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spk10: 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.
spk04: 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?
spk03: 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?
spk06: Thanks, Steve. I just got back this weekend from the American Society of Nephrology, ASN, annual conference in Philadelphia, where renal genetics was a hot topic and where the Renicare paper was well-received. Many doctors expressed the belief that nephrology is at the beginning of a new wave of personalized medicine. similar to where oncology was as a field 15 to 20 years ago. There are about 37 million people in the US living with CKD, or roughly one in seven adults. CKD is also a significant burden on the healthcare system, with roughly $85 billion Medicare spend related to its management. Natera launched the Renicare study back in 2019 in collaboration with leaders from Columbia, Yale, NYU, Mayo Clinic, and several other leading institutions, with the goal of determining what personalized insight can be gained from genetic testing with Natera's Renocyte product, a channel of 385 disease-related genes, and how often a genetic diagnosis leads to a change in treatment. More than 1,600 patients were enrolled across 31 sites in this real-world prospective study. The results were impressive. Some of the key headlines, as you can see on the slide, One in five patients tested positive for a genetic cause of CKD, meaning that a pathogenic or likely pathogenic variant was found in their germline DNA. Out of the positives, one in two patients received a new or reclassified diagnosis, and of the positives, one in three reported a change in treatment plan. At a high level, when thinking about renocyte diagnostic yield of 20.8%, Let's compare it to hereditary cancer testing, like the classic BRCA1 and 2G, where studies have shown a test-positive rate of between 5% and 17%, including in cohorts that meet NCCM criteria for being high-risk and that have received Medicare or commercial insurance coverage. We all know that germline DNA testing in oncology has become standard practice. But given the high yield we've seen for renocyte, together with its significant clinical utility, We see a great opportunity here for changing standard practice in nephrology, strong potential for clinical guidelines and insurance coverage. To that end, we recently submitted an application to MoldyX for coverage of renal sites, and we look forward to their feedback, particularly given the strength of the renal care studies. Let's dig just a little bit deeper now into study findings. One of the key stories unfolding here is that genetic testing is useful not only in the 8% or 9% of patients without a diagnosis, but also in patients who have already been given a clinical diagnosis. For background, CKD has a vast spectrum of underlying causes. The current diagnostic protocols generally rely on basic measurements of kidney function, as well as imaging and biopsy. This approach has left significant gaps, for example, diagnoses that are non-specific, meaning that the kidney disease may be inaccurately attributed to diabetes or hypertension when in fact those may be comorbidities that mask the true cause of a patient's PKD. Similarly, in the case of cystic disease, it contains clinical management to know the subtype of disease, whether it's driven by PKD1 or PKD2, for example. In many cases, we also found that timely genetic testing could have helped the patient avoid an unnecessary invasive biopsy. There are more than 20 drugs already addressing gene-specific CKD targets on the market, and approximately 270 clinical trials. So having this specific diagnostic information can really enhance targeted treatment options. It can open doors for participation in clinical trials, and ultimately, it can improve outcomes. For people who want to learn more, we just published a good white paper on our website. In summary, the RENACARE study provides solid evidence demonstrating that renocyte testing is useful and appropriate in the vast majority of patients presenting with CKD, that it can lead to an earlier and more accurate diagnosis in standard of care practices and frequently change or refine an existing diagnosis, and it can enable clinicians to tailor treatment decisions. We're very enthusiastic about the future potential of this product to help millions of people with CKD. Moving to oncology now, where we had a great quarter. Clinical Signatera volumes, shown on the right, had one of its best quarters to date in terms of absolute growth. This growth reflects a strong increase in new patient initiation, continued serial testing by existing patients, and significant adoption by new physicians who had never ordered Signatera before. We believe over 35% of all U.S. oncologists ordered Signatera in the quarter. The left-hand chart includes all clinical volumes and pharma units. As a reminder, we had a spike in pharma units in C2, which we discussed in our call in August. So we broke out the clinical volumes separately this time, relative to the pharma business, which is doing well, but is a bit more lumpy as expected. We recently closed some big pharma projects across various cancer types, including prospective, retrospective, and real-world data studies. There continues to be significant interest such that we are now expanding capacity in the RUO labs. Back to clinical signature, we've also continued to drive steady improvement in the average sales price, outpacing our initial expectations. In Q2, our ASP was in the 800s. In Q3, it was in the 900s. And now we see a near-term path getting above 1,000. This roadmap is being driven by better operational execution, as well as anticipated Medicare coverage of new applications and expanded coverage among private payers. As a reminder, Sigma-Para is in a unique economic position with its advanced diagnostic lab test status, or ADLT, which is very hard for other MRD labs to replicate. We believe all the data that we've been announcing and the studies underway will help drive ongoing volume growth over the near and long term. So with that, let me turn it over to Alex to provide a closer look at some of those studies. Alex?
spk05: Thank you, Solomon. We recently presented updated 24-month data from the Galaxy cohort at this year's ESMO 2023 conference. The data continues to support and strengthen our two central hypotheses that have implications to change how CRC is managed, namely that MRD-positive patients benefit from treatment, while MRD-negative patients do not. On the right-hand side of the page, CK and negative patients continue to show exceptional disease-free survival, regardless of adjuvant treatment. No significant differences in DFS at 24 months were observed for CTA-negative patients receiving ACC compared to those without ACC. We believe this data further derives the outcome of our definitive randomized VEGA study, which seeks to establish the de-escalation strategy as a standard of care in early-stage CRC. On the left-hand side of the page, we see CTA-positive patients treated with ACC have significantly improved DSS compared to patients who undergo observation. This effect persists even after adjusting for all possible confounding conditions. The randomized arm of this trial, known as Altair, is scheduled to read out in mid-2024, which will further assess whether the addition of TASC-102 on top of chemo can further improve DSS in MRD-positive patients. We believe that if the study is positive, it would establish a pathway for a new standard of care in CRC patients treated with curative intent or tested with signatera. As a reminder, the data on this page reflects outcomes based on single signatera time points within eight weeks post-surgery. The adult care study is a key component in the protocol that allows enrollment of patients who were initially negative but then turned positive in the surveillance setting up to 24 months post-surgery. This is a new concept in MRD and is what we are calling treatment on molecular recurrence. The majority of trials and data in the MRD space today have been focused on adjuvant decision-making based on the first one or two time points immediately post-surgery. However, we believe the largest market is treatment on molecular relapse, defined as initiating treatment based on positive CTDA status in the surveillance setting. instead of waiting for clinical or radiologic recurrence. This states to be multiple orders of magnitude larger and potentially revolutionize cancer treatment by providing patients a second cancer cure before overt recurrence is detected on a scan. We have seen tremendous interest in this strategy from clinicians, patients, pharmaceutical companies. These studies take years to design and run. and we recognized this opportunity over five years ago, and we now have multiple studies that are rolling in this space, including the ones listed below. I want to highlight a new study recently announced, the Phase III TREAT-CTDNA trial in early-stage breast cancer that is being done in collaboration with the ERTC Consortium. The primary objective of the study is to evaluate whether Minarini's oral endocrine monotherapy or SERDU can delay and or prevent occurrence of distance, metastases, or death. Patients return signatera positive in the late surveillance setting. The study is expected to screen approximately 1,900 patients across more than 120 sites. And if successful, the results of the study could support broad recommendations for serial monitoring with signatera in HR-positive or 2-negative breast cancer patients. Additionally, we continue to see strong interest in the Bayer and Leder studies that are also examining treatment on molecular recurrence in breast cancer patients and should be reading out in the 2024 to 2025 timeframe. We continue to generate new clinical data to support signatera reimbursement in an expanding list of indications. Today, we want to highlight non-small cell lung cancer, where in 2023, we have generated multiple present patients and publications in the neoadjuvant, adjuvant, and metastatic settings, including radiotherapy and immunotherapy treatment response monitoring. We have seen immunotherapies transition from being utilized primarily in late-stage non-fault cell lung cancer to earlier stages of disease, with the recent approval of these patients in the neoadjuvant, adjuvant, and perioperative settings. This has resulted in a significant expense of IO treatment eligible patients, a setting where signatories well-positioned to serve given the strength of our data and existing reimbursement for IO monitoring. In the adjuvant and surveillance setting, we continue to exceed exceptional specificity, approaching 100% across multiple studies, a key performance metric that many competitors have struggled with. In the recently published LIBO study of stage 1 to 3 lung cancer patients, we observed an 82% detection pre-treatment and 100% longitudinal sensitivity to a recurrence with a median of 162 days lead time. This builds on previously presented data in the ABOSH study showing a 93% longitudinal sensitivity to a recurrence. Broad set of data shows very strong performance across all key metrics. We believe these various datasets are critical to establishing clinical utility, achieving reimbursement, and maintaining market leadership in emerging indications like non-small cell lung cancer. The strength of the data has led to interest in prospective clinical trials, with the first signatory trials in the state now being launched. We plan to provide further updates on our prospective evidence generation strategy during future calls. Lastly, we want to highlight that we are now expanding our data generation efforts with partners like Foundation Medicine, where the tracker product was utilized either exclusively or in combination with Signatera in both the EMPower1 and IMPower131 studies. Building on the strength of this evidence and the recently announced Medicare coverage for IO monitoring, we are excited to highlight the FoundationOne tracker product that is now available across the U.S. This innovative assay combines the genomic information derived from the Foundation One CDX tissue-based comprehensive genomic profiling test with a personalized assay design and ccDNA analysis from Natera. We believe this is a great win for patients, given this product will enable greater access to Natera's core technology when tissue may be limited or previously exhausted. We are excited for the additive effects of this partnership for our core monitoring business. and excited to present additional clinical data to support the value of integrated tissue-informed CTDA monitoring into routine clinical practice. Now, handing it over to Mike to review our financial detail.
spk04: Mike? Thanks, Alex. The first slide is just our standard results slide. You can see again that revenues were up substantially versus last year, despite the fact that we had a very large licensing quarter in Q3, as Steve mentioned. So that really highlights how strong our product revenue growth has been over the last year and also gives me some confidence that the growth margins are sustainable. Operating expenses took some modest growth versus Q3 last year, but this year we've been effectively flat in sequential quarters now, even as we've delivered significantly faster revenue growth. The balance sheet includes proceeds from the equity raise in September, so we remain in a very strong capital position. The next slide highlights the tax burn dynamics we've seen in the last year and a half. You can see we were burning roughly $115 to $120 million a quarter on average in 2022 as we set up all the infrastructure needed to deliver a first-class launch of Signatera. We stepped down to $80 to $90 million a quarter burn as volumes and reimbursement grew rapidly, and now we've cut that tax burn roughly in half again here in Q3. As Steve described, we placed a lot of emphasis on getting reimbursed efficiently for covered services, and while we are still in the early innings of that effort, we do seem to be getting some results here in Q3. Day sales outstanding fell dramatically in the quarter and now stand in the low 90s. I'll offer the standard caveats here. We fully expect cash burns to fluctuate quarter to quarter, and given our COGS projects are all on track, we do have some large topics that have been explained in Q4. However, I think the trend you see here in the chart demonstrates continued progress, and we expect to see more of that next year. Great. Let's get to the 2023 guide on the next page. As Steve described, we are once again in position to completely re-rate the revenue guide upward and now expect to come in at $1.35 billion to $1.5 billion. we are pleased to be tightening the original gross margin guide to the top end of the range. And since the office guide is remaining unchanged, that means we can now significantly reduce our expected cash burn guide for the year, now expected to be $260 to $280 million. For many of you that have followed us for some time, you'll know that we try to set forecasts that require good but achievable execution. And I think that's what this guide implies. We've got to continue to grow margins and maintain the ASP improvements we attained this year. This guide does not imply, however, continued growth in ASPs. Obviously, we are focused on making that happen, but there is always some uncertainty around the specific timing of ASP improvements, which is why we are reserving that as an upside to the guide per our usual practice. As Steve described, we are feeling very positive about 2024, and we feel like we've got the right size sales team to continue driving growth. Given units are largely a function of sales rep productivity and rep counts are remaining stable next year, I think repeating the same absolute unit growth we achieved this year is a good target. This will require good execution because our commercial team will also need to manage a larger bulk of existing business at the same time as they're growing those units. In addition to this potential volume upside, we are now starting to see revenue increase at a faster pace as ASP improves. So if our strong ASCE trends continue, that could be another factor helping us in 24. On revenues, we've got the potential for a number of further upside tailwinds that I would regard as upside to our base forecast. We are cautiously optimistic on 22Q and broad-panel carrier screening guidelines and footnote inclusion in NCCN guidelines. Based on the cadence of meetings we've seen publicly announced from these guideline committees, we would expect updates relatively early in 2024. I'll state again that we do not need these to fit our tax flow break-even targets, nor to continue making progress on ASPs, which can support steady improvements in the gross margin over the course of the next year. We expect operating expenses to be relatively stable in 2024 compared to 2023. We've talked about the commercial teams, and we are rapidly getting operating leverage on our lab infrastructure for Signatera. Holding R&D expenses steady will still allow us to make critical investments in prospective clinical trials and cost-effective silver infections. We are also planning to launch a suite of compelling new products, and we are looking forward to talking more about those in the future. Our overarching goal in 2024 is to get to cash flow break-even without sacrificing growth and innovation. Given that objective, we're planning to spend only about $15 million next year on early cancer detection. That investment will still allow us to deliver two significant data readouts. One of which will come by either the end of this year or very early in Q1, and the other in the first half of 2024. If those data look very strong and pass transit investment criteria, then we would evaluate moving forward with the program. Given the goals we have in front of us in our core products, we will only push further into this area in the future if we see excellent results that we think can be market-leading. and we're hitting our task force goals. So we're really excited to be talking about the future of NICARA. And with that, let me open up the Q&A. Operator?
spk10: At this time, if you'd like to ask a question, press star 1 on your telephone keypad. If you'd like to withdraw your question, press star 1 again. Your first question is from the line of Taha Savant with Morgan Stanley.
spk01: Hey guys, good evening and thanks for the time here. Congrats on a great quarter. Steve, Mike, just in light of your comments that you didn't really have any benefit from one-timers here in the quarter on either revenue or gross margin, can you just help us contextualize that implied fourth quarter guide? Looks like you're pointing to sort of flattish growth, you know, sequentially and flattish gross margins as well for my quick math. So Any color on sort of any offsets that we should think versus the typical year-end seasonality?
spk05: Hey, Sage, thanks for the question. It's Mike here. Yeah, no, look, on the guide, I think on the gross margins, I think that's just tightening to the top end of that range implies some similar or better gross margins in Q4. As you know, as you guys know, we don't kind of guide specifically to quarters, so there's a level of caution there. I don't think that should be taken as a message about, you know, concerns about underlying trends. As you've heard in the prepared remarks, the underlying trends that really cross the business remain, you know, incredibly strong. I'd echo the similar sentiments on the revenue line. You know, volumes typically follow a pattern where Q2 and Q3 are kind of our weaker quarters in terms of the seasonality for the women's health business. Q1 is our strongest quarter, but usually Q4 is kind of, you know, it's also a good quarter as well. So, you know, we feel like we're off to a good start with Q4. As I mentioned in my prepared remarks, I mean, kind of our approach to providing guidance is always to try to provide kind of good but achievable you know, benchmarks for financial guidance. And, you know, we hope to be able to exceed those.
spk03: Yeah, I'll just add this to Steve. You know, we're off to, I would say, an incredibly strong start in Q4. And, you know, we're continuing to see, I think, acceleration in ASPs and in volumes.
spk01: Got it. That's super helpful, Culler. And then, guys, a couple in terms of the follow-up here. One on Signatera, can you just update us on your status with BSCA? And I know this is an immaterial part of revenue, but it's a question that we've gotten from investors here. And how do you sort of juxtapose that with the biomarker bill being passed in California? You've got the F1 tracker opportunity coming up as well. So any color on that? And then my second part of the follow-up is actually on Renacyte. Given the really strong results here on Renacare, How are you thinking about the slope of that adoption curve? I think in the past, Steve, you'd mentioned about, you know, you mentioned the 37 million new patient population, but about 750K newly diagnosed annually. So just any color in terms of the slope of the uptake there and, you know, early feedback from peers and nephrologists would be fantastic. Thank you.
spk03: Yeah, thanks a lot. So I guess first, you know, just on sort of commercial pairs and, you know, the biomarker bill, I think, you know, some of the other groups that have presented have talked, you know, quite a bit about that. You know, we're obviously monitoring things. We're taking a little bit of a more cautious approach. We want to see how things actually come through. But, you know, the reality is biomarker bills are in place now and passed in a significant number of a very critical state. So we think that it could serve as an opportunity, I think, to quicken the traditional pace that you see for commercial coverage. And obviously with California passing, that's resolved things with Blue Shield of California. But overall, I would say this biomarker bill is a net positive. It's something that is sort of unique for its time period and You know, not an opportunity that's been available previously. So, frankly, this might end up being, you know, the quickest path to get commercial coverage, you know, versus what we've seen historically. From an arena site standpoint, you know, I think the arena care study we think is a real inflection point. You know, we've already, you know, previously said, you know, about 40% of nephrologists have used the product You know, we've done tens of thousands of tests at this stage, and the excitement from the nephrology community and the interest is incredible. I mean, it's like something that, you know, I haven't experienced before where nephrologists are really, you know, welcoming this product in with open arms. You know, they're very engaged. It's like they've been starving for a product like this. So we're excited about that. You know, with that said, anytime you're introducing something new, you know, it does take a while to get protocols in place and, you know, get that type of market penetration that could be impactful. When I think about the market size, I think a very direct comparison here can be made with hereditary cancer testing. You know, there you have a very similar situation where you have the sort of incident and prevalent pools and You know, frankly, they're of similar size. And hereditary cancer testing today is an incredibly large opportunity. And so, we think we're laying the groundwork for something similar.
spk10: Your next question is from the line of Puneet Sudha with LERIC Partners.
spk08: Hey, guys. Thanks for the questions here. So, first one on ESP, then I'll follow up on guidelines. On ASB, I mean, it's good to see the improvement and appreciate you giving the details on Signaterra, but could you talk about what, how much was the ASB improvement on the Panorama and Horizon side and sort of what should we expect there? And then on Signaterra, could you outline, you know, what's the ceiling here given the ADLT rate you have, the reimbursement, the indication expansions that you're seeing and, you know, potentially guideline inclusion ahead as well? which could help with commercial pairs. So, maybe just talk about the ASP.
spk05: Hey, thanks, Vinny. Appreciate the question. So, yeah, first on the ASPs, you know, we saw in addition to continued pretty rapid improvement in the Signatera ASPs, which we covered, we also saw some very encouraging improvement in the women's health ASPs. I mean, I think that's both for Panorama and for carrier screening. You may recall that, you know, earlier in the year we actually guided, you know, assuming some erosion in the ASPs in that category. And it's, you know, at the time I said, look, it's not because we're seeing it, but it's kind of a more philosophical point. And, you know, thankfully we haven't seen that erosion. And indeed we've seen some, we've actually seen some improvement. Now where does that improvement come from? It really comes from a variety of sources. And it's small contributions from a range of the efforts that we've been, we've been really making over the last year, and Steve covered in some detail on the call. So, leaving the guidelines aside, which I think could be very impactful, I'm actually quite encouraged about the trajectory that we're seeing right now on ASPs in women's health, you know, to say nothing of, you know, the rapid improvement we've seen in the signatory ASPs, which we did expect. Second question, can you just remind me again? Just give me your follow-up again one more time.
spk08: Yeah, just what is the ceiling for Signatura? How do you think about that with the ADLTN indication expansions?
spk05: Yeah, yeah. So, you know, I think Solomon covered it in the prepared remarks that just based on where we're sitting right now, just on, you know, the current coverage dynamics that we have on current tumor types, we feel like there's a path, you know, beyond $1,000 just through kind of grinding and blocking and tackling and making sure that we get paid for covered services, and we clear all of the myriad kind of administrative hurdles that one typically encounters in this space. So that's a lot of room to run from where we are now. I wouldn't put a ceiling on that per se. I mean, you know, I think at about the time that we're reaching those levels, we're going to have more data. We're going to have feedback from NCCN, and then also we'll have Prospective randomized data will have data in a number of different sources. You know, Steve touched also on the biomarker legislation. So, there's some other potential catalysts that are going to hit, you know, roughly contemporaneously. So, I would expect kind of a fairly smooth trajectory to signatory ASPs, which is really encouraging.
spk03: Yeah, I'll just add too, I think, you know, one of the things that is really exciting is as we're looking now at this very clear path to cash flow break even in 24, and a very strong revenue growth ahead, that we're not really incorporating any of the upside opportunity from guideline changes, things like 22Q, or any of the upside opportunity from biomarker legislation, which was just asked about a minute ago. So the model that we're looking at really just includes sort of status quo and blocking and tackling and billing operations improvements But all of those other things are really upside, potentially very significant upside that we just don't need to get to cash flow break even and have another good year.
spk08: Got it. Super helpful. Then on guidelines, wondering maybe a part A and B to this question, could you clarify on the women's health side, Mike, did you say, you're expecting to see 22Q guideline update in early 2024. I just wasn't sure if I heard that correctly. And then on the NCCN for the signetaricide, could you maybe elaborate, you know, given the number of datasets that you have already with Altair and treat ctDNA coming up, you know, I guess the question is, When does this translate into NCCN guideline inclusion? What that guideline inclusion can look like? If you could, if maybe Alex or Solomon can elaborate on that. Thank you.
spk03: Yeah, yeah. First, let me just talk on limits health. So, you know, of course, we don't have any information on, you know, exactly what happened and so forth. But we do know that there was a guideline committee meeting, I think, in September from ACOG. And, you know, if you start to think about just, sort of the timeline that you might see the results from that. I think that could be in Q1. We don't know either way, you know, whether things will be positive or negative, but we feel really strong about the fundamentals behind 22Q testing that are outlined in the SMART study and behind the fundamentals of expanded carrier screening. So, we'll just have to stay tuned and see what happens there. From the NCCN side of things, you know, when you look at kind of the, you know, I think there was a meeting in August, you know, we're expecting to kind of hear the outcome from that maybe later this year or early next year. We do know that the circulate 18-month data, you know, was included in the review because it was submitted in time. But, of course, we don't know the outcome. Now, the great thing for Natera, is because we started working on randomized controlled trials in the escalation setting, for example, Altair, more than five years ago. In 2024, we will actually have the results, initial results from Altair reading out. So regardless of what the guideline committee says this year with respect to the Circulate study, next year the Altair results will be out. And so it's just really a matter of time, assuming the trial reads out positively, And, you know, that's why we feel, you know, very positive about things. And when you look at, you know, what setting is Altair, I think it has sort of two settings. One is treatment escalation. But then the other is a treatment on molecular recurrence components where patients from the Vega study that are initially negative are being monitored with ctDNA. And when they screen positive, they flip over into the Altair arm and are randomized at that time, and then are either treated or not treated. So, you know, we're excited about that treatment on molecular recurrence readout as well, which we think, you know, I think is another reason why surveillance testing is important. So, you know, look forward to having both of those read out. Alex or Solomon, would you like to add anything else? No? Okay. No.
spk10: Your next question is from the line of Catherine Schultz with Baird.
spk00: Hey guys, congrats on the quarter and thanks for the questions. I guess first, Steve, I think you mentioned planning to launch some new MRD products next year. Could you give any additional details on that? Will that be additional indications or are you more referencing a new platform like the potential for a liquid exome or tumor naive kind of off the shelf version?
spk03: Yeah, so we're going to have multiple new things that are coming out, not just in MRD, but across the business. And we've, We've been investing heavily in research and development and innovation, really, you know, the entire history of the company, but particularly over the last couple of years. And I think that's now going to start to bear fruit as we have a significant number of product launches and updates next year. So on the MRD side, I would expect to hear multiple different opportunities, you know, both new products and product updates.
spk00: Okay, great. And then you mentioned validating Signatera and NIPT on an alternative NGS provider. Any additional color you can give there? You know, what's the timeline to rolling out NIPT on the alternative sequencer in your central lab? And is the plan to switch all of your volumes over?
spk03: Yeah, so, you know, I think you guys sort of know the history here of, you know, the evolution of sequencing. And really over the last several years, you know, we've seen the market open up quite a bit. And now, you know, we've done work on multiple different instruments, and we think there's many different groups out there. So it's great that we've been able to meet regulatory milestones and, you know, in collaboration with pharma partners, validate Signatera and, you know, independently now validate NIPT on these alternative platforms. We're focusing on reducing our COGS and getting to cash flow breakeven. And so, we're going to, you know, make the best decision for Natera on what provider we use, you know, based on the service level, the price, and the quality.
spk10: Your next question is from the line of Rachel Thinsdale with JP Morgan.
spk09: Thank you for taking the questions, and congrats on the quarter, you guys. So first off, nice to see the coverage of the Foundation One tracker in the U.S. last month. Can you just kind of walk us through how should we size that opportunity, and then how quickly can it become a meaningful contributor here?
spk06: Yeah, Solomon, why don't you take that? Sure. Yeah, thank you for the question. We were very excited about getting that coverage for Medicare. And we thought it was, you know, appropriate given the great data that's already been generated to support the test. Foundation 1 tracker is very well positioned for patients in the advanced cancer setting who are already getting a Foundation 1 CDX test and want to monitor response to immunotherapy without needing to send another tissue sample for development of Signatera. And that's especially useful for patients where tissue might be scarce or already exhausted after the first analysis for genomic profiling. So that's exciting, and we look forward to rolling that out, you know, that commercialization being led by Foundation Medicine and helping a lot of patients.
spk09: Great. And then my follow-up, I just want to ask about the pending lawsuits that you guys have with RavGen and the upcoming trial in early next year. You know, you've had one peer that had to pay out in the high $200 million range, but other peers have settled out of court. You had one peer earlier this week flag that their payout is going to be in that like $30 million range all in. So can you just walk us through what are the potential range of outcomes that we could see for this suit and any color on, you know, dates leading up to that trial? Thank you.
spk05: Hey, Rachel. Thanks for the question. So, just like all the, you know, any pending litigation, we unfortunately just can't get into a lot of details on ongoing litigations. We clearly believe we don't infringe. We don't think the patents are valid, and we feel like we've got some, you know, very strong defenses. And that's kind of where we've got to leave it for now. But we look forward to providing more updates as they become available.
spk10: Your next question is from the line of Dan Brennan with TD Cowan.
spk07: Great, thanks. Thanks for the questions. Maybe the first one, Mike, you talked about some of the screening data that's coming out later this year and early next year. You talked about if the data looks very strong, you would evaluate and move forward, only excellent results. Can you give us a sense of what we expect to see here coming up in these two studies, and just any more color around the level of evidence you would need in order to push ahead?
spk03: Yeah, so this is Steve. I'll take that. So we've said before we have a, you know, case-controlled study that's coming out, you know, probably at the end of this year, maybe in early January. And then we're following that up, you know, with an additional study looking at advanced adenoma. And, you know, once we have both of those in hand, we're going to sort of see how we measure up to others that are out there. And, you know, I think there's sort of two decision points there. There's You know, how do we compare to the competition? And, you know, where are we on our trajectory to cash flow break even? And, you know, how do the financials look? And we're not going to do anything at all that's going to impact our ability to get the cash flow break even. So we think we're taking the right kind of measured approach and phase gated approach where we're waiting to hit key milestones before we decide whether we're moving the ball forward or not. And if we do move the ball forward, I think the next steps would really be in 2025 and 2026 where we'll be operating in a different environment where we think we'll be cash flow positive.
spk07: Got it. Thanks for that. And then maybe just another one on NTCN. If you are successful getting an inclusion maybe as a footnote in the current update that you expect early next year, what would that What does that mean? Obviously, commercial coverage could start, and you'd likely, I guess, see a volume benefit to it. Maybe just clarify. And then as a related question, obviously, the Galaxy 24-month data in the MRD positive arm look really impressive. How much does that de-risk Altair? I know you kind of mentioned, but I think the regimen might be a little bit different Altair. Just wondering how much of confidence that gives you in Altair positive readout. Thank you.
spk03: Let me just talk quickly about guidelines, and then I'll have Alex comment on the circulate data. You need guidelines to grow volume and to get commercial reimbursement. We're growing volume right now at a really fast pace. We're also now seeing commercial reimbursement coming on, and because of the biomarker bill, we think that's going to continue. You know, at this point, it's, you know, I think guidelines obviously would quicken the pace of those things. But, you know, we're going to get really far along here without guidelines coming in. And, you know, I think importantly for Natera, we don't need guidelines to achieve cash flow break even and continue to significantly grow the business. So, you know, we'll wait and see what happens. But, you know, if we don't end up getting it this time around, we have the Altair study coming out, and we'll be in a great position. So, Alex, you want to comment on the Circulate data, whether that's de-risked Altair or Vega?
spk05: Yeah, absolutely, Steve. So, we definitely have seen, you know, continuation of separation of the curves in the CTA positive arm in the Circulate study. And furthermore, we've seen that in the CTA negative arm. we continue to see very little, if any, benefit from adjuvant chemotherapy. And that absolute difference has shrunken, and actually we've seen those curves now reverse. We think actually both of those help de-risk not just the Altair study, but also the Vega study. And since Altair is coming up just around the corner, I think the way we are extrapolating these findings is that CKM-positive patients have almost 100% risk of recurrence without treatment. We've seen that adjuvant chemotherapy helps reduce that risk, but does not eliminate that. And the way that Altair is designed, you know, we are adding a known active agent, TASC-102, that's already approved in colorectal cancer and is known to have efficacy even in the second and third line setting. So by adding that and randomizing patients to either get that drug or get placebo, we're pretty confident that there will be an effect that should be able to bear out from that study. Again, we won't know the results until the study's unblinded, but I think given the study design, given the findings so far from the circulated data, we're very positive that we should be able to see something if the effect is there.
spk02: Great. Thank you.
spk10: This does conclude. There's a lot of time that we have for questions and answers. I will now hand the call back over to our presenters for any closing remarks.
spk05: Hey, thanks, operator, and thanks to everyone for joining today. We're really excited about these results, and we're very pleased to share them with you, so thanks again for joining.
spk10: This concludes today's call. Thank you for joining. You may now disconnect your lines.
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