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spk11: Hello, welcome to Natera's 2023 first quarter financial results conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a Q&A session. To ask a question at that time, please press star followed by one on your touch 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 9th, 2023. I would now like to turn the conference call over to Mike Brophy, Chief Financial Officer.
spk12: Please go ahead.
spk15: Thanks, Operator. Good afternoon. Thank you for joining our conference call to discuss the results of our first quarter of 2023. On the line, I am joined by Steve Chapman, our CEO, Alex Oleshin, Chief Medical Officer, subbing in for Solomon Moshevich, who wasn't able to join the call today due to company business, and John Sesko, Chief Business Officer. Today's conference call is being broadcast live via webcast. we will be referring to a slide presentation that has been posted to investor.natera.com. A replay of the call will also be posted to our IR site as soon as it's available. Starting on slide two, during the course of this conference call, we will make forward-looking statements regarding future events and our anticipated future performance, such as our operational and financial outlook and projections, our assumptions for that outlook, market size, partnerships, clinical studies, opportunities, and strategies, and expectations for various 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 the 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, 2023. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. The Territory claims 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 a performance during the quarter unless we do so in a public forum. We will quote a number of numeric or gross 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.
spk02: Thanks, Mike. As you can see from the highlights, we're off to a very strong start as we continue to drive robust financial performance, maintain our leadership position in cell-free DNA analysis, and achieve important milestones across the business. We process roughly 626,000 tests in the quarter, up 28% from Q1 of last year and 12% sequentially versus Q4. We generated $242 million in revenues in the quarter, which was a major increase, both versus Q4 and year-on-year. We also saw strong volume growth. We performed 71,000 signatera and altera tests in the quarter, which is more than 100% growth versus Q1 of last year. We saw a very strong step-up in clinical volumes over Q4 of last year and are generating continued momentum this spring. As a result, we are pleased to be raising our annual revenue guide that we just set two months ago. We are moving to a new range of $995 million to $1,015,000,000 for the year. The rest of the elements of the guide will remain the same for now. We are on pace to hit our margin target of 41% to 44% and hit our reduced cash burn target of $300 to $325 million. You will see our quarterly cash burn in Q1 cut almost in half versus Q1 2022, and we feel we're on track for our 2024 cash flow break-even goal that we previously announced. In addition, we've been conservative with the impact of guidelines for 22Q, expanded carrier screening, and MRD testing in our ASP forecast. Note that these guidelines are not necessary to achieve our financial goals. We continue to extend our leadership position in women's health with two significant NIPT publications and a third paper that has been accepted for publication. We now have more than 40 published peer-reviewed papers highlighting the performance of our Panorama NIPT, including the landmark SMART study. We think this clinical differentiation continues to be an important volume driver as the NIPT market continues to grow. Of course, we've had a string of wins for Signatera this spring as well. We continued our data leadership with several presentations at AACR, and we are very excited to announce two oral and 12 poster presentations at ASCO this June. In addition, a new study demonstrated signatera's performance in stages three and four melanoma, and the expanded I-SPY2 study demonstrated the value of signatera for breast cancer patients in the neoadjuvant setting. We think the neoadjuvant breast setting is important, and we will dig into that later in the call. After securing Medicare coverage for breast cancer in March, we were pleased to receive the first major commercial coverage decision for Signatera with a pan-tumor coverage policy from Blue Shield of California. In organ health, we secured Medicare reimbursement for Prospera in heart transplantation. We hadn't included this in the guidance originally, so this is a nice win. In kidney, in line with our expectations, we're seeing some modest disruption in the wake of the updated Medicare policy, But as you can see from the results in the guide, this isn't making an impact in the context of our overall business, especially with the upside from heart reimbursement now coming in. I'll get into more details a bit later in the call. Okay, great. Let me get into some of the business trends. We've more than tripled the quarterly volume since the beginning of 2019, and our growth rates remain in the mid-20s despite the significant increase in the scale of our business. I think that gives a sense of the commercial execution track record and shows that we are offering critical services to some very large patient populations. You can also see that Q1 historically represents a big step up over the prior year, and 2023 has proven to be no different. This is driven in part by the seasonal patterns of NIPT favoring Q1, but also shows our ongoing success in taking market share and represents a continuation of the broader shift from maternal serum screening to NIPT. As a reminder, we think NIPT is only about 50% penetrated today. This year, our Q1 volume growth was further amplified by three strategies we have been pursuing that increased volume for the long term, but we expected would impact gross margins this year. One was our decision to continue operating in California and to participate in the prenatal screening program that went into effect last fall when most lab providers opted to not participate. California initially required patients to go through the state program. Despite the low margin of the state's limited NIPT offering, we thought it was important to provide access for this patient population. However, after a legal challenge, the courts have now allowed NIPT to be offered outside of the state program, enabling us to regain some of the loss margin while increasing our volumes, so we're optimistic that we made the right decision to stay. The second was our decision to serve many new carrier screening customers after competitors exited the space last fall. Many of these customers are high-volume accounts, and they have a preference for the broader carrier screening panels that currently have a very low margin profile. We opted to take on many of these accounts because we feel the clinical utility and guideline support for broad carrier screening is strong, and we hope to see reimbursement rates improve as we go into 2024. The third is our decision to continue driving signature volumes. Because of the growth ramp and the upfront expense, Signatera's margin profile is lower than our overall company margin. However, we expect that delta to narrow as we continue to lower COGS and increase ASP through various initiatives. Obviously, growing Signatera is the right decision as we are still in the very early days in oncology. We have established a strong competitive advantage with Signatera, particularly with the extensive body of peer-reviewed data we've generated, which is now leading to strong uptake and more coverage. With each of these strategies, there was a trade-off between short-term gross margins and the future upside potential. Despite these volume bets, we've significantly improved our cash burn trajectory by continuing to grow top-line revenue on top of now much lower operating expenses. You see this happening with our net cash burn reduction in Q1, our aggressive cash burn goals remaining intact, and our strong gross margin guidance of 41 to 44% for the year. And again, we've been conservative with the potential upside for future society guidelines, which could boost things further. The next slide demonstrates the strong volume trends are translating into revenue at roughly the same pace. And as we just mentioned, we think there's upside on 22Q broad panel carrier screening in signature clinical volumes. As we described in detail in March, we were very pleased to see strong updates to the ACMG guidelines on 22Q. On ACOG guidelines, we think the data published in SMART are compelling. We're hopeful for a positive update soon, but of course, we don't have direct insight into the guideline process. With carrier screening off the back of favorable existing ACMG and ACOG guidelines, we're seeing payers start to change their policies, which we think is a good sign. In oncology, we were very pleased to see sequential progress in our Signatera clinical ASPs moving from the mid 700s in Q4 to the low 800s in Q1. This trend was driven largely by incremental progress in our Medicare and recurrence monitoring mix with a smaller benefit coming from breast coverage. So for Signatera, we are ahead of schedule on our reimbursement trajectory, and we remain optimistic that we can see continued improvement over the course of 23. For clarity, we're not dependent on NCCN guidelines to get the ASP to a much stronger place. Also, the signature gross margin benefit from improvements in ASP was offset by the fact that we haven't yet gotten the full COGS benefit on the tissue exome, which is a benefit we expect to realize as this year progresses. The next slide gets into the compelling new publications on our Panorama NIPT. As a reminder, Panorama represents around 50% of the NIPT market in the United States, with differentiated capabilities that are supported by more than 40 peer-reviewed publications. This includes SMART, the largest prospective multicenter NIPT study, where we clinically validated Panorama's performance in over 18,000 pregnancies, with genetic outcomes confirmed for all samples analyzed in the study. With recent publications, we are continuing to add to the body of evidence. The first, published in Ecstatrix and Gynecology, evaluated patients who received a rare panorama result that could indicate suspected maternal malignancy. We showed that when panorama sees a very specific type of DNA pattern, more than two-thirds of the time, these patients have maternal cancer. The PPV of 67% is quite high, so doctors seeing this result are advised to investigate further. It's an extremely rare finding. but one that could provide important and potentially life-saving clinical information for these patients and their doctors. The second is a new publication from SMART published in AJOG. This publication found that in a subcategory of about 1 in 200 patients, Panorama was able to determine a significantly increased risk of adverse pregnancy outcomes. These patients were four times more likely to have preeclampsia and four to ten times more likely to have preterm birth. In these patients, Panorama may provide important information about increased risk for adverse outcomes, which could ultimately help doctors to more closely manage these pregnancies at high risk. Finally, we learned that another publication was accepted from SMART by Genetics in Medicine. This is the largest prospective clinical validation of screening for sex chromosome aneuploidies with NIPT. Across over 17,000 pregnancies in a real-world setting, Panorama's performance with screening for sex chromosome aneuploidies was excellent. As we are seeing, the SMART study continues to yield critical new insights about NIPT and the real-world performance of Panorama. As the market expands, we think our strong data leadership will continue to differentiate Panorama from other NIPTs. Okay, let me transition over to Oregon Health. As I mentioned, we were pleased to secure Medicare reimbursement for Prospera in heart transplantation. We hadn't originally included this in our guidance because we can't always predict when coverage will come in. Many of you will recall that we launched Prospera in heart ahead of reimbursement, so now that we're covered, we're already off to a running start with a nice volume grant. We also have additional data coming out from the NIH-sponsored prospective DTRT study, which we think will be published later this year. So we're feeling really good about our trajectory in heart. Also in heart, but extending to kidney as well, we were pleased to see Medical Society endorsements of donor-derived cell-free DNA testing from the ASTS and AST, in addition to recent endorsements from ISHLT and ESOT. These guidelines and statements could serve as the basis for further volume growth, where today the markets are very underpenetrated. On kidney, we've seen modest disruption in the transplant volumes as physicians worked out how to implement the new Medicare policy. Some of the disruption is based on confusion surrounding the policy, which we think will resolve itself over time, and some represents slight shift in ordering patterns. The magnitude of the disruption is in line with our expectations, and it's offset somewhat by the upside from our heart coverage. As you can see from our raised revenue guidance, this isn't making a material impact on our overall trajectory. Looking ahead, the recent society endorsements provide a potential path to expand access and increase penetration. Plus, we've got new data from the now fully enrolled proactive trial that we think could help further expand patient access. The first readout will be at ATC in June. We think it's impressive data that can benefit the entire industry in support of donor-derived cell-free DNA testing, so we look forward to sharing it with the community. Now, let me turn it over to John Fesco, Chief Business Officer, to give a few additional updates on chronic kidney disease and oncology. John?
spk03: Thanks, Steve. As a reminder, we also have a chronic kidney disease genetic testing product line, Renacyte. Renocyte looks at conditions like polycystic kidney disease or Alport syndrome in germline DNA of those patients who have already been diagnosed with CKD. In the future, we think every patient who is diagnosed with CKD could get genetic testing. The market opportunity is potentially very large because over 1 million patients in the U.S. are diagnosed each year, and there are about 37 million patients in the U.S. living with CKD. To help define the clinical utility of genetic testing in this context, Natera sponsored the definitive Renicare study. We started working on this in 2019 and collaborated with leading investigators from Columbia, Yale, Penn, UPMC, NYU, Mayo, Cleveland Clinic, and others to design the study. We completed enrollment last year with more than 1,600 patients from over 30 centers. The renal care study is designed to prospectively assess the incidence of genetic conditions in the CKD population, and then importantly, how renocytes' genetic findings could impact clinical management. Some have asked us what success looks like in the renal care study. While we're waiting to publish the results, the best proxy we've found is hereditary cancer testing. We talked about this last quarter, but I think it's an instructive comparison. In a previous large study of nearly 3,000 cancer patients published in JAMA Oncology, 13.3% of patients had a pathogenic germline variant indicating hereditary cancer. Of those patients with a high penetrance variant, 28.2% had resulting treatment modifications. As Renicare reads out, we will be looking at these same metrics, including the fraction of study participants who have a pathogenic variant associated with CKD. as well as what fraction of patients who test positive had their treatment modified after the pathogenic variants discovered with renacyte. Stay tuned for more information over time. Okay, let's dive into some of the oncology trends on the next slide. We covered the strong overall volume growth at the top of the call. The growth in our clinical oncology volumes in Q1 is actually masked somewhat by a lumpiness in our pharma volumes that favor Q4. Typically, pharma companies will order a larger number of tests in Q4 as they need to utilize excess budget for the year. Our clinical volumes were actually up roughly 17% sequentially just since Q4 of 2022, and we've seen continued strong momentum so far in Q2. We are continuing to concentrate on the core indications where we have Medicare reimbursement. More than 80% of our volumes are now coming from covered indications. We were also really pleased to see ASPs make a meaningful step up in Q1 from the mid 700s to the low 800s, which we estimate was driven by the mix of time points ordered and some incremental benefit of rest reimbursement. Looking forward to the rest of the year, we think there are some opportunities to improve our collections within covered indications, expand into new indications, and drive more commercial coverage as well. On that note, we received our first commercial coverage policies in March. The recent decision from Blue Shield of California is a good case study for the kind of progress we are making with commercial plans who are increasingly appreciating the clinical and economic utility that Signatura offers. The fact that this was a pan-tumor coverage policy highlights the breadth of our data across a number of cancer types, which we think is a key differentiator. In addition to Blue Shield of California, we also secured coverage from Blue Cross and Blue Shield of Louisiana, for serial testing with Signatera for plan members diagnosed with colorectal cancer, muscle invasive bladder cancer, and pan-cancer iotherapy monitoring. We think there's momentum on commercial coverage, and we look forward to seeing how things progress. Right before I turn it over to Alex, I want to briefly touch on our IP portfolio. As we've discussed in the past, we have a broad portfolio of MRD IP, only a small portion of which has been deployed in litigation. The remainder is not yet in play as we assess how things evolve. With that, I will now turn it over to Alex to review our oncology data in more detail. Alex?
spk04: Thanks, John. First, let me provide some detail on the data roadmap in colorectal cancer. As we predicted, Signatera was not included in the updated NCCN guidelines that were published this spring. This is because the Circulate Galaxy paper published in January and was unavailable for the NCCN systemic evidence review process that occurred prior to the August meeting, and therefore was not included in the committee vote. Nevertheless, we are pleased to see that the 18-month real-world perspective data merited inclusion in the discussion section of the updated guidelines, and that Signataria was acknowledged as having prognostic and predictive value. Now that the Circulate Galaxy data has been published, and highlighted on the cover of Nature Medicine. We plan to submit this peer-reviewed data in time for the 2023 Systemic Evidence Review. While it's possible that the Galaxy study may be sufficient to change NCCM guidelines, we know that the NCCM committee referenced the need for more data in both the adjuvant and surveillance studies. The good news is that this data is already coming. There's a randomized biobank study in the adjuvant setting that is expected to read out later this year, followed by the prospective Altair data expected in 2024, which would address both the adjuvant and surveillance questions. Furthermore, the randomized de-escalation arms of the Japan and U.S. Circulate studies continue to enroll well, with the readouts currently anticipated in 2026. There are also several non-randomized trials that we expect will impact the field, including a large commercial experience study that will be submitted for publication later this year, extended follow-up from the Galaxy study, plus the bespoke trial where enrollment is now complete and which has relevant endpoints in both the adjuvant and surveillance settings. With these many shots on goal, we believe we're in a good position Additionally, it's worth noting that this list is far from extensive, as it does not include other independent clinical utility studies being conducted on Signatera by multiple institutions that are now beginning to read out. Given that we started working on these trials years ago, some dating back as far as six or seven years, we think this pipeline creates a significant competitive advantage going forward. While the CRC data pipeline has been advancing, we continue to make significant progress across multiple other indications. Here you see six studies with large patient cohorts and more than 500 plasma time points each, either recently published or on the near-term roadmap. We think that the data from these studies could support clinical adoption and serve as a basis for additional submissions to Medicare. The gastroesophageal and anal cancer papers are highly relevant to GI oncologists who order signetarum CRC. This is also true for pancreatic cancer, where we are planning to submit for publication a real-world study with more than 300 patients and 1,900 time points, data that opens new avenues for risk stratifying and managing these patients. For example, the surgery for pancreatic cancer can be extremely morbid, And our data suggests that Signatera may allow for more personalized selection of patients for either surgical or medical management of their disease. We've also had a particular focus on developing data in breast cancer, given the scale of the unmet need. So the recent coverage decision we achieved in this histology is a major win for us. Building on our landmark EBLA study published in 2019 in CCR, We are now following up with an expanded cohort, examining three times more patients and five times more plasma time points with significantly longer follow-up. This expanded data was presented to ASCO in 2022 and has already been submitted for publication. And of course, we're very pleased to get the publication out for the I-SPY2 neoadjuvant breast cancer data. We think neoadjuvant breast cancer represents a strong use case for Sigmatero. which I'll cover in more detail on the next slide. First, let me tell you about the neoadjuvant setting and how patients are treated today. Up to 50% of all breast cancer patients now get neoadjuvant treatment, which is a growing trend, and it describes any systemic treatment that is rendered before definitive surgery. This can include any combination of the following, chemotherapy, endocrine therapy, targeted therapy, or immune therapy. purpose of neoadjuvant therapy is threefold. The first is to decrease the risk of distant recurrence. The second is to downstage the tumor to allow for more effective surgery. And the third is to assess treatment response in order to guide adjuvant therapy. However, there are several unmet clinical needs in the neoadjuvant setting. Namely, it's hard to know if the adjuvant therapy is working and if certain patients can avoid or shorten the duration of toxic chemotherapy. The NCCN guidelines themselves state explicitly that accurate assessment of response to neoadjuvant therapy is difficult. So, there is an opportunity for signatera to fundamentally change management here. Now, let's go over the data. In this study, 280 patients with over 1,000 plasma time points were analyzed. TTA status and trajectory during neoadjuvant therapy. were found to be significant predictors of metastatic recurrence or death in HR-positive, HER2-negative, as well as triple-negative patients. As you can see on the slide, patients who tested CTA-negative after new adjuvant therapy had improved survival, even when a residual disease was detected at the time of surgery. This is a big deal. Since these patients are being treated with aggressive adjuvant regimen in the postoperative setting, which may not be necessary. Additionally, in triple negative breast cancer, this effect could be observed even earlier, as soon as just a few weeks after neoadjuvant therapy was initiated, suggesting that if a patient was to clear their CTA after just one or two cycles, they may be eligible for de-escalation of their neoadjuvant regimen and potentially avoid certain forms of additional adjuvant chemotherapy. The second significant finding was that patients who were CTA negative at T0, this is a time point before neoadjuvant therapy was initiated, had exceptionally favorable long-term outcomes with significantly improved relative distant recurrence-free survival compared to patients who were signatory positive at that time point. This is very powerful, indicating that CTA negativity at diagnosis may identify a favorable subgroup of patients that in the future may be managed much less aggressively in terms of the intensity of their chemotherapy, surgery, or their radiation treatments. We believe this data can support reimbursement in the neoadjuvant setting and help accelerate the general adoption of neoadjuvant treatment for breast cancer patients. It also enables an earlier entry point for patients into the Signatera ecosystem right at diagnosis, which then allows for seamlessly monitoring these patients after surgery. The data you're seeing today is the result of an incredible amount of time and effort. As we initiated our relationship with the I-SPY Consortium way back in 2015, as a next step, we are now coordinating with the I-SPY team to make Signatera a prospectively integrated biomarker in their future studies. Finally, we've kept a busy academic conference scheduled this season with a number of key studies being presented at AACR last month, and more being planned to be presented at ASCO in June. Let me highlight a few significant data sets that may be of particular importance for our program going forward. At AACR, we have five poster presentations, including new data in esophagastric, as well as muscle-invasive bladder cancer, highlighting the utility of Signaterum. in the neoadjuvant and adjuvant settings. At ASCO, there will be significant new data spanning across two oral and at least 12 poster presentations. I want to highlight just a few of these studies. The first being a poster discussion of the Intercept Program being conducted by Andy Anderson. This poster reports on the clinical utility of Signatera in the surveillance setting of CRC. Additionally, we look forward to the readout from the Empower One study being sponsored by Regeneron and non-small cell lung cancer, which we think will demonstrate the predictive nature of CTD dynamics in patients receiving immune therapy. We know that non-small cell lung cancer remains the largest market for immune therapy use, with upwards of 60% of non-small cell lung cancer patients receiving an IO-containing regimen. Lastly, updated data from Circulate Japan, including a focus on the role of CTA dynamics in predicting adjuvant therapy benefit and risk of recurrence, will also be presented. Finally, I want to provide a brief update on our ECD program. We continue to make good progress in developing a blood-only early cancer detection assay, first for colorectal cancer and later for multi-cancer. We are completing a case control study that should read out by the end of the year with a presentation to follow thereafter. We remain committed to prudent investment into this program. As we've said before, we will provide updates if and when a significant inflection in spending is warranted. With that, let me hand the call over to Mike to review the financial results. Mike?
spk15: Thanks, Alex. The next slide is just a summary of the quarterly financials versus last year. Steve covered the encouraging revenue and volume trends and the three market share initiatives that we've been taking to set up the business for future growth at the cost of short-term gross margins. Even with those initiatives underway, I was pleased to see revenue growth tracking in line with volume growth, which speaks to some of the progress we are making with average selling prices across the business, particularly in Singapura. Average cost of goods sold per unit picked up modestly in the quarter versus Q4 last year, This was expected given the continued Signatera volume ramp, and we expect to get some additional COPS savings from those COGS and Signatera later this year as more of our exome volume continues to be brought in-house. I want to reemphasize the point Steve made earlier on the call with respect to seasonality in the women's health business. Q1 is usually our strongest quarter, and I think that trend was really amplified in Q1 this year with California NIPT and carrier screening volume gains taking off in November and December last year. When we have had these really big first quarters in the past, women's health volume has been slapped slightly down sequentially and then returned to sequential growth in the second half of the year. If that were the case this year, we would still be in a great position for an excellent 2023 overall. Of course, Signatera appears to be in a secular growth phase as we continue a significant ramp in volume growth, as we talked about earlier in the call. Last point I'd make here is the noticeable gap between revenue growth and expense growth. We've spent a lot of time on prior calls laying out this strategy. Build best-in-class commercial channels that can win and then hold that expense base steady while the revenues and volumes continue to scale. We've done that once before when Natera was really just a women's health business, and we are really pleased to be showing that we are now achieving scale again after a few years of building the organ health and oncology channels. The next slide, I think, gives you a sense of the operating leverage we are starting to see in the business. We burned a little more than $160 million in Q1 last year, and that is down to about $86 million in Q1 of this year. I will caution you that cash burn will have some swings on the working capital, CapEx, and other factors, so we may not have just a linear progression downward on cash burn quarter after quarter. And just to keep things simple, this cash flow metric is just the change in cash and equivalents to short-term investments. So it includes some modest impact of unrealized gains and losses from our investment portfolio. The overall trajectory is quite clear in my view. The key from my perspective is driving strong revenue growth on flat or low growth operating expenses. I was also pleased to see DSOs trend down once again to the second consecutive quarter despite very robust revenue growth. That's a function of us getting some returns on our revenue cycle operations focus, and we hope to shorten the cash collection cycle further as we continue to gain experience with the nuances of Medicare and Medicare Advantage plans for signature reimbursement. Another opportunity for upside is gross margin traction driven by broader reimbursement lens. Steve talked about the fact that we could yet see some movement on 22Q and carrier screening this year, which would be significant wins given the volume scale we are operating at now. And I think we are showing very encouraging progress on Sagittaria ASPs. Even without some significant benefit from improved clinical practice guidelines, we continue to think that we are on track to hit our previously stated cash flow break even target next year based on our Q1 performance and our outlook for the rest of the year. Okay, so on the next slide, let's talk about that revised outlook. Steve mentioned we are moving up our expectations for revenues versus the guidance we provided two months ago. Those of you that have followed the company for a while know that we prefer to be cautious with these raises earlier in the year. I think the strong women's health performance in Q1 driven by account wins sets us up for a great year, but as I mentioned, we're going to monitor the impact of seasonality in the summer months especially. The guide assumes steady ASPs in NIPT, some continued erosion in the carrier screening ASPs and the ASPs for kidney transplant, and modest improvements from here in signatera clinical reimbursement. That leaves plenty of scope for these assumptions to prove conservative over the course of the year, but we think that's the appropriate forecast for now. We are leaving the rest of the guide elements unchanged. On gross margins, we're comfortable that the ASP trajectory and cost savings expected this year will bring us into the guided range of 41% to 44% for the full year. The operating expense plan remains on track, and cash burn is really similar in concept to the revenue guide. We think there is certainly scope to outperform, and we want to see the progress come in on a couple of our initiatives this year before getting more aggressive on that forecast. So in summary, we think we are off to a strong start this year and look forward to taking your questions. Operator?
spk11: All right, thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.
spk12: Okay, your first question comes from the line of Tejas Savant.
spk09: Hey, guys. Good afternoon. Maybe I'll start with one on the Signatera, you know, guideline decision commentary here, Steve. You talked about sort of the committee not sort of fully considering the circulate data. Can you just, you know, share some color on what sort of drives your confidence around that And more importantly, the degree to which you are viewing the timelines for that guideline inclusion as a swing factor in your medium-term Signatera CRC estimates?
spk02: Yeah, thanks, Teha. So first, nothing in our guidance or really in our path to cash flow break-even includes that we're going to get an NCCN guideline for CRC. So, I mean, we're trucking ahead. We've got a lot of momentum ahead. both on volume and on ASP without having that upside win. Now, with that said, of course, we set ourselves up here in really, I think, a very nice position with all of the data that Alex outlined. I think a lot of people probably didn't realize that we have randomized trials that are going to be reading out, you know, sort of toward the end of this year, and then the Altair trial, which we think is going to be reading out in 2024, I mean, certainly that will put us in a very, very strong position. As far as the 2022 vote is concerned, you know, we've confirmed that at the time of the vote, the circulate study, the Galaxy study, you know, was not considered, you know, but it was included in the discussion section, which was written, you know, several months after the vote occurred. You know, so I think that's sort of in line with what we expected. you know, as we realized that the Galaxy study wasn't going to be published before the August 2022 meeting. You know, that's what we've been saying, I think, down the last three earnings calls with respect to timing. Now, what happens going forward from here? You know, we do know there's another meeting in August. We can't say exactly what's going to happen at that meeting. It's good that Galaxy is now published and can be formally considered. But certainly, we've backstopped future decisions with all of the new data that's coming out in this suite of randomized trials.
spk12: All right.
spk11: Your next question comes from the line of Punit Sudha. Please go ahead.
spk08: Yeah. Hi, guys. Thanks for taking my questions. So, first one is on ASP, and maybe Mike can address some of this. Mike, could you talk a little bit about, you know, ASP both on the women's health side of the business, as well as, you know, Signatera, you know, sort of what are the trend lines here in terms of improvements? We were seeing some impact on carrier testing. So maybe just talk about that and how should we think about the ASP overall?
spk15: Yeah, thanks for the question. So first on Signatera, we're ahead of schedule, put simply on the clinical ASPs. We've talked a lot in the past about what are the components for drivers of the Signatera clinical ASP. And it's really just a function of that product being so pretty early days in the launch and that ASP being quite immature relative to the price points that we've earned for the product. So I think previously, you know, we had set the expectation that we would exit this year with an ASP for clinical significant error kind of in the 800s, at least with an 8 in front of it. We actually got there in Q1, as I think Steve mentioned, in his prepared remarks. So from here, you know, there's not really a reason in our minds why we would see that. you know, retrenched. I think, you know, the guide contemplates kind of modest improvement from here. And we hope that, you know, we can kind of keep that traction going for all the reasons that, you know, that we've talked about on this call and previously. And it's principally, you know, volume mix between initial and recurring time points. increasing concentration of our volumes in these tumor types where we have a Medicare reimbursed speech head, increased fractions of business coming from Medicare reimbursed patients, particularly in colorectal cancer, just to name a few, in addition to the kind of new reimbursed tumor types and now getting some commercial coverage. So lots of good drivers there. On the women's health side, You know, ex-California, the NICP ASPs were strong. They were, you know, we sequentially grew them in the quarter, so I was encouraged by that. We knew, and Steve talked about this in prepared remarks, that in order to stay in California, we would take a penalty on, you know, on blended ASPs there, but we wanted to stay in the state because we feel like there's a long-term rationale for being there, both clinically and for the business. And as Steve mentioned, we're cautiously optimistic about the way that that has trended so far. The guide contemplates a little bit more erosion on the carrier screening front, and that just goes back to the fact that we've actually kind of leaned into this previously talked about headwind that we're seeing in the carrier screening reimbursement. As a few competitors have exited the market, we've actually opted to take share there because we think the clinical utility and the guidelines are actually quite strong and there's a potential for us to improve the reimbursement profile in that business. And that's something that we'd like to see progress on here in the calendar year. So I know that's a lot, but those are kind of the main drivers. Overall, I'm feeling quite encouraged about the ASP trajectory business as you look out, you know, 23 into 24.
spk02: Yeah, I'll just add too, you know, even with the bets that we've taken and sort of some of the temporary initiatives where we traded out volume for margin, we're still keeping our guidance intact for margins for the year. of 41 to 44%, which we think is very strong. So things are actually looking very positive.
spk11: All right. Our next question comes from Katherine Schultz. Katherine, go ahead.
spk07: Hey, everyone. This is actually Tom Peterson on for Katherine. Thanks for taking the question. Good to hear about progress with commercial payers on the signature front. I guess, you know, what additional progress are you contemplating for the remainder of the year? And have you made any additional progress in states where we've seen genetic testing legislation passed?
spk02: Yes. So, you know, I think one of the, there's definitely a big opportunity in commercial coverage for signatera that we think is going to come in over time. You know, it all starts with having very strong peer-reviewed data. And that's where we really have an extensive leadership position, I think, now with more than 40 peer-reviewed papers. And you can see from some of the slides that Alex showed, it's not just expansion into commercial payers for colorectal, but we still have a long way to go with the Mold DX program and with Medicare. I think we said we might be able to do seven or eight new Mold DX submissions this year based on the strength of the data that we're putting out. So certainly that's an expansion opportunity as well as what we're seeing on the commercial side. On the commercial side, I think it's great that we are seeing this traction and we're seeing some of the bipartisan legislation supporting expanded access for everyone. We've seen several more states now sort of put this legislation in place. I think the kind of back end of us filing the appeals and getting paid is still the very early stages. So it's hard to really comment at this point on what the impact is going to be overall in the commercial plans. But the good news is the legislation continues. I think we're seeing progress. We're seeing an increased number of states adopting the positive legislation. And then, you know, again, we see plans like Blue Shield that have done their own health economic analyses and determined that it makes sense to add coverage per signature, which is great, and I think there'll be a little bit more of that as well.
spk11: All right. Our next question comes from the line of Julia Cannon. Julia?
spk01: Hello. Thank you for taking the question. This is Marta Owen for Julia. I just wanted to ask, you know, you recently got the CMS coverage for Cygneterra in breast. Have you seen any meaningful impact in terms of, you know, uptake and testing volume from that expansion? And if not, when do you expect to see it and how should we think about it for the rest of the year? Thank you.
spk02: Yeah, that's a great question. So we've actually been seeing an increase in breast, you know, at the kind of proportion of business for a while because there's, you know, first, breast is a very big opportunity when you just look at the number of patients that are available. You know, second, we think there's very high clinical utility. And third is we have incredible performance data, very, very strong performance data in breast in both adjuvant and recurrence monitoring setting, and now in the neoadjuvant setting. In both of those settings or all of those settings, we have, you know, initially published, you know, smaller data sets, and we've now followed those initial publications up with extensive data sets that include, you know, roughly 300 patients and well more than 1,000 time points. So, you know, this very strong data combined with the coverage, combined with the operational execution is leading to an increase in the number of tests that are coming in.
spk14: I think that's a very good sign.
spk11: All right. Our next question comes from the line of Dan Brennan. Dan, please go ahead.
spk05: Great. Thanks for the questions. Maybe a two-parter. Just on the neoadjuvant opportunity, you know, it sounded like the iSPI data you kind of commented could generate reimbursement, but I know you also cited you're coordinating with the team there to make a signatory perspective biomarker in future studies. So can you just kind of give us a sense of what the plans are for filing for coverage in neoadjuvant in terms of timing and data and kind of what the impact would be? And then just secondly, on the woman's side, just, you know, on 22Q and carrier screening, can you just remind us, like, I know they're not in guidance, but Assuming, you know, if they were to come through, how do we think about the potential impact when that happens? Thank you.
spk02: Yeah, so on the iSPICE study in the neoadjuvant setting, I think this is definitely one of the settings that we think has very high clinical utility where we have very strong data, you know, now with the new publication with 283 patients and 1,024 plasma time points. So this is one of the biggest breast studies that's ever read out for donor derived sulfur DNA. And we do plan on submitting this to MoldDx for coverage in the very near future. When it comes to, you know, the opportunities in women's health, you know, look, I think we sort of look at this as an opportunity to expand access to more patients. And, you know, anytime you generate the type of data that we've generated, that shows exceptionally high clinical utility for tests. Like, for example, in the SMART study for 22q, we showed that we could, with very high sensitivity, very high specificity, and a positive predictive value, which was really incredible, the 50% range, we could test for this disorder that affects roughly 1 in 1,500 pregnancies. So anytime you're generating that type of data, it is the type of thing that guideline committees are going to look at. And we think that's great because it expands access for patients and I think helps bring the test to those patients that may not otherwise have access.
spk12: All right.
spk11: Our next question comes from the line of Alex Nowak. Alex,
spk13: All right, great. Good afternoon, everyone. I was hoping you could expand a bit more on the kidney headwinds you're facing from the Moldy X coverage change. You said physicians are working through it. The headwind is tracking through expectations. So I guess just expand on how is the reimbursement change just impacting testing in the field? What would the guidance have been without that headwind? And then just how does this long-term change your outlook on the viability of the transplant testing market?
spk02: Yeah, thanks. So, you know, I think Anytime there's a change or clarification coming from Medicare, it just causes some sort of confusion with respect to what it actually means, what physicians should do. Do they need to make any change at all? And I think there's this sort of swirl of misinformation out there. Of course, that just causes some volume disruption. And I think as we're kind of working through that, You know, we're seeing that maybe things have been misinterpreted in various places. And, you know, I think the good thing for us is, I guess one of the biggest changes that was announced was that you can't get reimbursed for RNA and cell-free DNA testing at the same time on the same patient. And that was never part of Natera's strategy. And I think that's probably the biggest change that has occurred. And so we weren't impacted by that at all. So we're really just impacted by this sort of you know, slight volume disruption, you know, I don't know, I'd say maybe in the kind of 15 to 20% range of where, you know, accounts have sort of just kind of stopped ordering or temporarily pushed pause while they sort of work through things. Now, for us, you know, the revenue from donor garage cell for DNA testing kidney business, I think it's sort of, you know, mid single digits when it comes to kind of the overall book of business. You know, so it's a very tiny fraction of our overall revenue. And I think that disruption is offset now by the new revenue that we're seeing coming in from Prospera Heart. You know, in many ways, not completely offset, but we do have a nice rampant heart. And now that that's reimbursed, that is helping to offset things. Of course, you're seeing that we we raise our guidance. So, you know, overall, the broader company is growing nicely, even though we did see this sort of 15 to 20% pullback in the kidney volumes.
spk14: Great, thank you.
spk02: Sorry, there's a second part there. I think what do we think overall about the business? You know, look, we have a lot of different opportunities in organ health that we think are very positive. I think the proactive trial is reading out in June. I think that's going to be good for the entire industry. There's going to be some great information there that support donor-derived cell-free DNA overall. I think all these new guidelines that have come out, like really in the last six months, we've now seen four strong society guidelines that didn't exist before. And I think that creates an opportunity to, you know, expand volume, I think, potentially of coverage reassessed and maybe, you know, get into sort of commercial coverage in the future. And then, of course, In the last couple of calls, we've been talking more about renocyte. We think that's a great opportunity to really change how chronic kidney disease patients are treated, and we think it potentially could have very high clinical utility, and we're looking forward to the readout of the Renicare study later this summer.
spk11: All right. Our next question comes from the line of David Westenberg. David, please go ahead.
spk06: Hi, this is John. For Dave, thanks for taking the question. Can you give any comment on what the gross margins might have been if accounting for the California NIPT and the expanded carrier screening had one? Thank you.
spk14: Mike, do you want to take that? Yeah, sure.
spk15: So, yeah, I think gross margins would have been increasingly higher without those. But I think it's a little bit hard to just separate out those two things because Those two events have also caused some disruption. in the marketplace, I think, is temporary. And we are kind of leaning into that as kind of the market leader, kind of taking share, you know. So it's hard to take credit for some of the account wins and then turn around and say, well, yeah, you know, you would have gotten the gross margin. I mean, there's a penalty to be paid there. And so we're going to take that penalty now in return for kind of a longer-term benefit. And we think that, you know, you can see as early as this year and going into next year. So we feel really good about about that play. I mean, I think without those, and maybe I'll just include kind of the third, which was kind of the press onward with continuous season tear growth, you know, I think gross margins would have been kind of in that kind of, you know, the range that you've seen in the last year or so from us. So, this is a very intentional move on our part, and we think it's, you know, quite constructive for the long term of the business.
spk11: All right, our next question comes from the line of Liza Garcia. Liza, please go ahead.
spk10: Hey, guys. Thanks for taking questions. So, congratulations. Another great volume print on Cigna Terra. So, another Cigna Terra question for you. But, you know, you have been doing really, really well and obviously plan to kind of add indications which kind of drive new volumes. With that, I think, you know, more exome testing. And so if you guys could just kind of speak qualitatively to kind of how to think about, you know, that on the margin side. And obviously, you know, you alluded to how still you're not really getting that exome benefit right from the shift in kind of how you're doing your exome testing and really kind of how to think about the 2023 margins and kind of heading into 2024 on the oncology side. That would be great to kind of dig in there a little bit.
spk02: Yeah, so I'll comment first, and then maybe, Mike, you can jump in. Yeah, so on the Exome side, anytime we get a new patient for Signature, we run an Exome, and that's one of the more expensive parts of the protocol that does lead to increased COGS. And, you know, we've had various projects underway to, you know, reduce the COGS but still deliver, you know, the same very high-quality information for physicians. And You know, we're kind of midstream on that. I think, you know, most of the work there is going to be executed in sort of the kind of 23 timeframe. But, you know, there's still going to be some opportunity there as we extend beyond that. But, you know, look, I mean, the volume is growing very quickly. And, you know, you also have to focus on scaling up while at the same time you're focusing on COGS reductions. across the company as a whole um we have an extensive amount of cogs production projects that are underway and i'll just give you some basic uh insight onto some of these i mean you know one is as simple as moving the panorama test from the next seek to the nova seek right and so that obviously saves a decent amount uh on a per sample basis that's a project that you know, now is going to be applied across, you know, more than a million panorama tests that are being run. You know, so obviously we get sort of per sample savings because we reduce sequencing costs. That's applied across the bay, you know, a very large base of, you know, of NIPT samples. There's all types of projects like that. We have four or five pretty big COGS projects that, you know, each are in the range of sort of know probably uh five to twenty million dollars in savings on an annualized basis and you know that executing those none of which really uh require like an extreme uh amount of sort of new uh research they really just require kind of the development work of integrating things within the limb system you know doing the standard kind of verification validation studies and then launching those are all part of our road to getting the business to cash flow break even. You know, again, on the margin side, you know, it's sort of both COGS and ASP. And you can see, you know, some of the COGS projects are hitting this year. Some of the ASP projects are hitting this year. And that's how we're getting into that range of the kind of 41 to 44% by the end of the year. And then just as a reminder, you know, in order for us to hit that, we really don't need any of these big milestones that are out there, like getting 22Q guidance from ACOG or getting NCCN guidelines for colorectal or really seeing any sort of drastic improvements on expanded carrier screening.
spk10: All right.
spk11: Thank you. Awesome. Thank you. And that is all the time we have for questions. We would like to thank everyone for their time today and have a pleasant rest of your day.
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