Natera, Inc.

Thank you for standing by. My name is Greg and I will be your conference operator today. At this time, I would like to welcome everyone to the Natera Incorporated Q1 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 would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. And if you'd like to withdraw your question, simply press star one again. Thank you. I would now like to turn the call over to Mike Brophy, Chief Financial Officer. Mike, please go ahead.

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our first quarter of 2024. On the line, I'm joined by Steve Chapman, our CEO, Solomon Moscovich, President, Clinical Diagnostics, and Alex Aleshin, General Manager of Oncology and Chief Medical Officer. John Fesco, 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.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 8K files 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, 2024. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. The TOTUS 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. Let's get into the highlights on the next slide. We had an excellent quarter across the board, and I'm very pleased to share that we met a major milestone in the lifecycle of the company, reaching cash flow break-even in Q1, significantly ahead of schedule. Revenues were up 18% sequentially versus Q4 of 2023, and up 52% compared to Q1 of last year, driven by record volume growth and improving ASPs. Volumes were up over 17% sequentially versus Q4 of 2023, which is the fastest sequential growth rate we've seen since 2021, when the volumes were less than half the size they are now. We had record volumes across oncology, organ health, and women's health. In oncology, we performed 115,000 units in the quarter, representing sequential growth of 17,000 units versus Q4 of last year, a record growth quarter for the company. Women's health was also particularly strong, up more than 85,000 units versus Q4 of last year. Improving ASPs and continued execution on COGS reduction drove a record gross margin of 57% compared to 39% gross margin in Q1 of 2023. All of this momentum puts us in a great position to significantly raise every aspect of the guide for the rest of the year. We are now expecting revenues of $1,420,000,000 to $1,450,000,000, which is $100 million above the midpoint of the range we provided in February. We are also raising gross margins from 50% to 53% to a new range of 53% to 55%. And importantly, even as we increase investments in commercial operations and R&D, we're significantly reducing our cash burn guide from the year. Our previous range included a burn of $75 to $50 million, and we are now projecting to be cash flow breakeven for the full year, plus or minus $25 million. We've also had a full slate of clinical and product announcements, including the launch of our fetal RHD test. The vast majority of NIPT labs do not offer this type of testing. and we are particularly pleased to be serving a critical unmet need given the shortage of RHIG treatments available right now in the United States. In Oregon Health, many of you saw the updated Cadego guidelines that support genetic testing in patients with chronic kidney disease. This was great to see, particularly after the release of the excellent prospective results we read out last year with the Renicare study. More recently, we were thrilled to see the publication of our proactive study in a top journal which represents the largest prospective donor-derived cell-free DNA study published to date in the kidney transplant space. We think we have strong momentum in organ health, and we're excited about driving this forward this year. In oncology, we were very encouraged by the analysis released in the randomized prospective phase three Invigor-011 trial in bladder cancer, in which patients that were made negative on serial signatera testing had excellent outcomes. This is meaningful as it suggests that these MRD negative patients may be able to forego treatment in favor of signatory surveillance. This is also being explicitly evaluated in the modern trial, which we discussed last quarter. We also had several additional data readouts that we will cover today. We've got a full agenda for the call, and I'm excited to get into the business trends on the next slide. The first slide shows our sequential growth in volume between Q4 and Q1. both this year and last year we had a very strong q1 for women's health we saw a nice lift from the vitae accounts we picked up in january and february and the transition has been a success and we're pleased with the results we also had success organically growing the business in fact the majority of our growth in q1 came from organic new account wins and growth within our existing women's health accounts our core advantages continue to shine in the field and we've gotten a lot of traction with the launch of our RHD product, which we'll discuss later on the call. Organ health was also a bright spot this quarter. We saw strong sequential growth in Prospera on the back of the Proactiv publication, and Renocyte grew nicely as well, which is promising given that the updated Cadego guidelines came out very late in the quarter. And in oncology, we delivered our best quarter ever for signatory unit growth. Double-clicking on oncology volumes on the next slide, We typically see our oncology units grow between 7,000 and 10,000 units quarter over quarter. In Q1, oncology grew 17,000 units overall, with most of these units coming from the core signatera clinical business. We are seeing significant gains in new physicians and new patient starts in addition to recurrence monitoring. We think customers came out of ASCO GI excited about the Galaxy data and CRC, and that helped the quarter along with the quality, the size and the breadth of our clinical trial data, which is resonating with physicians. We're off to another strong start in Q2, but with that said, we, of course, see fluctuations in sequential growth as we've seen in the past. The next slide shows a significant step up in revenues we've seen over time, similar to the volume story. We had 18% sequential revenue growth over Q4 of last year and 52% compared to Q1 of last year. This represents some of the fastest revenue growth metrics we've generated, despite the fact that the revenue base has more than doubled in the last three years. In addition to the volume growth, we continue to see ASPs significantly outperforming across all of our major products. Women's Health and Oregon Health ASPs were up, and Signatura ASPs were above $1,000 in Q1. We continue to make progress on Signatura reimbursement, and we think we have a line of sight to continue asp expansion through the rest of the year in addition the rapid improvement in asp has driven about 34 million dollars in revenue true ups this quarter i think that's a very healthy sign for the business as it indicates the cash collections are exceeding our prior estimates our growth trends remain strong even when stripping out the true ups and those don't happen every quarter on the next slide you can really see the impact of our improving ASP and COGS on gross margin over the last year. Obviously, 57% is a huge number, but even if you strip out the revenue true-ups, we estimate the underlying repeatable gross margin would have been roughly 53%, which is well ahead of our expectations and drives the increase in the guide. We put a ton of resources and management focus on improving ASPs, but I'm equally excited about the COGS execution we generated recently. We've had several internal projects launch, including moving to higher throughput sequencers in both Austin and San Carlos for our prenatal business. In addition, we are still expanding our exome capabilities, which will likely drive some short-term increased costs in signatera cogs, but we are already below our goal of $450 based on these scaling benefits, and we expect to stay there for the rest of the year. We are also now getting large rebates from vendors as we hit higher volume tiers in our contracts. We've historically poured a meaningful percentage of our R&D spend into cost reductions, and now those lean costs are really paying dividends. So all these trends sum to the results on the next slide, which shows our cash burn reduction over time. We set a cash flow breakeven target on the Q1 earnings call about two years ago, and we're pleased to have met this goal significantly ahead of schedule. We've been very consistent about the strategy to get here. We've ramped volumes of revenues, increased ASPs and lowered COGS, leading to increased gross margins, and we've done that while maintaining ambitious levels of investment in R&D and commercial activities. We think this formula will allow us to continue delivering excellent financial results while maintaining our leadership position in clinical data generation, new product launches, and patient experience. In addition, we've achieved this cash flow breakeven goal without the help of any upcoming potential catalysts, such as 22Q guidelines or NCCN guidelines. Those would still represent further upside, along with continuing to execute the core strategy in very large, under-penetrated markets. Going through the rest of the year, we may bounce around between positive and negative cash flow quarters, depending on the working capital variables, like the timing of insurance payments, timing of CapEx and Lab, and other factors. But fundamentally, we think we're in a position to continue to serve more patients and grow the business and drive innovation without continually burning cash. And with that said, let me turn it over to Solomon. Solomon?