Natera, Inc.

Good afternoon and welcome to Natera Inc's Q2 earnings conference call. All participants are in a listen-only mode. After the speaker's remarks, we'll have a question and answer session. To ask a question at that time, please press star followed by the number one on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call over to Mike Brophy, Chief Financial Officer. Thank you. Please go ahead.

Thanks, Operator. Good afternoon. Thank you for joining our conference call to discuss the results of our second quarter of 2024. On the line, I am joined by Steve Chapman, our CEO, Solomon Moskovich, President, Clinical Diagnostics, and Alex Haleshin, General Manager of Oncology and Chief Medical Officer. Today's conference call is being broadcast live via webcast. We will be referring to a slide presentation that has been posted to investor.natera.com. A replay of the call will also be posted to our IR site as soon as it's available. Starting on slide two, during the course of this conference call, we will make forward-looking statements regarding future events and our anticipated future performance, such as our operational and financial outlook and projections, our assumptions for that outlook, market size, partnerships, clinical studies, 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 in or suggested by the forward-looking statements. Forward-looking statements made during the call are being made as of today, August 8th, 2024. 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 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 to the highlights on the next slide. We had another excellent quarter across the board. Revenues were up 12% sequentially versus Q1 of 2024 and up 58% compared to Q2 of last year. This was driven by record volumes and another strong quarter of ASP growth. Volumes were up over 23% compared to Q2 of last year. We had a great quarter winning new accounts in women's health, and despite the typical Q2 seasonal headwinds, we grew volume sequentially versus Q1. In organ health, we posted another strong volume quarter. And in oncology, Signataria grew another roughly 13,000 clinical units over what was a very strong Q1. We delivered a strong gross margin quarter with excellent ASP and COGS trends that I'll get into shortly. All of that means we can raise our guidance in revenues and gross margin for the full year. We are now centering the guide around roughly 1.5 billion in revenue and a 55% gross margin. At the midpoint, the new guide implies annual revenue growth of nearly 40% and an increase in gross margins of roughly 10 percentage points from the 45% gross margins we posted last year. We're excited about our progress and our transformational year continues. We also had many positive developments on the clinical and product side that we'll discuss on today's call. First, I want to flag that the Altair investigators let us know that they're not going to make the timeline for the submission to ESMO in mid-September. As you know, there's a huge amount of patient review and data analysis to generate the results and ready them for presentation, and the Circulate investigator team needs more time to get everything done. Their current plan is to target ASCO GI in January, So we'll stand by and let them do their work. In the meantime, we have an extremely full calendar of important data readouts in colorectal and other cancers, and we'll spend time reviewing that today. This includes the very significant 36-month readout from the GALAXY study, which we believe is of critical importance because it marks the first prospective overall survival data readout for signatera and colorectal cancer. These results will be shared at ESMO. In addition, Solomon will provide an update on organ health and some recent news on Prospera and Renocyte. He will discuss a major win with the new consensus paper published by the National Kidney Foundation that recommends genetic testing for the majority of patients with kidney disease. We also launch a new differentiated feature for our Prospera heart test that enhances the detection of organ rejection for heart transplant patients and allows us to deliver a more accurate risk assessment across both acute cellular rejection and antibody-mediated rejection than with donor-derived cell-free DNA percentage alone. And finally, on the legal front, the federal appeals court in July upheld the preliminary injunction of the Radar MRD assay made by Neogenomics. As a reminder, the preliminary injunction was first issued by the district court late last year, so this recent decision upholds that order, barring sales of the assay with limited exceptions. We are pleased with the outcome and look forward to presenting our case to the jury next year. Okay, let's get into some of the business drivers on the next slide. The first slide shows the year-over-year volume progression we've had over time, both in terms of growth rates and absolute unit growth. This quarter looks like one of the best Q2 results we've had in the last five years. As a reminder, volumes from our existing women's health customers usually decline 5% to 10% compared to Q1, because clinics see fewer new pregnancies in Q2. Given the large book of existing business we have in women's health, that drag of same-store sales volume is hard to overcome with new account wins. So I was particularly pleased to see the new volume growth in women's health above and beyond our strong quarter in Q1. The outperformance was partly enabled by our differentiated new product features, especially the non-invasive fetal RHD analysis, which we launched in May, in the midst of a nationwide shortage of GroGam that continues to affect the industry today. We continue to see very strong interest in our core women's health products, Panorama, where we're the market leader in NIPT, and Horizon, where we're the market leader in expanded carrier screening. In addition to that organic growth, we got a full quarter contribution from the Vitae deal that we announced in January, which further boosted our growth in the quarter. We also saw another great quarter for both Prospera and Renocyte, We continue to perform well here, and growth is accelerating. Of course, Signatera was a major source of growth in the quarter, and we had another outstanding result in clinical volumes, as you can see on the next slide. The left-hand chart is the total oncology volume metric we've always shown, which includes Signatera clinical as well as Altera orders and pharma clinical trial units. The right-hand chart shows the quarterly volume progression of the clinical setting over time. You can see in the past, we typically have added about 8,000 or 9,000 units per quarter. We had a big step up in Q1, and now we've followed that with roughly 13,000 sequential units in Q2. While we still think roughly 8,000 to 10,000 units of quarterly growth is the right baseline expectation going forward, clearly the experience physicians and patients are having with Signatera continues to drive meaningful adoption. So all that volume growth helped us to drive one of the best Q2 revenue growth performances in recent memory. This next slide shows the Q1 to Q2 change in revenue in the last two years alongside the 2024 results. In addition to volume trends, we continue to see very positive trends in ASPs really across the businesses. Signatera ASPs were up modestly over Q1, but we're modeling some additional growth ASPs for the rest of the year as we've seen some continued positive momentum from both Medicare Advantage plans and biomarker state reimbursement that can be a source of upside through the year. Women's health ASPs were very strong once again this quarter. Even without the tailwind of potential new guidelines, which we're still very positive on, we continue to make improvements on the fraction of cases that are getting reimbursed. That has been a major undertaking internally, and we made substantial investments in data analysis, engineering, and persistent appeals and payer outreach to make that happen. We model women's health ASPs remaining stable through the rest of the year, but we have a list of projects that may provide upside as we work through them. All of this effort is driving cash collections in excess of the revenue accruals we set last year, which is why we're seeing these revenue true-ups in 2024. These true-ups will be lumpy, and so we don't include future true-ups in our guidance, but they do represent execution above our prior expectations. While the ASPs improve, we continue to benefit from the efforts of our R&D team to reduce our cost of goods sold. Signature COGS modestly declined again in the quarter and are now just above $400, and our Women's Health COGS remain in the range we achieved in prior quarters. The net result is that we had another record gross margin quarter. This slide shows both the total gross margins as well as the underlying gross margins net of revenue true-ups, and both metrics tell the same story. Underlying organic gross margins grew about two full percentage points above the Q1 results and now stand above 54%. The next slide shows our cash burn trajectory over time. For those of you that are newer to the story, you can see that historically we made substantial initial investments to launch Cigna Terra, and now we are getting scale on that commercial and operational base while Women's Health continues to generate cash. We are very pleased to be cash flow breakeven for the second consecutive quarter, which is above our expectations given the potential for seasonal headwinds in Q2. Looking into the second half of the year, we are well positioned to hit the guide of cash flow breakeven for the full year, even when incorporating the stepped up investment in R&D and sales we announced in May. I'll say this again. We did not get to cash flow breakeven by splashing investments into our future. Our strategy is to keep our foot on the gas and to make sure we're doing everything we need to deliver fantastic products for our patients. With that, let me hand the call over to Solomon to cover organ health and commercial updates from oncology.