Natera, Inc.

Ladies and gentlemen, thank you for standing by. My name is Desiree and I will be your conference operator today. At this time, I would like to welcome everyone to the Natera Inc. Fourth Quarter 2023 Earnings 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 would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. I would now like to turn the conference over to Michael Brophy, Chief Financial Officer. Please go ahead.

Thanks, Operator. Good afternoon. Thank you for joining our conference call to discuss the results of our fourth quarter of 2023. On the line, I'm joined by Steve Chapman, our CEO, Salman Moshavich, President, Clinical Diagnostics, and Alice Alessian, General Manager of Oncology and Chief Medical Officer. John Sesko, President and Chief Business Officer, is also on the line 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.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, and expected results, opportunities and strategies, and expectations for various current and future products, including product capabilities, expected release dates, reimbursement coverage, and related effects on our financial and operating results. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. Please refer to the documents we file from time to time with the SEC including our most recent Form 10-K or 10-Q and the Form 8-K filed with today's press release. Those documents identify important risks and other factors that may cause our actual results to differ materially from those contained or suggested by the forward-looking statements. Forward-looking statements made during the call are being made as of today, February 28, 2024. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. The charity 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 numeric or growth changes as we discuss our financial performance. And unless otherwise noted, each such reference represents a year-on-year comparison. And now I'd like to turn the call over to Steve. Steve?

Great. Thanks, Mike. Natera is focused on transforming the diagnosis and management of disease worldwide. Our growth is driven by combining our innovative technology with significant peer-reviewed clinical evidence that supports the utility of our products. We've had a lot of great news since our presentation at the JPMorgan Conference, and we're excited to get into the highlights. We finished Q4 with $311 million in revenue, which was $11 million ahead of the pre-announcement we made in January, and represents 43% growth over Q4 of 2022. Full year revenues were $1,080,000,000, an increase of more than 30% compared to 2022. On volumes, we processed 2,496,000 tests in 2023, which is roughly 6,000 units ahead of the pre-announcement. We processed 341,000 oncology tests in 2023, representing year-over-year growth of 73.5%. And we also saw strong growth metrics in women's health and organ health. Gross margins in Q4 came in at 51.4% compared to our Q1 margin of 39.9%. We finished the full year at 45.5% above the top end of the Q3 guide. As Mike will cover later in the call, we had some revenue true-ups and lab savings in Q4 that don't repeat every quarter. We estimate organic revenues in Q4 were roughly $306 million, and gross margins were roughly 49%, which still represents a significant improvement versus previous quarters. And as we discussed at the J.P. Morgan Conference, we also made great progress on cash burn throughout the course of the year, ultimately reducing our cash burn by roughly $193 million in 2023 compared to 2022. The guide for 2024 reflects the continued momentum in the business that generated these very strong results in 2023. We are guiding revenues of $1,320,000,000 to $1,350,000,000, gross margins of 50% to 53%, and cash burn for the full year of $50 million to $75 million. On cash, we estimate we will be cash flow breakeven by Q3 or sooner. What's most impressive is we will be achieving this cash flow breakeven quarter while still making very significant investments into our core business. You'll see later in the guidance that our investment in research and development and commercial operations remains robust in 2024. This includes major investments in core product enhancements and line extensions, plus potentially guideline-enabling clinical trials that we believe could benefit patients in the years to come. We can do this because our core fundamentals are so strong. We're in large expanding markets, our volume is growing rapidly, and our margin is expanding with ASP increasing and COGS going down. I'll now hit a few other highlights before we go into more details on each. First, we think our recent acquisition of Invitae's women's health assets is well-timed given the clinical value of expanded carrier screening and the strong trends we are seeing there, and we're feeling positive about our progress on the acquisition thus far. In organ health, we're building momentum as we complete enrollment and read out major innovative clinical trials. We'll be talking today about some big, first-of-their-kind prospective studies in donor-derived cell-free DNA and how they may positively impact patient care. Finally, in oncology, earlier this week, we were pleased to announce that the MoldDx has expanded coverage for signatera to neoadjuvant monitoring in breast cancer, and separately for MRD and recurrence monitoring in ovarian cancer. We've had a drumbeat of exciting clinical developments across a range of indications, including CRC, muscle invasive bladder cancer, and breast cancer. I'm excited for Alex to also talk about the modern study in bladder cancer, which just enrolled its first patient a few weeks ago. Finally, we've had a string of good results on the IP front that I think puts us in an excellent position in 2024 and beyond. Okay, great. Let's get into details of the results on the next slide. Revenues exceeded our expectations at $311 million, driven by continued strong volume growth and excellent ASP traction across the business, particularly in women's health and oncology. We previously had a goal to get oncology ASPs above $1,000 by the end of 2024, and we actually hit that level in Q4 of 2023. That's great news because we now think we can get a full year's benefit of higher ASPs in 2024, and we think there's still room to drive Signatura clinical ASPs another $50 to $75 higher just by continuing to execute on currently covered indications. Of course, this week's announcement on new Medicare coverage will help us as well. The commentary on women's health ASPs is broadly similar, We saw encouraging sequential quarterly progress throughout the course of 2023, and preliminary analysis of Q1 trends suggest that we are on track for continued improvement so far in 2024. Volume was a strong driver of Q4 performance as well, and you can see the annual volume trend on the next slide. As mentioned earlier, we came in 6,000 units ahead of our pre-announcement in January. I have a separate slide on ecology coming up, so I'll focus on women's health and organ health here, where we saw strong growth in the full year 2023. As the year ended, we saw an acceleration of women's health, including hitting a record units per receiving day in December. This strong momentum carried into January as well, and that was prior to the acquisition of Invitae's women's health assets, where we're just now starting to see volume come in. In Oregon Health, as the year progressed, we saw a return to growth in the donor-derived cell-free DNA business after the initial pullback in early 2023 due to the coverage changes. We think we're well positioned going forward in donor-derived cell-free DNA to compete, given the significant body of peer-reviewed evidence that we generated and the unique features of our tests. Also, we continue to see strong interest in Renacyte after the Renacare publication. This momentum is great, and we're off to a fast start across women's health, organ health, and oncology. On the next slide, we're showing the ramp of our oncology business, which continues to outperform. In Q4, we did 98,000 units, another strong sequential quarter, increasing by 9,000 clinical units over Q3 of 2023. For the full year of 2023, the growth rate was 73.5% over 2022. We're continuing to see strong growth across the core indications, including colorectal cancer, breast cancer, muscle invasive bladder cancer, and immunotherapy monitoring, even as we add new indications. Roughly 40% of oncologists use Signotera in Q4, which shows the strong clinical utility of the test, and we have strong momentum going into 2024. Just as critical as revenue and volume growth is the gross margin traction we are seeing. I think this slide is a good snapshot of the business maturing. Over the course of the year, our ASP and COGT initiatives delivered above our expectations particularly in signature asp and cogs both of which improved over the course of 2023 as i mentioned at the top of the call we think the underlying repeatable gross margin the quarter was roughly 49 our 2024 guide implies meaningful continued gross margin improvements based on asps and college drivers that are within our control in addition We've also got a number of potential upside drivers to both revenue and gross margins that we'll discuss later in the call that aren't included in our guide. So the net result of strong revenue growth and expanding margins on stable operating expenses is a dramatic reduction in cash burn we achieved in 2023. This is essentially in line with the data we released in January. As discussed previously, we accelerated a chunk of 2024 scheduled CapEx in December to take advantage of some large year-end discounts, which has helped us set up for an efficient year in 2024. Two years ago, we set a long-term target to get a cash flow breakeven quarter this year, and based on these results, plus the early data we are seeing so far in Q1, we are confident that we can reach that milestone by Q3 of this year, if not sooner. Of course, cash flows are dependent in part on payer response times to submitted claims, and so are inherently difficult to forecast with precision on a quarterly basis. But the point is that we're continuing to build momentum, and our confidence in achieving this goal is stronger than ever. Finally, I think anyone that follows this space has taken note of our results on the IP front. Since we created the category of tumor-informed MRD in 2017, we've had two companies attempt to follow us into the space, requiring us to enforce our IP against them. The good news is that they've now both been enjoined for violating RIP. The permanent injunction against Archer and Nogite was ordered after the conclusion of a jury trial, and then subsequently a preliminary injunction was entered against Neogenomics. One notable point about these results is that different sets of patents and different judges are at issue in each of these cases, which I think demonstrates the strength of the IP estate that protects our core technology. The CARE DSIP litigation offers another case in point, which generated a sizable jury verdict for damages based only on past infringement of our patents. The process is still ongoing to determine whether future royalties will be awarded. And on the Rabjan trial, we were found to not willfully infringe, and the damages awarded were obviously much lower than what Rabjan was requesting. but we still respectfully disagree with the outcomes of the trial, and we plan to appeal certain of the rulings. Okay, now let me hand it over to Solomon to discuss updates in women's health and organ health. Solomon?