Natera, Inc. Q2 FY2024 Earnings Call

Good afternoon, and welcome to Natera Inc.'s Q2 Earnings Conference Call. All participants are in a listen-only mode. After the speakers’ remarks, we’ll have a question and answer session. As a reminder, this conference call is being recorded. I would now like to turn the call over to Mike Brophy, Chief Financial Officer. Thank you. Please go ahead.

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our second quarter of 2024. On the line, I am joined by Steve Chapman, our CEO; Solomon Moshkevich, President, Clinical Diagnostics; and Alexey Aleshin, General Manager of Oncology and Chief Medical 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 posted to our IR site as soon as it's available. Starting on Slide 2. During the course of this conference call, we will make forward-looking statements regarding future events and our anticipated future performance, such as our operational and financial outlook and projections, our assumptions for that outlook, market size, partnerships, clinical studies, and expected results. Opportunities and strategies and expectations for various current and future products, including product capabilities, expected release dates, reimbursement coverage, and related effects on our financial and operating results. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. Please refer to the documents we file from time to time with the SEC, including our most recent Form 10-K or 10-Q and the Form 8-K filed with today's press release. Those documents identify important risks and other factors that may cause our actual results to differ materially from those contained in or suggested by the forward-looking statements. Forward-looking statements made during the call are being made as of today, August 8, 2024. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. Natera disclaims any obligation to update or revise any forward-looking statements. We will provide guidance on today's call, but will not provide any further guidance or updates on our performance during the quarter unless we do so in a public forum. We will quote several numeric or growth changes as we discuss our financial performance. And unless otherwise noted, each such reference represents a year-on-year comparison. And now I'd like to turn the call over to Steve. Steve?

Great. Thanks, Mike. Let's get to the highlights on the next slide. We had another excellent quarter across the board. Revenues were up 12% sequentially versus Q1 of 2024 and up 58% compared to Q2 of last year. This was driven by record volumes and another strong quarter of ASP growth. Volumes were up over 23% compared to Q2 of last year. We had a great quarter winning new accounts in women's health and despite the typical Q2 seasonal headwinds, we grew volume sequentially versus Q1. In organ health, we posted another strong volume quarter. And in oncology, Signatera grew another roughly 13,000 clinical units over what was a very strong Q1. We delivered a strong gross margin quarter with excellent ASP and COGS trends that I'll get into shortly. All of that means we can raise our guidance in revenues and gross margin for the full year. We are now centering the guide around roughly $1.5 billion in revenue and a 55% gross margin. At the midpoint, the new guide implies annual revenue growth of nearly 40% and an increase in gross margins of roughly 10 percentage points from the 45% gross margin we posted last year. We're excited about our progress and our transformational year continues. We also had many positive developments on the clinical and product side that we'll discuss on today's call. First, I want to flag that the ALTAIR investigators let us know that they are not going to make the timeline for the submission to ESMO in mid-September. As you know, there's a huge amount of patient review and data analysis to generate the results and ready them for presentation, and the circular investigator team needs more time to get everything going. Their current plan is to target ASCO GI in January, so we'll stand by and let them do their work. In the meantime, we have an extremely full calendar of important data readouts in colorectal and other cancers, and we'll spend time reviewing that today. This includes the very significant 36-month readout from the GALAXY study, which we believe is of critical importance because it marks the first prospective overall survival data readout for Signatera in colorectal cancer. These results will be shared at ESMO. In addition, Solomon will provide an update on organ health and some recent news on Prospera and Renasight. He will discuss a major win with the new consensus paper published by the National Kidney Foundation that recommends genetic testing for the majority of patients with kidney disease. We also launched a new differentiated feature for our Prospera Heart Test that enhances the detection of organ rejection for heart transplant patients and allows us to deliver a more accurate risk assessment across both acute cellular rejection and antibody-mediated rejection, then with donor-derived cell-free DNA percentage alone. And finally, on the legal front, the Federal Appeals Court in July upheld the preliminary injunction of the RaDaR MRD assay made by NeoGenomics. As a reminder, the preliminary injunction was first issued by the District Court late last year. So this recent decision upholds that order, barring sales of the assay with limited exceptions. We are pleased with the outcome and look forward to presenting our case to the jury next year. Okay. Let's get into some of the business drivers on the next slide. The first slide shows the year-over-year volume progression we've had over time, both in terms of growth rates and absolute unit growth. This quarter looks like one of the best Q2 results we've had in the last 5 years. As a reminder, volumes from our existing women's health customers usually decline 5% to 10% compared to Q1 because clinics see fewer new pregnancies in Q2. Given the large book of existing business we have in women's health that drag of same-store sales volume is hard to overcome with new account wins. So I was particularly pleased to see the new volume growth in women's health above and beyond our strong quarter in Q1. The outperformance was partly enabled by our differentiated new product features, especially the Noninvasive Fetal RHD analysis, which we launched in May in the midst of a nationwide shortage of program that continues to affect the industry today. We continue to see very strong interest in our core women's health products, Panorama where we're the market leader in NIPT; at Horizon, where we're the market leader in expanded carrier screening. In addition to that organic growth, we got a full quarter contribution from the Invitae deal that we announced in January, which further boosted our growth in the quarter. We also saw another great quarter for both Prospera and Renasight. We continue to perform well here and growth is accelerating. Of course, Signatera was a major source of growth in the quarter, and we had another outstanding result in clinical volumes as you can see on the next slide. The left-hand chart is the total oncology volume metric we've always shown, which includes Signatera clinical as well as Altera orders in pharma clinical trial units. The right-hand chart shows the quarterly volume progression of the clinical setting over time. You can see in the past, we typically have added about 8,000 or 9,000 units per quarter. We had a big step-up in Q1, and now we followed that with roughly 13,000 sequential units in Q2. While we still think roughly 8,000 to 10,000 units of quarterly growth is the right baseline expectation going forward clearly, the experience physicians and patients are having with Signatera continues to drive meaningful adoption. So, all that volume growth helped us to drive one of the best Q2 revenue growth performances in recent memory. This next slide shows the Q1 to Q2 change in revenue in the last 2 years, alongside the 2024 results. In addition to the volume trends, we continue to see very positive trends in ASPs really across the businesses. Signatera ASPs were up modestly over Q1, but we're modeling some additional growth ASPs for the rest of the year as we've seen some continued positive momentum from both Medicare Advantage plans and biomarker state reimbursement that can be a source of upside through the year. Women's health ASPs were very strong once again this quarter. Even without the tailwind of potential new guidelines, which we're still very positive on, we continue to make improvements on the fraction of cases that are getting reimbursed. That has been a major undertaking internally, and we made substantial investments in data analysis, engineering, and persistent appeals and payer outreach to make that happen. We model women's health ASPs remaining stable through the rest of the year, but we have a list of projects that may provide upside as we work through them. All of this effort is driving cash collections in excess of the revenue accruals we set last year, which is why we are seeing these revenue true-ups in 2024. These true-ups will be lumpy, and so we don't include future true-ups in our guidance, but they do represent execution above our prior expectations. While the ASPs improve, we continue to benefit from the efforts of our R&D team to reduce our cost of goods sold. Signatera COGS modestly declined again in the quarter and are now just above $400, and our women's health COGS remained in the range we achieved in prior quarters. The net result is that we had another record gross margin quarter. This slide shows both the total gross margins as well as the underlying gross margins and net of revenue true-ups, and both metrics tell the same story. Underlying organic gross margins grew about 2 full percentage points above the Q1 results and now stand above 54%. The next slide shows our cash burn trajectory over time. For those of you that are newer to the story, you can see that historically, we made substantial initial investments to launch Signatera. And now we are getting scale on that commercial and operational base, while women's health continues to generate cash. We are very pleased to be cash flow breakeven for the second consecutive quarter, which is above our expectations given the potential for seasonal headwinds in Q2. Looking into the second half of the year, we are well positioned to hit the guide of cash flow breakeven for the full year even when incorporating the stepped-up investment in R&D and sales, we announced in May. I'll say this again. We did not get to cash flow breakeven by flashing investments in our future. Our strategy is to keep our foot on the gas and to make sure we're doing everything we need to deliver fantastic products for our patients. With that, let me hand the call over to Solomon to cover organ health and commercial updates from oncology. Solomon?

Thanks, Steve. Good afternoon, everyone. I'll start with updates on organ health. Since we launched the Renasight test in 2020 for renal genetics, key trial data and now society guidelines have reinforced the importance of genetic testing for the 37 million patients in the U.S. affected by chronic kidney disease or CKD. We are pleased to share that the National Kidney Foundation published a new consensus paper last week with a strong endorsement for comprehensive genetic testing in the majority of patients with CKD. The consensus paper included input from experts in nephrology, clinical and lab genetics, kidney pathology, and genetic counseling, in addition to patients who also provided their perspectives. The NKF paper recommended a broad multi-gene panel as the primary choice for testing. Natera agrees with that position and our Renasight test covers 385 genes. NKF also clearly recognized the clinical utility and benefits of genetic testing across a wide range of renal conditions and patient characteristics. We, too, reported on that strong utility in our recent RenaCARE trial, which showed 1 out of 5 patients with a positive genetic diagnosis, 1 out of 2 positives leading to a change in diagnosis, and 1 out of 3 positive cases leading to a change in therapy. The NKF paper follows the recent guideline update from KDIGO, which we spoke about on our earnings call in May. So this means we now have support for genetic testing from two of the major organizations in nephrology. We believe these recommendations will continue to have a positive impact on clinical adoption of the Renasight test. Moving on to Prospera, where we are seeing multiple account wins in kidney, heart, and lung. Following some turbulence last year after changes in Medicare reimbursement, we see the market has fully rebounded and on a positive growth trajectory, and we believe Prospera is taking a disproportionate share of the growth. I would like to highlight that we recently launched a product enhancement for our heart transplant test called DQS or donor quantity score. Previously, Prospera Heart reported out the fraction of donor-derived cell-free DNA in the blood compared to the total cfDNA, but the donor fraction can be influenced by fluctuations in background cell-free DNA. For example, patients who are fighting off an infection, a malignancy, or who just underwent surgery, all of those could cause the background levels of cell-free DNA to vary. With DQS, we have a second threshold, which is independent of those background cell-free DNA levels. This feature was previously introduced for Prospera Kidney and now it's available for Prospera Heart, too. In a study presented at the International Society for Heart and Lung Transplantation in April, we showed that the addition of DQS increased Prospera's sensitivity to rejection in heart transplant from 80% to 88%, and it also reduced false positives by approximately 37%. We plan to submit the study for peer-reviewed publication later this year. This new and improved test enables clear clinical decisions and fewer unnecessary biopsies, all using BDC FD&A. Turning now to oncology. On the commercial front, as Steve noted, we saw excellent growth for Signatera clinical volumes driven by multiple factors. We saw another impressive increase in the number of ordering physicians with over 40% of all oncologists in the U.S. ordering at least one Signatera test during the quarter. There was also strong growth in new patient initiation, which was observed across all major disease indications led especially by colorectal cancer and breast cancer. This growth is being driven by the core value proposition of Signatera to inform risk-based treatment decisions in the adjuvant setting after surgery, to monitor for recurrence in conjunction with standard imaging, enabling earlier interventions. For example, over 85% of colorectal cancer recurrences are historically caught too late for curative intent surgery, which is the preferred treatment approach. And number three, to monitor for response to neoadjuvant therapy and immunotherapy. We're also investing heavily in user experience. Record numbers of customers are choosing mobile phlebotomy and engaging with Natera through our digital portals and EMR integrations. And test results are being delivered reliably in under 3 weeks from the time of specimen receipt for initial cases and under a week for subsequent cases. One final note on the commercial side. I want to comment on our partnership with Foundation Medicine. The deal with Foundation was originally signed in 2019 and was up for renewal this summer. For business reasons, the companies have decided not to renew the agreement. This allows Natera to maintain our focus on growing Signatera, Altera, and Empower and adding new cutting-edge products and services to our oncology portfolio. For continuity of care, we will continue monitoring services for any existing F1 tracker patients. Now I'll turn it over to Alex to discuss our clinical roadmap in oncology. Alex?

Thanks, Solomon. Operational improvements and volume growth in the oncology business continued to outperform our expectations, and the clinical utility of Signatera continues to gain traction based on the core value proposition from the previous slide. At the ASCO meeting in June, Signatera was featured in over a dozen publications. And I wanted to highlight one particular multi-institutional study from UCLA and other academic institutions that really nicely delineates this clinical utility. As highlighted on this slide, this study examined 464 patients with Stage I to III breast cancer. The vast majority of the patients tested Signatera negative, offering valuable reassurance in a time of high anxiety. And the 12% of patients who tested Signatera-positive, investigators reported a treatment change in 91% of these patients with evidence that treatment change resulted in possibly improved outcomes. Some of you will remember the INTERCEPT study in colorectal cancer from MD Anderson. This study is very similar but in breast cancer. This is a great showcase of how Signatera is being adopted into clinical practice and having a positive impact for patients across the country. We are also pleased to publish several new peer-reviewed publications during this quarter, including the expanded EBLIS study, which we discussed in the Q1 call. But since then, there have also been new studies in muscle invasive bladder cancer, pancreatic cancer, and Merkel cell carcinoma. The latter two represent first-time publications for Signatera in these disease indications, and we believe they are both areas of significant clinical unmet need. For example, in the Merkel cell carcinoma paper, Signatera testing after curative treatment was associated with significantly higher risk of recurrence. The hazard ratio reported was 7.4. This outperformed established Merkel cell carcinoma risk factors currently being utilized by clinicians. We look forward to presenting these new indications to Medicare later this year adding to the multiple submissions that are currently under review, and we will provide an update on these submissions in the future. Looking ahead to future data readouts. We have a strong pipeline of prospective randomized trials that we believe could, if successful, further change clinical practice in the United States and globally. As Steve mentioned, the ALTAIR investigators notified us of the need for more time for data review, analysis, and interpretation. So they plan to delay the study readout to ASCO GI in January. We defer to the PIs on the timing and look forward to announcing these results at that time. Meanwhile, we are looking forward to the readout of the new GALAXY data at the ESMO conference in September with 36-month outcomes being reported in over 2,000 patients, and mature overall survival data being presented in addition to disease-free survival data. This will be the first time prospective overall survival data in colorectal cancer will be presented. Looking forward to 2025, 2026, and beyond, we have a full suite of Phase III studies in colorectal cancer, bladder cancer, and breast cancer, including both escalation and treatment on molecular recurrence studies. Furthermore, we have trials focused on de-escalation and some trials that span both of these indications. In bladder cancer, we're expecting the IMvigor011 trial to read out in 2025 with the MODERN trial also continuing to enroll well after being recently opened. We also have important breast cancer trials that we've previously presented on. This is just a snapshot of our data pipeline, and we continue to invest in generating high-quality clinical evidence to achieve our vision of Signatera as part of standard clinical practice. I also want to provide an update on our early cancer detection program. We continue to make progress in developing a differentiated blood-based assay to detect colorectal cancer. We are finishing a study utilizing prospectively collected colonoscopy matched average-risk blood samples supplemented by colorectal cancer samples. We look forward to sharing these results in the near future, and I will provide further details on our plans at that time. Now I will turn it over to Mike to cover the financials. Mike?

Great. Thanks, Alex. The next slide is just a summary of the P&L in Q2 and the year-over-year progress. Steve covered the key points on revenues and margins. On the expense lines, just as a reminder, we've made several growth-oriented investments in SG&A over the past year. For example, taking up the women's health sales team from Invitae, which is working out very well. We also had a modest step up in R&D in clinical trials. These measured increases in OpEx are consistent with the Q1 guide, and I think are indicative of how we would like to proceed for the time being. We'd like to maximize investments to grow revenues and margins while holding our cash balance relatively constant. That's what we achieved here in the second quarter that we were able to break even despite the seasonal headwinds that Steve described, and our cash balance actually grew slightly with interest income. Okay, let's get to the revised financial guidance on the next slide. On revenues, we are now expecting $1.49 billion to $1.52 billion. This represents a bump of $70 million at the midpoint as compared to the roughly $30 million beat in the quarter when removing revenue true-ups Steve talked about. The annual revenue guide now implies about 40% revenue growth versus 2023. The guide also implies we are bullish on the second half of the year, and we are off to a good start so far in Q3. On pacing, we expect steady sequential growth in volumes and revenue in Q3 and Q4. Our guide always assumes 0 and true-up revenues in future periods. And if we continue to generate cash above our expectations in the second half, any true-ups would represent upside to our guidance. We are also modeling largely stable ASPs in the second half for the overall business. So we do expect to see continued modest sequential improvement in the Signatera ASP, given the current momentum that Steve described. We are leaving the OpEx guide and the cash guide unchanged versus Q1, and we are still on track to make all the necessary growth investments we have planned for this year. I'll repeat my disclaimer on cash burn. Now that we are operating at this breakeven level, it's important to understand that we expect to have fluctuations in quarterly cash burn due to timing of capital expenditures and working capital. The timing of reimbursement from payers can easily vary in a given quarter. So I wouldn't be surprised to have a quarter where we have negative cash flow and others where we are positive and the guide just represents the full year results. The income statement, of course, is less prone to these swings. And so I expect our losses to continue to gradually narrow through the course of the year. Okay. So with that, we're very pleased with the quarter and happy to take your questions. Let me hand it to the operator.

Our first question comes from Dan Brennan from Cowen. Please go ahead, your line is open.

Great, thank you. Congrats on the quarter, and thanks for the question. Maybe just on the clinical trial readouts on ALTAIR and GALAXY. I appreciate the ALTAIR readouts delayed just due to the PIs maybe more time. But is there anything to read into this at all from either given the time that they need from either the PFS or the OS that you might see coming out of this trial? And then on GALAXY, OS would be something, I understand this is an observational trial, not a randomized trial. So how do we think about the expectation here if we see an OS benefit, what that could actually mean either for kind of doctor usage and/or NCCN?

Yes. Thanks, Dan. Good question. So yes, on ALTAIR, I mean there's obviously a lot of work to do to get the patient data together and complete the analysis. And I think the timeline leading into ESMO was just a little bit too tight. So the PIs want to move to the next kind of large-scale conference, which is ASCO GI. And of course, we support that. But we're definitely excited about reading out the GALAXY 36-month data at ESMO. And I think for having the first perspective, overall survival data readout on Signatera is going to be a big milestone, and it's something that we're really excited about. So Alex, do you want to talk a little bit more about I think this readout coming up at ESMO?

Yes, certainly, Steve. Thank you for the question. In the context of colorectal cancer and the adjuvant setting, a three-year disease-free survival is typically regarded as the benchmark for predicting overall survival. The timing is ideal since we are now able to analyze the overall survival data from the GALAXY cohort, which is also maturing. We believe this provides two significant advantages. Firstly, it demonstrates how the results from Signatera correlate with long-term outcomes, including disease-free survival and overall survival. Secondly, it establishes a framework for evaluating circulating tumor DNA dynamics as potential indicators for future clinical trial development.

Great. And then if I have a follow-up just on pricing. True-ups have been obviously a big driver here in the last two quarters. I know you don't guide for that. Any way to characterize what that opportunity could look like? And then Mike, on Signatera pricing in the back half of the year, it sounds like I think from the last call, you were assuming flat pricing now, maybe you're assuming a step-up in price. Maybe just discuss if anything changed there?

Yes, thank you for the question. I would expect to see some additional true-ups, but since they are difficult to predict, we do not provide guidance on them. I believe this will stabilize. We have significantly increased average selling prices in response to improved cash collections over the past 18 months. As these prices rise, we hope that more revenue will be recognized immediately rather than requiring a true-up later. This will be an ongoing process. Regarding pricing, we've made progress with reimbursement for Signatera. Our guidance anticipates some modest increases in average selling prices in the second half, though nothing beyond what we believe is realistically achievable based on Medicare and Medicare Advantage reimbursements.

Great, thank you.

Our next question comes from Rachel Vatnsdal from J.P. Morgan. Please go ahead, your line is open.

Thank you guys for taking the questions. So first up on women's health, great to see the continued progress there this quarter, especially given the typical seasonality dynamics. So can you break out for us what was the contribution from the fetal test that you guys highlighted? And then also on the Invitae side, can you walk us through how much did Invitae benefit? You talked about some of the increasing of the salesforce there. So how should we think about that contribution in the back half?

Thank you very much. We are really excited to have launched the fetal RHD test, as it addresses a significant unmet need. We have seen ongoing interest, which has helped us attract new customers. One of the main factors that contributed to our strong performance in Q2 was the increase in new customers following Q1, which continued into Q2. Much of this growth is driven by the organic expansion of our women's health business. Invitae has also played a role in this; in Q1, we noted that Invitae accounted for around 25% of the women's health growth, and this was similar in Q2 as we received a full quarter of Invitae volume. However, a substantial portion of the new volume is coming from the organic growth of our Natera prenatal portfolio.

Great. And then just on my follow-up, you had another really solid quarter on the gross margin front. So I guess, how should we think about this progress continuing into the back half of the year? And can you kind of break down for us, especially on the Signatera side. You've mentioned some of the COGS dynamics. How much of that gross margin progression on Signatera was due to getting into the subsequent test for patients versus that first test where you really do the whole sequencing bit on the patient versus further operational efficiencies? And how do we think about that into the back half?

Mike, do you want to take that?

Yes, you're correct. The guidance for gross margin is positively impacted by the ongoing improvements in the Signatera gross margin. Additionally, I want to emphasize that the average selling prices in women's health are performing very well, which we've noted in this call. Specifically regarding the dynamics of the Signatera gross margin, we observed a slight reduction in the cost of goods sold for Signatera compared to the first quarter. This reduction is largely tied to the increased scale and volume we are experiencing. There is still potential to further decrease the costs related to conducting tissue processing in-house, especially as we establish the Austin lab, which will enhance our scale. This is a favorable factor for the latter part of the year. If you consider the overall progress in gross margin, excluding any adjustments, we can anticipate a continued modest sequential improvement in the underlying trend during the third and fourth quarters. That is what our model suggests.

Our next question comes from Puneet Souda from Leerink Partners. Please go ahead, your line is open.

Yes, hello everyone. Thank you for taking my questions. If it's alright, I would like to ask both regarding ALTAIR. I would like to get Alex's perspective on this. I understand it's been delayed, but in terms of benchmarking the trial with 240 patients that is 80% powered to deliver DFS at a hazard ratio of 0.67, is that the appropriate benchmark? You've mentioned the MOSAIQ trial previously, where Natera wasn't involved; could you clarify how we should benchmark this? My second question is for Mike regarding the gross margin. Can you explain the basis for the 54% to 56% gross margin estimate? I understand there is a true-up difference, but is there anything else we should take into account? Thank you.

Yes. Thanks, Puneet. Yes, Alex, why don't you go ahead and talk about what good looks like and then you can hand it to Mike.

Yes. Thanks, Puneet, for the question. I think as we've previously discussed and I think we stand by that benchmark. Mosaic is, we think, the best kind of DFS number to really target. I think that study showed a DFS of 0.0 0.77. And it was the last study that led to a change in treatment guidelines in the adjuvant setting. So we think that's still the right number. And I think we are just awaiting the final results to be generated and reported out by the investigators, and we continue to look forward to those when they're available.

On the gross margin, yes, I mean, I think the key delta to me is just that the second half could just presume 0 and true-ups, right. So that's a key difference between first half and second half. I do think that backing out the true-ups, as I've mentioned, I think it's kind of the organic kind of underlying gross margin. I think there's room for there to be sequential improvement both in Q3 and Q4. And so the guide is a blend of those couple of variables. So pretty bullish on the kind of organic underlying gross margin progression.

Okay. Got it. And if I could just squeeze a quick one around FMI. With the partnership termination, does that change your volume growth expectation for Altera or any impact on Signatera?

Yes, thanks. That's a good question. No, we mentioned we're not continuing the partnership going forward, and it doesn't change our guidance or our volume forecast at all in any way.

Our next question comes from Tejas Savant from Morgan Stanley. Please go ahead, your line is open.

Hey, guys. Good evening and thanks for the time here. Sticking with the Signatera theme, Alex, can you share some color on just in light of the delay here and ASCO GI, I think it's Jan 23rd. Is early next year the right time frame for when we can expect a top line readout from you guys? And then in terms of framing that readout, right? So should the trial not meet that sort of 0.77 hazard ratio bar, you talked about, do you think we could still get enough evidence from the subgroup level analysis to demonstrate that Signatera performed as it should, and it was the drug that failed to meet the bar. Just any color on those 2 points would be great.

Yes. So maybe I'll comment on the readout and then, Alex, you can talk about the performance. So yes, I think as we've got a ways out here now from ASCO GI, which is the next major conference. And as we get closer there, we'll kind of discuss the communication plan. I think we were planning to read out top line results if they were available a couple of weeks before the conference, but we'll meet with the PIs and decide what we want to do as we get a little closer to ASCO GI. Alex, do you want to talk about some of the subgroup analysis?

Yes, definitely. So I think the first question about asset performance. Signatera is being used in GALAXY. Altera is obviously a portion of that study. We published on assay performance in GALAXY. We're updating the performance estimates at ESMO, and that will also be published. So in terms of assay performance concerns, I think the data is out there and it's been published, and I think that's what we expect. Now in terms of subgroup analyses, here, I just don't even want to speculate. I think we're awaiting the final results. And depending on what the results show, subgroup analyses may be important, may not be important. They're pre-specified. So we'll take a look at those as soon as that data is available to us as well.

Got it. That's helpful. And then just as a follow-up, one of your competitors recently talked about greater physician preference for tumor-naive approaches in the surveillance setting. Just due to apparently a lack of conviction that a tumor-informed approach can continue to provide relevant results given the time since diagnosis. So I'm just curious as to your take on that. And as we think about your MRD pipeline, you've got a few things in the hopper here. Is that one aspect that you will look to address either via an improved version of Signatera, perhaps a broader tumor-informed panel or a tumor-naive approach of your own?

Yes. So we think at this point, the decision on whether tumor-informed or tumor naive is going to be more successful. I think it's pretty clear, right? If you just look at the volume and the physician interest in the marketplace. And a question about kind of tumor dynamics over time, that's not really relevant. I think generally, we're looking at coronal mutations that are present even if there's developments in the tumor over time. So I don't really think the way that it's being described is relevant. Look, we always keep our eye out on what's happening with competition, what's happening in the marketplace. And obviously, we've been successful doing innovative things and innovating and evolving products over time, and we'll continue to do that as the market evolves. But I think at this point, things are pretty clear, the tumor-informed approach is clearly the chosen approach by physician.

Got it. Super helpful, guys. One final one for me. Just on ACOG, Steve, as you think about that as a catalyst, I mean, it's still in the framework, but do you think it happens between now and year-end? Or you just don't know and there's a possibility that this could slip to 2025?

Yes, we remain very optimistic about the ACOG guidelines, both regarding carrier screening and 22q, and this is based on our analysis of the data, physician preferences, and existing studies. We anticipate seeing developments this year and are confident that progress is on the horizon.

Our next question comes from Matt Sykes from Goldman Sachs. Please go ahead, your line is open.

Hey, guys. Congrats on the quarter. My first one is, do you expect ASPs in women's health to decline at all for the second half, assuming ASPs, you mentioned will be stable in the second half with the sequential step-up in Signatera ASPs?

Hey, it's Mike. I'll take that one. Thanks for the question. No, we actually kind of model kind of stable ASPs in the women's health space for the second half. So do not expect a decline, which as the long-term follower in the car will recall, and that's a little bit of a deviation from the way that we typically guide. We've historically guided to some erosion in the ASPs, but that's just inconsistent with the momentum that we've seen in the women's health space. We've seen just continued progress really across the board in getting that long tail of recalcitrant payers that just reimburse particularly for NIPT. Now that it's been kind of the standard of care for a few years now, you kind of get this kind of conversion of that long tail of payers, and we're definitely seeing that now. So feeling very good about the women's health ASPs at this time.

Got it. And then is the CIRCULATE-France study that you're expecting data from shortly? Is that similar to the CIRCULATE-Japan study does it also have an escalation and de-escalation arm? And what are you expecting there incrementally that's potentially different from the Japan study?

Yes. Alex, do you want to take that?

Yes, absolutely. In the CIRCULATE-France study, we are focusing on the lower risk Stage 2 patient population, where the advantages of adjuvant chemotherapy are widely discussed. Most patients around the world are currently receiving adjuvant chemotherapy, yet many of them still experience recurrences. This study is randomizing Signatera-positive patients after surgery within this specific stage-defined group to either receive adjuvant chemotherapy or follow the standard care, which is observation. In many respects, it differs significantly from ALTAIR, as my question was regarding postoperative adjuvant therapy. There is no de-escalation arm because, under standard care, these patients typically do not receive adjuvant chemotherapy. Signatera negative patients will just be monitored, and their outcomes recorded, but there is no randomized de-escalation aspect.

Got it. Thank you. And I forgot to mention this is Sean on for Matt. Thank you for the questions.

Our next question comes from Doug Schenkel from Wolfe Research. Please go ahead, your line is open.

I want to address a few points regarding Signatera. First, I'd like to discuss competition but will hold off on that for now. What's the current ratio of first-time tests to surveillance tests? When you mention improvements in COGS, I assume that's not affected by the mix. This should improve further over time as the proportion shifts more towards surveillance. Also, considering you're on track for Signatera revenue growth of over 80% year-over-year, if we look at the current data on first-time tests and then consider that there will be an average of four more predictable surveillance tests per year moving forward, along with new growth in first-time tests, doesn't that suggest a strong possibility for continued volume growth of 50% or more in the coming year?

Thanks for the question, Doug. It's Mike. Yes, look, what we've seen is, first, when we launched ALTAIR, obviously, there's very few surveillance tests in the cohort. Then we've kind of grown to where historically, it's been kind of gotten to like a 50-50 kind of balance, and it has been quite stable there for some time. It's continued to evolve, but I would characterize it very broadly. It's still kind of in that zone where you have very high compliance of patients staying with Signatera into the surveillance setting. And I think steady state, that's probably the vast majority of your volume, 75%, 80% of your volumes, like over time, mature product would be that tail of patients kind of getting surveilled in the recurrence monitoring setting. We haven't seen that progression happen as rapidly as you might expect because the top of the funnel just keeps getting filled. I mean they just continue to be kind of new account when physicians adopting the test, new patients coming in the top of the funnel. And so that's kept that mix much more balanced, okay. And so to your point, I do think that it's kind of a unique dynamic, the fact that you've got this kind of long-term ongoing relationship with the patient where you stack up kind of classes of patients that stay with the test. It does support, I think, a longer-term outlook for growth potential that we're quite excited about because we think that can be extremely useful to patients over time. And you have the two-parter, and I'm only smart enough to remember one part. So I ask the second one again.

I believe the improvements in cost of goods sold you mentioned are independent of the mix, which appears stable at 50-50. Regarding competition, Garden released data from the COSMOS study, reporting a specificity of 98% and a sensitivity of 8%. While these studies are difficult to compare directly, this sensitivity seems significantly lower than what we've seen from you, by over 10 points. Garden claims their data is superior to what we have with Signatera. Are you noticing anything that indicates their results are equivalent or better than yours? Based on the current data, which segments of the market might be at risk for you? Should we expect any slowdown in growth if some customers consider switching to a more convenient assay, even if it sacrifices performance? Ultimately, it seems like convenience might be prioritized over performance.

Yes, thank you. Garden has been promoting their tests since 2021, and we have observed them being used in accounts and the field. They announced the COSMOS results in January of this year, which have been available for some time. It's positive that their paper has been published, but we don't believe this changes the overall dynamics significantly. They have shared their data for the past seven months, so we don't expect a substantial impact. We are very confident in our test performance, with 50 peer-reviewed publications and several additional studies underway. Currently, we see 40% of oncologists utilizing our product. Our operations are strong, and everything is progressing well.

Our next question comes from Tycho Peterson from Jefferies. Please go ahead, your line is open.

Hey, thanks. A couple of cleanups here. I guess going back to ALTAIR I just want to make sure I understand kind of the pacing here. I think you previously talked about the CRC committee for NCCN meeting this summer and incorporating all tier. Now that's pushed out to next year. How do you think about timing of NCCN? And do you still think this is kind of a driver versus strictly U.S.? So that's the first question.

I'm happy to address that. First, we are pleased to see that Signatera and MRD testing are already included as a footnote in the NCCN guidelines based on the available data. We are also looking forward to the 36-month prospective overall survival data set to be presented at ESMO, which we view positively. The committee has indicated they are seeking prospective overall survival data, and we are conducting randomized clinical trials to achieve that. While we cannot predict the NCCN committee's actions, we believe that our studies position us favorably. As Solomon mentioned, it's important to consider the various applications of Signatera. We have adjuvant decision-making primarily supported by the GALAXY study, and surveillance intended for curative surgery upon recurrence detection. These two aspects are currently driving a significant portion of our utilization. Additionally, the Altera study aims to explore a new treatment approach for molecular recurrence, although it hasn't been the main factor for our recent growth. We will have to wait and see how things unfold, but we are committed to positioning ourselves well by conducting these studies to influence guidelines and outcomes over time.

And then, I guess, on kind of use cases. I think last quarter, you talked about some bumps in bladder cancer, ovarian cancer. Ovarian on the back of Medicare coverage. Can you maybe just talk a little bit about some of those newer indications and if you're doing anything around kind of market development there?

Yes. So we're actually seeing a lot of interest in these other areas. And one of the things I think that is great about the Signatera strategy is that we've been able to generate peer review data and get coverage in multiple different indications now. And in fact, in this last quarter, as Alex announced, we just had data on Merkel cell and now pancreatic cancer. So we're continuing to generate evidence in new tumor types, and those will all be submitted for MolDX. So when we've gotten coverage, we definitely see a bump as we go out and the sales team starts promoting in those indications. And then as we look towards 2025, actually, one of the exciting areas I think, is bladder cancer with the IMvigor011 results potentially being read out in 2025. So we continue to see a lot of interest across the board, and we think that the pan-cancer approach backed by strong clinical data is the right approach.

Great. And then last one. Is it a little bit of a change in strategy on tumor-naive for MRD? I think in the past, you talked about spending about $15 million this year on data sets and maybe some readouts just somewhere in the fall. Understanding, obviously, it's a smaller part of the market, not a huge focus, but I think you previously talked about spending on tumor-naive.

Yes. So I think what we've said before is that we're definitely kind of looking at the competition, understanding what's happening, understand what physicians are interested in. We definitely think tumor-informed is, I think, a winning approach at this point. But certainly, we are aware of what's happening in the marketplace and what types of test physicians are using. I think we've said we're innovating and we're doing different things, and we expect to announce some different MRD enhancements and product line extensions in the future. And I think we'll just have to wait and kind of see what those are. As far as early cancer detection, I think that's generally where we've talked about having that spend in the range of like $10 million to $15 million and having some readouts coming later this year, and those are actually on track. So we expect in the very near future to be able to give a readout on our progress in early cancer detection, which we're excited about.

All right, thank you.

Our next question comes from Catherine Schulte from Baird. Please go ahead, your line is open.

Hey, guys. Thanks for the questions. Maybe first on women's health ASPs, just regarding your comments on improving the fraction of tests you get paid on even without guidelines. Does that hold true on microdels? Are you seeing improved collections there? Or was that more of a carrier screening comment?

Yes, Catherine, that's a good question. I would say that isn't the case for microdeletions. The improvement is really going to come from a change in guidelines. We're talking about situations where there is a covered test, but payers may not be paying as they should. You need to engage with the payer to ensure you receive payment, which might involve collecting medical records, appealing unjust denials, and similar actions. We are getting better at this over time as we gain more experience. However, the potential for improvement in areas that typically lack coverage, like microdeletions, still relies on establishing guidelines and securing coverage.

Okay. Got it. And then for Signatera, you mentioned, I think, over 40% of oncologists ordered it in the second quarter. What percent have ordered it at all cumulatively since launch? What portion of your sequential volume growth was from new ordering physicians versus penetrating existing accounts?

Yes, once doctors begin using Signatera, they tend to be consistent in their usage. However, different groups have varying ordering patterns. Typically, doctors will test it with a few patients, find value in it, and then expand its use in their practice, which might include other doctors ordering the test as well. They might also start using it for different types of tumors beyond colorectal. Generally, once they adopt it, there is a strong tendency for repeat orders and further expansion within those practices. Additionally, we monitor new physicians coming on board and observe a healthy influx of interested new users, some of whom may have been waiting for more data or figuring out the best timing to use the test. We are certainly seeing an influx of new users alongside the growth within the established physicians already using it.

We are out of time for questions today. This will conclude today's conference call. Thank you for your participation. You may now disconnect.