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spk08: 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.
spk04: 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.
spk02: 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?
spk11: Thanks, Steve. We have had a flurry of important milestones and announcements recently, so I'm happy to provide some further detail. Genentech has followed up rapidly since the release of the Invigor 010 results, incorporating Cignatera as a companion diagnostic for atezolizumab in a global prospective Phase III trial called Invigor 011 Natural Sequel. The results from the first Phase III released last fall are on the left-hand side of the page. You can see that the 37% of bladder cancer patients identified as MRD-positive by Cignatera had a clear survival benefit from treatment with Atizo with a hazard ratio of 0.59, while the MRD-negative patients had no benefit. In Invigor 011, which is already underway, patients with muscle-invasive bladder cancer will be screened after surgery to find 500 who are MRD-positive. and those patients will be randomized to receive atezo or a placebo. If successful, Natera would seek FDA approval for Signatera as a companion diagnostic to atezolizumab for this intended use. This is the first of many registrational trials for Signatera, as the Invigor-010 data has been recognized as a major proof of concept with application across cancer types. Okay, now I'd like to cover the preliminary data set that we are releasing today in colorectal cancer. As Steve described, this is the first of many data readouts we expect from the large perspective Circulate IDEA trial that is running now in Japan with plans to expand to the U.S. and Europe. As we've described in the past, this trial is led by the National Cancer Center East in Japan with over 150 clinical sites actively enrolling across the country. And the primary goal of which is to definitively assess whether stage 3 colorectal cancer patients who test MRD negative with Signatera can be safely deescalated from chemotherapy. Slide has the key headlines. Based on the interim analyses, Signatera showed a presurgical sensitivity of 94%, which is even better than the 89% published in our validation paper with Reinert et al. in 2019. This also compares favorably to the 47% sensitivity reported recently by Parikh et al., using a competing MRD test called Reveal, which is not tumor-informed. The presurgical sensitivity ought to be very high in colorectal cancer, near 100%, given that patients have the cancer in their body, they have not had any prior systemic therapy, and CRC is known as a tumor type with a high rate of ctDNA shed. This is a metric that can be compared relatively easily across different tests. Furthermore, out of 31 recurrence events thus far recorded in the study, Signaterra has detected 29 out of 31, or 93.5%, in longitudinal testing, which again is better than the 88% we published in Reinert et al., and again compares favorably to the 69% longitudinal sensitivity reported by Parikh et al., We are pleased to see that our performance metrics are improving in the prospective setting, given all the technical improvements we've implemented since our launch in 2019. Finally, we're seeing a sample failure rate in this study of less than 3%, including both tissue and plasma, which compares very favorably to the double-digit failure rate in plasma alone reported by Parikh et al. As we've seen from our experience in NIPT, these rates of success and failure have a significant impact on clinical utility and adoption. Data from a subset of this group will be presented in a few weeks at ASCO, and we look forward to continuing our momentum in Japan over the coming months and years. This next slide provides a more comprehensive comparison between the performance data available with Signatera versus the data reported on the reveal test. Drawing on the breadth and depth of evidence behind Signatera, specifically in CRC and across other solid tumors, we believe the science is clear that personalized and tumor-informed MRD testing is the way to go. In addition to the sensitivity advantages that I described a moment ago in both the pre-surgical and post-surgical settings, I want to highlight the significant difference in diagnostic lead time with these two different products. Using serial longitudinal testing, Reiner et al. reported that Signatera detected residual disease on average 8.7 months ahead of radiographic recurrence, whereas, by our estimate, Parikh et al. observed a lead time of approximately four months. We believe the more sensitive and useful test is the one that will pick up the cancer recurrence earlier, before it becomes radiographically or clinically apparent. Beyond that, there are a number of other clinical advantages with Signatera. One important one is the ability to quantitate the ctDNA level. In addition to reporting presence or absence of tumor DNA, Signatera also provides a quantitative metric that allows physicians to track tumor growth and dynamics over time. We already know that this is critical for treatment monitoring, which led to the draft LCD for Medicare in immunotherapy monitoring. But we will soon report new data at ASCO with our collaborators from Aarhus University, showing how this quantitative signal can also be clinically useful during recurrence monitoring in CRC. By comparison, the reveal test, which relies on a black box combination of genomic and epigenomic signatures, does not quantitate. As a reminder, Signatera is being ordered clinically now by hundreds of physicians, not only in CRC but across many different cancer types. To that point, the next slide covers a couple major new indications where we are producing positive data. On the left is the data we released at AACR in ovarian cancer. Ovarian cancer is a highly lethal malignancy, with an average five-year survival rate of only 47%. Right now, a serum-based biomarker called CA-125 is commonly used for recurrence detection, but it lacks sensitivity and specificity, similar to CEA in colorectal cancer. In the study we presented at AACR, patients were tested with Signatera before surgery, and then a smaller set were tested serially after surgery. We reported that 100% of the patients who cleared their tumor DNA with surgery and treatment remained relapse-free, while 100% of the patients who stayed cpDNA positive after surgery went on to relapse. Signatera provided an average diagnostic lead time of about 10 months. We're also very excited about the data to be presented at ASCO in multiple myeloma. The annual incidence of this disease is about 35,000. and there are approximately 150,000 people in the U.S. living with a prior diagnosis of multiple myeloma. Most of these patients go into remission after initial treatment, but then they are actively monitored for many years, often for the rest of their lives. The big clinical opportunity here is to provide accurate monitoring and MRD assessment using serial blood sampling instead of requiring serial bone marrow specimens like the current labs do. The data coming up at ASCO will be a first look at what the performance could look like in blood using Signatera. Our plan in both of these indications is to continue building our data sets to pursue reimbursement from payers, including Medicare, and to enable prospective trials in partnership with pharma companies. We believe these new indications expand our addressable market opportunity to approximately 3 million tests per year in the U.S., and that does not even begin to address the global opportunity. which is real, considering our momentum in Japan, a partnership with BGI in China, and our clinical development activities in Europe. We are also very pleased with the progress in our foundation medicine partnership, and we look forward to providing additional updates on this throughout the year. With our strong commercial channel in the U.S. calling on community and academic oncologists, we look forward to expanding access to Signatera for more and more patients over time. Now I'd like to hand the call over to Mike to cover the financials. Mike?
spk04: Thanks, Solomon. The slide here is just a summary set of results for the quarter. Steve covered a lot of the trends on volumes and revenues, and you can see revenues have expanded significantly, even stripping out the one-time QIAGEN revenue recognition. The organic quarter significantly exceeded our internal expectations. It's worth noting that we have had a lot of new positive reimbursement decisions across the business, both with Medicare for Signatera and major commercial payers for average risk and IPT. Given we have less history with reimbursement in these areas, we were cautious in accruing revenue for the reported volumes in Q1. At the same time, volumes obviously ramped incredibly quickly in Q1, so that caution on ASPs tempered the product growth margins in the quarter compared to what we think is achievable in the immediate term. So based on this and the good underlying recent actuals we are seeing, we are optimistic that accrued ASPs can improve over the next few quarters. Cost of goods sold per unit was excellent in the quarter, driven by continued COGS progress in the women's health products. We had about $20 million in bigger ticket non-recurring cash outflows in the quarter. For example, we did refund $10 million of QIAGEN's initial $38 million cash payments. Despite that, we are still on track for our original cash burn guide, as I'll discuss on the next slide. Okay, on to the next slide and the revised guide. Steve gave you the headline that we are resetting the guide higher as a result of our Q1 experience. The change in the guidance range well exceeds the QIAGEN contribution, and the organic driver of the guidance reset is almost entirely driven by revising the volume forecast upwards. The approved gross margin guide is driven by the QIAGEN revenue and reflects the same cost of goods sold per unit assumptions we've had previously. The COGS trends look good, as we've discussed. In terms of quarterly revenue pacing, I do think the seasonality we've historically seen in the business is still relevant and should be taken into account. Generally, the volume trends in women's health lead to a slightly more muted sequential growth in Q2 and then expanding growth rates in Q3 and Q4. Partly in response to the increased demand across the business lines, we are marginally stepping up some investments in SG&A and R&D to support the growth. For example, we are accelerating investments to lab operations infrastructure and staffing that we had initially planned to make next year, but the volume is exceeding our initial forecast, and so we are accelerating our expansion plans. The net impact of all of these changes to the forecast is the cash burn guide remains the same. We remain in a very strong cash position and will continue to invest. We talked about the women's health business getting the cash flow break even this year, and we feel even more confident in that goal at this point in the year. So it's an exciting time for Natera, and we are very excited to have been able to share these results with you. Now I'd like to turn the call back over to the operator for questions. Operator?
spk07: Ladies and gentlemen, if you'd like to ask a question at this time, please press the star, then the number one key on your touch-tone telephone. To withdraw your question, press the pound key. Again, that is star, then one, if you'd like to ask a question at this time. Our first question comes from Teja Savant with Morgan Stanley.
spk01: Hey guys, good evening and congrats on the strong quarter here. Steve, I'd like to start with a question on the circulate idea data that you just presented. Looks pretty impressive. Is there anything more you can share in terms of just the competitive positioning versus a tumor agnostic approach? Do you think the metrics that you've just shown be a circulate idea, and I'm sure there's more to come, will be enough to kind of like put enough daylight, so to speak, between you and peers where you get a commercial sort of leg up there? And then finally, in terms of the plans to accelerate liquid exome from RU1 to the clinic, how does that look now that you have this data out there Do you feel like you're pretty comfortable continuing to rely on the tissue exome, or is that an effort you'll still pursue, you know, from the point of view of shortening the turnaround time for the assay?
spk02: Yeah, thanks for the question. So I would say, you know, at a very high level, we think we stack up very, very well to the tumor-naive approaches that are out there and, you know, to the other tumor-informed approaches that are out there, frankly. I mean, when you look at the breadth of data and the performance, we have a very significant lead and a great position compared to the other groups that are coming into the space. So we're doing well. We're on market. The volume is growing. The launch is successful. You know, I feel like we're in a very strong position. As far as, you know, building personalized approaches off of a liquid exome, you know, I think that that's something that we have the capability to do and, you know, it's something that we're considering, but we don't feel like it's required at this point, just given the success that we're seeing. Solomon, would you like to add any additional points?
spk11: Yes, I think one other part of the question was related to the circulate idea. trial data. Um, so we're, we're very pleased with the interim results we're seeing from that trial. It is the largest prospective, uh, MRD trial of its kind. And, uh, it's, it's been rolling very well. There's a lot of excitement on the physician and patient side to be a part of this. Uh, and the data is looking even better than what we had published previously. So yes, we think this, you know, this is an important, uh, uh, you know, validation of, uh, what we've seen before, and it sets us up to only improve the adoption of the test, not only in clinical use, but also in other clinical trials, because it's such a good feasibility demonstration of how this can work in a clinical trial. So we're very optimistic, and we look forward to presenting additional data at ASCO in a few weeks.
spk01: Got it. And Solomon, just a quick follow-up there on the ASCO multiple myeloma data that you highlighted. How do you think the use case here would shape up relative to, you know, some of the immunosequencing assays like Clonoseq from Adaptive, for example? Do you essentially sort of view this as being a blood-based approach and perhaps in multiple myeloma it's unclear yet whether they can be sort of bone marrow or blood-based? Is that really the angle that you're taking here?
spk11: Yeah, thank you for your question. Without being able to present the data itself at this time, it'll be shown in detail at ASCO. Yeah, the general concept here is just like it's the same signatera product. So we start with a sample of the tumor, which in this case comes from the bone marrow biopsy for that initial analysis and personalized assay design. And once that's done, we just analyze the plasma going forward serially. And that presents a massive opportunity to improve the clinical utility and accessibility of MRD and monitoring for the 35,000 multiple myeloma patients per year and the 150,000, you know, that have had a prior diagnosis because those patients today without Signatera require a serial bone marrow biopsies in order to continue their monitoring. And that's a painful procedure. That's a very expensive procedure. And frankly, patients simply avoid it because of those hurdles. And so with Signatera, we think if we can consistently show a similar performance that's clinically sufficient, then not only will people switch over to using Signatera in this setting, but we think the overall use of monitoring and MRD testing will just go up because of the improved accessibility.
spk07: Our next question comes from Tycho Peterson with JP Morgan.
spk09: Thanks. We'll start with a couple on just Cydna Terra as we think about kind of, you know, CRC and the IO and Altera ramp. Have your kind of assumptions for kind of the back half of the year ramp changed at all? And then I just want to make sure I understand your answer to the last question because, you know, your competitors like Adaptive are moving toward a blood draw, a blood-first approach away from bone marrow. So I'm just trying to understand competitively if that changes things in your perspective on multiple myeloma.
spk02: Yeah, so I'll comment on the ramp. I mean, we haven't broken out our, you know, Signatera numbers or Prospera numbers specifically, but you can see our volume growth is going very well. And that includes, you know, what we believe is a very successful launch for Signatera and our other products. So, you know, it's in line with our expectations. We're seeing good adoption. The test is working very well. And so we're pleased with the trajectory. You know, I think on the question of multiple myeloma, so currently to run the monitoring assays that are available, you have to do repeat bone marrow biopsies. in order to do that ongoing monitoring. So with the test that we're working on, you do one bone marrow biopsy for the setup, and then all the ongoing draws are just blood draws. So there's no need for a repeat bone marrow biopsy.
spk09: And Steve, what's the latest thinking from your perspective around screening? You know, it's probably one of the top three questions we get on you guys. Can you maybe just share your thoughts a little bit about how you're thinking about that opportunity, either organically or inorganically over time?
spk02: Yeah, you're talking about early cancer screening? Correct. Yeah, so we've said actually recently, I think on our last call, that we do have a program in that space, and that's an area that we're moving into. We're actually making progress. We didn't announce anything today, but The program is underway. We think we have a very efficient approach to go after that market, both technically and from a validation and commercialization standpoint. And we will be providing updates in the future, but we're not going to be providing any today.
spk07: Our next question comes from Doug Shankle with Cowen.
spk03: Hey, good afternoon, everybody, and thank you for taking my questions. So I just want to start on really volume trends and guidance. I think it looks like, just doing some quick math, that you were doing about 25,000 tests per week in Q1, which, if I got that right, is pretty remarkable, you know, keeping in mind, you know, that's a big step up from where we've been. I'm just wondering if you could comment on how that trended over the course of the quarter. Was it pretty steady or did it continue to improve into the end of the quarter? And then kind of building off of that, you know, and just, you know, using that 25,000 tests per week in the context of full-year guidance, I can get to the low end of your range with, you know, pretty nominal improvement in that figure and nominal pricing improvements there. I'm not sure either of those assumptions make a ton of sense given what feels like strong momentum and various things that you called out that could drive ASP improvement, including accruals, a higher mix of Prospera and Signatera, things like that. So I just want to make sure I'm not doing something wrong. And assuming I'm not, is the low end of guidance just reflecting a scenario where you want to be conservative early in the year?
spk04: Hey, Doug, it's Mike. Thanks for the question. Yeah, I mean, I think your summary is basically spot on. The only caveat I'd have is something that I've mentioned in the prepared remarks was just a reminder on the seasonality of the business, particularly the women's health business, which is the majority of the volume still. And that is historically we've seen a strong Q1 and then the same clinic volumes increase. are a lot lighter in Q2. And so you see, like, kind of a flash Q2 and then a kind of growth in Q3 and Q4. So we are taking into account that kind of seasonality still, even though clearly, I mean, you can see from, I think, the first couple slides on the deck that something different is going on right now in terms of the trajectory. And I think that's really positive. You can see that in the weekly. So the weekly volumes through this call are looking quite strong. But, you know, we do, I think the only other added after your summary is the seasonality point, which I think would temper the model slightly there. But obviously, when we guide, we try not to give aspirational guidance. We try to give guidance that we think we're going to hit. So, you know, I would certainly hope that the low end of any guide that we give is something that we feel like we can do.
spk03: Okay. Super helpful. And then just a couple on NIPT. Anything you can share on how MIPS is evolving and really reimbursement is evolving? Obviously, a lot of progress last year on the average risk guideline and reimbursement front. I'm just wondering if there's anything new in terms of how that is impacting MIPS and ASPs. And then on micro deletions, anything new in terms of progress towards incremental reimbursement? Probably pretty early for that, but anything you could share would be of interest. Thank you.
spk02: Yeah. Mike, maybe I'll comment on volumes and then if you want to follow on ASPs. From a volume standpoint, I think we are starting to see the long-awaited shift over towards average risk.
spk04: And
spk02: You know, when we look at the growth in Q1, it's really coming from two factors. So one is new wins from competitive takeaways. So we had our best quarter ever for growth coming from new customers and competitive takeaways. And the second thing that we're seeing is a shift towards average risk. So when we look at the mix of volume coming in, this high risk versus average risk, we're starting to really see that needle move. For a long time, for years, it was very steady. And over the last six months, we've seen kind of a linear ramp up. And so we think the market's moving now toward a place where it's, you know, maybe it was 20% penetrated on average risk before. I think we're starting to get up into the, you know, 30%. average risk penetration. So there's a long way to go. We're at the very early stages, but it's happening. And we're doing well both in absorbing that penetration, but also winning new customers and taking business away from others. Mike, you want to comment on ASPs?
spk04: Yeah, the recent ASP trends were quite strong for NIPT. I mean, it's kind of happening as we've described that would. We were contracted for an NIPT code, and the fraction of time we're getting paid is just steadily increasing. And it takes a couple quarters for that to flow into the revenue line. Just based on the way that we do the accrual, we really need a critical mass of of historical actuals to kind of get full credit for that, the way we do the accrual, and perhaps that's a bit cautious, but we like to be a little bit careful, you know, when we do that. So I'm cautiously optimistic, as I've mentioned in the prepared remarks, about the ASP trend for the rest of the year.
spk07: Our next question comes from Puneet Suda with SBB Lyric.
spk05: Hey, great. Good afternoon. This is actually Wesley on for Puneet today. I wanted to go back to MRD briefly just for the first question. And I guess having been on the market for the better portion of a year and reimbursements since I think last October in CRC at least, I guess what have you learned about the market itself and what feedback from potential customers who are kind of on the verge about MRD testing in general? What are you hearing from them? What are your expectations for being able to drive penetration in CRC? stage two, three CRC still and also in some of the newer indications and potential timing on multiple myeloma.
spk02: Yeah, so I'll make some comments and then Solomon, you can jump in. So in general, the feedback has been very positive. I mean, if you go back, you know, four years ago when we first started talking about this, nobody was talking about solid tumor MRD or MRD testing in the adjuvant setting. And now if you're an oncology diagnostic company, you have to have an MRD product. Everybody's trying to move into this space. And that's really a validation of the enormous market opportunity. You know, when you look at colorectal alone, there's a million tests that could be done per year. So these market sizes that we're talking about here are orders of magnitude bigger than anything else in the specialty diagnostic space and certainly much, much bigger than the therapy selection market alone where traditionally, you know, a lot of the energy has been focused. So we're really happy about how things are going. We're seeing the use from doctors accelerate. We're seeing lots of repeat use from patients and doctors. We're seeing use in all different stages of colorectal. We're seeing use beyond colorectal. We're getting a lot of great patient stories and great physician stories about how the test, you know, worked as advertised and how it helped your patients. So we're pleased with how things are going. Solomon, do you want to jump in on that?
spk11: Thanks, Steve. I agree with everything that was said. Of course, we've learned a ton about how people want to use this test and where they find it to be useful and to inform treatment. I think one of the interesting things that we've seen in addition to what Steve described is that a lot of the time, you know, there are already patients who are somewhere midstream in their course of care. And many, many of our tests get ordered for patients for the first time who are, you know, 6, 12, 18, 24 months out of surgery because they had some indeterminate scan you know, some nodules showed up, something that was suspicious, but it's hard to, you know, to assess for the physician. And more and more people are coming to us to help them triage a borderline situation, whether it's, you know, do I treat or not? Or in this case, do I perform a biopsy on this nodule that's indeterminate or not? You know, how do I proceed? And once people see that see that data come back and they start to grow comfortable with what the test can do, the adoption just increases significantly. And the other thing I'll say that Steve mentioned, but we've been very impressed to see how sticky the product is once a patient is on it. You know, the repeat use and the frequency, you know, is frankly above our expectations. And it matches, you know, what what it should be, frankly, because it's just such an informative test over time. So I'm sure there's more I could say there, but I'll stop at that point.
spk05: Great, great. Thank you. And then on the women's health side, just speaking on the average risk market specifically, Steve, you just mentioned it's about, do you think it's around a 30% penetration right now? I guess what's differentiating about Panorama and I guess Natera's combined offering? that can help drive the remaining 70% of that market, and what are you seeing that's driving the competitive wins? And then just finally, a follow-up on the last question, any update on the microdeletion timing? Thanks.
spk02: Yeah, so, you know, one of the reasons, if you look back at Natera's history, we were the fourth company into the NIPT space, but today we're the market leader by far. We have the most clinical differentiation, we have the most peer-reviewed published data, and we're doing the most volume And the reason is because our test is unique and differentiated and physicians like it. So we're the only company out of all the other companies that are out there that are looking at SNPs. And when you use SNPs, you're able to identify things that simply biologically can't be identified by the other companies. Things like triploidy, for example, that are very relevant in pregnancy. but it also allows us to get higher sensitivity and specificity on things like trisomy 21 and the standard chromosomes. When you shift over to, you know, something like 22q microdeletion disorder and you look at the performance using SNPs there versus the shotgun sequencing method, I mean, it's really night and day, the difference in the performance. I mean, we're talking about, you know, sensitivity in the 90s versus, you know, others that have published performance sensitivity in the 20s. So, you know, the technique works exceptionally well, and that's now, you know, being shown out in the volumes. On the microdeletion standpoint, we, you know, now have published or have presented and soon to be published the largest prospective trial that has ever been done in the microdeletion space. The results look exceptional. There were two key findings on microdeletions. One is that the 22Q disease is much more common than what was previously expected at approximately 1 in 1,500. And the second was that our test works really, really well. So the sensitivity was very high, and the positive predictive value was also very high. And those are two of the, I guess combined, those are the three things, disease incidence, sensitivity, and specificity, that the societies look at when they're deciding whether or not something meets the criteria to be approved for a prenatal screening test. So we think we're in a good position to, at some point in the future, get into the guidelines and receive payer coverage. And we're doing hundreds of thousands of these tests already every year that are not reimbursed. So as soon as reimbursement comes in, this is going to be an immediate, very significant impact to Natera's revenue and the bottom line.
spk07: Our next question comes from Mark Massaro with ETIG.
spk10: Hey, guys. Congrats on a great quarter. I guess it's exciting to hear that you have a program in place in early cancer detection. You know, you guys are a women's health company. You know, you've shown promising data in ovarian cancer initially. So when I think about certainly the promise of developing an ovarian cancer screening test or a breast cancer screening test, you know, the market has never seen that. So can you maybe just talk about your plans of either going indication by indication or perhaps looking at the multi-cancer screening opportunity?
spk02: Yeah, thanks, Mark. So, you know, I think the initial – initial area that, that, you know, we're, we're looking at is, is colorectal. And I think, you know, similar to some of the others in the space. Um, and then, you know, ideally that would be expanding, you know, beyond, uh, CRT into, into some of the other cancer types. Um, you know, but, you know, I, I, I would just say, wait till we provide the more significant update that, that will be coming. Um, you know, it's, it's not something that, uh, you know, that we included in the call today, but there will be some solid updates coming in the future.
spk10: Okay, that's helpful. And just my follow-up question, you know, obviously Adaptive has done a great job in blood cancers. It's certainly interesting that you're showing data in MM. You know, do you think there are any limitations to, you know, I think perhaps there's a reason why you started in solid tumors. Obviously, it's a bigger market but are there any technical limitations of addressing blood cancers? I know, you know, adaptive is looking primarily at lymphoid, but not myeloid. So I don't know if you have any thoughts on any technical limitations of your technology in blood cancers.
spk02: Yeah, I'd just say, you know, the data that we have coming out, you know, at ASCO is going to speak for itself. You know, it's early, but You'll see when you attend the conference, we think it's very positive. Of course, there's more work to be done there, but we don't think that there's technical limitations in this particular indication. Solomon, do you want to add to that?
spk11: Sure. I think it's hard to speak in generalities, so of course there are going to be Yeah, there's going to be technical matters we have to sort through along the way with all different types of either new indications or new specimen types or other biological variations that we're going to learn more about. But just sticking to the facts here, we're going to present great data in multiple myeloma, and I think there's a real opportunity to help a lot of patients here.
spk07: Our next question comes from Rachel Vestal with Piper Sandler.
spk06: Great. Thanks for taking the questions. We spent a lot of time on oncology today, so I'll just ask a few on transplant and women's health. So first on transplant, can you guys just give us some color on the launch and how penetration has been with transplant centers versus community nephrologists? And then also regarding the blanket LCD for transplant testing. You mentioned heart and lungs, so can you talk about your timing expectations for addressing those other organs with Prospera?
spk02: Yeah, thank you. So we're pleased with how the launch is going. We've been out there now a handful of quarters, and things are in line with our expectations. We think we have a unique technology that competes very well in the areas that matter. I think the paper that we showed here in the earnings deck I think highlights one important factor where we've already, in a very short period of time, you know, completely moved the science forward. This issue of background cell-free DNA is very important. If you're looking at a metric donor-derived cell-free DNA percentage, you know, but the background cell-free DNA is very, very high, you can mask rejection and you can have a false negative result. And so we're now incorporating that and flagging cases, you know, where there's a very high background cell-free DNA. And that was what was covered in this, you know, paper with UCLA that looked at this COVID case study. So we're doing well. The community nephrology space, you know, I think is an opportunity. And, you know, that's something where, you know, we are seeing some volume come in. But certainly, I think the transplant centers are the larger opportunity in the near term. When you look at expansion into other organs, you know, we're sort of assessing what opportunities are out there for us, but there's no reason why our technology should not work very, very well in hard, long, and other indications. And now that the reimbursement hurdle has been cleared, you know, it certainly makes it a more attractive opportunity for us. You know, if you look at some of our competitors and the volumes, you know, that they're presenting and some of these other companies areas like hearts, it's compelling. And we know our technology works well. We know we can get reimbursed very easily now with this new reimbursement guideline. And so it's something worth assessing. And we're going to have to consider whether it makes sense for us.
spk06: Great. Thanks. Next question for me. So for women's health, you guys have mentioned that you're taking share from competitors, which is great. So can you just spend a minute on your women's health sales force? Do you guys think that your sales team is right-sized to address this larger average risk market? And then what are your thoughts on keeping that business profitable versus expanding out the women's health efforts to take share, especially as average risk and then potentially micro-deals opens up that opportunity? Thanks.
spk02: Thanks. Yeah, so, you know, we've been able to grow the business with, you know, some incremental increases in operating expenses, you know, that we've kind of layered in over time. So I think we're in a good position right now as far as our kind of reach and frequency in the women's health team. You know, of course, we're always monitoring and sort of looking at things, but I don't think that there's any big changes at this point that we would anticipate. When you look at the path towards profitability and towards cash flow break-even, I mean, that path at this point is very clear, the women's health side. I mean, we're seeing – so with this panel AI launch that we announced, the phase one implementation and then the remaining phases of the year, and this is a big card savings on NIPT. You know, we haven't talked about that in a long time, but our COGS on NIPT now are well below $200 per test. I mean, well below because of the scale that we're operating at, because of, you know, things like Kano AI, where we're now incorporating deep neural networks and machine learning from over 2 million tests that we've run in our lab, and we're using that to you know, reduce the costs of the workflow and of the reagents that we put into the assay. So major cost reductions, you know, that are hitting, and I think that path to cash flow breakeven is very clear. You know, we're always looking out for incremental investments, but I think we're in a good position right now in women's health.
spk07: Our next question comes from Alex with Craig Hallam.
spk12: Good afternoon, everyone. This is Trent McCarthy. I'm jumping on for Alex. Just one quick question on NIPT. It's been six months or so since the ACOG guidelines came out, and we've heard a lot of local charters have been training on the changes. So what are you hearing in the field? Are more clinicians embracing the guidelines and ordering more tests? If you could just give a little bit more color on that.
spk02: Yeah, it's definitely happening. We've seen over the past six months a linear shift in the percentage of our business that is average risk versus high risk. So that's definitely happening. It's going to continue. We think that the end point for this is going to be around 90% penetration, 95% penetration. And we think we can get there in, you know, three, three, four years, something in that range, maybe even less. Right now, I think the market is 30% penetrated. So there's a long way to go. I mean, NIPT growth is just really starting to ramp right now. We're just at the very beginning. And we're positioned – I mean, we are in an incredible position. We have a great sales team. They're tenured. We have the most data. We have the best-performing product on the marketplace. So we're in great position to ride the wave of expansion in an average risk NIPT.
spk12: Got it. That's helpful. And just to pivot over to Signaterra here, you're obviously not breaking out Signaterra CRC, which makes it kind of hard to gauge performance. But what sort of penetration do you want to see this year, next year, 2023, and so that you could say, yes, Natera was successful here, if that makes sense.
spk02: Yeah, so when you look at a lot of the historical cancer diagnostic launches, you know, the companies that have been very successful, you know, Foundation Medicine or Genomic Health, you go back and what you see is in the first year, sort of a lower single-digit penetration. In the second year, kind of a mid-digit. single-digit penetration into the market. And in the third year, you know, maybe high single-digit, low double-digit penetration. And, you know, that's sort of what we use to kind of draft our forecasts. And, you know, I think it's in line with other specialty diagnostics that are out there. Now, the data coming out, I mean, we're putting so much really compelling data out. I mean, it's almost every month there's a massive announcement coming out, or every conference we're now having you know, multiple presentations, I think things could really start to accelerate. But, you know, that's kind of what we set out as the benchmark for success, you know, just from a historical perspective. And we're pleased, very pleased with where we are right now in the launch.
spk07: I'm sure there are no further questions in queue at this time. And that concludes today's question and answer session. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.
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