Hello. Welcome to Natera's 2023 First Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, May 9, 2023. I would now like to turn the call -- conference call over to Mike Brophy, Chief Financial Officer. Please go ahead.

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our first quarter of 2023. On the line, I am joined by Steve Chapman, our CEO; Alex Aleshin, Chief Medical Officer, stepping in for Solomon Moshkevich, who wasn't able to join the call today due to company business; and John Fesko, Chief Business 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 close to our IR site as soon as it's available. Starting on Slide two. During the course of this conference call, we will make forward-looking statements regarding future events and our anticipated future performance such as our operational and financial outlook and projections, our assumptions for that outlook, market size, partnerships, clinical studies, opportunities and strategies and expectations for various hiring future products, including product capabilities, we expect to release dates, reimbursement coverage and related effects on our financial and operating results. We caution you that such statements reflect our better it based on the factors currently not a and 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 forward-looking statements. Forward-looking statements made during the call are being made as of today, May 9, 2023. 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 form 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?

Great. Thanks, Mike. As you can see from the highlights, we are off to a very strong start as we continue to drive robust financial performance maintain our leadership position in cell-free DNA analysis and achieve important milestones across the business. We process roughly 626,000 tests in the quarter, up 28% from Q1 of last year and 12% sequentially versus Q4. We generated $242 million in revenues in the quarter, which was a major increase, both versus Q4 and year-on-year. We also saw strong volume growth. We performed 71,000 Signatera and Altera test in the quarter, which is more than 100% growth versus Q1 of last year. We saw a very strong step-up in clinical volumes over Q4 of last year and is generating continued momentum this spring. As a result, we are pleased to be raising our annual revenue guide that we just set two months ago. We are moving to a new range of $995 million to $1.015 billion for the year. The rest of the elements of the guide will remain the same for now. We are on pace to hit our margin target of 41% to 44% and hit our reduced cash burn target of $300 million to $325 million. You will see our quarterly cash burn in Q1 cut almost in half versus Q1 2022, and we feel we're on track for our 2024 cash flow breakeven goal that we previously announced. In addition, we've been conservative with the impact of guidelines for 22q and expanded carrier screening and MRD testing in our ASP forecast. Note that these guidelines are not necessary to achieve our financial goals. We continue to extend our leadership position in women's health with two significant NIPT publications in a third paper that has been accepted for publication. We now have…

Thanks, Steve. As a reminder, we also have a chronic kidney disease genetic testing product line, Renasight. Renasight looks at conditions like polycystic kidney disease, or Alport syndrome, in germline DNA of those patients who have already been diagnosed with CKD. In the future, we think every patient who is diagnosed with CKD could get genetic testing. The market opportunity is potentially very large because over one million patients in the U.S. are diagnosed each year, and there are about 37 million patients in the U.S. living with CKD. To help define the clinical utility of genetic testing in this context, Natera sponsored the definitive RenaCARE study. We started working on this in 2019 and collaborated with leading investigators from Colombia, Yale, Penn, UPMC, NYU, Mayo, Cleveland Clinic and others to design the study. We completed enrollment last year with more than 1,600 patients from over 30 centers. The RenaCARE study is designed to eases the incidence of genetic conditions in the CKD population and then importantly, how Renasight's genetic findings could impact clinical management. Some have asked us what success looks like in the RenaCARE state. While we're waiting to publish the results, the best proxy we found is hereditary cancer testing. We talked about this last quarter, but I think it's an instructive comparison. The previous large study of nearly 3,000 cancer patients published in general oncology, 13.3% of patients had a pathogenic germline variant indicating hereditary cancer. Of those patients with a high penetrance variants had resulting treatment modifications. At RenaCARE reached out, we will be looking at these same metrics, including the fraction of study participants who have a pathogenic variant associated with CKD as well as what fraction of patients who test positive had their treatment modified after the pathogenic variant is discovered with Renasight,…

Thanks, John. First, let me provide some detail on the data road map in colorectal cancer. As we predicted, Signatera was not included in the updated NCCN guidelines that were published this spring. This is because the CIRCULATE Galaxy paper published in January and was unavailable for the NCCN systemic evidence review process that occurred prior to the August meeting and therefore, was not included in the committee vote. Nevertheless, we are pleased to see that the 18-month real-world prospective data merit an inclusion in the discussion section of the updated guidelines and that Signatera was acknowledged as having prognostic and predictive value. Now that the CIRCULATE GALAXY data has been published and highlighted on the cover of Nature Medicine, we plan to submit the peer reviewed data in time for the 2023 systemic evidence review. While it's possible that the GALAXY study may be sufficient to change NCCN guidelines, we know that the NCCN committee referenced the need for more data in both the adjuvant and surveillance study. The good news is that this data is already coming. There's a randomized biobank study in the adjuvant setting that is expected to read out later this year, followed by the prospective Altera data expected in 2024, which would address both the adjuvant and surveillance questions. Furthermore, the randomized de-escalation arms of the Japan and U.S. CIRCULATE continue to enroll out. with the readouts currently anticipated in 2026. There are also several nonrandomized trials that we expect will be at the field, including a large commercial experience study that will be submitted for publication later this year, extended follow-up from the GALAXY study, plus the BESPOKE trial where enrollment is now complete and which has relevant endpoints in both adjuvant and surveillance settings. With these many shots on goal, we believe…

Thanks, Alex. The next slide is just a summary of the quarterly financials versus last year. Steve covered the encouraging revenue and volume trends and the three market share initiatives that we've been taking to set up the business future growth at the cost of short-term gross margins. Even with those initiatives underway, I was pleased to see our revenue growth tracking in line with volume growth, which speaks to some of the progress we are making with average selling prices across the business, particularly in Signatera. Average cost of goods sold per unit picked up modestly in the quarter versus Q4 last year. This was expected given the continued significate volume ramp, and we expect to get some additional cost savings from those COGS in Signatera later this year as more of our exome volume continues to be brought in-house. I wanted to emphasize the point Steve made earlier on the call with respect to seasonality in health business. Q1 is usually our strongest quarter, and I think that trend was really amplified in Q1 this year with California NIPT and carrier screening volume gains taken off in November and December last year. When we have had these really big first quarters in the past, women's health volume has been flat to something down sequentially and then returned to sequential growth in the second half of the year. If that was the case this year, we would still be in a great position for an excellent 2023 overall. Of course, Signatera appears to be in a secular growth phase as we continue a significant ramp in volume growth, as we talked about earlier in the call. Last point I'd make here is the noticeable gap between revenue growth and expense growth. We've spent a lot of time on prior…

[Operator Instructions] Your first question comes from the line of Tejas Savant.

Maybe I'll start with 1 on the Signatera guideline decision commentary here, Steve. You talked about sort of the committee not sort of fully considering the CIRCULATE data. Can you just share some color on what sort of drives your confidence around that? And more importantly, the degree to which you're viewing the time lines for that guideline inclusion as a swing factor in your medium-term Signatera CRC estimates?

Yes. Thanks, Tejas. So first, nothing in our guidance. We're really in our path to cash flow breakeven includes that we're going to get an NCCN deadline for CRC. So I mean, we're trucking ahead. We've got a lot of momentum both on volume and on ASP without having that upside in. Now with that said, of course, we set ourselves up here in really, I think, a very nice position with all of the data that Alex outlined. I think a lot of people probably didn't realize that we have randomized trials that are going to be reading out sort of towards the end of this year. And then the Altera trial, which we think is going to be reading out in 2024. I mean, certainly, that will put us in a very, very strong position. As far as the 2022 vote is concerned, we've confirmed that at the time of the CIRCULATE study, the GALAXY study was not considered but it was included in the discussion section, which was written several months after the vote occurred. So I think that's sort of in line with what we expected as we realized that the GALAXY study wasn't going to be published before the August 2022 meeting, that's what we've been saying, I think, now in the last 3 earnings calls with respect to timing. . Now what happens going forward from here? We do know there's another meeting in August. We can't say exactly what's going to happen out there, meaning it's good that GALAXY is now published and can be formally considered. But certainly, we've backstopped future decisions with all of the new data that's coming out and the suite of randomized trials.

Your next question comes from the line of Puneet Souda.

So first one is on ASP and maybe Mike can address some of this. Mike, could you talk a little bit about ASP both on the women's health side of the business as well as Signatera. Sort of what are sort of the trend lines here in terms of improvements? We were seeing some impact on carrier testing. So maybe just talk about that. And how should we think about the ASP overall?

Yes. Thanks for the question. So first on Signatera, we're ahead of schedule put simply on the ASPs. We've talked a lot in the past about what are the components for drivers of the Signatera clinical ASP and it's always a function of that product being -- so pretty early days in launch and that ASP being quite immature relative to the price points that we for the product. So I think previously, we had set the expectation that we would kind of exit this year with an ASP for clinical Signatera in the 800s or will be in front of us. We actually got there in Q1, as I think Steve mentioned in his prepared remarks. So from here, not it's not really a reason in our mind why we would see that retrench. I think the guide contemplates kind of modest improvement from here. And we hope that we can keep that traction billing for all the reasons that we've talked about on this call and previously. And it's principally volume mix between initial and recurring time point. increasing concentration of our volumes in these tumor types but we have a Medicare reimbursed speechead, increased traction of the business coming from Medicare reimbursed patients, particularly in colorectal cancer. Just to name a few, in addition to the kind of new reimbursed tumor types and now getting some commercial coverage. So lots of good drivers there. On the women health side, ex California, and I think ASPs were strong. They were -- we sequentially grew them in the quarter. So I was encouraged by that. We knew and Steve talked about this prepared remarks that in order to stay in California, we would take -- we would take a penalty on blended ASP there, but we wanted to stay in the state because we feel like the long-term rationale for being there, both clinically and for the business. And as Steve mentioned, that we're cautiously have to be taken off the way that has trended so far. The guide contemplates a little bit more erosion on the care screen front. And that just goes back to the fact that we've actually kind of leaned into this previously talked about headwind that we're seeing on the care reimbursement. As a few competitors have exited the market, we've actually opted to take share there because we think the clinical utility and the guidelines are actually quite strong and it's table for us to improve the reimbursement profile in that business. And that's something that we'd like to see progress on here in the calendar year. So I know that's a lot, but those are kind of the main drivers of [indiscernible] in Natera. Overall, I'm encouraged about the ASP trajectory in this business as you look out '23 into '24.

I'll just add too, even with the best that we've taken in sort of some of the temporary initiatives where we traded off volume for margin, we're still keeping our guidance intact for margins for the year of 41% to 44%, which we think is very strong. So things are actually looking very positive.

Our next question comes from Catherine Schulte.

This is actually Tom Peterson on for Catherine. Good to hear about progress with commercial payers on the Signatera front. I guess what additional progress are you contemplating for the remainder of the year? And have you made any additional progress in States where we've seen genetic testing legislation in past?

Yes. So I think one of -- there's definitely a big opportunity in commercial coverage for Signatera that we think is going to come in over time. It all starts with having very strong peer-reviewed data. And that's where we really have an extensive leadership position, I think, now with more than 40 peer-reviewed papers. And you can see from some of the slides that Alex showed -- it's not just expansion into commercial payers for colorectal, but we still have a long way to go with the MolDX program and with Medicare. I think we've said we might be able to do seven or eight new MolDX submissions this year based on the strength of the data that we're putting out. So certainly, that's an expansion opportunity as well as what we're seeing on the commercial side. On the commercial side, I think it's great that we are seeing this traction and we're seeing some of the bipartisan legislation supporting expanded access for everyone. We've seen several more states now sort of put this legislation in place. I think the kind of back end of us filing the appeals and getting paid is still at the very early stages. So it's hard to really comment at this point on what the impact is going to be overall in the commercial plans. But the good news, the legislation continues. I think we're seeing progress. We're seeing an increased number of states adopting the positive led solution. And then again, we see plans like Blue Shield that have done their own economic analysis and determined that it makes sense to add coverage for Signatera, which is great, and I think there'll be a little bit more of that as well.

Our next question comes from the line of Julia Qin.

This is Marta on for Julia. I just wanted to ask, you recently got the CMS coverage for Signatera in breast, have you seen any meaningful impact in terms of uptick testing volume from that extension? And if not, when do you expect to be in? And how should we think about it for the rest of the year?

Yes, that's a great question. So we've actually been seeing an increase in breast at the kind of proportion of the business for a while because there's first breast is a very big opportunity. When you just look at the number of patients that are available. Second, we think there's very high clinical utility. And third is we have incredible performance data, very, very strong performance data in breast in both adjuvant and recurrence monitoring setting and now in the neoadjuvant setting in both of those settings or all of those settings, we have initially published a smaller data set, and we've now followed those initial publications up with extensive data sets that include roughly 300 patients and well more than 1,000 time points. So this very strong data, combined with the coverage, combined with the operational execution is leading to an increase in the number of tests that are coming in. I think that's a very good sign.

Our next question comes from the line of Dan Brennan.

Great. Maybe two parter. Just on the neoadjuvant opportunity, it sounded like the I-SPY data, you kind of commented could generate reimbursement, but I know you also cited your coordinating with the team there to make Signatera prospective biomarker in future studies. So can you just kind of give us a sense of what the plans are for finally for coverage in neoadjuvant in terms of timing and data and kind of what the impact could be? And then just secondly, on the women's side, just on 22q in carrier screening, can you just remind us like -- I know they're not in guidance, but assuming if they were to come through, how do we think about the potential impact when that happens?

Yes. So on the I-SPY study in the neoadjuvant setting, I think it is definitely one of the settings that we think has a very high clinical utility where we have very strong data now with new publication with 283 patients and 1,024 plasmic time points. So this is one of the biggest breast studies that's ever read out for donor-derived cell-free DNA, and we do plan on submitting this to MolDx for coverage in the very near future. When it comes to the opportunities in women's health, look, I think we sort of look at this as an opportunity to expand access to more patients. And any time you generate the type of data that we've generated that shows exceptionally high clinical utility for tests. Like, for example, in the SMART study for 22q, we showed that we could with very high sensitivity, very high specificity and a positive predicted value, which was really incredible to sort of 50% range, we could test for this disorder that affects roughly one in 1,500 pregnancies. So any time you're generating that type of data it is the type of thing that guideline committees are going to look at. And we think that's great because it expands access for patients and I think helps bring the test to those patients that may not otherwise have access. .

Our next question comes from the line of Alex Nowak.

All right. Great. I was hoping you could expand a bit more on the kidney headwinds you're facing the MolDx coverage change. You said physicians are working through it. The headwind is tracking to your expectations. So I guess just to expand on how is the reimbursement change just impacting testing in the field? What would the guidance have been without that headwind? And then, just how does this long term change your outlook on the viability of the transplant testing market?

So I think anytime there's a change or clarification coming from Medicare? It just causes some sort of confusion with respect to what it actually means, what physicians should do? Do they need to make any change at all. And I think there's a sort of swirl of misinformation out there. Of course, that just causes some volume disruption. And I think as we're kind of working through that we're seeing that maybe things have been misinterpreted in various places. And I think the good thing for us is, I guess, one of the biggest changes that was announced was that you can't get reimbursed for RNA and cell-free DNA testing at the same time on the same patient. And that was never part of Natera's strategy. And I think that's probably the biggest change that has occurred. And so we weren't impacted by that at all. So we're really just impacted by this sort of slight volume disruption, I don't know I'd say maybe in the kind of 15% to 20% range of where accounts have sort of just kind of stopped ordering or temporarily push pause while they sort of work through things. Now for us, the revenue from donor-derived cell-free DNA testing, kidney business, I think is sort of mid-single digits when it comes to kind of the overall book of business. So it's a very tiny fraction of our overall revenue. And I think that disruption is offset now by the new revenue that we're seeing coming in from Prospera heart in many ways, not completely offset, but we do have a nice ramp in heart now that that's reimbursed that is helping to offset things. But of course, you're seeing that we raised our guidance. So overall, the broader company is growing nicely even though we did see the sort of 15% to 20% pullback in the kidney claims.

Great.

Sorry, there's a second part there. I think what do we think overall about the business. Look, we have a lot of different opportunities organ health that we think are very positive. I think the proactive trial is reading out in June. I think that's going to be good for the entire industry. There's going to be some great information there. that support donor-derived cell-free DNA, overall. I think all these new guidelines that have come out like really in the last six months, we've now seen four strong society guidelines that didn't exist before. And I think that creates an opportunity to expand volume, I think, potentially of coverage reassessed and maybe get into sort of commercial coverage in the future. And then, of course, in the last couple of calls, we've been talking more about Renasight. We think that's a great opportunity to really change how chronic kidney disease patients are treated, and we think that potentially could have very high clinical utility, and we're looking forward to the readout of the RenaCARE study later this summer.

Our next question comes from the line of David Westenberg.

Hi this is Johan[ph] on for Dave. Can you give any comment on what the gross margin might have been if accounting for the California NIPT and the expanded carrier screening headwinds?

Mike, do you want to take that?

Yes sure. So -- yes, I think gross margins would have been at least higher without those, but I think it's a little bit hard to just separate out those two things because those two events have also caused some disruption in the marketplace I think is temporary, and we are kind of leaning into that as one of the market leaders is going to take a share. So it's hard to take credit for some of the account wins and then turn around and say, well, yes, you would have gotten the gross margin? I mean there's a penalty to be there. And so we're going to now in return for to have a longer-term benefit that we think that you can see as early as they were this year and going into next year. So we feel really good about that play. I mean I think without those and maybe I'll just include kind of the third kind of the press onwards with continues to impair growth. I think gross margins would have been kind of in the range that you've seen in the last year so from us. So it's very intentional move on our part, and we think it's quite constructive for the long term of the business.

Our next question comes from the line of Liza Garcia.

So congratulations for another great volume print on Signatera. So another Signatera question for you. But you guys have been doing really, really well. It obviously plans to kind of ad indications, which kind of drive new volumes with that, I think, more exome testing. And so if you can just kind of see qualitatively to kind of how to think about that on the margin side? And obviously, you alluded to how still you're not really getting that exon benefit, right, from the shift in kind of how you're doing your exome testing and really kind of how to think about the 2023 margins and kind of heading into 2024 on the oncology side, that would be great, kind of in there a little bit.

Yes. So I'll comment first and then maybe, Mike, you can jump in. Yes. So on the exome side, any time we get a new patient for Signatera, we've run an exome and that's one of the more expensive parts of the protocol that does lead to increased COGS. And we've had various projects underway to reduce the COGS but still deliver the same very high-quality information for physicians. And we're kind of midstream on that. I think most of the work there is going to be executed in sort of the '23 time frame, but there's still going to be some opportunity there as we expand beyond that. But look, I mean, the volume is growing very quickly. And you also have to focus on scaling up, while at the same time, you're focusing on COGS reduction. Across the company as a whole, we have an extensive amount COGS reduction projects that are underway. And I'll just give you sort of some basic insight on some of these. I mean, one is as simple as moving the Panorama tabs from the NextSeq to the NovaSeq, right? So that obviously saves a decent amount on a per sample basis. That's a project that now is going to be applied across more than 1 million Panorama tests that are being run. So obviously, as we get sort of per sample savings because we do sequencing costs that's applied across the very large base of NIPT samples. So there's all types of projects like that. We have 4 or 5 pretty big COGS projects that each are in the range of sort of $5 million to $20 million in savings on an annualized basis. And executing those, none of which really require like an extreme amount of sort of new research, they really just require kind of the development work of integrating things within the LIMS system, doing the standard kind of verification validation studies and then launching, those are all part of our road to getting the business to cash flow breakeven. Again, on the margin side, it's sort of both COGS and ASP. And you can see some of the card projects are hitting this year some of the ASP projects are hitting this year, and that's how we're getting into that range of the kind of 41% to 44% by the end of the year. And then just as a reminder, in order for us to hit that we really don't need any of these big milestones that are out there like getting 22q guidance from ACOG or getting NCCN guidelines for colorectal or really seeing a sort of drastic improvements on expanded carrier shrink.

Thank you. And that is all the time we have for questions. We would like to thank everyone for their time today and have a pleasant rest of your day.