Natera, Inc. Q4 FY2020 Earnings Call

Welcome to Natera's 2020 Fourth Quarter and Full Year 2020 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, February 25, 2021. 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 fourth quarter and full year results for 2020. On the line is Steve Chapman, our CEO; Bob Schueren, Chief Operating Officer; Solomon Moshkevich, General Manager of Oncology; and Paul Billings, Chief Medical Officer. Today we also have our Co-Founder and Chairman, Matt Rabinowitz, on to review the results of the SMART trial. 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. 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, our assumptions for that outlook, the impact of the COVID-19 pandemic on our business and operations, market sizes, 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 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. 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.

Thanks, Mike. Good afternoon, everyone, and thanks for joining us. Let's get into the highlights. Q4 2020 was the best quarter we've ever had at Natera. We processed 295,000 tests, up 13% sequentially versus a very strong Q3 2020 and up 41% over Q4 2019. Revenues were $112 million, our first quarter above $100 million, and product revenues were up 43% versus Q4 of last year. This represents the fastest quarterly net unit growth in company history. I'll get into more details on what's driving our performance in a moment. On top of 2020 being a great year for Natera, we enter 2021 with significant momentum across all of our businesses. In women's health, we've seen an acceleration in commercial payer coverage in average-risk NIPT, even since we last spoke in November. As of January, all of the major national plans are covering NIPT for all women and we've seen significant adoption among state Medicaid plans. We also released the results of the SMART trial at the SMFM Conference in late January and we announced the validation of our new Panorama artificial intelligence platform. The final results from this trial were even stronger than expected and put us in an excellent position to achieve reimbursement for our microdeletions test and further drive market share gains within the NIPT space. Our growth is being further amplified by the progress we are making in the transplant business. We've collaborated with top KOLs to present data at each of the major academic conferences this winter. We've continued to produce data on Prospera's unique differentiators, including the ability to detect background cell-free DNA simultaneously from the same workflow, with no extra turnaround time or added cost. We believe this differentiator will be valuable for physicians. For example, the high level of background cell-free DNA we are seeing in patients affected by COVID-19 can mask rejection and we've completed a study highlighting our ability to assess when this might be occurring. All of these data sets are being submitted for publication. And I will spend more time on that when it comes out later this year. Overall, we continue to hit our internal volume growth targets for Prospera, and we're very pleased with how the transplant business is developing. In oncology, on the pharma side of the business, we announced in January that deals signed in 2020 exceeded $65 million, up from $9 million two years ago. That business got a boost in December when Genentech's IMvigor study was presented. This was the first time an MRD assay has been evaluated in a Phase III clinical trial and the results for Signatera were compelling. On the clinical side of the business, our colorectal cancer launch is underway and we've now completed the build-out of our commercial team. This investment gives us a great jump-start as we seek to capitalize on our first-mover advantage. Now that the commercial team is in place, we can start executing on our plan to expand the Signatera indications and add other new products to their bag. I'm excited today to announce two oncology launches, Signatera I/O monitoring and Altera tissue-based comprehensive genomic profiling which allows physicians to select targeted therapies for cancer patients. Altera can be ordered from the same tissue sample used to power Signatera, but will also be available as a stand-alone offering. There are significant synergies between the two tests, particularly in advanced-stage indications, where the use of a therapy selection panel is commonplace and reimbursed and the need for improved monitoring of patients for sponsored immunotherapy is clear. Altera fits right into the bag of the clinical field force we have in place for Signatera. And we think this combined offering will be compelling for oncologists. Solomon will get into more detail on that later in the call. Mike is going to get into details on the revised guide at the end of the call, but there are two major headlines. The first is that we're guiding total revenues at $500 million to $525 million. And second, we expect the reproductive health business to get to a sustainable cash flow breakeven during 2021. Having our core women's health franchise cash flow breakeven allows us to continue making substantial investments to maintain our leadership position in oncology for the long term. This guide presumes we keep the volume growth going across all three areas of the business, and that's exactly what we've seen so far this year in 2021. Going above the $500 million mark in revenues, and getting to cash flow breakeven in women's health are two major milestones that have been years in the making. And we're excited to have these goals in sight. Okay. With that, let's get into some of the business trends. The next slide is our volume progression over time. Q4 represents a big step-up, even compared to our very strong Q3 performance. This breaks from historical trends where both Q3 and Q4 have traditionally been more muted, providing a nice momentum into 2021. The volume growth we experienced in the second half of the year was driven by strong account retention and new business wins during the height of COVID-19, last spring and early summer. The mix in our women's health business between average-risk and high-risk hasn't changed that much. We believe two potential future drivers of growth average-risk NIPT market penetration and a bump from the SMART trial are likely still in front of us. The next slide demonstrates that revenue growth is tracking nicely with volume growth, once again accelerating meaningfully over what we've seen in the past. If you just zero in on product revenues on the right-hand side, you'll see revenue growth rates of 43%. This removes development revenue from partners which was larger in 2019 than it is now. We saw recurring ASPs step-up again in Q4 versus prior periods and blended COGS remain in the low 200 range. The combination of consistent gross profit per test and volume growth that we talked about in the past is working as expected, allowing us to get the women's health business to cash flow breakeven, supporting even bigger investments in the oncology business. The payor response to the ACOG practice bullet has been stronger and faster than we anticipated last fall. We were really pleased to see all the major payors start covering NIPT in all women, and continue to see excellent progress among state Medicaid plans. This is positive not only for coverage but also for market penetration. As health plans expand coverage, many providers are changing their protocols from serum to NIPT. Given those trends, the timing of our SMART trial data readout is very timely. We are very pleased to be joined on the call today by Matt Rabinowitz, our Board Chairman and Natera's Co-Founder, who helped initiate and steer this trial for several years. Matt?

Thank you, Steve. Good afternoon, everyone. I decided to join the call today to highlight the significance of the team's achievement on the SMART trial, which was over five years in the making. The trial was designed to affirm the performance of our NIPT technology in the general population and in the detection of microdeletions. We have made some big predictions at Natera. These include that NIPT would be adopted and reimbursed in all risk categories and that our personalized oncology assay Signatera would achieve differentiated performance and reimbursement across multiple cancer indications. These have now occurred as we predicted because solid science usually prevails. Based on the exceptional performance of our technology in the SMART trial and the prevalence of microdeletions in the study, we now believe that professional guidelines can change and that microdeletions testing in NIPT will be more broadly reimbursed. SMART was an over 20,000-patient prospective clinical trial with 21 global centers. We collected pregnancy clinical outcomes as well as genetic truth samples from the fetus or the born children for 18,497 cases. This unprecedented data was used to showcase unique capabilities of Panorama, including Panorama AI. The AI or artificial intelligence component uses deep learning neural networks to model the sequencing data better than could be achieved by our team of classical statisticians. This amazing science was enabled by more than 1.6 million samples that we could use for training the deep learning network and the performance can continue to evolve with more samples. This is like a modern biotech equivalent of the competition between Kasparov and the supercomputer over the game of chess, which the supercomputer ultimately had to win. Panorama AI extends our leadership in women's health. Two major presentations came out of the trial and each are now being submitted for publication. First, SMART serves as the largest ever prospective aneuploidy NIPT trial and the only study of this scale to collect genetic outcomes at birth, setting a new bar in quality and science. The majority of the patients in the study were average-risk and we demonstrated best-in-class performance with 99% sensitivity and 99.97% specificity in Trisomy 21 with a positive predictive value in the general population of 95.1%. As a large number of newly adopting providers start using an NIPT, we think this study confers a significant advantage and further separates us from NIPTs that have limited or no peer-reviewed data. Panorama AI lowered the no call rate to roughly 1.5% while maintaining best-in-class accuracy. This category of cases that have very low fetal fraction were also clinically significant as these cases were at substantially increased risk for other conditions including preterm birth and pre-eclampsia. These add to the list of unique clinical differentiators, which have made Panorama the leading test. Second, SMART serves as a major advancement for microdeletion testing, rigorously validating Panorama's best-in-class performance and advanced clinical knowledge of the most common microdeletions 22Q11.2. We showed excellent performance in detecting 22Q, as we expected detecting 100% of cases of the most common microdeletion, 2.6 megabases or greater. Using Panorama AI, we were able to also detect the smaller microdeletions below 2.6 megabases, down to 0.7 megabases, which amounted to 41% of the disease load, significantly more than previously believed. Including microdeletions of all sizes in the 22Q region, we demonstrated a sensitivity of 83% and a positive predictive value of 53%. This performance is unique in the industry. Today, none of the mass parallel shotgun sequencing labs are testing for the smaller microdeletions, which is a critical issue given how common they are. This could prove to be a major competitive advantage for Natera. Clinically, 22Q microdeletions proved to be much more common than previously believed, but consistent with our estimates based on commercial experience. At an incidence of one in 1,525, this disorder is more common than cystic fibrosis at one in 4,000 or spinal muscular atrophy at one in 10,000, each of which are in the guidelines for screening and broadly reimbursed. In women under the age of 35, the incidence of this disorder neared that of Trisomy 21. Crucially, none of these 22Q cases were detected at the first trimester ultrasound and only roughly half were detected by any other means throughout the pregnancy. We can't be prescriptive yet on timing, but we think that the study should be sufficient to drive changes to society guidelines. We received a dedicated reimbursement code for microdeletions testing which is priced by CMS at $759 and we already run more than 400,000 of these tests annually, which grew 37% year-on-year from 2019 to 2020. The next step is to get these data sets accepted for publication in high-impact journals. Back to you, Steve.

Thanks, Matt. Panorama is the market-leading NIPT. We performed over two million tests to date. We're uniquely leveraging the power of SNPs to deliver best-in-class performance and differentiated clinical value and the SMART trial further amplifies those differences. We've studied more than 1.3 million patients in 23 peer-reviewed publications. With the completion of the SMART trials we now have the largest, most rigorous and the highest-quality validation data for both aneuploidy and microdeletion testing. Combined that with our seasoned clinical and commercial teams and we're very well positioned for the increase in NIPT adoption over the next several years. We believe the average risk NIPT market could get close to 75% to 90% penetration over the next three to five years which bodes well for our business, especially with the high and consistent attachment rates of both carrier screening and microdeletion testing to NIPT which further amplify the benefit of the expanding NIPT market penetration. Now I'd like to hand the call over to Solomon Moshkevich to cover some of the recent highlights in oncology. Solomon?

Thanks, Steve. The first slide here is on the addressable markets in liquid biopsy that we've shown before. Natera is the leader in MRD and monitoring and we are aggressively investing to maximize our first-mover advantage. We have hired up the commercial oncology team and we're well underway with our launch in colorectal cancer which is going very well. As Steve announced earlier, we're now launching Signatera for immunotherapy monitoring as well on the strength of both our peer-reviewed data in Nature Cancer published last year and our draft coverage decision from Medicare which we expect to be finalized later in this year. We're now also leveraging our leadership position in monitoring and MRD to expand into adjacent markets. We're excited today to announce the launch of Altera tissue-based comprehensive genomic profiling or CGP for therapy selection. Therapy selection we believe is a $6 billion market opportunity with established reimbursement which makes a lot of sense for Natera given the growing strength of our customer relationships in oncology. Altera also pairs nicely with our launch of Signatera in immunotherapy monitoring which we'll go into more in a moment. Let's first dive into how Altera works. Altera reports genomic alterations found in cancer across the full exome with extra boosted coverage in over 400 clinically relevant oncogenes. Altera is at the cutting-edge of therapy selection tests with its exome-wide coverage of nearly 20,000 genes, its full transcriptome-based RNA-seq analysis for optimal detection of structural rearrangements, its matched normal DNA analysis to filter out germline mutation that can sometimes cause false positives in other tests, and its ability to identify MSI status and gold standard TMB status based on the exome. Altera will be offered as a stand-alone test and also in conjunction with Signatera for those who want to combine therapy selection with personalized monitoring. A big advantage here is that Signatera is a tumor-informed test where whole exome sequencing is already performed on the tissue and normal DNA specimens from all Signatera patients to inform the personalized assay design. So now we can deliver the Altera CGP results seamlessly from the same specimens. This is a key advantage for advanced-stage patients where both CGP and treatment monitoring are both clinically indicated and where tissue can often be scarce. Now let me share a typical patient journey that includes both Altera and Signatera for a patient receiving immunotherapy. As we've discussed before, over 200,000 patients per year are treated with immunotherapy, but an even higher number of patients are screened annually for immunotherapy eligibility. This eligibility assessment often depends on biomarker status including what alterations are found in the patient's tumor. For example, the FDA has approved a pan-cancer indication for the immunotherapy drug pembrolizumab in patients with MSI-high tumors or tumors with high Tumor Mutational Burden or TMB. We think that using our Altera test would be an efficient way for a treating physician to assess immunotherapy eligibility or eligibility for other targeted therapies and then use the pretreatment blood sample as the baseline for future treatment response monitoring with Signatera with no additional tissue specimen required. Both Altera and Signatera would be covered by Medicare in this scenario. So in our clinical business, we're now full steam ahead with early-stage colorectal cancer where we are enrolling nicely into the BESPOKE registry trial as commercial adoption of Signatera gains broader momentum. And now we're launching IO monitoring and Altera. We look forward to releasing more updates on the clinical market as time goes on. Now shifting gears to the pharma business. You see the rapid progression we've had these last two years since launch. This business has continued to mature as we have predicted and we're now seeing significant interest in larger Phase III studies which if successful can lead to having Signatera included in the drug's label as a companion diagnostic. Pharma is now using Signatera in studies of more than a dozen different cancer types. A key driver of this business is the compelling data that we've been able to generate from some of the clinical trials. The muscle-invasive bladder cancer data presented just a couple of months ago by Genentech at ESMO IO is an excellent case study. This was the IMVIGOR one trial which was a global Phase III randomized and controlled trial of atezolizumab. It took more than five years to run at great expense. Unfortunately, the trial itself failed to meet its primary endpoint in all comers after cystectomy. But atezo improved overall survival by 41% for the Signatera-positive patients, which was 37% of the population. So with 581 patients analyzed, IMVIGOR 010 is by far the largest study evaluating any MRD assay. And it's the first-ever randomized controlled Phase III trial presenting results stratified by MRD status. Critically, the study shows how Signatera can take a trial that did not work in all-comers and make the results positive by getting the drug to the right patients who are MRD-positive. As you can imagine, we've fielded a lot of interest after the results of this study. Going forward, we expect most adjuvant trials to include some level of MRD-related stratification. And in addition, we also are seeing the impact of this predictive data on how physicians in the clinical market are perceiving the utility of Signatera even in early-stage colorectal cancer and in other indications. So to summarize, in oncology we have a lot of activity underway to drive the business: clinical launch of Signatera and CRC now in IO monitoring; launch of Altera CGP to drive additional insights for our ordering physicians; and continuing to ramp in our pharma business. Beyond that, this slide gives a good snapshot of the data that we've already published to date and our pipeline that we'll be reporting out over time. As you can see, we have a significant head start in published data across a range of cancer types and that leadership creates its own momentum and network effect. The leading biopharma companies, academic medical centers, and community oncologists all have a strong incentive to use the most thoroughly validated technology for their patients and in their clinical trials, which could in turn enable us to accelerate our lead in generating more data which eventually leads to more coverage and adoption in new clinical indications. It's a virtuous cycle. As Mike will cover in a second, this demands a significant investment on our part. But the rationale for our patients and our business is very clear. Now let me hand the call over to Mike to cover the financials.

Thanks, Solomon. The slide here is just a summary set of results for the quarter. Steve covered the major trends on volumes and revenues at the top of the call. You can see on the first two rows of the chart that the revenue growth was driven by robust product revenue growth and accounting-driven revenue recognition around signing the BGI and Foundation Medicine deals in 2019 was actually a headwind for the year-on-year revenue growth comparison. That's a very healthy dynamic and exactly what we had hoped to see. Within the reproductive health business, we continue to see a stable mix between Panorama and Horizon carrier screening and microdeletions testing was ordered as part of the Panorama NIPT about 75% of the time, which is consistent with what we've seen for the last five years or more. COGS per unit in the women's health business continued to improve. We are now below $200 per unit in that category and we saw improving trends in the NIPT average selling price. On NIPT ASP, we started to benefit from average-risk NIPT coverage policies, but the full benefit I think will gradually translate to revenue over several quarters as we get more history with changing payor coverage policies. To be clear, we started getting paid right away when coverage changes, but the visible impact on the P&L is really driven by the history required for accounting accruals on revenue. So the unit economics for our reproductive health tests continue to improve. Overall gross margins were slightly softer owing to driving some volumes in our new businesses prior to getting fully reimbursed. That's also a fairly transient impact as I'll discuss on the guide. On the expenses side, we were able to significantly accelerate our build of the infrastructure for commercialization in oncology. Accelerating this build-out is crucial to making sure we can win on every dimension, not just technology and published leadership, but also in the experience we provide for the physician and the patient. It's much the same story in R&D. There's really two categories of R&D efforts we have going. One is a very targeted effort on true research. These teams are doing things like leveraging the data we are collecting from early stage cancer exomes to develop new tests that can expand our addressable market. We've always committed a minority of our R&D team to this kind of work and the results include the technology behind Panorama AI and the Signatera and Prospera franchises. The second, much larger effort is focused on development work that requires time and effort from a lot of really high-quality people, but the technical risk is relatively low and the returns are very clear. If you could sit in our reviews of these projects, you would want us to fund all of them. One of the large projects in this category is our aggressive effort partnering with academia to generate validation data in a growing set of oncology indications. These types of projects have obviously paid off for us in the past and we are happy to have more sample banks and studies to run in this area. We built a strong cash position last year and we've been able to use it to our competitive advantage. For example, in return for more favorable terms from partners and vendors and long-term deals, we made prepayments of roughly $15 million in Q4. Other than those prepayments, our cash burn last year actually came in below our previous guide. Okay. Let's get to the next slide and the guidance for the year 2021. Steve gave you the headline at the top of the call. We expect revenues to be $500 million to $525 million, gross margins in the 47% to 52% range, and we are expecting our cash burn to be $230 million to $250 million this year distributed across SG&A and R&D as you can see on the page. Let's walk through each of the key assumptions for each of these lines. First, the revenue line presumes that we will continue to see strong volume growth across all three business areas. In reproductive health, we've historically focused on the absolute unit volume growth per sales rep given that team is more mature. So the guide presumes we can produce a similar unit growth pace as last year which of course will require very good execution given the year we just had. The guide does not presume we get a huge windfall of units in a short period of time from the average-risk NIPT market opening up since the specific timing and speed of broader NIPT adoption are not under our direct control. Similarly, we've tried to take a balanced approach in modeling the volume trajectory in transplant and oncology recognizing that we now have big teams in large markets for these areas. But these are also basically new categories and we have less forecasting history with them. We've taken a conservative tack on average selling price assumptions for the year's guide. That's mainly a philosophical point in that we just don't think it's wise for diagnostics businesses to just assume ASPs are going to improve, because the factors that can move against you are also largely beyond your control. But if the very recent trends we've seen so far in Q1 hold up, our blended ASP assumption could end up being slightly conservative for the year. The gross margin assumptions have several crosscurrents running this year. We feel great about the reproductive health gross margin trajectory because both because of the improving NIPT coverage, but also because cost of goods sold per unit continues to decline. For example, we've got a better Illumina supply agreement and the Pano AI platform is cutting down on our redraw rates once again. We are also pleased with the cost per unit trends we are seeing in oncology and transplant, which should be no surprise since both franchises are based on our core technology. The pressure on gross margins is as much more transient linked to volume growth as I mentioned. For example, we are excited about launching in the IO monitoring indication and hope to grow units quickly, but don't expect a final reimbursement decision from CMS until the second half of the year. I covered the major drivers of SG&A and R&D increases in my review of the Q4 results. I expect those lines to grow in Q1 and Q2, and basically stay flat in the second half of the year based on the objectives we have mapped out for 2021 at this point. I do think there's one more variable that gets obscured on the page. We have found that investing in SG&A and R&D is much more effective and capital-efficient than doing lots of acquisitions. Many of the players in our space pay full price for targets to stay relevant and what we've done instead is we've built our team. We'll try to be opportunistic on the M&A front, but I think you'll see us selectively picking up technologies for relatively small dollars and that's because the organic growth engine here is really strong. We talked in the past about the gross profit per test and the unit volume metrics we would need to get to cash flow breakeven in the reproductive health business. Even with some additional investment targeting new product features and commercial activities to support the growth we've seen, we feel confident we can cross over the cash flow breakeven line in reproductive health this year as Steve mentioned at the top of the call. That's a huge milestone for us and should give some confidence that the investments we are making are primarily focused on these large markets in transplant and especially in oncology. So to summarize, we are very excited about 2021. We are off to a great start so far in Q1 and we think we've got a bunch of interesting catalysts to unlock as the year progresses. So with that, let me hand it back to the operator for questions.

Our first question comes from Tejas Savant with Morgan Stanley.

Thank you for the time, and congratulations on a strong quarter. I wanted to ask a broader question regarding the guidance. Mike, you mentioned being relatively conservative in your assumptions for Signatera and Prospera. I assume Altera is not included at this stage. Could you provide more details on the volume trends, especially for the second half of each of those tests?

Mike, you want to take them?

Yeah. So thanks for the question. I think you hit on something there in your question, which was just the weighting for the year. I would expect the year to be somewhat back-end weighted as we kind of grow into these launches. In terms of specific stages, I think like in the future, we will start to give you kind of more color on volume trends broadly in those new areas. But not yet, I mean, we're basically starting from launches in Signatera effectively in Q4, and then middle of the year last year is when we got going in transplant. So we started to see some green shoots there and some contribution to revenue in Q4. And we're just going to expect that to kind of grow consistent with our comps, so far this year.

Got it. Fair enough. And Matt, it's good to hear from you again. Following the SMART study readout and the validation of the algorithm here, can you just share some color on early feedback you've had since the SMART study? I know it's very recent, but I'm especially interested in the ability to detect patients at increased risk of pre-term birth in pre-eclampsia. Are those sort of standalone indication something that you could look to essentially add to the reproductive portfolio here? And on microdels, over what time frame do you think you start generating meaningful pay traction following the readout?

Yes. This is Steve. Thanks, Tejas. I'll take those. On the payer side, we believe the most crucial aspect is society guidelines. We are currently generating high-quality evidence, conducting the largest prospective trial for NIPT that has ever been carried out, specifically focused on microdeletions to gather data that will be positively received by societies. Once the paper is published this summer, we anticipate feedback from the societies. In various press releases, the principal investigators of the study have expressed strong optimism about the potential for changing society guidelines. If that happens, payers will likely adjust their guidelines as well. We are eager for the paper's release, followed by updated society guidelines and subsequent changes in payer policy. As we mentioned earlier, last year we conducted 400,000 microdeletion tests, achieving a growth rate of 37% year-over-year compared to 2019. This is a rapidly expanding sector. We are conducting the tests, and if we can secure reimbursement, we will see significant momentum. Regarding the first question about pre-eclampsia and pre-term birth, we decided a while back not to report results with extremely low fetal fractions because we believed it could mislead physicians and result in a negative NIPT outcome when there might be more significant issues at play. Recently, we found that fetal fraction is not only a key quality control measure for accurate microdeletion results but that patients with low fetal fractions also face elevated risks for pre-term birth, fetal demise, and pre-eclampsia at alarming rates. We are eager to see how physicians and experts in the field interpret this information. With the Panorama AI algorithm, we are observing risk percentages of 15%, 16%, and 17% for pregnancies, which are substantial compared to other available biomarkers. While it is unlikely to serve as a standalone test, it provides additional valuable insights alongside negative callbacks that are unavailable from other laboratories.

Got it. That's super helpful, Steve. And one final one on Prospera for me. I feel like that's a part of the pipeline that sometimes doesn't get as much attention as oncology. The market is sort of still relatively at low levels of penetration. Over what timeframe, do you think you have a shot at sort of pulling even with your competition there? And have you thought about sort of creating an ecosystem of service offerings around Prospera? Your competitors launched a referral service and a waitlist management service and a software like EMR platform, etc. Is that very much on your radar as well as you think about ramping Prospera volumes here?

We spent a significant amount of time discussing organ health today, an area where we continue to invest and are performing very well in 2020. At the JPMorgan Conference, we noted that we exceeded our pre-COVID estimates for Prospera, which we're happy about. The performance of the test and our interactions with key opinion leaders have been positive. We are also monitoring various ancillary opportunities to determine if they align with Natera's broader strategy, as well as our approach to engaging with patients and physicians. If they do align, we will definitely consider them. We believe there is substantial growth potential in this area moving forward.

Got it. Thanks so much and congrats again.

Thanks.

Our next question comes from Tycho Peterson with JPMorgan.

Hey, thanks. A couple on Signatera IO and Altera, given the timeline for the final LCD that you laid out, I guess is the initial use case for Signatera IO for RUO for pharma until you have the final LCD? And then, pricing you previously talked about $1,800 to $3,500. I'm just curious, if there's any updated thoughts? And then how are you thinking about pricing for Altera?

Yeah. So on the Signatera IO side, the test is CLIA validated. We have a peer-reviewed publication that came out in Nature Genetics last summer that serves as a validation study. So it's on the market now through our sales force in the CLIA environment clinical offering. So it's available to pharma as well as a CLIA test, but it is being sold through the commercial clinical sales force at this point. Now we're getting out there pre-reimbursement and we expect reimbursement to come in at some point this summer. And as you build the ramp when you initially launch something in the earlier days, the volume coming in and the ramp is less significant. So we think we'll be hitting our stride right around the time that that reimbursement comes in. The great thing about the Altera launch is that it's the same tissue sample and it's going to be very convenient for physicians to be able to order Altera, get the information back on therapy selection and tumor mutational burden MSI status, and then the ongoing monitoring and surveillance with personalized Signatera. Now the reimbursement for Altera is already established, so we can piggyback on the broad reimbursement that's already in place there. And that's one of the reasons why we thought it made sense to launch this and to add it to the bag.

And then how often do you expect Signatera IO and Altera to be used together? Do you think that becomes the norm?

Yeah. I mean, if you look at the opportunity and the percentage of patients that are eligible for IO monitoring and then how that decision is made on who's eligible for IO treatment, it does seem like the vast majority of the time someone is setting up for potential Signatera that they're going to want Altera.

Okay. And then as we think about your work with Foundation on developing liquid exome, how do you think about that in the context of these launches? I mean, is that something that potentially could replace Altera over time, or no?

No. We think about the Foundation partnership as separate. I mean, Foundation Medicine is really the leader in tissue-based comprehensive genomic profiling. And the product that we're working on with them is going to be a therapy monitoring product that is based on their FoundationOne CDx product, which is a targeted panel comprehensive genomic profile. So they have a large team in place. They have a big customer base. And whenever somebody orders that FoundationOne CDx, they'll be eligible to design personalized primers. So we think about our exome-based Altera and Signatera as an independent offering. And together we're going to approach this market.

Okay. And then a follow-up on the microdel commentary, I just want to be sure I heard that right. Do you think the guidelines could actually change as soon as this summer? I mean, we're all a little bit jaded from the average situation. And why do you think you're more bullish on microdels than some of your peers who have talked it down?

The societies respond to peer-reviewed data, and this study is significant enough to make an impact. Previous studies related to noninvasive prenatal testing, even for high or average risk, were much smaller and less rigorous than this one. A study of this size and with this level of clinical outcome has never been conducted before. If you were to design the ideal study to get a positive response from the societies, this would be it. When we consulted with key opinion leaders and society members about what they needed to see to alter society guidelines, they identified two criteria: a disease incidence that aligns with expectations and high sensitivity alongside a high positive predictive value. At the time, 22Q was believed to have a prevalence of approximately one in 2,000, but our study revealed it to be closer to one in 1,500, indicating it is more common than previously thought. Furthermore, we demonstrated exceptional sensitivity. For microdeletions above 2.6 megabases, sensitivity was 100%, and for all 22Q microdeletions, it was 83%. The positive predictive value stood at 53%. In comparison, traditional serum screening for aneuploidy has a positive predictive value of just 5%. Noninvasive prenatal testing for aneuploidy typically has a much higher predictive value, between 80% to 90% for trisomy 21, while being lower for trisomy 18 and 13. This performance positions our study among the best concerning common aneuploidies, and we are very optimistic about the findings. It's a serious genetic disorder with significant implications for live births, and our screening test has proven to be highly effective. The gold standard study has been completed successfully, and the results are promising. This aligns perfectly with what is needed to potentially change guidelines. While we cannot guarantee outcomes, this presents an ideal scenario for guideline adjustments. If such changes occur, it’s likely that payers will adapt accordingly, and we are anticipating the publication to be released sometime this summer.

Okay. That's helpful. And then just last one quickly on guidance. On the guidance side for R&D, you highlighted expansion into new oncology indications. Is that anything you can kind of shed some more color on? Is that other indications beyond CRC? Is it pan-cancer MRD? Is it liquid exome? What's kind of the priority of this?

Yes. So we're looking at multiple different things. That includes rapidly expanding Signatera indications. So while we work on commercializing colorectal and IO monitoring, we're looking at a long list of additional indications. We think eventually Signatera will be a pan-cancer assay and we're working on generating the data in multiple different indications as we've shown in the slide deck. But we're also looking at other ways that we can penetrate to the $50 billion liquid biopsy market. We talked today about tissue-based therapy selection. But we think that there's a lot more that Natera can do to leverage the strength of our technology across the entire $50 billion TAM. And you can certainly believe we have irons in the fire in each of those circles that we've shown in the slide deck.

Okay. Thank you.

Next question comes from Doug Schenkel with Cowen.

Good afternoon, everyone, and thank you for taking my questions. First, I have a trend and math question. It appears that you conducted about 22,000 tests per week in the fourth quarter. I'm curious how that figure changed throughout the quarter. Considering you were averaging 17,000 to 19,000 tests per week during the first three quarters of the year, to what extent did the increase from the start of the year to what we observed in Q4 result from average risk, new products, or seasonality? Lastly, are you anticipating further growth as we move into Q1 and beyond?

Yes. Thanks, Doug. I apologize actually, my phone broke up for the first half of the quarter.

I got it. Steve, I'll take it. Yes. The main part of the question concerns how much of the increase in Q4 is attributable to average risk versus the natural business progression and our usual seasonality. Looking back over the year, we found that the volume growth was primarily driven by organic new account acquisitions combined with improved account retention. The balance between average risk and high-risk NIPT remained relatively stable throughout the year, with historical figures around 60% average risk and 40% high risk. This has shifted slightly, possibly to about 63% average risk and 37% high risk. This indicates that the average risk segment is not yet the primary driver of our performance, which may be more prominent in the future. As for Q4, we usually see an increase compared to Q3, but this year's jump was more significant than in previous years. The charts in the presentation illustrate this considerable increase in Q4 compared to past trends. This growth appears to stem from positive account wins and organic growth. In hindsight, we will assess how much of this was contributed by average-risk penetration, which seems to still lie ahead for us. As for volume projections for next year, they are summarized in the revenue guidance, indicating expectations for strong volume growth next year, moderated by the conservative outlook we've discussed in the prepared remarks.

Okay. Just a couple of clarifications, Mike. And thank you for all that. So there's nothing in there. I think Signatera would be in that number in terms of kind of Q3 to Q4 where you had another quarter of marketing. You're starting to get paid. That wasn't a big mover to the sequential improvement.

Yes, that is a factor. Since it didn't play as much of a role in Q3 due to our growth, I believe it contributes. However, if you observe the sequential growth in the women's health business, it is evident across all product lines. There isn’t a significant difference where new products are increasing and existing products are stagnant; in fact, we noticed substantial growth throughout the business.

Okay. That's very helpful. Steve, I'm going to ask a similar question to ones I've posed to other companies in this area during earnings calls. I apologize for repeating, but we’re going to revisit this topic. You and your peers seem to be aligned regarding the cancer menu, which we have anticipated for some time. It appears to be progressing faster than we initially expected. Your transition to MRD monitoring seems like a natural and wise move given your expertise in high sensitivity cell-free DNA assay development. However, you are now entering the tissue space where your experience is somewhat limited, particularly in utilizing tissue for diagnostic purposes. It looks like you would need assays for screening and blood-based therapy selection to complete the offering. With that in mind, I have a few questions. First, how did you expand your tissue capabilities? Second, how are you developing your commercial infrastructure to support the complete menu? Is that the correct approach? And lastly, how do you plan to enhance the menu? Mike mentioned increased investment in R&D and SG&A at the end of his remarks. When I consider areas like screening, it seems that pursuing inorganic options could be more beneficial. I would like to hear your thoughts on this.

Thanks, Doug. We've been actively hiring in R&D, which is reflected in our results, and we have a strong team in place. We're working on various initiatives and are excited about the Altera launch, viewing it as the initial step into a $6 billion therapy selection opportunity. We believe that exploring liquid therapy selection and asymptomatic screening is sensible, and we'll be making informed, targeted decisions in this area. We possess unique advantages, such as conducting early-stage exomes that provide us with information unavailable to others, enabling us to design effective assays for asymptomatic settings. While our focus on asymptomatic screening is strategic, we will share more details as our program advances. For both tissue and liquid therapy selection, we are applying the same techniques we use for other assays. Our skilled team positions us well to develop competitive tests for the market. We're aiming to utilize the commercial framework we've established to offer a comprehensive menu to physicians. Our oncology team consists of high-quality medical and sales staff, and when interacting with physicians—especially in areas of significant synergy like IO monitoring and Altera—it makes sense to take advantage of these opportunities.

Steve, can I add a comment there?

Yes. Sure, Solomon.

Yes, there's a significant opportunity here, as you noted, Doug. From my viewpoint, our main focus is to maintain and enhance our leadership role in MRD, which has created numerous chances to improve patients' lives. We are seeing considerable demand from the data and utility we have generated. When considering the platform's potential, there are two key aspects. First, when you conduct a Signatera test, you automatically receive a tissue sample, a normal DNA sample, and various other samples. There is a lot that can be done with those specimens. Secondly, after creating a personalized assay for a patient and conducting long-term monitoring, that patient remains with us for an extended duration. This establishes a unique long-term relationship that is less common in this industry. We aim to maximize that relationship by providing the best services and insights for those patients. Together, these elements will also contribute to our clinical genomic data strategy, yielding an extensive amount of genomic information that has not been available before from exomes in both early and late-stage patients with long-term follow-up. This will open up new investment opportunities that will further strengthen our leadership position. I believe there are many opportunities ahead, and we are well-equipped to pursue them.

Thank you. Your next question comes from Catherine Schulte with Baird.

Hey, guys. Thanks for the question. First, just one on guidance and then I have a couple on Signatera. Mike, how should we think about revenue pacing throughout this year kind of weighting in the first half versus the back half? And I'd imagine transplant and oncology as well as some of the average-risk ASP lift are likely more back-end loaded.

Yes, that's exactly right. Thanks for that question. I mean, it is significantly back-end loaded. And part of that is just the natural tempo of the business and the fact that you've got volumes growing through the course of the year, since the business is growing so quickly. Part of that is related to reimbursement, where you'll have broader reimbursement for things like IO monitoring which will be contributing volumes in the first half and can start to contribute to actual revenues in the second half, so long as we can get the CMS reimbursement in place. So drivers like that do tend to put you kind of more back-end weighted this year.

Okay. And then on Signatera RUO, you had $55 million of total contracted value at the end of 2019, added another $65 million to that last year. Can you just talk to how much that contributed to revenue in 2020? And when can we expect to see that ramp up more materially?

Yes. To refresh everyone, typically, when you sign a contract for a pharma deal, it takes about a year from signing for patients to start sending samples, and you recognize revenue from that contract in the second and third years after signing. You can see from that chart that we started in the approximately $9 million range and have grown from there. This pattern provides a clear indication of our pharma revenues this year, which are in the high single to low double-digit millions. This growth will continue to increase, especially as we move into larger studies. That's why results from trials like Imvigor are so significant for us.

Okay. And then on the breast cancer recurrence Phase II trial initiated by Mass Gen last year, are you still expecting a data readout sometime this year? And is it your thought that that would be enough to take to Medicare, or do you think you’d have to wait for the Phase III data?

Yes, I'll make a comment on that and then maybe Solomon, you can come in. So we actually announced two trials, one with Pfizer and the other with Novartis that were looking at breast cancer treatment on molecular recurrence, both Phase II trials. And I think we're excited about that because that's an enormous opportunity. I mean, the breast recurrence market is maybe five, six times bigger than the colorectal market. And that's an area where there are Phase III trials that we've competed for and we're feeling very, very good about. I do think that in order for physicians and pharma companies to be enabled to actually make that change, you'll need to see the Phase III data. But certainly, I think these Phase II trials will be good initial readouts. But there are Phase III trials underway that we look forward to making announcements in the near future. Solomon, would you like to make additional comments there?

Sure. Yes. Just echoing breast cancer is a hugely important area with a lot of unmet need and there are other studies that are underway that have not been announced yet. But yes, I agree with Steve that in terms of base case assumption, you need some strong level one data like Phase III data to really enable that. But there is upside potential. And we've seen before the breast cancer patient population. It's very active, very forward-thinking, a lot of patients who take matters into their own hands and push policy forward more than you see in some of the other cancer types. So, between that and a lot of the data, we'll be reading out earlier, I think there's some upside potential. But in general I agree with you Steve.

Okay. And if I could add one more, please continue.

Yes, just going to say Catherine. As a reminder too, we just published some great data in neoadjuvant breast. And as you saw in the slide deck, we've had another peer-reviewed paper in breast cancer that's been accepted that we can't talk about now. But just adding to the massive amount of data that we have out there, one of the main things that separates Signatera from some of the other groups that are coming into MRD is the amount of data that we have. I mean, we have now eight accepted and published peer-reviewed papers and over 2,000 patients that have been studied. And when you look at some of the competitors that are now coming in that really don't have any peer-reviewed data yes, I think it's a very significant differentiator.

Okay. Got it. And just sneaking one and you've talked a lot about early detection today. What's the general timeline we should think about for hearing more about your early detection plans? And is your general thought to take a multi-cancer or single-cancer approach there?

At this time, we haven't shared any specific details about our plans. We will provide updates when we are ready. Currently, we are working on several initiatives, leveraging our unique capabilities from early stage exome data. We have a focused investment strategy aimed at this market. We look forward to sharing more updates in the future, but today we are not prepared to provide specific information.

All right. Great. Thank you.

Ladies and gentlemen, this is all the time we have for questions today and this also does conclude today's presentation. You may now disconnect and have a wonderful day.