Earnings call: Natera posts strong Q2 growth, raises full-year guidance

Natera Inc . (NASDAQ: NASDAQ:NTRA), a global leader in personalized genetic testing and diagnostics, has reported a significant increase in revenue and volume growth for the second quarter of 2024. In its latest earnings call, Natera announced a 12% sequential revenue increase from the first quarter and a 58% surge compared to the same quarter of the previous year.

The company has raised its full-year revenue guidance to approximately $1.5 billion, with a gross margin expectation of 55%. These optimistic figures come alongside a record number of test volumes and a rise in average selling prices (ASPs).

Key Takeaways

• Natera reported a 12% sequential revenue increase from Q1 2024 and a 58% increase year-over-year.
• Full-year revenue guidance raised to around $1.5 billion with an expected 55% gross margin.
• The company experienced record test volumes and growth in ASPs.
• National Kidney Foundation endorsed genetic testing for chronic kidney disease, supporting Natera's Renasight test.
• Positive growth in Signatera clinical volumes noted, especially in colorectal and breast cancer.
• Natera reached cash flow breakeven for the second consecutive quarter and remains on target for the full year.

Company Outlook

• Natera anticipates a 40% revenue growth compared to 2023.
• The company expects modest sequential improvement in Signatera's ASP in the second half of the year.
• They plan steady sequential growth in volumes and revenue.
• Investments in user experience and product enhancements like DQS for heart transplant testing are underway.

Bearish Highlights

• Quarterly cash burn may fluctuate due to the timing of capital expenditures and payer reimbursements.
• The submission of the ALTAIR study to ESMO has been delayed.
• Non-renewal of the partnership with Foundation Medicine, though it is not expected to impact volume growth.

Bullish Highlights

• National Kidney Foundation's endorsement of genetic testing for chronic kidney disease.
• Strong growth in Signatera clinical volumes and physician adoption.
• The company is confident in the tumor-informed approach of Signatera.
• ACOG guidelines expected to be released within the year, positive for Signatera's growth.

Misses

• Delay in the submission of the ALTAIR study to ESMO.
• The non-renewal of Foundation Medicine partnership, despite no expected impact on growth.

Q&A Highlights

• Natera is confident in Signatera's market position despite competition from Garden's COSMOS study.
• The company is expanding into new indications, such as bladder cancer.
• Investments continue in MRD enhancements and product line extensions.
• Coverage for microdeletions still relies on guideline changes, impacting reimbursement.
• The majority of Signatera's growth comes from adjuvant decision-making and recurrence monitoring.

Natera's Q2 earnings call highlighted the company's robust performance and strategic focus on expanding its product offerings, particularly in the oncology and organ health sectors. With the endorsement from the National Kidney Foundation and the continued growth in Signatera's clinical volumes, Natera is well-positioned to maintain its upward trajectory in the personalized genetic testing market. Despite the challenges such as the delay in the ALTAIR study and the non-renewal of the Foundation Medicine partnership, the company's outlook remains positive, supported by strong demand for its tests and a conservative yet outperforming growth strategy.

InvestingPro Insights

Natera Inc. (NASDAQ: NTRA) has demonstrated impressive financial performance in the second quarter of 2024, with significant revenue growth and test volume expansion. To provide further context to these results, InvestingPro data and tips offer additional insights into the company's financial health and stock performance.

InvestingPro Data highlights include a robust revenue growth of 39.26% over the last twelve months as of Q1 2024, indicating the company's strong sales performance. The market cap stands at $14.06 billion, reflecting investor confidence in Natera's market position. However, the company's Price to Book ratio is relatively high at 17.8, suggesting that the stock may be trading at a premium compared to its book value.

An InvestingPro Tip that stands out is Natera's significant return over the last year, with a 119.27% price total return, underscoring the stock's bullish trend and investor optimism. Additionally, the company's liquid assets exceed its short-term obligations, which is a positive indicator of Natera's ability to meet its immediate financial liabilities.

For investors seeking deeper analysis, InvestingPro offers additional tips, such as the company's moderate level of debt and the fact that analysts do not anticipate the company will be profitable this year. In total, there are 13 additional InvestingPro Tips available that provide a comprehensive view of Natera's financial standing and future prospects.

These data points and insights are crucial for investors considering Natera's stock, especially in the context of the company's recent earnings report and future outlook. For a more detailed analysis, investors can explore the full range of InvestingPro Tips at https://www.investing.com/pro/NTRA.

Full transcript - Natera Inc (NTRA) Q2 2024:

Operator: Good afternoon, and welcome to Natera Inc.'s Q2 Earnings Conference Call. All participants are in a listen-only mode. After the speakers’ remarks, we’ll have a question and answer session. [Operator Instructions] 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.

Mike Brophy: 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 Moshkevich, President, Clinical Diagnostics; and Alexey Aleshin, 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 2. 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 8, 2024. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. Natera disclaims 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?

Steve Chapman: 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, Signatera 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 margin 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 are not going to make the time line 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 circular investigator team needs more time to get everything going. 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 in 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 Renasight. 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 launched 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, then 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 (NASDAQ:NEO). As a reminder, the preliminary injunction was first issued by the District Court late last year. So this recent decision upholds that order, borrowing 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 5 years. As a reminder, volumes from our existing women's health customers usually declined 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 Noninvasive Fetal RHD analysis, which we launched in May in the midst of a nationwide shortage of program 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; at Horizon, where we're the market leader in expanded carrier screening. In addition to that organic growth, we got a full quarter contribution from Invitae (OTC:NVTAQ) deal that we announced in January, which further boosted our growth in the quarter. We also saw another great quarter for both Prospera and Renasight. 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 in 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 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 2 years, alongside the 2024 results. In addition to the 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 fracture of cases that are getting reimbursed. That has been a major undertaken 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 are 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. Signatera COGS modestly declined again in the quarter and are now just above $400, and our women's health COGS remained 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 and net of revenue true-ups and both metrics tell the same story. Underlying organic gross margins grew about 2 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 Signatera. 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 flashing investments in 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. Solomon?

Solomon Moshkevich: Thanks, Steve. Good afternoon, everyone. I'll start with updates on organ health. Since we launched the Renasight test in 2020 for renal genetics, key trial data and now society guidelines have reinforced the importance of genetic testing for the 37 million patients in the U.S. affected by chronic kidney disease or CKD. We are pleased to share that the National Kidney Foundation published a new consensus paper last week with a strong endorsement for comprehensive genetic testing in the majority of patients with CKD. The consensus paper included input from experts in nephrology, clinical and lab genetics, kidney pathology and genetic counseling in addition to patients who also provided their perspectives. The NKF paper recommended a broad multi-gene panel as the primary choice for testing. Natera agrees with that position and our Renasight test covers 385 genes. NKF also clearly recognized the clinical utility and benefits of genetic testing across a wide range of renal conditions and patient characteristics. We, too, reported on that strong utility in our recent RenaCARE trial, which showed 1 out of 5 patients with a positive genetic diagnosis, 1 out of 2 positives leading to a change in diagnosis and 1 out of 3 positive cases leading to a change in therapy. The NKF paper follows the recent guideline update from KDIGO, which we spoke about on our earnings call in May. So this means we now have support for genetic testing from two of the major organizations in nephrology. We believe these recommendations will continue to have a positive impact on clinical adoption of the Renasight test. Moving on to Prospera, where we are seeing multiple account wins in kidney, heart and lung. Following some turbulence last year after changes in Medicare reimbursement, we see the market has fully rebounded and on a positive growth trajectory, and we believe Prospera is taking a disproportionate share of the growth. I would like to highlight that we recently launched a product enhancement for our heart transplant test called DQS or donor quantity score. Previously, Prospera Heart reported out the fraction of donor-derived cell-free DNA in the blood compared to the total cfDNA, but the donor fraction can be influenced by fluctuations in background cell-free DNA. For example, patients who are fighting off an infection, a malignancy or who just underwent surgery, all of those could cause the background levels of cell-free DNA to vary. With DQS, we have a second threshold, which is independent of those background cell-free DNA levels. This feature was previously introduced for Prospera Kidney and now it's available for Prospera Heart, too. In a study presented at the International Society for Heart and Lung Transplantation in April, we showed that the addition of DQS increased Prospera's sensitivity to rejection in heart transplant from 80% to 88%, and it also reduced false positives by approximately 37%. We plan to submit the study for peer-reviewed publication later this year. This new and improved test enables clear clinical decisions and fewer unnecessary biopsies, all using BDC FD&A. Turning now to oncology. On the commercial front, as Steve noted, we saw excellent growth for Signatera clinical volumes driven by multiple factors. We saw another impressive increase in the number of ordering physicians with over 40% of all oncologists in the U.S. ordering at least 1 Signatera test during the quarter. There was also strong growth in new patient initiation, which was observed across all major disease indications led especially by colorectal cancer and breast cancer. This growth is being driven by the core value proposition of Signatera to inform risk-based treatment decisions in the adjuvant setting after surgery, to monitor for recurrence in conjunction with standard imaging, enabling earlier interventions. For example, over 85% of colorectal cancer recurrences are historically caught too late for curative intent surgery, which is the preferred treatment approach. And number three, to monitor for response to neoadjuvant therapy and immunotherapy. We're also investing heavily in user experience. Record numbers of customers are choosing mobile phlebotomy and engaging with Natera through our digital portals and EMR integrations. And test results are being delivered reliably in under 3 weeks from the time of specimen receipt for initial cases and under a week for subsequent cases. One final note on the commercial side. I want to comment on our partnership with Foundation Medicine. The deal with Foundation was originally signed in 2019 and was up for renewal this summer. For business reasons, the companies have decided not to renew the agreement. This allows Natera to maintain our focus on growing Signatera, Altera and Empower and adding new cutting-edge products services to our oncology portfolio. For continuity of care, we will continue monitoring services for any existing F1 tracker patients. Now I'll turn it over to Alex to discuss our clinical road map in oncology. Alex?

Alexey Aleshin: Thanks, Solomon. Operational improvements and volume growth in the oncology business continued to outperform our expectations, and the clinical utility of Signatera continues to gain traction based on the core value proposition from the previous slide. At the ASCO meeting in June, Signatera was featured in over a dozen publications. And I wanted to highlight one particular multi-institutional study from UCLA and other academic institutions that really nicely delineates this clinical utility. As highlighted on this slide, this study examined 464 patients with Stage I to III breast cancer. The vast majority of the patients tested Signatera negative, offering valuable reassurance in a time of high anxiety. And the 12% of patients who tested Signatera-positive, investigators reported a treatment change in 91% of these patients with evidence that treatment change resulted in possibly improved outcomes. Some of you will remember the INTERCEPT study in colorectal cancer from MD Anderson. This study is very similar but in breast cancer. This is a great showcase of how Signatera is being adopted into clinical practice and having a positive impact for patients across the country. We are also pleased to publish several new peer-reviewed publications during this quarter, including the expanded EBLIS study, which we discussed in the Q1 call. But since then, there have also been new studies in muscle invasive bladder cancer, pancreatic cancer and Merkel cell carcinoma. The latter two represent first-time publications for Signatera in these disease indications, and we believe they are both areas of significant clinical unmet need. For example, in the Merkel cell carcinoma paper, Signatera testing after curative treatment was associated with significantly higher risk of recurrence. The hazard ratio reported was 7.4. This outperformed established Merkel cell carcinoma risk factors currently being utilized by clinicians. We look forward to presenting these new indications to Medicare later this year adding to the multiple submissions that are currently under review, and we will provide an update on these submissions in the future. Looking ahead to future data readouts. We have a strong pipeline of prospective randomized trials that we believe could, if successful, further change clinical practice in the United States and globally. As Steve mentioned, the ALTAIR investigators notified us of the need for more time for data review, analysis and interpretation. So they plan to delay the study readout to ASCO GI in January. We defer to the PIs on the timing and look forward to announcing these results at that time. Meanwhile, we are looking forward to the readout of the new GALAXY data at the ESMO conference in September with 36-month outcomes being reported in over 2,000 patients, and mature overall survival data being presented in addition to disease-free survival data. This will be the first time prospective overall survival data in colorectal cancer will be presented. Looking forward to 2025, 2026 and beyond, we have a full suite of Phase III studies in colorectal cancer, bladder cancer and breast cancer, including both escalation and treatment on molecular recurrence studies. Furthermore, we have trials focused on de-escalation and some trials that span both of these indications. In bladder cancer, we're expecting the IMvigor011 trial to read out in 2025 with the MODERN trial also continuing to enroll well after being recently opened. We also have important breast cancer trials that we've previously presented on. This is just a snapshot of our data pipeline, and we continue to invest in generating high-quality clinical evidence to achieve our vision of Signatera as part of standard clinical practice. I also want to provide an update on our early cancer detection program. We continue to make progress in developing a differentiated blood-based assay to detect colorectal cancer. We are finishing a study utilizing prospectively collected colonoscopy matched average-risk blood samples supplemented by colorectal cancer samples. We look forward to sharing these results in the near future, and I will provide further details on our plans at that time. Now I will turn it over to Mike to cover the financials. Mike?

Mike Brophy: Great. Thanks, Alex. The next slide is just a summary of the P&L in Q2 and the year-over-year progress. Steve covered the key points on revenues and margins. On the expense lines, just as a reminder, we've made several growth-oriented investments in SG&A over the past year. For example, taking up the women's health sales team from Invitae, which is working out very well. We also had a modest step up in R&D in clinical trials. These measured increases in OpEx are consistent with the Q1 guide, and I think are indicative of how we would like to proceed for the time being. We'd like to maximize investments to grow revenues and margins while holding our cash balance relatively constant. That's what we achieved here in the second quarter that we were able to break even despite the seasonal headwinds that Steve described, and our cash balance actually grew slightly with interest income. Okay, let's get to the revised financial guidance on the next slide. On revenues, we are now expecting $1.49 billion to $1.52 billion. This represents a bump of $70 million at the midpoint as compared to the roughly $30 million beat in the quarter when removing revenue true-ups Steve talked about. The annual revenue guide now implies about 40% revenue growth versus 2023. The guide also implies we are bullish on the second half of the year, and we are off to a good start so far in Q3. On pacing, we expect steady sequential growth in volumes and revenue in Q3 and Q4. Our guide always assumes 0 and true-up revenues in future periods. And if we continue to generate cash above our expectations in the second half, any true-ups would represent upside to our guidance. We are also modeling largely stable ASPs in the second half for the overall business. So we do expect to see continued modest sequential improvement in the Signatera ASP, given the current momentum that Steve described. We are leaving the OpEx guide and the cash guide unchanged versus Q1, and we are still on track to make all the necessary growth investments we have planned for this year. I'll repeat my disclaimer on cash burn. Now that we are operating at this breakeven level, it's important to understand that we expect to have fluctuations in quarterly cash burn due to timing of capital expenditures and working capital. The timing of reimbursement from payers can easily vary in a given quarter. So I wouldn't be surprised to have a quarter where we have negative cash flow and others where we are positive and the guide just represents the full year results. The income statement, of course, is less prone to these swings. And so I expect our losses to continue to gradually narrow through the course of the year. Okay. So with that, we're very pleased with the quarter and happy to take your questions. Let me hand it to the operator. Operator?

Operator: [Operator Instructions] Our first question comes from Dan Brennan from Cowen. Please go ahead, your line is open.

Dan Brennan: Great, thank you. Congrats on the quarter, and thanks for the question. Maybe just on the clinical trial readouts on ALTAIR and GALAXY. I appreciate the ALTAIR readouts delayed just due to the PIs maybe more time. But is there anything to read into this at all from either given the time that they need from either the PFS or the OS that you might see coming out of this trial? And then on GALAXY, OS would be something, I understand this is an observational trial, not a randomized trial. So how do we think about the expectation here if we see an OS benefit, what that could actually mean either for kind of doctor usage and/or NCCN?

Steve Chapman: Yes. Thanks, Dan. Good question. So yes, on ALTAIR, I mean there's obviously a lot of work to do to get the patient data together and complete the analysis. And I think the time line leading into ESMO was just a little bit too tight. So the PIs want to move to the next kind of large-scale conference, which is ASCO GI. And of course, we support that. But we're definitely excited about reading out the GALAXY 36-month data at ESMO. And I think for having the first perspective, overall survival data readout on Signatera is going to be a big milestone, and it's something that we're really excited about. So Alex, do you want to talk a little bit more about I think this readout coming up at ESMO?

Alexey Aleshin: Yes, definitely, Steve. Thanks for the question. For colorectal cancer and adjuvant setting 3-month -- 3-year DFS is usually considered kind of the gold standard as we think about predicting overall survival. And I think the timing is perfect in that the overall survival data from the GALAXY cohort is also now maturing and we're able to read it out. So we think that kind of provides 2 big upsides. I think the first it shows kind of how Signatera results predict with long-term outcomes, both DFS and OS. And it also builds a framework for looking at CTA dynamics as possible surrogates for future clinical trial development?

Dan Brennan: Great. And then if I have a follow-up just on pricing. True-ups have been obviously a big driver here in the last two quarters. I know you don't guide for that. Any way to characterize what that opportunity could look like? And then Mike, on Signatera price in the back half of the year, it sounds like I think from the last call, you were assuming flat pricing now, maybe you're assuming a step up in price. Maybe just discuss if anything changed there?

Mike Brophy: Yes. Thanks for the question. So yes, on the true-ups, it wouldn't surprise me to see us have some additional true-ups. But again, they're just -- because they're hard to forecast is really more the reason why we don't guide to them. I do expect that to moderate. I mean, we stepped up ASPs very meaningfully in response to the better cash collections that we've seen over the last 18 months or so. So I think as the ASPs go up, hopefully, the more of that revenue is showing to the accrual rather than a true-up a year later. But nonetheless, I mean, this will be kind of a process, I think so that's on true-ups. On pricing, yes. I mean, look, we've seen continued progress with the reimbursement for Signatera. And we think that, that can yield some -- the guide presumes some modest step ups in the ASP in the second half but not something heroic beyond what we think is imminently achievable just based on reimbursement from Medicare and Medicare Advantage payers.

Dan Brennan: Great, thank you.

Operator: Our next question comes from Rachel Vatnsdal from J.P. Morgan. Please go ahead, your line is open.

Rachel Vatnsdal: Thank you guys for taking the questions. So first up on women's health, great to see the continued progress there this quarter, especially given the typical seasonality dynamics. So can you break out for us what was the contribution from the fetal test that you guys highlighted? And then also on the Invitae side, can you walk us through how much did Invitae benefit? You talked about some of the increasing of the salesforce there. So how should we think about that contribution in the back half?

Steve Chapman: Yes. Thanks a lot. So yes, we were really excited to launch the fetal RHD test. It seemed like we were meeting what is -- continues to be a very significant unmet need. And we've seen a lot of interest in -- continuing interest, particularly, I think, leading to us closing new customers. And one of the things that drove this outperformance in Q2 was an increase in new customers as we came out of Q1, and then that continued on in Q2. And a lot of that is from the organic growth of the women's health business. So of course, Invitae made a contribution. I think we said in towards Q1 that Invitae was maybe like 25% of the women's health growth or something in that range. And I think it's similar in Q2 as now we're getting a full quarter of the Invitae volume coming in. But a lot of the new volume coming in is organic growth that we're just continuing to see interest in the Natera prenatal portfolio.

Rachel Vatnsdal: Great. And then just on my follow-up, you had another really solid quarter on the gross margin front. So I guess, how should we think about this progress continuing into the back half of the year? And can you kind of break down for us, especially on the Signatera side. You've mentioned some of the COGS dynamics. How much of that gross margin progression on Signatera was due to getting into the subsequent test for patients versus that first test where you really do the whole sequencing bit on the patient versus further operational efficiencies? And how do we think about that into the back half?

Steve Chapman: Mike, do you want to take that?

Mike Brophy: Yes, sure. So yes, you're right. The gross margin guide is influenced, of course, by continued improvement in the Signatera gross margin. But I'd also highlight that the women's health ASPs are looking quite strong, as Steve kind of mentioned in the call, we're very gratified to see that. Specifically, on the Signatera gross margin dynamics. We saw another kind of modest step down in the COGS for Signatera sequentially versus Q1. And a lot of that, I think, is really kind of related to kind of the scale and the volume that we're seeing. There's still, I think, room to run in terms of reducing the COGS associated with running the tissue in-house, particularly as we stand up to Austin lab where we really get scale in that facility. So I think that's a positive driver for the back half. And I think if you just kind of -- in terms of the gross margin progression, if you just kind of think about the underlying kind of non true-up progression we've seen here. I think you could still see kind of modest sequential improvement in that kind of underlying trend sequentially in Q3 and Q4. That's what the model implies.

Operator: Our next question comes from Puneet Souda from Leerink Partners. Please go ahead, your line is open.

Puneet Souda: Yes, hi guys. Thanks for taking my questions and if you don't mind, I'll ask both of them together on ALTAIR, I just wanted to understand perspective from Alex. How should -- I mean I appreciate that it's getting pushed out. But just in terms of overall benchmarking of this 240 patients trial, 80% powered to deliver DFS at a hazard ratio of 0.67. Is that the right benchmark? You've talked about the MOSAIQ trial before where Natera wasn't involved, but maybe just tell us how should we benchmark this? And then a second question follow-up for Mike is on gross margin. What's behind the 54% to 56% gross margin estimate? I appreciate there is a true-up difference here. But is there anything else beyond that, that we need to consider? Thank you.

Steve Chapman: Yes. Thanks, Puneet. Yes, Alex, why don't you go ahead and talk about what good looks like and then you can hand it to Mike.

Alexey Aleshin: Yes. Thanks, Puneet, for the question. I think as we've previously discussed and I think we stand by that benchmark. Mosaic is, we think, the best kind of DFS number to really target. I think that study showed a DFS of 0.0 0.77. And it was the last study that led to a change in treatment guidelines in the adjuvant setting. So we think that's still the right number. And I think we are just awaiting the final results to be generated and reported out by the investigators, and we continue to look forward to those when they're available.

Mike Brophy: On the gross margin, yes, I mean, I think the key delta to me is just that the second half could just presume 0 and true-ups, right. So that's a key difference between first half and second half. I do think that backing out the true-ups, as I've mentioned, I think it's kind of the organic kind of underlying gross margin. I think there's room for there to be sequential improvement both in Q3 and Q4. And so the guide is a blend of those couple of variables. So pretty bullish on the kind of organic underlying gross margin progression.

Puneet Souda: Okay. Got it. And if I could just squeeze a quick one around FMI. With the partnership termination, does that change your volume growth expectation for Altera or any impact on Signatera?

Steve Chapman: Yes, thanks. That's a good question. No, we mentioned we're not continuing the partnership going forward, and it doesn't change our guidance or our volume forecast at all in any way.

Puneet Souda: All right, guys. Congrats. Thanks.

Operator: Our next question comes from Tejas Savant from Morgan Stanley. Please go ahead, your line is open.

Tejas Savant: Hey, guys. Good evening and thanks for the time here. Sticking with the Signatera theme, Alex, can you share some color on just in light of the delay here and ASCO GI, I think it's Jan 23rd. Is early next year the right time frame for when we can expect a top line readout from you guys? And then in terms of framing that readout, right? So should the trial not meet that sort of 0.77 hazard ratio bar, you talked about, do you think we could still get enough evidence from the subgroup level analysis to demonstrate that Signatera performed as it should and it was the drug that failed to meet the bar. Just any color on those 2 points would be great.

Steve Chapman: Yes. So maybe I'll comment on the readout and then, Alex, you can talk about the performance. So yes, I think as we've got a ways out here now from ASCO GI, which is the next major conference. And as we get closer there, we'll kind of discuss the communication plan. I think we were planning to read out top line results if they were available a couple of weeks before the conference, but we'll meet with the PIs and decide what we want to do as we get a little closer to ASCO GI. Alex, do you want to talk about some of the subgroup analysis?

Alexey Aleshin: Yes, definitely. So I think the first question about asset performance. Signatera is being used in GALAXY. Altera is obviously a portion of that study. We published on assay performance in GALAXY. We're updating the performance estimates at ESMO, and that will also be published. So in terms of assay performance concerns, I think the data is out there and it's been published, and I think that's what we expect. Now in terms of subgroup analyses, here, I just don't even want to speculate. I think we're awaiting the final results. And depending what the results show, subgroup analyses may be important, may not be important. They're pre-specified. So we'll take a look at those as soon as that data is available to us as well.

Tejas Savant: Got it. That's helpful. And then just as a follow-up, one of your competitors recently talked about greater physician preference for tumor-naive approaches in the surveillance setting. Just due to apparently a lack of conviction that a tumor-informed approach can continue to provide relevant results given the time since diagnosis. So I'm just curious as to your take on that. And as we think about your MRD pipeline, you've got a few things in the hopper here. Is that one aspect that you will look to address either via an improved version of Signatera, perhaps a broader tumor informed panel or a tumor naive approach of your own?

Steve Chapman: Yes. So we think at this point, the decision on whether tumor-informed or tumor naive is going to be more successful. I think it's pretty clear, right? If you just look at the volume and the physician interest in the marketplace. And a question about kind of tumor dynamics over time, that's not really relevant. I think generally, we're looking at coronal mutations that are present even if there's developments in the tumor over time. So I don't really think the way that it's being described is relevant. Look, we always keep our eye out on what's happening with competition, what's happening in the marketplace. And obviously, we've been successful doing innovative things and innovating and evolving products over time, and we'll continue to do that as the market evolves. But I think at this point, things are pretty clear, the tumor-informed approach is clearly the chosen approach by physician.

Tejas Savant: Got it. Super helpful, guys. One final one for me. Just on ACOG, Steve, as you think about that as a catalyst, I mean, it's still in the framework, but do you think it happens between now and year-end? Or you just don't know and there's a possibility that this could slip to 2025?

Steve Chapman: Yes. I think we still feel very positive about ACOG guidelines, both for carrier screening and on 22q, and that's really grounded in looking at the data, looking at physician preferences and looking at the studies that have been done. So I think you will -- well, we expect to see something this year, and we feel very strongly that things are coming.

Tejas Savant: Awesome. Thanks guys, appreciate it.

Operator: Our next question comes from Matt Sykes from Goldman Sachs. Please go ahead, your line is open.

Unidentified Analyst: Hey, guys. Congrats on the quarter. My first one is, do you expect ASPs in women's health to decline at all for the second half, assuming ASPs, you mentioned will be stable in the second half with the sequential step-up in Signatera ASPs?

Mike Brophy: Hey, it's Mike. I'll take that one. Thanks for the question. No, we actually kind of model kind of stable ASPs in the women's health space for the second half. So do not expect a decline, which as the long-term follower in the car will recall, and that's a little bit of a deviation from the way that we typically guide. We've historically guided to some erosion in the ASPs, but that's just inconsistent with the momentum that we've seen in the women's health space. We've seen just continued progress really across the board in getting that long tail of recalcitrant payers that just reimburse particularly for NIPT. Now that it's been kind of the standard of care for a few years now, you kind of get this kind of conversion of that long tail of payers, and we're definitely seeing that now. So feeling very good about the women's health ASPs at this time.

Unidentified Analyst: Got it. And then is the CIRCULATE-France study that you're expecting data from shortly? Is that similar to the CIRCULATE-Japan study does it also have an escalation and deescalation arm? And what are you expecting there incrementally that's potentially different from the Japan study?

Steve Chapman: Yes. Alex, do you want to take that?

Alexey Aleshin: Yes, absolutely. So CIRCULATE-France, we're looking at the lower risk Stage 2 patient population where the benefit of adjuvant chemotherapy is hotly debated. The majority of patients in the -- probably the world are now giving adjuvant chemotherapy, but many of these patients still recur. So that is a study that's randomizing Signatera-positive patients after surgery in that kind of narrow stage defined patient population to either receive adjuvant chemotherapy or follow kind of the standard of care, which is observation. So in many ways, I would say it's pretty different than ALTAIR and I was asking kind of a postoperative adjuvant question. There is no deescalation arm since, again, these patients as part of standard of care are not usually getting adjuvant chemotherapy. So the Signatera negative patients are being just followed and their outcomes are observed, but there is no randomized deescalation component.

Unidentified Analyst: Got it. Thank you. And I forgot to mention this is Sean on for Matt. Thank you for the questions.

Operator: Our next question comes from Doug Schenkel from Wolfe Research. Please go ahead, your line is open.

Douglas Schenkel: I want to just go through a few loose ends on Signatera. So -- actually, I want to come back to the topic of competition, but let me put that to the side for a second. What's the mix of first-time tests versus surveillance as we sit here today? When you talk about COGS improvement, I'm assuming that's independent of mix. So that gets better even more so over time as the mix shifts towards more surveillance. And then kind of building off of this, keeping in mind that you seem to be on track to go Signatera revenue over 80% year-over-year. If we think of how you've been tracking on first-time tests, and then think about the annual tail of 4 more predictable tests per year for surveillance purposes the following year, and then you stack that on top of new first-time test growth, doesn't that mathematically support an outlook for sustained 50% maybe more volume growth in the year ahead?

Mike Brophy: Thanks for the question, Doug. It's Mike. Yes, look, what we've seen is, first, when we launched ALTAIR, obviously, there's very few surveillance tests in the cohort. Then we've kind of grown to where historically, it's been kind of gotten to like a 50-50 kind of balance, and it has been quite stable there for some time. It's continued to evolve, but I would characterize it very broadly. It's still kind of in that zone where you have very high compliance of patients staying with Signatera into the surveillance setting. And I think steady state, that's probably the vast majority of your volume, 75%, 80% of your volumes, like over time, mature product would be that tail of patients kind of getting surveilled in the recurrence monitoring setting. We haven't seen that progression happen as rapidly as you might expect because the top of the funnel just keeps getting filled. I mean they just continue to be kind of new account when physicians adopting the test, new patients coming in the top of the funnel. And so that's kept that mix much more balanced, okay. And so to your point, I do think that it's kind of a unique dynamic, the fact that you've got this kind of long-term ongoing relationship with the patient where you stack up kind of classes of patients that stay with the test. It does support, I think, a longer-term outlook for growth potential that we're quite excited about because we think that can be extremely useful to patients over time. And you have the two-parter, and I'm only smart enough to remember one part. So I ask the second one again.

Douglas Schenkel: So I mean I think it was essentially just the COGS improvements that you talked about, that's independent of mix. And I think you kind of just answered that because your mix is stable at 50-50. So I think we're going to like -- yes, exactly, yes. My follow-up is on competition. Garden reported data from the COSMOS study yesterday, specificity was 98%, sensitivity was 8. Recognizing that these studies are done in a way where it's hard to make perfect apples-to-apples comparisons. This seems to be well below certainly what we've seen in studies from you especially sensitivity, which, at least to me, looks like it was over 10 points lower. That said, Garden is clearly asserting that their study data is actually better than what we've seen with Signatera. Are you seeing anything that suggests this is equivalent or better than what you guys have presented and based on what's out there, what part of the market positioning would be at risk for you? And should we be contemplating any moderation in growth as folks potentially contemplate shifting to a study, which -- I'm sorry, an assay that may be more convenient. But from a performance standpoint, I think you'd have to once again view that convenience is more important than performance.

Steve Chapman: Yes, thanks. So I guess I'll say Garden's been out since, I think, 2021 promoting their tests, and we've seen them in accounts. We've seen them in the field. And they announced, I think, the COSMOS results maybe in January of this year. So that's been out there for a while. It's good that they've gotten the paper published. We don't think the dynamic really changes much. They've been out -- they've had the data out for 7 months now. So I don't think it will impact much. We feel really good about our test performance. 50 peer-reviewed publications plus multiple further studies in the pipeline. We're seeing 40% of oncologists use the product. Great operations. Things are going really well.

Douglas Schenkel: Okay, thanks guys.

Operator: Our next question comes from Tycho Peterson from Jefferies. Please go ahead, your line is open.

Tycho Peterson: Hey, thanks. A couple of cleanups here. I guess going back to ALTAIR I just want to make sure I understand kind of the pacing here. I think you previously talked about the CRC committee for NCCN meeting this summer and incorporating all tier. Now that's pushed out to next year. How do you think about timing of NCCN? And do you still think this is kind of a driver versus strictly U.S.? So that's the first question.

Steve Chapman: Yes, I'll take that. So look, so first, we were happy to see Signatera and MRD testing being incorporated already as a footnote and NCCN based on the data that's out there. And we're excited about this 36-month perspective overall survival data that's going to be read out at ESMO, which we think is a very positive thing. The committee, I think, previously has said they're looking for overall survival data in a prospective manner. Of course, we're looking for randomized data as well, and that's what we're doing all of these randomized clinical trials. So we can't always predict what's going to happen with the NCCN committee. But certainly, doing all these studies, I think, puts us in a positive position. It's also important to remember, as Solomon described. I think, in his section, the different used cases of Signatera, right. So we have adjuvant decision-making, which is largely covered by the GALAXY study. We then have surveillance with the notion of doing surgery with curative intent if you find a recurrence. And that's -- those 2 things are really driving a lot of the utilization today. And then you have the Altera study, which is looking at sort of a new paradigm of treatment on molecular recurrence, but it's not necessarily the indication that's been driving all of the growth that we've seen today. So look, we'll have to see, but we're doing everything we can. We're putting ourselves in the right position by doing these studies to see guidelines and see impact over time.

Tycho Peterson: And then, I guess, on kind of used cases. I think last quarter, you talked about some bumps in bladder cancer, ovarian cancer. Ovarian on the back of Medicare coverage. Can you maybe just talk a little bit about some of those newer indications and if you're doing anything around kind of market development there?

Steve Chapman: Yes. So we're actually seeing a lot of interest in these other areas. And one of the things I think that is great about the Signatera strategy is that we've been able to generate peer review data and get coverage in multiple different indications now. And in fact, in this last quarter, as Alex announced, we just had data on Merkel cell and now pancreatic cancer. So we're continuing to generate evidence in new tumor types, and those will all be submitted for MolDX. So when we've gotten coverage, we definitely see a bump as we go out and the sales team starts promoting in those indications. And then as we look towards 2025, actually, one of the exciting areas I think, is bladder cancer with the IMvigor011 results potentially being read out in 2025. So we continue to see a lot of interest across the board, and we think that the pan-cancer approach backed by strong clinical data is the right approach.

Tycho Peterson: Great. And then last one. Is it a little bit of a change in strategy on tumor naive for MRD? I think in the past, you talked about spending about $15 million this year on data sets and maybe some readouts just somewhere in the fall. Understanding, obviously, it's a smaller part of the market, not a huge focus, but I think you previously talked about spending on tumor naive.

Steve Chapman: Yes. So I think what we've said before is that we're definitely kind of looking at the competition, understanding what's happening, understand what physicians are interested in. We definitely think tumor informed is, I think, a winning approach at this point. But certainly, we are aware of what's happening in the marketplace and what types of test physicians are using. I think we've said we're innovating and we're doing different things, and we expect to announce some different MRD enhancements and product line extensions in the future. And I think we'll just have to wait and kind of see what those are. As far as early cancer detection, I think that's generally where we've talked about having that spend in the range of like $10 million to $15 million and having some readouts coming later this year, and those are actually on track. So we expect in the very near future to be able to give a readout on our progress in early cancer detection, which we're excited about.

Tycho Peterson: All right, thank you.

Operator: Our next question comes from Catherine Schulte from Baird. Please go ahead, your line is open.

Catherine Schulte: Hey, guys. Thanks for the questions. Maybe first on women's health ASPs, just regarding your comments on improving the fraction of tests you get paid on even without guidelines. Does that hold true on microdels? Are you seeing improved collections there? Or was that more of a carrier screening comment?

Steve Chapman: Yes, Catherine, good question. I'd say that's not the case on microdels. I think there -- the improvement is really going to come from a guideline change. I think what we're talking about is where there's a covered test and maybe the payers aren't paying when they're supposed to. And you need to really do things with the payer to try to make sure you get paid, like, for example, collecting medical records, appealing after an unjust denial, things like that. And we're just getting better at that as time goes on and we learn more. But certainly, the upside on something that generally doesn't have coverage like microdeletions still rests with guidelines and getting coverage in place.

Catherine Schulte: Okay. Got it. And then for Signatera, you mentioned, I think, over 40% of oncologists ordered it in the second quarter. What percent have ordered it at all cumulatively since launch? What portion of your sequential volume growth was from new ordering physicians versus penetrating existing accounts?

Steve Chapman: Yes. So we actually see, once doctors start using Signatera, they're generally pretty consistent. But obviously, there's groups across the board that have different ordering patterns. But I would say the typical pattern is they trial it out on a couple of patients. They like the experience, they see the clinical utility and then they start expanding into their practice, into other patients. Maybe other doctors within the practice start ordering the test. And then maybe they move beyond colorectal, would be around breast to other tumor types. And so I would say that once people get on board, generally, there's a very strong rate of recurrent orders and expansion within those practices. Now with that said, we definitely track new physicians coming on board, and we see a very healthy pipeline there of new physicians coming in with interest that maybe they were waiting for more data to come out, maybe they just -- they hadn't decided on the right timing for them to use it yet, but we're certainly seeing a lot of new people come in, in addition to expansion within the physicians that are currently using.

Catherine Schulte: Okay, thank you.

Operator: Our next question comes from Subbu Nambi from Guggenheim. Please go ahead, your line is open.

Subbu Nambi: Hey, guys. Thank you for taking my questions. Do you believe that the delay in the Altera readout will have any impact on market demand? I don't think so, but just wanted to confirm any signs that clinicians were holding off on adopting pending the readout?

Steve Chapman: Yes, that's a good question. So just as a reminder, what Altera is studying is sort of a new paradigm, which is treatment on molecular recurrence where you would need to go get approval for this particular drug to be used without clinical relapse. And so the vast, vast majority of the usage that we've seen today and the growth that we're seeing is based on different indications. And those indications are adjuvant decision-making, where the doctor is trying to make a decision about whether to give adjuvant chemotherapy or not. That's not being studied in Altera or just standard surveillance and recurrence monitoring for the intent of doing surgery because in colorectal cancer, in a significant portion of the patients, if you catch the cancer early, you can actually do surgery. And in many cases, the patients can be cured just from that surgery alone. So neither of those 2 indications are being studied in Altera. So the delay, obviously, won't have any impact on the current status quo. And I think we remain excited about reading the results out as we turn the corner into 2025 and potentially expanding the market opportunity further.

Subbu Nambi: Okay. That's super helpful. And consistently, our checks on Altera trial, it appears that even if it reads out positive, it could be practice changing just like what you said, a new use case. But if it reads out negative, Signatera ordering behavior wouldn't be impacted because I think they point out the trial design is complicated and there are multiple subgroups. Is this how you're thinking about it internally?

Steve Chapman: Yes. I mean, look, we've thought about it as potentially opening up a new area of growth. This idea of sort of treatment on molecular recurrence. And I think that's really the view of how we're looking at things. And of course, the core volume growth today and all the utilization or the vast majority utilization that we're seeing. And we're still very, very underpenetrated, I think, are on adjuvant decision-making and recurrence monitoring with the intent to do surgery. So we'll have to see how things go after the data reads out and what additional uptake we get from this.

Subbu Nambi: Perfect. Thank you, guys.

Operator: Our next question comes from Eve Burstein from Bernstein. Please go ahead, your line is open.

Eve Burstein: Great. Two for you. First one, you said that your base case is to add 9,000 to 10,000 Signatera tests per quarter. At this point, though, you've had two quarters in a row with test growth, clearly well above that. So two parts to this. One is part of the reason you've given for anchoring on that 9,000 to 10,000 members because you don't plan to increase your salesforce. But you're clearly seeing interest from the market. So why not increase salesforce at this point? And then two, given that strong tailwind from surveillance, even if you don't increase sales force, you'll have that working in your favor. So don't you think it's reasonable to increase the base case at this point?

Steve Chapman: Yes, that's a good question. And look, we're in a very underpenetrated market. There's lots of demand. We've been growing. We have seen two really strong quarters in a row, a very solid volume growth. But look, I think we have to just kind of stay conservative with our expectations as we normally are and try to outperform them, which we generally have been able to do. But look, it's hard to -- you can't judge things on a quarter-to-quarter basis because there's -- sometimes there's a different number of receiving days. Sometimes there's holidays. Sometimes there's big major conferences where doctors are at. And so I think part of the point of just sort of reiterating kind of the base case is just because things can fluctuate every quarter. But when you take a step back, you look at an annual basis, I think that's kind of probably a better way to look at things. But of course, we've given the same pitch before about the 8,000 to 9,000. I think we reiterated that in Q1, and then we delivered 13,000 units of growth. So it's just a kind of a standard baseline that we keep reiterating and has nothing to do with sort of our views on exactly how the next particular quarter is going.

Eve Burstein: Got it. Thanks. As a follow-up -- following up on the partnership with Foundation, you said that deciding not to renew that isn't changing your guidance or your forecast in any way. That partnership made a lot of sense strategically because you could piggyback off the 150,000 or 200,000 therapy selection tests they were doing and Altera is clearly well below that. So if you're not changing your forecast, it makes me think that the partnership wasn't really delivering a ton of value. Why not? And why not sort of fix the things that weren't going right for you? And then what, if anything, will you plan to change about your Altera marketing going forward to try to drive volumes there? Because I imagine that they, in turn, really could drive volumes for Signatera.

Steve Chapman: Yes, I would say, look, when you look back to when we signed the partnership back in 2019, I mean, things have really changed quite a bit since then, right. So Signatera growth has accelerated and grown immensely. And we're just in a very different place than we were back when we sell that partnership. And as a reminder, we were running the plasma test, but the partner laboratory was responsible for commercial distribution. And that can be a challenging situation to be in. And I think for business reasons, both sides decided that it didn't make sense to continue. But like I said, it doesn't impact our forecast. We're focusing on Signatera, the opportunity that we have with Altera, which I think we're doing really well on. We continue to do really well in immunotherapy monitoring where we've had very strong data where a lot of times, we see the Altera being ordered alongside those immunotherapy monitoring patients. So we're continuing to move forward in that indication, but it just doesn't make a lot of sense anymore to continue the partnership. It's sort of -- yes, we'll move it along.

Eve Burstein: Okay, thanks a lot.

Operator: We are out of time for questions today. This will conclude today's conference call. Thank you for your participation. You may now disconnect.

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