Thank you for standing by and welcome to the Natera Inc. Q3 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] As a reminder today's call is being recorded. I will now hand today's call over to Michael Brophy, Chief Financial Officer. Please go ahead sir.

Thanks operator. Good afternoon. Thank you for joining our conference call to discuss the results of our third quarter 2023. On the line I am joined by Steve Chapman, our CEO; Solomon Moshkevich, President of Clinical Diagnostics; and Alexey Aleshin, General Manager of Oncology and Chief Medical Officer. John Fesko, President and Chief Business Officer is also on the call 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 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 finance 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 to 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, November 8th, 2023. If this call is replayed or reviewed later 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’ll 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?

Thanks Mike. I think our Q3 results demonstrate the strategy we're paying off and I'm excited to share the highlights. We generated $215 million in total revenue and product revenues were up 33% versus last year. Volumes were stronger again across the business with strong year-on-year growth in women's health and oncology versus Q3 of last year and a nice sequential recovery quarter for organ health. Signatera volume growth particularly continues to exceed our internal forecast and this was the second-best quarter ever in terms of the absolute unit growth in the clinical panel. As good as those topline metrics are, I'm most encouraged by the margin and cash on results. We talked about the focused effort to improve ASPs and I think that effort started to pay off this quarter. Gross margins were 45%. You'll recall we also had 45% gross margins in Q2, but we noted it was closer to 43% on a normalized basis as it had some one-time benefits. In contrast, we think this quarter represents an organic 45% based on ASP and COGS improvements. We slashed our cash burn dramatically in the quarter as well, almost a 50% reduction compared to last quarter. Clearly, we are getting leverage as revenue grew rapidly, while operating expenses was essentially flat and margins have improved. Our efforts to improve ASPs, is also leading to getting reimbursed more quickly on average from payers. Mike will talk about this later in the call, but we think this is a good sign that more ASP improvements are in store for future quarters. These results in the continued strong trends we are seeing so far in Q4 put us in a position to significantly improve our annual guidance across the board. We are raising the revenue guide once again to a completely…

Thanks Steve. I just got back to the weekend from the American Society of Nephrology, ASN, Annual Conference in Philadelphia, where renal genetics was a hot topic and where the RenaCARE paper was well received. Many doctors expressed the belief that nephrology is at the beginning of a new wave of personalized medicine similar to where oncology was as it feels 15 to 20 years ago. There are about 37 million people in the US living with CKD or roughly one in seven adults. CKD is also a significant burden on the healthcare system with roughly $85 billion of Medicare spend related to its management. Natera launched the RenaCARE study back in 2019 in collaboration with leaders from Colombia, Yale, NYU, Mayo Clinic and several other leading institutions, with the goal of determining what personalized insights can be gained from genetic testing with Natera Renasight product with 380 disease-related games. And how often a genetic diagnosis we can attain in treatment. More than 1,600 patients were enrolled across 31 sites in this real-world prospective study. The results were impressive. Some of the key headlines as you can see on the slide. One in five patients tested positive for a genetic cause of PKD meaning that a pathogenic or likely pathogen variance was found in their germline DNA. Out of the positive one in two paces received a new or reclassified diagnosis and of the positive one in three reported pain and treatment plan. At a high level when thinking about Renasight's diagnostic yield of 20.8%, let's compare it to hereditary cancer testing like the classic BRCA one and 2J. Where studies tension a test positive rate of between 5% and 17% including in cohorts that meet NCCN criteria for being high risk and that have received Medicare or commercial insurance…

Thank you Solomon. We recently presented updated 24-month data from the Galaxy cohort at this year's ESMO 2023 conference. The data continues to support and strengthen our two Seneca hypotheses that have implications to change how CRC is managed namely the MRD-positive patient's benefit from treatment, while MRD-negative patients do not. On the right-hand side of the page, CK negative patients continue to show vestinal disease-free survival, regardless of adjuvant treatment. No significant differences in DFS at 24-months were observed for CPA negative patients receiving ACT compared to those without ACT. We believe this data further dereslkomahar definitive randomized Vega study, which seeks to tablet the de-escalation strategy as a standard of care in early-stage CRC. On the left-hand side of the page, we see CPAs positive patients treated with ADP have significantly improved DSS compared to patients who undergo observations. This effect even after adjusting for all possible confounding convictions. The randomized arm of this trial known as Altera, the scheduled the readout in mid-2024, which will further assess whether the disaPAS-102 on top of chemo can further improve DFS and MRD-positive patients. We believe that, if the study is positive it would establish a pathway for a new standard of care in therapeutic treated with prive intent or tested with Signatera. As a reminder, the data on this page reflects outcomes based on single segmentary time points within eight weeks post surgery. The delta study is a key component in the protocol that allows enrollment of patients who were initially negative, but then term positive in the surveillance setting up to 24-month pose surgery. This is a new concept in MRD and is what we are calling treatment on molecular recurrence. The majority of trials and data in the MRD space today have been focused on additive and…

Thanks Alex. The first slide is just our standard results slide. We can see again that revenues were up substantially versus last year despite the fact that we had a very large licensing quarter in Q3 as Steve mentioned. So that really highlights how strong our product revenue growth has been over the last year and also gives me some confidence that the gross margins are sustainable. Operating expenses for some modest growth versus Q3 last year. But this year we've been effectively flat in sequential quarters now even as we delivered significantly faster revenue growth. The balance includes proceeds from the equity raise in September though we remain in a very strong capital position. The next slide highlights the cash burn dynamics we've seen in the last year and a half. You can see we were burning roughly $115 million to $120 million a quarter on average in 2022 as we set up all the infrastructure needed to deliver a first-class launch of Signatera. We stepped down to $80 million to $90 million a quarter burn as volumes and reimbursement grew rapidly. And now we've put that cash burn roughly in half in here in Q3. As Steve described we placed a lot of emphasis on getting reimbursement recently for covered services. And while we are still in the early innings of that effort we do think you'll be getting some results here in Q3. Days sales outstanding fell dramatically in the quarter and now stand in the low 90s. I'll offer the standard caveats here. We fully expect cash burn to fluctuate quarter-to-quarter and given our COGS projects are all on track we do have some large topic than we planned in Q4. However, I think the trend you see here in the car dinette continued progress and…

[Operator Instructions] Your first question is from the line of Tejas Savant with Morgan Stanley.

Hi, guys. Good evening and thanks for the time here. Congrats on a great quarter. Steve, Mike just in light of your comments that you didn't really have any benefit from onetimers year in the quarter on either revenue or gross margin. Can you just help us contextualize that implied fourth quarter guidance. It looks like you're pointing to sort of flattish growth sequentially and flattish gross margins as well for my quick math. So any color on sort of any offsets that we should think versus the typical year-end seasonality.

Hi, Tejas. Thanks for the question. It's Mike here. Yes look on the guide I think on the gross margins I think that's just tightening to the top end of that range implies similar or better gross margins in Q4. As you guys know we don't guide specifically to quarters. So there's a level of caution there. I don't think that should be taken as a message about concerns about underlying trends. As you've heard in the prepared remarks the underlying trends that really across the business remain incredibly strong. I echo this similar sentiments on the revenue line. Volumes typically follow a pattern where Q2 and Q3 are kind of our weaker quarters in terms of the seasonality from the women's health business. Q1 is our strongest quarter but usually Q4 is also a good quarter as well. So we felt we're off to a good start with Q4. As I mentioned in my prepared remarks, I mean our approach to providing guidance is always to try to provide good but achievable benchmarks for financial guidance and we hope to be able to exceed this.

Yeah. I'll just add. This is Steve. We're off to I would say an incredibly strong start in Q4 and we're continuing to see I think acceleration in ASPs and in volumes.

Got it. That's super helpful color. And then guys a couple in terms of the follow-up here, one on Signatera. Can you just update us on your status with BFCA [ph]. And I know this is a immaterial part of revenue but it's a question that we've gotten from investors here. And how do you juxtapose that with the biomarker bill being passed in California, you've got the F1 tracker opportunity coming up as well. So any color on that? And then my second part of the follow-up is actually on Renasight. Given the really strong results here in RenaCARE. How are you thinking about the slope of that adoption curve? I think in the past Steve you had mentioned about -- you mentioned the 37 million patient population, but about 750,000 newly diagnosed annually. So just any color in terms of the slope of the uptake there, and early feedback from payers and nephrologists would be fantastic? Thank you.

Yeah. Thanks a lot. So I guess first just on commercial payers and the biomarker bill, I think some of the other groups that have presented have talked quite a bit about that. We're, obviously, monitoring things. We're taking a little bit of a more cautious approach. We want to see how things actually come through. But the reality is the biomarker builds are in place now and passed in a significant number of very critical states. So we think that it could serve as an opportunity I think to quicken the traditional pace that you see for commercial coverage. And, obviously, with California passing that's resolved things with Blue Shield of California. But overall I would say this biomarker bill is a net positive. It's something that is unique for its time period and not an opportunity that's been available previously. So frankly this might end up being the quickest path to get commercial coverage versus what we've seen historically. From a Renasight standpoint, I think the RenaCARE study, we think is a real inflection point. We've already previously said about 40% of nephrologists have used the product, we've done tens of thousands of tests at this stage and the excitement from the nephrology community and the interest is incredible. I mean it's like something that I haven't experienced before where nephrologists are really welcoming this product in with open arms. They're very engaged they -- it's like they've been starving for a product like this. So, we're excited about that. With that said, any time you're introducing something new, it does take a while to get protocols in place and get that type of market penetration that could be impactful. When I think about the market size, I think a very direct comparison here can be made with hereditary cancer testing. There you have a very similar situation where you have the sort of incident and prevalent pools. And frankly, they're a similar size. And hereditary cancer testing today is an incredibly large opportunity. And so, we think we're laying the groundwork for something similar.

Your next question is from the line of Puneet Souda with Leerink Partners. Q – Puneet Souda: Hi, guys. Thanks for taking the question here. So first one on ASP, then I have a follow-up on guidelines -- on ASP, I mean it's good to see the improvement. And I appreciate you giving the details on Signatera. But could you talk about what -- how much was the ASP improvement on the Panorama and Horizon side? And sort of what should we expect there. And then on Signatera, could you outline what's the ceiling here, given the ADLT rate you have the reimbursement, the indication expansions that you're seeing and potentially guideline and inclusion ahead as well, which could help with commercial payers. So maybe just talk about ASP.

Thanks, Puneet. I appreciate the question. So yes, first on the ASPs, we saw in addition to continued pretty rapid improvement in the Signatera ASPs, which we covered. We also saw some very encouraging improvement in the women's health, ASPs. I mean I think and that's both for Panorama and for carrier screening. You may recall that earlier in the year, we actually guided assuming some erosion in the ASPs in that category. And at the time, I said, look it's not because we're seeing it but it's kind of more of a focal point. And frankly, we haven't seen that erosion. And indeed we've seen some, we've actually seen some improvement. Now where does that improvement come from? It really comes from a variety of sources and it's small contributions from a range of the efforts that we've been we've been really making over the last year, and Steve covered in some detail on the call. So, leading the guidelines aside, which I think could be very impactful, I'm actually quite encouraged about the trajectory that we're seeing right now on ASPs in women's health, I have to say nothing of the rapid improvement we've seen in the signatory ASPs, which we did expect. Second question, can you just remind you again, just give me a follow-up again one more time. Q – Puneet Souda: Yes. Just what is the ceiling for Signatera, and how you think about that with the ADLT indication expansions?

Yes. So I think Solomon covered it in the prepared remarks that just based on what we're seeing right now just on the current coverage dynamics that we have on our current tumor types we feel like there's a path beyond $1000 just through kind of grinding and blocking and tackling and making sure that we get paid for covered services. And we clear all of the myriad kind of administrative hurdles that one typically encounters in this space. So that's a lot of room to run from where we are now. I wouldn't put a ceiling on that per se. I mean I think at about the time that we're reaching those levels we're going to have more data. We're going to have feedback from NCCN and then also we'll have prospective randomized data we'll have data in a number of different sources. Steve touched also on the biomarker legislation. So there's some other potential catalysts that are going to hit roughly contemporaneously. So I would expect kind of a fairly smooth trajectory to say the areas piece which is really encouraging.

Yes. I'll just add too. I think one of the things that is really exciting is as we're looking now at this very clear path to cash flow breakeven in 2024 and a very strong revenue growth ahead that we're not really incorporating any of the upside opportunity from guideline changes, things like in 22q, or any of the upside opportunity from biomarker legislation, which was just asked about a minute ago. So, the model that we're looking at really just includes sort of status quo and blocking and tackling and billing operations improvements, but all of those other things are really upside, potentially very significant upside that we just don't need to get to cash flow breakeven and have another good year.

Got it. Super helpful. And then on guidelines, wondering maybe a part A and B to this question. Could you clarify on the women's health side, Mike, did you say you're expecting to see 22q guideline update in early 2024? I just wasn't sure if I heard that correctly. And then on the NCCN for the Signatera side, could you maybe elaborate -- given the number of data sets that you have already with ALTAIR and treat ctDNA coming up. I guess the question is when does this translate into NCCN guideline inclusion? What that guideline inclusion can look like? If you could -- if maybe Alex or Solomon can elaborate on that. thank you.

Yes. First, let me just talk about women's health. So, of course, we don't have any information on exactly what happened and so forth. But we do know that there was a guideline committee meeting, I think in September from ACOG. And if you start to think about just sort of the timeline that you might see the results from that, I think that could be in Q1. We don't know either way whether things will be positive or negative, but we feel really strong about the fundamentals behind 22q testing that are outlined in the SMART study and behind the fundamentals of expanded carrier screening. So, we'll just have to stay tuned and see what happens there. From the NCCN side of things, when you look at kind of the -- I think there was a meeting in August, we're expecting to kind of hear an outcome from that maybe later this year or early next year. We do know that the CIRCULATE 18-month data was included in the review because it was submitted in time. But of course we don't know the outcome. Now, the great thing for Natera is because we started working on randomized controlled trials in the escalation setting for example, ALTAIR, more than five years ago. In 2024, we will actually have the results -- initial results from ALTAIR reading out. So, regardless of what the guideline committee says this year with respect to the CIRCULATE study, next year the ALTAIR results will be out. And so it's just really a matter of time assuming the trial reads out positively and that's why we feel very positive about things. And when you look at what setting is ALTAIR. I think it has sort of two settings. One is treatment escalation. But then the other is a treatment on molecular recurrence components where patients from the VEGA study that are initially negative are being monitored with ctDNA. And when they screen positive, they flip over into the Altera Arm and are randomized at that time. And then are either treated or not treated. So we're excited about that treatment on molecular recurrence readout as well which we think -- I think is another reason why Surveillance Testing is important. So look forward to having both of those read out. Alex or Solomon, would you like to add anything else or? Yeah. Okay.

No.

Your next question is from the line of Catherine Schulte with Baird.

Hey guys congrats on the quarter. And thanks for the questions. I guess, first, Steve, I think you mentioned planning to launch some new MRD products next year. Could you give any additional details on that? Will that be additional indications? Or are you more referencing a new platform like the potential for a Liquid Exome or Tumor-Naïve kind of off-the-shelf version?

Yeah. So we're going to have multiple new things that are coming out, not just in MRD but across the business. And we've been investing heavily in research and development and innovation really the entire history of the company, but particularly over the last couple of years. And I think that's now going to start to bear fruit as we have a significant number of product launches and updates next year. So on the MRD side, I would expect to hear multiple different opportunities both new products and product updates.

Okay. Great. And then you mentioned validating Signatera and NIPT on an alternative NGS provider. Any additional color you can give there? What's the timeline to rolling out NIPT on the alternative sequence here in your central lab? And is the plan to switch all of your volumes over.

Yeah. So I think you guys sort of know the history here of the evolution of sequencing. And really over the last several years, we've seen the market open up quite a bit. And now we've done work on multiple different instruments. And we think there's, many different groups out there. So it's great that we've been able to meet regulatory milestones. And in collaboration with pharma partners validate Signatera and independently now validate NIPT on these alternative platforms. We're focusing on reducing our COGS and getting to cash flow breakeven. And so we're going to make the best decision for Natera on what provider we use, based on the service level, the price and the quality.

Your next question is from the line of Rachel Vatnsdal from JPMorgan.

Great. Thank you for taking my questions and congrats on the quarter you guys. So first off, nice to see the coverage of the FoundationOne Tracker in the US last month. Can you just kind of walk us through how should we size that opportunity? And then, how quickly can it become a meaningful contributor here.

Yeah, Solomon, why don't you take that?

Sure. Yeah. Thank you for the question. We were very excited about getting that coverage for Medicare. And we thought it was appropriate given the great data that's already been generated to support the tests. FoundationOne Tracker is very well positioned, for patients in the advanced cancer study who are already getting a FoundationOne CDx test and want to monitor response to immunotherapy without needing to send another tissue sample for development of Signatera and that's especially useful for patients where tissue might be scarce already exhausted after the first analysis for genomic profiling. So that's exciting and we look forward to rolling that out that commercialization being led by Foundation Medicine, and helping a lot of patients.

Great. And then my follow-up, I just want to ask about the pending lawsuits that you guys have with Rabgen in the upcoming trial in early next year. You have one peer that had to pay out in the high $200 million range but other peers have settled out of court. You had one peer earlier this week flagged that their payout is going to be in that like $30 million range all in. So, can you just walk us through what are the potential range of outcomes that we could see for tissue? And any color on dates leading up to that trial? Thank you.

Hey, Rachel. Thanks for the question. So just like all the intending litigation unfortunately I just can't get into a lot of details on ongoing litigations -- we clearly believe we don't infringe. We don't think the patents are valid and we feel that we've got some very strong defenses. And that's kind of where we've got to leave it for now. But we look forward to providing more updates as they become available.

Your next question is from the line of Dan Brennan with TD Cowen.

Great. Thanks for the question. Maybe the first one Mike you talked about some of the screening data that's coming out later this year and early next year and you talked about if the data looks very strong you would evaluate and move forward only excellent results. Can you give us a sense of what we expect to see here coming up in these two studies? And just any more color around the level of evidence you would need in order to push ahead?

Yes. So, this is Steve. I'll take that. So we've said before we have a case-controlled study that's coming out probably at the end of this year maybe in early January. And then we're following that up with an additional study looking at advanced cetinoma. And once we have both of those in hand we're going to sort of see how we measure up to others that are out there. And I think there's sort of two decision points there. There's -- how do we compare to the competition and where are we on our trajectory to cash flow breakeven and how do the financials look. And we're not going to do anything at all that's going to impact our ability to get to cash flow breakeven. So we think we're taking the right unmeasured approach and phase-gated approach where we're waiting to hit key milestones before we decide whether we're moving the ball forward or not. And if we do move the ball forward the -- I think, the next steps would really be in 2025 in 2026, where we'll be operating in a different environment where we think we'll be cash flow positive.

Got it. Thanks a lot. And then maybe just another one on NTCN, just if you are successful getting, an inclusion maybe as a footnote in the current update that you expect early next year like what would that what does that mean? Obviously commercial coverage could start and you'd likely I guess see a volume benefit to maybe just clarify. And then as a related question, obviously, the GALAXY 24-month data and the MRD-positive arm looked really impressive. How much does that derisk ALTAIR? I know you kind of mentioned -- but I think the regimen might be a little bit different ALTAIR. Just wondering how much of confidence that gives you in ALTAIR positive readout. Thank you.

Yes. Let me just talk quickly about guidelines and then I'll have Alex comment on the CIRCULATE data. So the -- why do you -- you need guidelines to grow volume and to get commercial reimbursement. And we're growing volume right now at a really fast pace. And we're also now seeing commercial reimbursement coming on, and because of the biomarker bill, we think that's going to continue. So at this point, it's -- I think guidelines obviously would quicken the pace of those things. But, we're going to get really far along here without guidelines coming in. And I think importantly for Natera, we don't need guidelines to achieve cash flow breakeven and continue to significantly grow the business. So we'll wait and see what happens -- but if we don’t end up getting it this time around we have the ALTAIR study coming out and we'll be in a great position. So Alex, do you want to comment on the CIRCULATE data whether that's derisked ALTAIR Vega.

Yes, absolutely Steve. So we definitely have seen continuation of separation of the curves in the CT positive arm in the CIRCULATE study. And furthermore, we've seen that in the CT negative arm, we continue to see very little if any benefit from adjuvant chemotherapy. And that absolute difference has shrunken and actually we've seen those curves now reverse. We think actually both of those help derisk not just the ALTAIR study but also the Vega study. And since ALTAIR is coming up just around the corner, I think the way we are extrapolating these findings is that CT positive patients have almost 100% risk of recurrence without treatment. We've seen that adjuvant chemotherapy helps reduce that risk but does not eliminate that. And the way that healthcare is designed, we are adding a known active agent TAS-102 that's already approved in colorectal cancer and is none to have efficacy even in the second and third-line setting. So by adding that and randomizing patients to either get that drug or get placebo, we are pretty confident that there will be an effect that should be able to bear out from that study. Again, we won't know the results until the study is unblinded. But I think given the study design, given the findings so far from the CIRCULATE data, we're very positive. But we should be able to see something if the effect is there.

Great. Thank you.

This does conclude the allotted time that we have for question and answers. I will now hand the call back over to our presenters for any closing remarks.

Hey, thanks operator, and thanks to everyone for joining us today. We're really excited about these results, and we're very pleased to share with you. So, thanks again for joining.

This concludes today's call. Thank you for joining. You may now disconnect your lines.