleanup because we're getting this question increasingly as new investors look at the name.

What percentage of Signatera assays today are for true surveillance versus point in time MRD?.

Yes. I'll comment on the first question. So one of the things that's really exciting about Natera right now is we're growing rapidly. We're hitting this cash flow of breakeven milestone and we're increasing our investment in the future of the business in both innovation and in the commercial franchise.

So it's great to be doing all of those things at one time and seeing the company's strategy working. But at the same time, we're not really forecasting in the impact of these big potential catalysts that could come in the future. .

For example, as you mentioned, the 22q guidelines. And these could be very significant meaningful events in the future if they do come through and they're positive. The guidelines can impact payer coverage policies very quickly like was in a period of sort of 3 to 6 months if the guidelines are very definitive.

If the guidelines are a little more vague, it can take longer potentially if it does have an impact at all. And so it really depends on what the guideline says. And we're just going to have to wait and see..

On the second question, I think Mike that was a question for you. Yes, go ahead. .

Yes. So the question was on kind of the mix in Signatera volumes between adjuvant and surveillance. And what we've seen is that there's a slight majority of the volumes that are still adjuvant volumes, and that's been pretty stable now for several quarters.

Initially in the launch, of course, all of the units are adjuvant treatment units, because patients almost always start with us in Signatera in the adjuvant setting. And then as those patients go into remission, we're seeing very high compliance with patients staying with Signatera into the surveillance setting, which we find very encouraging.

It's kind of consistent with kind of qualitatively, we think we heard about patients understanding of the utility of the test..

So absent other factors, you would expect steady state to have the vast majority of your volumes to be recurrence monitoring volumes. And we haven't quite seen that. We've seen some of that trend progression, but we've been holding steady work and it's still a little bit of the majority is in the adjuvant setting.

And what's causing that is just the rapid new patient starts that we continue to see. So you think about kind of the top of the funnel just continues to grow really rapidly..

So I actually think that penalizes your margins in the immediate term, but I think that's a great sign for the order progression of the product here in the future. .

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

First, Mike, maybe on that slide from 1Q '22 earnings that you showed.

Do you still feel comfortable with this 70% plus gross margin and 25% plus EBIT margin target when you get to over $2 billion of revenue?.

I knew that someone was going to come and ask me about like what about the long term? So yes, no, thanks for the question, Catherine. Yes, I mean, look, I mean, obviously, with the revenue trajectory that we've been on, $2 billion plus, I think if you're talking about long-term steady state. I mean I think that looks pretty safe.

At this point, I think we're going to be able to get beyond that. 70% and 25% EBIT margins, I think, are achievable.

I mean, if you think you're willing to go out a few years and this is not kind of time dated guidance as the cash flow breakeven target was, but this is more kind of conceptual what can the business do based on the forecasted unit economics..

And I think the path to getting to those types of margins are going to require continued maturation in the Signatera ASP, continued excellent prospective data, which we want to publish, and is obviously slated to come down the pipeline, we'll support that.

I think there's still room to move the women's health margins meaningfully, particularly if you can get some benefit from guideline inclusion that we haven't yet seen, as we talked about in the prepared remarks..

On the EBIT margin, it's really a function of those couple of variables I just described, plus this concept that we don't need to grow expenses anywhere near as rapidly as we're seeing the revenue growth happening.

So an increasing percentage of every incremental revenue dollar from here drops more to the bottom line, right? And so I do think that given -- if you can get to 70% gross margins, at this scale well beyond $2 billion, I do think that 25% EBIT margins are still in play for us. So really encouraged by the trajectory in the business, obviously. .

All right. Great.

And then on the Signatera volume outperformance in the quarter, are there any particular indications that are driving that strength? Or is it pretty broad-based?.

Yes.

Solomon, do you want to talk about that?.

Yes. Great. First of all, it was really broad-based. I mean, we're seeing great continued adoption and growth in our core areas of colorectal cancer and breast cancer and IO monitoring. We did see pretty strong bumps in bladder cancer and ovarian cancer. In ovarian cancer, we just recently got the coverage from Medicare.

So it's great to see that reaction from the marketplace and from physicians. In bladder cancer, there's just a lot of opportunity there. And I think that's a pretty underpenetrated space. But both of those together in terms of overall absolute numbers are not as big as the colorectal and breast and IO monitoring..

So -- and the other thing I'll say is just generally the drivers are which I think Mike or Steve mentioned earlier, just the number of new physicians ordering the test was very strong in Q1, which led to the outperformance?.

And our final question today comes from the line of Matt Sykes with Goldman Sachs. .

Just, Steve, for you, just more of a longer-term question on women's health. Just given the step-up you saw in Q1, I realized this 1 quarter, but it was a pretty impressive quarter given the level of market share and penetration and assuming Invitae revenues kind of fold in this year.

What's now and have you changed your long-term expectation for when women's health as a segment would sort of start to normalize growth just given the I guess, relative maturity of that category and just your penetration of market share.

Any thoughts on how you're thinking about it long term in terms of growth?.

Yes. So that's a good question. I mean, obviously, we had an incredible Q1. And what we normally see, and this has always been the case in the women's health businesses, a lot of the growth for the year comes in Q1.

And then there's a little bit of a dip in Q2 due to seasonality and then we start to see kind of things grow again in the second half of the year. And that's really kind of been the trend for a long period of time. We think we have somewhere around like 50% share and the markets slightly over 50% penetrated. So there's still a long way to go. .

We're actually seeing opportunities, both competitive wins for some of the more established players, but also still new conversions where people are moving from serum screening over to NIPT or on carrier screening, where they're going from looking at just testing a single gene to maybe series of genes or sort of a broader panel..

So we think there's a lot of opportunity ahead of us. And I think, obviously, at some point, you start to get more further penetrated in the NIPT space. But we're always innovating and we always have new things coming out, for example, with the Rh launch and these create opportunity for us.

And we said before, we've got a lot of new stuff coming out, both on the MRD side, where we said we have product enhancements and new products coming, but also on the women's health side, where we have new products and product enhancements coming. So we're still very excited about the opportunity to help more patients..

And then keep in mind, it's not just about volume growth, it's also about ASP and revenue growth. And there's still a lot of tests that we're doing today, where we're not getting coverage where we think there's upside opportunity. Particularly, I think we mentioned 22q where we have a very high attachment rate and those are generally not reimbursed.

I think there's some opportunities there. Obviously, the guidelines come in, but there's still a lot of room to improve ASPs by increasing coverage for things like carrier screening or even still some of the base panorama testing. So lots of opportunity ahead and we feel good about it. .

Great. And then Mike, just a modeling question. I understand the true-ups are not embedded in the guide. But just given your focus on cash collections, like how should we think about [ true-ups ] over the course of the year? I'm sure there's some unpredictability about it.

But just wanted to get your sense for how we should be thinking about these true-ups Q2 through Q4. .

Yes, it's a good question. I mean the reason why we typically don't include it in the guide, it's not our intention when we set the accrual, we're trying to set it at exactly 100%. But of course, you'd rather collect at 101% and at 95%, for example. So that's on my mind when we set the accrual.

I think in terms of the guide, I really -- I don't have a way to tell you, hey, there's going to be x amount of Q2 versus Q4. My goal is just to have the accruals hit 100% and let's see where we land. .

All right. Thank you, Matt. And ladies and gentlemen, that is our time today. That concludes today's call. Thank you all for joining, and you may now disconnect. Have a great day, everyone..