Yahoo Finance Natera, Inc. (NASDAQ:NTRA) Q1 2024 Earnings Call Transcript
Natera, Inc. (NASDAQ:NTRA) Q1 2024 Earnings Call Transcript May 9, 2024
Natera, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: 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 Inc. Q1 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Mike Brophy, Chief Financial Officer. Mike, please go ahead.
Mike Brophy: 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 Moshkevich, President, Clinical Diagnostics; and Alex Aleshin, General Manager of Oncology and Chief Medical Officer. John Fesko, 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 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 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. 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 numerical growth changes as we discuss our financial performance. And unless otherwise noted, each such reference represents a year-on-year comparison. And now, I'd like to turn the call over to Steve. Steve?
Steve Chapman: 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 breakeven in Q1 significantly ahead of schedule. Revenues were up 18% sequentially versus Q4 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 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 $1.42 billion to $1.45 billion 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 million 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 organ health, many of you saw the updated KDIGO 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 RenaCARE study. More recently, we were thrilled to see the publication of our proactive study at 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 3 IMvigor011 trial bladder cancer in which patients that remain 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 Signatera 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 Invitae 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 one 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 proactive publication and Renasight grew nicely as well, which is promising given that the updated KDIGO guidelines came out very late in the quarter.
And in oncology, we delivered our best quarter ever for Signatera unit growth. Double clicking on oncology volumes on the next slide, we typically seen our oncology units grow between 7,000 units 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 have of course see fluctuations in sequential growth as we've seen in the past.
The next slide shows the 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 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 ASP significantly outperforming across all of our major products. Women's health and organ health ASPs were up and Signatera ASPs were above $1,000 in Q1. We continue to make progress on Signatera 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 in revenue true-ups this quarter.
I think that's a very healthy sign for the business as it indicates that 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 launched, 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 cost [ph] in Signatera or 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 COGS reductions, and now those lean COGS 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 and 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 2022 Q guidelines or NCCN guidelines. Those would still represent further upside, along with continuing to execute the core strategy in very large underpenetrated 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 in the 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?
Solomon Moshkevich: Thanks, Steve. Onto some of the highlights from our clinical and product roadmap. In April, we were pleased to mark that we surpassed over 200 peer reviewed papers as a company. This chart highlights that we have pursued this strategy throughout the history of the company across all key areas of focus, with more than 85 papers in women's health, more than 75 in oncology and MRD, and more than 40 in organ health. We've also been published in some of the most highly respected journals in the world, including science, nature and nature medicine. These papers include major breakthroughs in patient care such as the smart trial with Panorama, the GALAXY study with Signatera, and the proactive trial with Prospera.
The latter of which was the paper that brought us to the 200 mark. We look forward to growing this even further as we continue generating meaningful evidence to support our roadmap and our mission. In women's health, as Steve mentioned, the launch of our new fetal RhD test was a major advancement in prenatal care and one that really differentiates Natera. The test can be performed alongside Panorama as early as nine weeks gestation and is designed to determine the fetal Rh status from a maternal blood draw. The launch is particularly timely right now, as OBGYNs are currently facing limited supplies of medication that are traditionally given to RhD negative women to prevent potential complications during pregnancy. The FDA warned about the shortage earlier this year, and following suit, ACOG came out with a statement just in April that supports the use of NIPT for fetal RhD testing, essentially to help conserve medication supply.
We are proud to offer this test at a time of critical need in the prenatal community. Beyond the shortage, we view this launch as a key differentiator for Natera on several fronts. First, the vast majority of other NIPT labs do not offer fetal RhD assessment, with only one other test on the market in the U.S. Second, Natera's test is backed by a large validation study that included fetal RhD status confirmed via newborn serology, which is the gold standard in more than 650 RhD negative pregnancies. This is roughly 10 times more patients with confirmed outcomes than validation studies from other labs. The performance was also outstanding, resulting in 100% sensitivity and 99.3% specificity. We believe these differentiators, coupled with a highly validated SNP-based technology that's already built into Panorama, will allow us to expand our reach into new physician practices.
Moving to organ health. We had some key announcements during the quarter for both Renasight and Prospera. Starting with Renasight, our genetic test for chronic kidney disease. We were pleased to see a recent guideline update from a leading medical society in nephrology, KDIGO, which stands for kidney disease improving global outcomes. KDIGO updated their clinical practice guidelines for the evaluation and management of chronic kidney disease. This is significant as the guideline had not been updated in more than 10 years. The guideline now includes a specific section about the use of genetic testing in CKD and offers a broad range of support, including number one, stating that genetic tests should be used, among other factors, to establish the cause of CKD.
Number two, noting that genetic testing can impact the clinical management of CKD patients, just as we saw in the RenaCARE study. And number three, recommending a list of clinical indications where genetic testing is particularly informative and that's a list which represents the vast majority of CKD patients. The updated guideline makes it clear that genetic tests like Renasight are an essential tool for nephrologists in the management of CKD patients. We believe this was a key milestone for the field of renal genetics and we expect this guideline to have a positive impact on clinical adoption of Renasight testing. In April, we also published the first major readout from the proactive trial, which was the largest prospective donor-derived cfDNA study in kidney transplantation, with data from the first 1,600 patients approximately.
The data demonstrated for the first time that Prospera is a leading indicator of rejection as donor cell-free DNA levels were significantly elevated up to five months prior to antibody mediated rejection and up to two months prior to T cell mediated rejection. These results show the value of using Prospera as an ongoing surveillance tool to detect rejections earlier, not just in scenarios that are for cause. Further, the proactive data once again highlights the outstanding performance of Prospera, with an area under the curve of 0.88 and a negative predictive value of 98%, in line with performance as published in the previous studies. In a pretty short time, Prospera has established itself as the premier choice in transplant monitoring, and based on this strong clinical evidence, we see growing momentum behind Prospera among transplant physicians in the market.
Finally, in oncology, on top of the record volume growth that we generated during the quarter, as Steve outlined, we had a steady drumbeat of trial announcements and publications that continue to demonstrate the clinical value of Signatera across tumor types. I'm going to hand it over to Alex to provide color on our progress in colorectal, bladder, breast and uterine cancers, starting with an update on the ALTAIR trial where things are on track. Alex?
Alex Aleshin: Thank you, Solomon. I'll start with colorectal cancer, in particular the ALTAIR study, where we have an exciting few months in store. As a reminder, ALTAIR is a treatment of molecular recurrence randomized, placebo controlled Phase 3 study in colorectal cancer that is part of the ongoing CIRCULATE-Japan study. We've been working closely with our partners in Japan and are looking forward to approaching the key milestones you see outlined on the slide here. First and foremost, we recently surpassed the pre-specified target of 190 events for the trial, which is a key step in getting to the next phase of statistical analyses for the readout. After completion of data analyses by our collaborators in Japan, we plan to announce top-line results in August.
We expect to present the complete analysis, including primary and secondary endpoints, at a major conference in the fall, and by the end of the year we plan to submit the study for peer reviewed publication. We're very excited to share these results with you. As we do believe that this study, if positive, may be one of the most impactful readouts in early stage CRC in quite some time. Also in colorectal cancer, we recently announced in March our participation in the CIRCULATE-France trial, which is another randomized Phase 3 study. We were pleased that Signatera was selected based on the well validated assay performance characteristics for patient enrollment into this study, which is the only ongoing randomized trial dedicated to studying the benefit of ctDNA testing in low risk Stage 2 colorectal cancer.
It complements our data generation in both CIRCULATE-Japan and North America trials, which are also studying MRD guided treatment in colorectal cancer, but in a higher risk population. CIRCULATE-France specifically addresses the need for a personalized approach in a population who currently does not receive chemotherapy as the standard of care and with over 44,000 people in France diagnosed with colorectal cancer each year, we believe this trial has the potential to improve outcomes for many of these patients and pave the way to adoption and reimbursement of Signatera in France and possibly the European Union. We also had compelling data released in bladder cancer from the ongoing IMvigor011 trial, which is an international randomized Phase 3 trial being conducted in collaboration with Genentech.
This is the first time that prospective Signatera data from an ongoing Phase 3 global study was presented a milestone for our evidence generation strategy. The first analysis was presented in March at the European Association of Urology Conference and included post surgical outcomes of 171 patients with high risk bladder cancer who serially tested negative with Signatera. The analysis showed that patients who remained Signatera negative without treatment at disease-free survival rates of 92% at 12 months and 88% at 18 months. Furthermore, the overall survival rates were 100% at 12 months and 98% at 18 months. This was a significant improvement versus the baseline expectations set by prior biobank studies, which further underscores the importance of prospective evidence generation.
These results have been generating interest in the medical community and give us increasing confidence that patients who are Signatera negative after surgery and remain negative under surveillance might be able to be spared from adjuvant therapy, which is the current standard of care for high risk patients with muscle invasive bladder cancer. This concept is being formally evaluated in the randomized NCI sponsored modern study, which we discussed in detail during the last earnings call. While this first analysis covered only MRD negative patients, the MRD positive arm of the trial, which is investigating the efficacy of Genentech atezolizumab drug versus placebo, is expected to read out early next year. That trial result is expected to serve as the basis of our first FDA submission for Signatera for a companion diagnostic label in bladder cancer.
We are optimistic on what this data could mean for the role of Signatera in clinical practice, as well as the potential to tailor treatment and improve outcomes for the more than 150,000 muscle invasive bladder cancer cases diagnosed globally each year. Moving to the next slide. Here you can see meaningful data we've generated in common cancers affecting women. Earlier this year, we had a new publication in gynecologic oncology validating the use of Signatera in resected uterine cancer. This is especially timely and important as new diagnoses are rising in the U.S. and mortality rates are also increasing, which is at least partially due to an increase in diagnoses of the more aggressive subtypes of this disease. In this study of real world Signatera utilization, we looked at 267 plasma samples drawn after surgery from 101 women with uterine cancer.
As you can see from the Kaplan-Meier curve on the left, the results demonstrate how Signatera is a powerful post surgical predictor of recurrence. All patients who were Signatera negative after surgery remained recurrence free. All Signatera positive patients had a 15 fold worse recurrence free survival. Moving to breast cancer, we announced the publication of an expanded cohort from the EBLIS study. The original cohort of 49 patients was published in 2019 with up to five years of clinical follow up. The new expanded cohort had Signatera monitoring in 156 patients across all subtypes of breast cancer, with over 1,000 plasma time points being analyzed. It also had clinical follow up of up to 12 years, which we believe is the longest in the field of ctDNA monitoring.
Samples in the study were collected every six months starting after the completion of definitive therapy. Patients who were Signatera positive had over a 53 fold increased risk of death compared to those who tested persistently negative on Signatera. The diagnostic lead times were also longer than before, with Signatera detection of recurrence up to three years before imaging being observed, with median lead time of ten and a half months. Altogether, these findings BOLSTER the evidence for long term monitoring of breast cancer patients who often face late recurrences. These publications build on our commitment to be a leader in women's health. This includes our recent MolDX approval in ovarian cancer as well as our expansion of breast cancer coverage to the neoadjuvant setting.
Lastly, we continue to make progress on an early cancer detection program with judicious utilization of resources and a data first strategy. We are completing a large case control study and we plan for the data to be announced in June. In addition, as we stated before, we are prospectively collecting a large screening cohort of colonoscopy matched blood samples and we plan to share the results of that study in Q4. With that update, let me hand the call back to Mike to cover the financials. Mike?
Mike Brophy: Great. Thanks, Alex. The next slide is just a summary of the P&L l in Q1 and the year-over-year progress we've made. Steve covered the key points on revenues and margins, so I won't repeat them here. On the expense lines, we've made several growth oriented investments in SG&A over the past year, for example, picking up the women's health sales team from Invitae and doubling down on our staffing and technology investments and revenue cycle that we've described previously. We also had some elevated litigation expenses in the quarter given all the activity we had on the IT front in Q1. We stepped up R&D modestly, in part with the goal of accelerating several product launches in the near future, the first of which is the time sensitive Rh launch Steven and Solomon described earlier.
I think each of these investments are delivering strong ROICs as evidenced by the significant bottom line improvement year-on-year in EBITDA, EPS and of course cash burn, where we burned $86 million in Q1 last year and broke even in Q1 this year. I was particularly pleased to see us break even on cash flow this quarter, given the disruptions to the entire healthcare payment system caused by the change healthcare cyber attack. Change is not a direct vendor to us, but the attack nonetheless caused several weeks of confusion and delayed claim submissions as change is a very large claims and payments clearinghouse. Though I still think the impact is ultimately immaterial to our results. We are still dealing with backlog responses from payers and I think the cleanup will last well into Q2 at least.
The good news is that our team was able to move quickly, find some alternative pathways to get claims submitted and responded, and our overall positive momentum on volumes and ASPs allowed us to keep deliver above plan. Okay, good. Let's get to the revised financial guidance on the next slide on revenues. We are now expecting $1.42 billion to $1.45 billion for the full year 2024. This represents a bump of about $100 million at the midpoint, as compared to the roughly $20 million beat in the quarter when removing the revenue true-ups Steve talked about. The annual revenue guide now implies about 33% revenue growth versus 2023. We experienced a huge organic step up in women's health, as you saw in the earlier slides, which was further amplified by the [indiscernible] addition in Q1.
As a reminder, there's a pronounced seasonality in our women's health volumes, so we wouldn't be surprised to see some modest pullback in Q2 volumes as we've seen in previous years, then see sequential growth in the women's health business again in Q3 and Q4. We are off to a strong start again in oncology volumes in Q2, though I wouldn't expect the same kind of step up we saw in Q1. We've got great momentum going in Signatera and expect continued sequential growth in Q2 and beyond this year. The guide implies ASPs remaining stable at these levels across women's health and oncology for the rest of the year. We think that's appropriate because there can always be quarter-to-quarter fluctuations in ASPs, but if we can continue to drive them higher, as Steve described, that would be a source of upside to the guidance.
So the revenue guide implies that we will build on the strong volume base we've established in Q1 and continue to benefit from the ASPs we are seeing now at this level. As Steve mentioned in his section, we are already ahead of schedule for our COGS forecast, and so the guide implies stable cogs for the remainder of the year. We've got a number of product and lab workflow launches planned for this year, which usually generates some temporary transition costs, but I think those can be balanced out by the efficiencies we've already achieved in Q1. So those are the assumptions driving the increase in our gross margin expectations for the year. The operating expense guide implies that quarterly expenses will remain relatively flat, flat compared to Q1 for the rest of the year.
This should allow for room to make incremental growth investments in sales and operations and R&D as a chunk of the Q1 SG&A spend went to all the IP related litigation activities and a one-time non cash true-up related to a stock-based comp. While we will continue to defend our IT, I don't expect that level of legal activity to repeat every quarter. As Steve described, we are in position to keep making investments to stay in the lead and still grow revenues much faster than expenses. You can see the result of that formula on the cash burn guide, which now has us cash neutral at the midpoint of the range. Now that we are operating at this breakeven level, it's important to understand that we will expect to have fluctuations in quarterly cash burn due to timing of capital expenditures and working capital.
As Steve described, the timing of reimbursement from payers can easily vary in a given quarter, and the changed healthcare breach is a good example of how that can happen. So, I fully expect 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 gradually narrow through the course of the year. Okay, the next slide we'll do quickly. I was looking back at the Q1 2022 earnings call deck while preparing for our call today, and I thought this long range model from that presentation was an interesting slide. This is the exact slide we used when setting the goal of getting to a cash flow breakeven quarter in 2024, and you can see that our results this quarter mirror very closely what we had forecasted back then.
Specifically, we thought we could get to roughly $1.4 billion in annual revenues at mid-50s gross margins on stable operating expenses in 2024, which is essentially what we're showing today. I think most investors discounted this target at the time as being overly aggressive, but we have a lot of conviction in this model because starting with Steve, our executive team spent a lot of time and effort forecasting the business. One final slide on the next slide, just to summarize a few of the potential key catalysts to watch more for the remainder of the year. Of course, we will remain focused on driving quarterly results and hope to have more earnings calls like this one. As of today, we've been able to deliver strong results without the tailwind of updated women's health guidelines in carrier screening or microdeletions.
As usual, we don't include any guideline expectations in our guidance because the timing of these updates are completely out of our hands and hard to predict. Still, we continue to expect updated guidelines in both microdeles and broad panel carrier screening, and wouldn't be surprised to see one or both of them arrive in the near term. The ALTAIR study continues to progress on schedule, and while the timeline is ultimately in the hands of the investigators, we continue to expect top line results to be released in August, subject to variances caused by investigative data analysis and the embargo requirements of various academic conferences where the data may be presented. We've got a number of additional cancer types in the pipeline for MolDX coverage, and we hope to be able to announce several additional coverage decisions this year.
We also have submitted an LCD for Renasight and hope to report on further progress on that later this year. We spent a good amount of time on biomarker states during our Q4 call, so we didn't want to rehash that content again today, but we are pleased with the early traction we are seeing. We continue to think that while the positive impact is most likely to be seen in 2025, progress through the course of this year on biomarker related reimbursement would further enhance our results. Finally, we are pleased to be able to announce our first major product launch of the year with RhD testing, and we've got several more slate to launch later this year and look forward to announcing those as they go live. Okay with that, let's open it up for questions.
Operator?
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