Welcome to Natera's 2022 Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will hold a Q&A session. As a reminder, this conference call is being recorded today, August 4, 2022. I would now like to turn the conference call over to Michael Brophy, Chief Financial Officer. Please go ahead.

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our second quarter of 2022. On the line, I'm joined by Steve Chapman, our CEO; and Solomon Moshkevich, General Manager of Oncology. 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 available at investor.natera.com. 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, 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 4, 2022. 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 we'll 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?

Thanks, Mike. Let's get into Q2 highlights on Slide 3. As you can see from the press release, we had another strong quarter in Q2. Revenues grew approximately 40% over Q2 of last year. And we reached an incredible new milestone by processing 500,000 tests in a single quarter, growing more than 33% over Q2 of last year. We achieved this growth rate despite the fact that Q2 of last year had a large onetime benefit from a competitor exiting the NIPT business. We saw a strong continued sequential growth from organ health and oncology products, strong ASP gains in Signatera in NIPT, and we further strengthened our NIPT market position. We estimate our Panorama test now commands roughly 50% market share in this expanding market. This business momentum enables us to again raise our 2022 revenue guidance to $805 million to $825 million, an increase of $15 million at the midpoint. Pro forma for last year's onetime QIAGEN revenue of $28.6 million, this new range implies an annual revenue growth of 37%. Mike will cover this in detail later in the call, but our progress so far this year makes us even more confident on our path to cash flow breakeven in mid-2024. As good as the Q2 results were, they were negatively impacted by a timing difference of about $3 million worth of volumes that were accessioned in our lab but not reported out until early July. So we took the expenses on that testing in Q2, but we'll recognize the revenue and margin benefit in Q3. Therefore, we believe the printed results actually understate the momentum we think we are seeing in the business right now, and I think the rest of these highlights show that we are just getting started. We recently announced that we've been…

Thanks, Steve. The big news in oncology was MolDx's decision to cover Signatera for muscle invasive bladder cancer under its umbrella LCD, which we announced in July. This is our fourth coverage decision by Medicare for Signatera after early-stage colorectal cancer; then a follow-on extension for Stage IV oligometastatic colorectal cancer; then third, the pan-cancer immunotherapy monitoring; and now, bladder cancer. We expect the coding and pricing will be similar to CRC with coverage effect as of April 19. Based on the communications we've had from MolDx, we believe coverage will include the neoadjuvant, adjuvant and recurrence monitoring settings. With about 81,000 newly diagnosed cases per year, bladder cancer is the sixth most common cancer in the U.S. generally split into muscle invasive and non-muscle invasive. Signatera's coverage in muscle invasive disease on the right side of the page represents, we believe, about 35,000 new patients per year. With a median age of diagnosis at 73, we expect a heavier Medicare mix in this patient population than we see in CRC. Based on our anticipated testing schedule, which itself is based on current NCCN guidelines for imaging, we believe this implies approximately 400,000 Signatera tests per year at full adoption. As a reminder, to put this in perspective, that is more than 2x the size of the entire breast cancer gene expression testing market, which has been a very important area for diagnostics in the past. But most importantly, this will have a big impact on patients and patient care. To better understand the clinical utility of Signatera in this population, let's take a look at the patient journey. Today, guidelines recommend starting with a TURBT procedure which stands for a transurethral resection of the bladder tumor. This allows for pathological staging and assessment of the tumor's invasion into the…

Great. Thanks, Solomon. The first slide is just the standard financial results for Q2. Steve covered the key trends on volumes and revenues. As Steve mentioned, revenues would have been roughly $3 million higher in the quarter, if not for the timing difference between accessioning in the lab and reporting out the units, which is the event we need to accrue revenue. So that also artificially held down gross margins in the quarter, and I expect Q3 gross margins to be a little higher than usual as a result. Steve touched on the fact that new account starts were really strong in Q2. In women's health, we have a sustained track record of adding 250 to 300 new physician offices ordering per month on a base of approximately 20,000 customer accounts. We saw another quarter of good sequential progress on clinical Signatera ASPs. We've now moved from the ASPs in the 500s last year to roughly $650 in Q1 to now just above an estimated $700 in Q2 for the clinical ASPs. With clinical COGS now in the low 500s, we are still gross margin dilutive. But that progression is absolutely critical, given that the volumes continue to exceed our initial sales targets. We are armed with another coverage decision in our favor, and we are optimistic about starting to get some commercial coverage traction as Solomon described. I think that sets up for more ASP progress on Signatera in the second half of the year. NIPT ASPs were up sequentially again this quarter, and we think there's more room for progress on women's health ASPs in the second half of the year. The balance sheet remains strong. We used substantially less cash in Q2 as compared to Q1 this year. We expect quarterly cash usage to continue to drop…

[Operator Instructions] Our first question comes from Tejas Savant with Morgan Stanley.

Congrats on a strong [indiscernible] here. My first question is on reproductive health. Steve, can you talk a little bit about the opportunities for share gain that you alluded to here, particularly given some of the competitors going through internal restructurings? How much of that is playing into your outlook increase? And then as we think about sort of the Roe versus Wade decision, is there a possibility here of microdels getting into guidelines sooner off that? And how should we think about the revenue implications? Is that sort of a '23 situation?

Yes. Thanks for the question. So I think on the share gains, we think it comes down to a lot of things. I think largely that we generated significantly more clinical data supporting the validation and the performance of Panorama than any other NIPT company. And in addition, there's about nine points of clinical differentiation where we offer things that others simply can't do. So I think it's largely those two things, combined with our focus on user experience that are driving our share gains. Of course, as others pull back their investments both in their commercial infrastructure and also in R&D, I think that does benefit us. But largely, I think we're benefiting from the data and the clinical differentiation. On the 22q side, we've talked a little bit more in this earnings call about the possibility of society guidelines being updated in the near future. There's a very strong clinical utility resulting from doing prenatal testing for the 22q deletion and that's outlined in the SMART study, which was the largest prospective trial that's ever been done in the space that was published in January of this year. So we do think that there's a likelihood, a possibility that society guidelines change in the near future and include 22q as part of routine prenatal screening. And I'd just say that we feel more confident now than we have in the past that those guidelines are going to change.

Our next question comes from Dave Delahunt with Goldman Sachs.

Guys, congrats on the strong quarter. You see the ASPs going up. Could you double-click on that and give us a little bit more color on what's going into both NIPT ASPs going up as well as the Signatera getting up into the 700s now?

Yes, Mike, do you want to take that?

Yes. Good. Yes. Thanks for the question, Dave. Good to talk with you. Yes. I mean, look, no surprise, right? I think on the Signatera ASP, it's largely what we had high hopes and expected for at the beginning of the year, which is our Medicare mix is increasing, the number of chemotypes that are reimbursed are increasing. And we're just getting further into launch. And so you're going to just have more and more patients that are actually falling into these reimbursed categories that could get further into the launch. So it's really a pretty natural organic progression on Signatera as we're very focused on, obviously, because those lines are really ramping. So on the NIPT side, it's -- again, it's pretty predictable. It's -- there's a significant chunk of -- especially state plans that haven't historically priced or covered NIPT. There's been some other barriers to kind of getting reimbursed for those patients and though that's gradually improving, whether it's kind of administrative barriers stopping us from getting the reimbursement for a covered test or just new coverage policies coming online. So those are kind of the main drivers.

Our next question comes from Catherine Schulte with Baird.

What are you expecting in terms of -- for muscle invasive bladder and any contribution to guidance there? And related to that, I think you've seen stronger adoption in [longer] patient population for CRC. And given the older SKU for bladder, is that something that you would anticipate being a rate limiter for adoption?

Yes. Solomon, do you want to take that?

Sure. Happy to. I actually didn't quite hear the very first part of your question, Cathy. Was it -- what we expect for commercial adoption in bladder cancer? I guess we can't hear her anymore. But yes, I'll answer the second part. Certainly, the -- with the median age of diagnosis at 73, we do expect a bigger Medicare mix there, a heavier Medicare mix, which is going to be positive for ASPs. And we don't expect that necessarily to weigh down anything in the adoption curve. The enthusiasm and receptiveness that we've encountered thus far among GU oncologists is quite significant given the unmet needs that they have today in managing our bladder cancer patients.

Yes. Let me just add on commercial adoption, I'll say we're already seeing a nice increase in the utilization in muscle invasive bladder post some of these publications coming out. And post the coverage decision, there's been, I think, a lot of positive buzz. So I think we're feeling good about it. I think when you look at the overall TAM, it's about maybe 1/3 of -- maybe between 1/3 and 1/2 of what we had announced previously for colorectal, so that's potentially a good benchmark. But the other thing that I think is really unique here is that there's very limited data, I think, from competitors in this sector in muscle invasive bladder. And I think that's an opportunity for us to really kind of, on the long term, have a very significant outsized share of this particular segment of the market, which, I think -- which is a great benefit.

Our next question comes from Max Masucci with Cowen.

Just the first one, if you look at Slide 20 in the deck, it highlights the mid-2024 target for quarterly cash flow breakeven. In the prior Q1 slide deck, it suggested that $1.3 billion to $1.5 billion revenue run rate and 55% gross margins would get you there to breakeven. So if we just look at that mid-2024 target on Slide 20, it seems to imply that $1.3 billion to $1.5 billion in revenues could be a reasonable target for 2024. Just looking at consensus, it's just north of $1.2 billion. So it's more of a broad question of just about how we should think about that, bridging those two numbers and the confidence that we can have in our modeling for the growth segments?

Yes. Matt, thanks for the question. Good to chat with you. So yes, so look, all that stuff is roughly right. I think the distinction is that what we're calling for us in getting to a quarter where we're kind of crossing over that cash flow breakeven threshold as distinct from like a full year revenue number. So there's just a little bit of nuance there. And that's a question we often get is just kind of which quarter does that -- roughly what the timing is. I do think that our -- with our confidence on getting to that level has increased as the year has gone on because of all the commentary we provided in the prepared remarks. It's the headlines of continued commercial traction, the continued progress across all points of the business gives us more comfort to give -- provide a little bit more precision around a quarter. I don't think that necessarily implies that there seems to be a disconnect in terms of the numbers that were put out previously versus the model. I think it's just a distinction of like getting to a specific quarter.

Thank you. Our next question comes from Puneet Souda with Leerink.

So first one is really around NCCN. Can you just provide any updates there in terms of Signatera? And any studies or things that you have submitted or anything that you expect here in the second half?

Yes, I'll take that. And Solomon, maybe you may want to add something additional. So I think we're feeling positive. Although we don't control the guidelines, I still think that there's some good discussion happening with KOLs that we're feeling positive about, both from the data that we've generated and also from the data from the DYNAMIC trial that was presented previously. So I think that there is a good opportunity for guidelines to potentially change in the summer or later in the year, like the December time frame. The biggest contribution that we'll be making to that will be the publication of the CIRCULATE-Japan study. And that paper is now in submission as we said it would be. And there is a possibility it could be published sometime this summer or in the early fall. And one of the key updates is that the follow-up for that study has now been extended to 18 months. And I think that just makes the paper even stronger than it was before and I think well positions that to really drive guidelines if they haven't changed this summer based on the existing data. Solomon, feel free to add to that if you'd like.

Yes. I'll just add two things. First, we do not think that publication of the GALAXY data in August is gating for a change in the guidelines, though we've done everything we can to accelerate that. And again, the reason we don't think it's gating is just because there has been so much other data now published and presented in the field that has really impacted how leading GI oncologists think about utility here. And as Steve mentioned, the DYNAMIC trial from Australia was a welcome addition to the overall body of evidence supporting ctDNA.

Our next question comes from Julia Qin with JPMorgan.

Can you hear me now?

Yes.

All right. Could you give us an update on the current mix between first-year patients and recurring patients? And in light of the expanded coverage, what kind of ASP trajectory are you expecting for Signatera over the next few years?

Yes. Let me comment on the first one. And then maybe, Mike, you can talk about the ASP trajectory. So long term, when you look at the number of patients that are living with cancer versus the number of patients that are diagnosed every year, obviously, there's way more patients that are living with cancer. And so over the long term, we think that there's going to be a very significant shift to the recurrence monitoring indication. What we're seeing now though is just the demand and the uptake for the test is still high that we're seeing like a very large number of new patients coming in, and these are patients that are using the test for the first time. And as we -- our commercial and clinical team meet with more doctors, there's a lot of these patients coming in for the first time at their first time point. Now we are seeing, over time, over the past two years, a shift in the volume towards the recurrence monitoring and longitudinal tracking segment, which is what one would expect. But obviously, it's not going to fit with this sort of population dynamic just because we do have this significant number of new patients coming in. Mike, do you want to comment further on the ASP?

Yes. I mean I think those drivers actually influence ASP quite a lot. I think in summary, we think that the current ASP is quite immature for Signatera, and it's really a function of volumes expanding in these reimbursed populations, having more of these populations covered by Medicare, where we feel like we can really make a huge difference to the care in these patients. The clinical utility that we've demonstrated, I think, in some of the data that we published, particularly the prospective data in colorectal cancer, we think is really compelling. And obviously, that would then direct guidelines, which, of course, guidelines would then drive a broader commercial coverage. All those things are areas that we expect to have happen over the next few years in Signatera, which would drive ASPs significantly higher and make this business something that works for everyone.

Our next question comes from Mark Massaro with BTIG.

This is Vivian on for Mark. So could you share with us at a high level what some of the key milestones or catalysts will be for your early detection program? Could you also share any learnings you may have gleaned from potential discussions with the FDA as it relates to clinical trial development or size of patient enrollment?

Yes. Thanks for the question. So as we said before, on early cancer detection, which is a priority for us, what we're doing is we're leveraging the data that we have on early-stage tumor exomes, and we've used that to generate a proprietary targeted panel of DNA mutations. We're combining that with methylation signatures, both available from public databases but also that we've developed ourselves and that we've licensed from our partnership with Aarhus University. So we're taking the DNA combined with methylation and we plan to run that and generate some data looking at the performance of the test. The initial performance looks good, and that's prompted us, obviously, to continue with the work. But we plan on having a kind of more significant readout, I would say, later in '22 at some point in kind of the first half of '23 roughly. The biggest milestones in front of us are getting feedback from the FDA. In fact, we've already done our pre-submission to discuss the clinical trial that we are participating in. And we're looking forward to that meeting, which will be coming up in the next couple of months. And then post that, we'll be understanding their feedback, adapting our trial strategy if need be and then generating more significant proof-of-concept data, as I mentioned in the next kind of year or so.

Our next question comes from Alex Nowak with Craig-Hallum.

This is Connor on for Alex. I guess, first, I was hoping on some color around the competitive environment in MRD test. As I'm sure you all know, Guardant Health got their test covered. But I mean, do you expect some of these tests to be solely used for adjuvant decision-making and others used for recurrence monitoring? Just some thoughts there would be helpful.

Yes. Thanks. So from a competitor standpoint, I think we think that we're doing exceptionally well. I think in physicians' minds, we're seeing that the tumor-informed approach is the winner. We think we have the vast majority of the market share at this point, and we're in a very good position. Most of that is driven by the breadth and depth and quality of our peer-reviewed data. We think physicians will want to use the same test for the MRD time point and adjuvant decision-making as they will for recurrence monitoring. And when you look at our local coverage decision from Medicare based on the data that we've generated and the peer-reviewed evidence that we've had, we've received coverage for both the MRD time point adjuvant decision-making in addition to longitudinal monitoring or recurrence monitoring. And we think that that's really important long term. Similar, when you look at muscle invasive bladder, we've now received coverage for neoadjuvant for MRD adjuvant and for longitudinal recurrence monitoring. Again, I think just showing that we have super high-quality data and the breadth of our data is outside of just one narrow indication.

Our next question comes from Mason Carrico with Stephens.

Sorry about that. Maybe to hit on Prospera kidney for a minute. Could you update us on penetration in the kidney centers? How many centers are you receiving orders from? And then thinking about the components of growth there, how much is coming from untouched greenfield opportunity? And are you guys taking share there as well?

Yes. Thanks for the question. So I think from a volume standpoint and a growth standpoint, we're doing well. We're seeing volume increasing. We're hitting record numbers every quarter. Physicians are giving very positive feedback post the publication of the Trifecta study, which was the largest multisite prospective fully biopsy-matched study that's ever been performed. We've continued to get excellent feedback. So we think we're in a good position. We're working with the vast -- well, I'd say, with the majority of transplant centers at this point. I think previously, we've said roughly in the range of 50% or something in that range but that continues to increase. From a penetration standpoint, we think the overall market is probably about 10% penetrated, and that means the vast majority of patients today still aren't being monitored with donor-derived cell-free DNA. And we think that's where the biggest opportunity lies. Now there are some centers that haven't yet adopted donor-derived cell-free DNA. There are some centers that are using it in a selective way. But as things -- more data is generated and as physicians start to use donor-derived testing more frequently in their practice, obviously, there's a large opportunity to help patients.

Thank you. This concludes the Q&A session. Thank you for participating. This concludes today's conference call. You may now disconnect.