Natera, Inc.

Welcome to Natera's 2021 First Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, you will hold a question and answer session. To ask a question at that time, please press star followed by one on your touchtone phone. If anyone has difficulty hearing the conference, please press star zero for operator assistance. As a reminder, this conference call is being recorded today, May 6, 2021. I would now like to turn the conference call over to Michael Brophy, Chief Financial Officer. Please go ahead.

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our first quarter of 2021. On the line is Steve Chapman, our CEO, Bob Shuren, Chief Operating Officer, Solomon Moskovich, General Manager of Oncology, and Paul Billings, Chief Medical Officer. Today's conference call is being broadcast live via webcast. We will be referring to a slide presentation that has been posted to investor.natera.com. A replay of the call will also be available at investor.natera.com. During the course of this conference call, we will make forward-looking statements regarding future events and our anticipated future performance. such as our operational and financial outlook and projections, our assumptions for that outlook, market size, partnerships, clinical studies, opportunities and strategies, and expectations for various current and future products, including product capabilities, expected release dates, reimbursement coverage, and related effects on our financial and operating results. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. Please refer to the documents we file from time to time with the SEC, including our most recent Form 10-K or 10-Q and the Form 8-K filed with today's press release. Those documents identify important risks and other factors that may cause our actual results to differ materially from those contained in or suggested by the forward-looking statements. Forward-looking statements made during the call are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. Natera disclaims any obligation to update or revise any forward-looking statements. We will provide guidance on today's call, but 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.

Thanks, Mike. Good afternoon, everyone, and thank you for joining us. Let's get into the unit and financial highlights. As you can see from the press release, we had an exceptional quarter. We processed 348,000 tests in Q1, which was 18% growth over our record Q4 performance and 47% year-on-year growth. As our base of business has grown substantially, our growth rates have still continued to accelerate. that acceleration is being driven by continued strong growth in the women's health business, but also we are seeing some real benefit from oncology and organ health as well. Revenues were $152 million in the quarter, which included a $28 million acceleration of revenue recognition from our deal with Kyogen, which wound down in Q1. That revenue is a non-cash accounting benefit, as we will explain later in the call, But even stripping Kaijin out of the results, revenue growth was very strong. For example, the year-on-year product revenue growth was 36%. As a result of the incredible momentum we're seeing in the business, I'm pleased to significantly raise our guidance for the year by $50 million. We are now targeting $550 to $575 million, which represents a complete reset of the range. I'll give you some of the key highlights on those trends now before giving more detail later in the call. First, we were very pleased to launch our new Panorama AI algorithm for broad use in our lab during Q1. We built the new algorithm using data from more than 2 million cell-free DNA tests, and we validated the performance as part of our SMART study, the results of which we released in February of this year. Phase one of the Panorama AI launch reduces cost of goods sold for Panorama and also cuts our no-call rate in half while maintaining market-leading sensitivity, which dramatically improves our customers' experience. Moving on to organ health. We're a few quarters into the Prospera launch for kidney transplant rejection, and it's going very well. We found that there is a broad base of customers eager to adopt self-REDNA testing, and we're continuing to innovate and push the science forward. More recently, Medicare issued new coverage guidance for donor-derived cell-free DNA testing, enabling coverage beyond kidney transplants. The technology required for detecting transplant rejections in other organs, such as heart or lung, is essentially the same technology we use for Prospera. So it's very encouraging to see a pathway to reimbursement for these other organ types. In oncology, we're at the early stages of our signatory clinical launch, and we're continuing to see strong momentum in our pharma business. We have a lot of exciting updates to share with you today. On our last earnings call, we reviewed the results of our groundbreaking Invigor 010 study with Genentech, which looked at using atezolizumab in adjuvant muscle-invasive bladder cancer. While the drug did not meet its primary endpoint in the all-commerce population, there was a significant treatment benefit in those patients who were signatera positive prior to receiving treatment. Based on these results, we were happy to move very quickly with Genentech to set up a second phase three trial, Invigor 011, which, if successful, could position us favorably to obtain FDA approval for Signatera as a companion diagnostic to atezolizumab in muscle and base and bladder cancer. Invigor 011 has already started enrolling patients. These types of studies with pharmaceutical companies are all part of the data flywheel we've described in the past. Paid studies with pharma generate high-quality data that can be later used for reimbursement approvals and guideline changes. The powerful and vigor 010 results have also driven additional demand with our pharma business development efforts. For example, we recently received two additional FDA breakthrough device designations for major new signatory indications outside of colorectal cancer. And we look forward to providing additional information as our pharma partners publicly disclose these trials. In addition to the expansion in bladder cancer and the new FDA breakthrough device designations, at AACR a few weeks ago, we presented compelling data in ovarian cancer together with our collaborators from UCSF, Columbia, and UPMC. Signatera significantly outperformed the standard of care serum-based monitoring test for ovarian cancer, CA-125, and it predicted relapse an average of 10 months before radiographic recurrence. Ovarian is an indication that's very important to us, given our history in women's health and given the very high recurrence rate and low overall survival rates. We also plan to present positive early multiple myeloma data in a few weeks at ASCO. We expect Signatera to address a major unmet medical need in this cancer type. Today, MRD testing and monitoring are already the standard of care in multiple myeloma, but the problem is that existing MRD tests require a bone marrow biopsy each time the patient is monitored. Bone marrow biopsies are painful and expensive, a few thousand dollars each, so many patients avoid getting tested. After initial setup, Signatera offers the chance to monitor for recurrence with a simple blood sample and without the added cost of the additional bone marrow biopsy that's required for ongoing monitoring with other MRD tests. I'm also pleased for the first time to publicly announce an interim readout from the international prospective CIRCULATE idea trial, which has already enrolled its first 1500 CRC patients. As we described in the past, CIRCULATE is a landmark prospective trial designed to be process changing in early stage CRC. In the interim readout, Signatera delivered longitudinal sensitivity to relapse of greater than 93%, which compares favorably to the 69% longitudinal sensitivity recently published by a tumor naive competitor. Data on the first 400 patients from the trial will also be presented in June at ASCO. So clearly, our momentum continues as we build upon our leadership position in each of these business areas. Okay, now let me move on to the business trends. The next slide is our volume progression over time, where the Q1 in each year is highlighted in green. Those of you that have followed the company know we get some seasonal benefit in NIPT volumes during Q1, but the increase we saw in Q1 this year was significant. You can visually see the acceleration of the business in the last few quarters compared to historical trends. We're benefiting from successful launches in our organ health and oncology businesses, which are both going very well and meeting our expectations, and we're also seeing continued momentum in the women's health business. NIPT sequential quarterly growth rates accelerated once again in Q1, and carrier screening tests also increased proportionally. These trends were fueled by very strong new account wins and account retention trends that were even higher than our historical averages. I also think we're starting to see the first signs of broad average risk market penetration that we've been waiting on for a long time. More on that in a moment. The next slide shows the revenue trajectory continuing on pace as well. Obviously, Q1 is a bit of an outlier given the Kyogen revenue recognition of $28 million. Some of you will recall we collected a large upfront cash payment from QIAGEN in return for our commitment to offer clinical content for their sequencing program, which they subsequently wound down. Most of that cash was non-refundable, so now that the deal has been formally ended, we have now recognized the remaining cash on our books as revenue for the work we performed. If you focus beyond that one-time event, however, you'll see we significantly exceeded revenue expectations in Q1, with a roughly 124 million organic quarter and a 36% product revenue growth. Mike will spend more time on this later in the call, but we were cautious in our revenue accrual given we just recently received a lot of reimbursement decisions in our favor. The outlook for ASPs throughout the course of the year looks positive. One of the reasons we can maintain our leadership and NIP team is that we continue to invest in new improvements in the technologies. The Pano AI Phase 1 launch is the most recent example. We showed in the SMART trial that this new algorithm boosted our PPV for microdeletions to 53%, which is significantly better than what others have published. And in core antibody testing, Pano AI Phase 1 achieved a 50% reduction in NIPT no-call rates while maintaining our market-leading sensitivity and specificity. This allows us to more efficiently meet the rapidly growing demand for Panorama and it's yet another positive talking point for the sales team. We are not finished with improvements to Panorama, and I look forward to sharing additional phases of Panorama AI with you later this year. As you can see on the next slide, we think we are well-positioned to take advantage of the NIPT market expanding in the wake of the ACOG and SMFM practice bulletins posted last fall. The continued account wins make sense because we've got exciting new talking points with the launch of Pano AI, and we're seeing upside from the presentation of the SMART trial data earlier this year at SMFM. We're uniquely leveraging the power of SNPs to deliver best-in-class performance and differentiated clinical value. We've now studied more than 1.3 million patients in over 23 peer-reviewed publications. Now with the completion of the SMART trial, we have the validation data for the largest and most rigorous study covering both aneuploidy and microdeletion testing. Combine that with our seasoned clinical and commercial teams, and we're well positioned for the increase in NIPT adoption that we expect to see over the next several years. Okay, now I'd like to spend a few minutes on our recent progress in Oregon Health. We've been pleased with the progress of our launch, which is in line with our expectations. In addition to growing commercial volume, one of our goals has been to push the science forward in a meaningful way, and we've made great progress. For example, we've recently developed a method to routinely check the background cell-free DNA in each sample, and now we inform physicians when we see exceptionally high background cell-free DNA, which can potentially mask transplant rejection. The first example of this technology was just published in TransplantDirect, showing the impact of COVID-19 on background cell-free DNA levels. It turns out that COVID-19 causes background cell-free DNA levels to spike dramatically, which can potentially mask rejection if you're only looking at the donor-derived cell-free DNA percentage. This example in COVID-19 is important, but we believe it's not the only use case for Natera's technology. There are many factors that cause an increase in background cell-free DNA, and we think ultimately it's going to be important to be able to flag the patients where this is occurring. On the next slide, we were thrilled with the recent local coverage decision from Medicare which we think could open up a pathway to reimbursement for Prospera in a range of organ transplant settings beyond just kidney. There's no reason why our technology shouldn't work very well in other organ types, and we are, of course, pleased to see one of the major hurdles, reimbursement, essentially removed from the equation as we evaluate these other additional expansion opportunities. With that, let me hand the call over to Solomon to give some more detail on our efforts in oncology. Solomon?