Natera, Inc.

Thank you for standing by and welcome to the Notaro Inc. Q3 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. As a reminder, today's call is being recorded. I will now hand today's call over to Michael Brothe, Chief Financial Officer. Please go ahead, sir.

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our third quarter of 2023. On the line, I am joined by Steve Chapman, our CEO, Solomon Moskowitz, President of Clinical Diagnostics, and now selecting General Manager of Oncology and Chief Medical Officer. John Stesko, President and Chief Business Officer, is also on the call and will be available for Q&A. Today's conference call is being broadcast live via webcast. we will be referring to a slide presentation that has been posted to investor.netera.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 talk to 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, 10-Q, and the Form 8-K file listed especially. 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, November 8, 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 our performance during the quarter unless we do so in a public forum. We will quote a number of numerical growth changes as we discuss our financial performance. And unless otherwise noted, each such reference represents a year-on-year comparison. And now I'd like to turn the call over to Steve. Steve?

Thanks, Mike. I think our CO3 results demonstrate that our strategy is paying off, and I'm excited to share the highlights. We generated $268 million in total revenue, and product revenues were up 33% versus last year. Volumes were strong again across the business, with strong year-on-year growth in women's health and apology versus CO3 of last year, and a nice sequential recovery quarter for Oregon Health. Signature volume growth particularly continues to exceed our internal forecast, And this was the second best quarter ever in terms of the absolute unit growth in the clinical channel. As good as those top line metrics are, I'm most encouraged by the margin and cash burn results. We talked about the focused effort to improve ASPs, and I think that effort started to pay off this quarter. Gross margins were 45%. You'll recall we also had 45% gross margins in Q2, but we noted it was closer to 43% on a normalized basis as it had some one-time benefits. In contrast, we think this quarter represents an organic 45% based on ASP and COGS improvements. We slashed our tax burden dramatically in the quarter as well, almost a 50% reduction compared to last quarter. Clearly, we are getting leverage as revenue grew rapidly while operating expenses was essentially flat and margins have improved. Our efforts to improve ASPs is also leading to getting reimbursed more quickly on average from payers. Mike will talk about this later in the call, but we think this is a good sign that more ASP improvements are in store for future quarters. These results and the continued strong trends we are seeing so far in Q4 put us in a position to significantly improve our annual guidance across the board. We are raising the revenue guide once again to a completely new range and now expect to come in between $1,035,000,000 and $1,050,000,000 in total revenue for the year. We are tightening the gross margin guide to the top end of the range and are now expecting full year gross margins to land between 43 and 44%, which we think implies the strong Q3 gross margins are repeatable in Q4. Finally, we are dramatically reducing our tax burden guide for the year, now expected to be $260 to $280 million. This represents a more than $200 million reduction in tax burden versus 2022. The momentum we are seeing leaves us even more confident that we are in a good position to reach the cash flow breakeven quarter next year, and we do not believe we need any guideline changes in order to hit that milestone. The significant reduction in cash flow has largely been achieved because our core strategy is working. We are growing revenue rapidly while reducing COGS and improving ASPs. We are keeping OpEx stable, though at very competitive levels, allowing us to maintain a strong commercial team and continue to focus on clinical and innovation roadmaps. For example, over the past few years, we've made investments into technology development, product enhancements, and clinical trials. These investments are now resulting in an excellent pipeline of new products and new indications to go after within our core businesses. As a result, in 2024, we expect to announce new MRD-related products and updates along with other major innovations that can power future growth. In addition, on the clinical side, we have major randomized controlled trials that we expect will be read out in 2024, some of which have taken investments over five or more years to get to this point. So we think we are positioned very nicely for the future. We're on a rapid revenue growth path while moving quickly to cash flow break even. and doing so with our previous multi-year investments driving potential major near-term catalysts. On top of our financial results, we had several big wins during the quarter. I'll start with Renicare, which has proven to be a landmark study for us in an area that we believe can drive significant growth over time. Last week, we announced the study's publication in Jason, a leading nephrology girl, and also shared the results at the ASN Kidney Week Conference. As a reminder, Renicare is a large, real-world, prospective study of more than 1,600 patients that looked at the impact of genetic testing within chronic kidney disease. The findings showed a strong clinical and diagnostic utility profile for renocytes or genetic tests to identify causes of CKD. The results also exceeded clinical precedence for the implementation of genetic testing within an at-risk population, for example, hereditary breast cancer, which we think is a good proxy for comparison. I won't spend too much time on this now, as Solomon will cover it in detail later in the call, but I'll just note that we're very excited to see where we go from here. Feedback from nephrologists has been positive, and we believe these results lay a strong foundation for increased adoption and coverage. The market opportunity is potentially large and notably underpenetrated, with 37 million people affected by CKD in the United States. There's a significant need for reliable and actionable genetic information to serve these patients, and we think renocyte could be that driver, backed by the strong clinical evidence we reported in the study. In oncology, we presented key colon cancer data at ESMO from the Galaxy Arm of the CIRCULATE study. Notably, this analysis included 2,000 patients, which was twice as many as the Nature Medicine paper, as well as significantly longer follow-up at 24 months. The data provides significant insights of the predictive and prognostic values Signatera and CRC with ongoing excellent performance by Signatera. Separately, while MRD has historically been focused on the initial adjuvant draw and the adjuvant PMO decision-making, the initial MRD time point represents only a tiny fraction of the overall MRD opportunity. More and more, we are leading the way in a new area that we call treatment on molecular relapse, which is where patients can actually receive a drug upon becoming ccDNA positive with Signatera in the surveillance setting, rather than waiting for radiologic evidence of recurrence. This is part of a key vision for how the serial use of Signatera can transform cancer care and ultimately save lives. We see it gaining real momentum now with sponsorship from both pharma and academic consortia. In fact, Long-term, this might be the single biggest MRD opportunity and one where we believe Matera has a meaningful first-mover advantage with multiple Phase II and Phase III trials already underway, some which have been ongoing for several years already. So Alex will describe treatment on molecular relapse a little bit later in the call, including describing the new TREAT-CT DNA study, which seeks to show the benefits of treatment on molecular relapse in early-stage breast cancers. This is a randomized phase three trial conducted across 120 sites in 12 countries, led by the European Organization for Research and Treatment of Cancer, otherwise known as EORTC. We also published additional data in lung cancer, strengthening our leadership position in the patient population. In 2023 alone, we published and presented the results for four key lung cancer trials across the neoadjuvant, adjuvant, and metastatic treatment setting, and we've seen very strong performance. Two of these were conducted in collaboration with our partners at Foundation Medicine and demonstrated strong clinical test performance for immunotherapy monitoring. These studies help to support the broad clinical launch and Medicare coverage of Foundation One Tracker, which we also announced in October. As many of you know, Tracker is a complementary asset at Cigna-Sara, where they focus on patients with advanced stage cancers. We're very excited about the launch and believe this new offering will help oncologists make the best possible decisions about their patient care through actionable and personalized data. Great, so with that, let's get into some of the business trends on the next slide. We saw continued strong growth in volumes across the major product areas as I described. In women's health, we had strong growth compared to Q3 of last year. This strong growth particularly given our ongoing effort to reduce some volume from accounts where we don't see a path to stable reimbursement over time. In Oregon Health, we were pleased with the return to growth. As a reminder, earlier this year, reimbursement changes created some uncertainty for transplant centers about when they should order Prospera. That uncertainty has now largely been resolved, and in Q3, we saw some of our larger customers return to prior levels. Both Oregon Health and Women's Health represent large underserved patient populations that have a critical need for the type of testing we offer. Solomon will cover the oncology volumes later in the call where the trends continue to be positive. On the next slide, you can see that our revenue growth is getting a significant boost from improved reimbursement in addition to our volume growth. The left chart is total revenues, which grew 27% year-on-year, and I think that growth rate actually understates our true progress because we reported a large one-time licensing payment in Q3 of last year. The product revenues on the right-hand side of the page adjust for that, and as you can see, product revenues were up 33% year-on-year. We made a decision last November to redouble our efforts on reimbursement and billing operations, making sure that we navigate all the operational hurdles required to get reimbursement for a covered service. For example, doing veteran appeals when a service is denied or chasing down missing insurance information. Since then, we've made a significant investment in new processes, we've added new team members, and we've identified systems and engineering opportunities. While we're still at the very early stages, it's great to see that we're starting to see these efforts come through in the financial results, and there's still a long way to go. Of course, these improvements benefit both revenue growth and growth margins, as you can see on the next slide. Growth margins dipped to 41% in Q4 of last year and then to 39% in Q1 of this year as we executed growth on the initiatives that we've described in the past. On the Q2 call, we described that growth margins were helped a bit by some one-time factors. In that time, we estimated the organic growth margin to be about 43% on a normalized basis. In Q3, our 45% growth margin is largely organic. We're seeing modest improvements in the NIPT and carrier ASPs and have outperformed our expectations in Cigna Terra. For each of these products, we have put in place multiple operational initiatives whose effects have not yet been fully recognized in our revenue accruals, so we're cautiously optimistic that we can deliver steady gains in the growth margins throughout the course of 2024. Another interesting byproduct of all this effort is that our cap selection cycle noticeably improved in Q3 compared to prior quarters, which helped drive the significant reduction in quarterly cash flow along with the revenue growth and growth margin improvements. Finally, we continue to hit our marks on cost of goods sold. as we've expanded our signetar ectome laboratory and executed COGS projects across the company. We've got a full slate of these lab infrastructure projects, and we expect to launch many of them during 2024. This has been a big area of investment within our R&D budget, and it will be nice to see that investment pay off. In addition to the above COGS projects, we've also passed some key validation and regulatory milestones with an alternative NGS provider. We validated the Signatera technology on an alternative NGS platform, and in partnership with a major pharmaceutical company, achieved a C regulatory milestone using that alternative platform. In addition, we validated NIPT on an alternative NGS platform and passed C regulatory milestones, which we may now launch a version of in our centralized laboratory. All of these factors give us confidence that we are on track to get to a cash flow breakeven quarter next year. And with that, let me turn it over to Solomon, who will dive deeper on the results from Renicare in the oncology business. Solomon?