Earnings Call Transcript - NTRA Q2 2021

Operator, Operator

Welcome to Natera's 2021 Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will hold a Q&A session. As a reminder, this conference call is being recorded today, August 05, 2021. I would now like to turn the conference call over to Michael Brophy, Chief Financial Officer. Please go ahead.

Michael Brophy, CFO

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our second quarter of 2021. On the line is Steve Chapman, our CEO; and Paul Billings, our Chief Medical Officer; Solomon Moshkevich, General Manager of Oncology will be joining for Q&A as he's dialing in from overseas. So Steve will give his prepared remarks today. 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 and projections, our assumptions for that outlook, market size, partnerships, clinical studies, opportunities and strategies; and expectations for various current and future products, including product capabilities, expected release dates, reimbursement coverage and related effects on our financial and operating results. We caution you that, such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. Please refer to the documents we file from time-to-time with the SEC, including our most recent Form 10-K or 10-Q and the Form 8-K filed with today's press release. Those documents identify important risks and other factors that may cause our actual results to differ materially from those contained in or suggested by the forward-looking statements. Forward-looking statements made during the call are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. Natera disclaims any obligation to update or revise any forward-looking statements. We will provide guidance on today's call but we'll not provide any further guidance or updates on our performance during the quarter, unless we do so in a public forum. We will quote a number of numeric or growth changes, as we discuss our financial performance and unless otherwise noted, each such reference represents a year-on-year comparison. And now, I'd like to turn the call over to Steve. Steve?

Steve Chapman, CEO

Thanks, Mike. Good afternoon, everyone, and thank you for joining us. Let's dive into the recent highlights. As mentioned in our pre-announcement, we experienced another exceptional growth quarter. The second quarter marked the fastest year-on-year growth for both volumes and revenues since becoming a public company, with our volume base now more than four times larger than when we first went public. I'm happy to report that we surpassed the upper end of our pre-announcement targets in units processed, total revenue, and product revenue. We processed 376,000 tests in the second quarter, representing roughly 61% growth compared to the same period last year. Total revenues and product revenues increased by 64% and approximately 71%, respectively, over the same timeframe. This upward trend is fueled by continued strong growth in our Women's Health segment and significant contributions from oncology and transplant, which are now substantial enough to positively impact our growth rates. Given this momentum, we are thrilled to raise our revenue guidance for the second time this year. We initially projected between $500 million and $525 million, then increased the range to $550 million to $575 million in May. We are now raising our guidance again to $600 million to $620 million for this year, a nearly $100 million increase from our initial March projection. As we successfully launch our new products, we are also accelerating planned investments over the next couple of years, which we are eager to pursue. Mike will cover the complete guidance later on in the call. We are also delighted to see that the Women's Health segment achieved cash flow breakeven this quarter, a key goal I set when I became CEO in 2019, and I am proud that our team accomplished this while achieving record growth rates. In oncology, we are generating high-quality evidence with 14 peer-reviewed publications and more to come. We're also excited about the improved quality of our evidence as we move away from validation studies to focus on outcomes data like overall survival. Recently, we published or presented data from four new prospective trials that included outcomes data, three of which measured overall survival and one indicated that Signatera is predictive of treatment response. We view these trials as crucial for the wider adoption of MRD testing among physicians and professional societies, and we believe they clearly distinguish Signatera in the market and set the stage for broad reimbursement and adoption. Furthermore, we announced another significant study yesterday which has the potential to expand indications for breast cancer. The first patient has been screened in the prospective multisite definitive ZEST trial, a new Phase III study with GSK evaluating the efficacy of niraparib in 800 breast cancer patients monitored with Signatera following adjuvant treatment. Signatera received Breakthrough Device designation from the FDA for this study, and I will detail this trial later in the presentation. We made several commercial advancements with Signatera this quarter. Our direct sales team is performing exceptionally well, and the launch momentum is building. We also partnered with Foundation Medicine in the pharmaceutical sector and BGI in China, which allows us to reach patients we couldn't impact alone. Foundation Medicine holds numerous pharma partnerships and is a market leader in tissue clinical volumes. BGI is a top diagnostics player in China with strong commercial channels and reimbursement expertise. While these partnerships are still in their early stages, we believe each can contribute to Natera's growth in the coming years. Additionally, we achieved a significant milestone in reimbursement, receiving ADLT status for Signatera, which increases our Medicare reimbursement from $795 to $3,500 per test. Lastly, we completed a follow-on equity offering netting about $551 million, starting with a $350 million offering that we upsized due to strong investor demand. We see many high-return projects to fund and are excited to deploy this capital effectively. I will discuss these developments further later in the call. Now, let's focus on unit growth in the next slide. This longer-term historical view provides insight into our Q2 performance over the years. Historically, Q2 has seen a slight sequential decline from Q1, largely due to seasonal trends in Women's Health, where Q1 typically performs strongly and Q2 is softer in terms of existing accounts. This year, as seen in the Q2 bar on the far right, we are witnessing a different trend. Firstly, our Women's Health business growth has accelerated to a level that has successfully countered the usual seasonal downturn. We are benefiting from our SMART trial data presented in January, which raised the bar for NIPT validation data, and from the joint ACOG and SMFM practice bulletin advocating for NIPT for all pregnant women. We believe we are at the beginning of expanding from approximately 1.5 million NIPTs in the U.S. to potentially over four million in the future. Secondly, growth rates are further enhanced by our product launches in transplant and oncology, which have exceeded internal expectations, necessitating an acceleration of capacity build-out and hiring to support our operations teams. Signatera volume is steadily increasing as we onboard new accounts monthly and initiate more patients for CRC and IO monitoring. We will share some case studies later in the call. In the next slide, you’ll see that our volume growth is translating into revenue growth, particularly in product revenues. We observed a nice bump in blended ASPs over Q1, continuing a trend that began last year. Although Women's Health ASPs rose modestly from Q1, the main improvement came from the product mix, as transplantation and oncology offerings have higher pricing. This signals positive momentum for the rest of the year. As Mike will explain later, we still believe there’s potential for NIPT ASPs to increase in the second half, informed by ongoing reimbursement trends, particularly as we make steady advancements with state Medicaid plans. Some of you will recall that when I was appointed CEO in January 2019, I stated that our primary goal was to achieve cash flow breakeven in the Women’s Health segment. Since that time, we have maintained a disciplined investment approach, increasing ASPs while reducing COGS, and growing volumes rapidly. Therefore, despite the potential for further gains in the Women's Health business, we now estimate that we are sustainably at cash flow breakeven in that segment, which serves as an important case study for the entire company. We have demonstrated that after making necessary investments to establish our product and commercial channels, we can sustain growth while optimizing COGS and maintaining operational efficiency. As our new business volumes grow, we will continue to benefit from cost synergies derived from our overall company scale and expertise. We can also apply similar COGS and operational savings strategies to new business areas in the future. Now, let’s shift to Organ Health. We are performing above our internal expectations for Prospera, and we believe the transplant market is still in its early adoption phase with considerable room for growth. Alongside increasing volumes, we are generating new evidence. Recently, a study from UCLA was published in Transplantation Reports, where investigators compared Prospera and a competitor test in 15 patients, six of whom experienced rejection. The Prospera test accurately identified five out of six rejections, while the competitor identified four. This aligns with prior head-to-head studies showing Prospera's superior performance. Additionally, we noted Prospera's strong performance in a cohort of patients receiving simultaneous pancreas and kidney transplants, which is important as these cases constitute 8% of all kidney transplants, with a 15% rejection rate in the first year. On the right side of the slide, you can see data from the ATC Conference in June, indicating Prospera's strong results across all metrics in testing both SPK and solo pancreas transplant patients. These results enhance our ability to serve a new patient population, which is essential for our transplant physicians. Furthermore, this study suggests Prospera's potential effectiveness in organ types beyond kidney transplants. As mentioned in May, we believe the pathway to reimbursement for a wider array of organ transplants was significantly opened by the CMS local coverage decision published in spring. This is crucial as it offers a streamlined path for reimbursement in organs beyond kidneys. Preliminary evidence indicates our test's efficacy in other transplants like pancreas. We anticipate this LCD will be active later this year. Now, let’s transition to oncology. We’ve published findings on Signatera in 14 peer-reviewed publications, securing adoption and reimbursement by demonstrating the test’s analytical and clinical performance across various cancer types. I referred to the shift towards prospective studies focused on outcomes data earlier. This includes large prospective real-world interventional studies like the CIRCULATE trial. These substantial studies differentiate us due to their size, designed to influence practice guidelines and requiring years for maturity. It’s crucial to validate the performance of the test in real-world settings, focusing on verifiable patient outcomes instead of just analytical metrics. We commenced these important trials years ago and are now starting to reap the rewards with data releases. Recently, we presented updated data from the extensive CIRCULATE trial at the ESMO GI Conference, which has over 2,000 patients enrolled and six months of follow-up for the first 800 patients. We maintained high detection rates for presurgical and longitudinal sensitivity to relapse in this prospective setting and have begun to examine initial outcomes data based on MRD status. We are thrilled to report that over 99% of MRD-negative patients remain disease-free at the six-month median time point, irrespective of whether they receive adjuvant chemotherapy. This represents substantial progress, which I will elaborate on in the next slide. A key clinical utility question for stage III colorectal patients is whether we can avoid chemotherapy for MRD-negative individuals. Currently, nearly all stage III colorectal cancer patients receive adjuvant chemotherapy, yet about half do not require it because surgery alone is sufficient for their treatment. A major concern from doctors is their hesitation to eliminate chemotherapy for these patients, as it conflicts with NCCN guidelines. They agree that MRD testing can assist in deciding between three months versus six months of chemotherapy, but they ultimately seek confidence in forgoing chemotherapy altogether for MRD-negative patients. The CIRCULATE trial aims to test the theory that MRD-negative patients can safely skip chemotherapy post-surgery. In the diagram on the left, you’ll see the patient flow in the CIRCULATE trial. MRD-negative patients are randomly assigned to receive standard adjuvant chemotherapy or not. We believe the study will prove there’s no benefit for MRD-negative patients to receive chemotherapy, and the interim disease-free survival data strongly suggests we are on track to validate this hypothesis. Such findings could revolutionize treatment guidelines and fulfill a significant clinical need as physicians seek high-quality outcomes data for the test. Since the trial began three years ago, we’re optimistic about this data further distinguishing us in a competitive market. We expect to present MRD-negative stratification results at ASCO GI in January 2022, and if it aligns with our expectations, it will mark a pivotal moment for Signatera in colorectal cancer. We are also committed to deepening our colorectal cancer data, which is a core strategy for us. In addition to the new de-escalation indication discussed, we published a prospective trial for stage IV colorectal cancer demonstrating excellent results, including overall survival rates, unveiling another layer of clinical utility beyond stages II and III. This study appeared in the Journal of Clinical Oncology Precision Oncology, analyzing 112 patients with stage IV disease after surgery with curative intent. At the first post-surgery time point, we detected a 72% sensitivity to relapse, which increased to 91% when retesting these patients who didn’t receive adjuvant chemotherapy. Additionally, 96% of patients who were MRD-negative at the single post-surgery time point were still alive by the end of clinical follow-up lasting up to 54 months, compared to just 52% overall survival for those who tested positive for Signatera. This data addresses an urgent clinical gap, as current guidelines leave uncertainty regarding which stage IV colorectal patients should undergo adjuvant chemotherapy post-surgery. Monitoring these patients closely for early signs of recurrence is currently advised. Based on this publication, we’ve submitted a request to Medicare for expanded coverage under the current LCD to encompass stage IV oligometastatic patients, which we anticipate may be approved by late 2021 or early 2022. The opportunity is substantial, with an estimated 10,000 new diagnoses of stage IV oligometastatic colorectal cancer annually, leading to a testing frequency similar to CEA, results in a total addressable market of about 100,000 tests per year, which is significant compared to historical volumes. We are proud of the studies we’ve generated, and we believe the shift towards outcomes data, including prospective overall survival data over nearly five years, and validating our test performance in real-world interventional settings are essential for deeper clinical market penetration and future reimbursement opportunities. We also celebrated another prospective publication this quarter, with overall survival data featured in Nature from the Phase III IMvigor010 muscle invasive bladder cancer trial we conducted with Genentech. This exhaustive trial evaluated whether Genentech's immunotherapy drug atezolizumab could enhance outcomes for patients with adjuvant muscle invasive bladder cancer over seven years. Before data compilation, Genentech established endpoints evaluating patient response among those who were Signatera-positive post-surgery, alongside the overall cohort. While the trial did not meet its primary endpoint in the general population, we noted a significant treatment benefit for Signatera MRD-positive recipients who received atezolizumab, with no advantage for MRD-negative patients. This study establishes Signatera's predictive capabilities in this context, a claim that’s challenging to substantiate and can only come from high-quality research like this. Moreover, we found prospective data indicating MRD-negative patients exhibit far better overall survival rates compared to MRD-positive patients. In light of these compelling results, Genentech has initiated patient enrollment for a sequel Phase III study, IMvigor011, which will randomize Signatera-positive patients to receive either atezolizumab or placebo. Interest is now rapidly increasing among pharmaceutical and academic consortia to incorporate Signatera as a companion diagnostic in pivotal randomized trials. This week, we announced our second major Phase III drug trial, the ZEST trial. This randomized, multicenter, placebo-controlled study, supported by GSK, will evaluate niraparib in 800 patients with early-stage triple-negative breast cancer or HR-positive HER2-negative BRCA-mutated breast cancer. Patients testing positive after standard definitive treatment will be randomized to receive either niraparib or a placebo. Successful trial outcomes could lead to a life-saving new treatment option for MRD-positive patients, providing significant support for widespread clinical adoption of Signatera. Approaches in indications like breast cancer often necessitate pharmaceutical partnerships since clinical utility in recurrence monitoring hinges on new treatments coinciding with molecular recurrence, which isn’t typically feasible for a lab to manage alone. Therefore, we are excited to secure these considerable pharmaceutical collaborations, which will unlock future clinical applications for Signatera. This project resulted from the strong validation data we have published regarding breast cancer, including the Clinical Cancer Research paper and the I-SPY 2 results in Annals of Oncology. Turning to Medicare briefly, we achieved a major milestone this summer when Signatera was awarded ADLT status. Previously, once a patient completed adjuvant treatment monitoring and entered recurrence monitoring, our pricing was set at $795 per time point. With the ADLT status, Medicare reimbursement for Signatera now stands at $3,500 per blood draw, and we anticipate this will remain relatively stable over time. As longitudinal monitoring continues, the proportion of blood draws falling within this reimbursement category will increase, positively influencing our overall gross margins in the long run. The ADLT status rewards innovation, requiring several stringent criteria, such as market uniqueness and fulfilling a clinical need unmet by other available tests, and utilizes a truly distinctive empirically driven algorithm. Signatera has met these criteria, making it difficult for potential future MRD competitors to achieve this status, thereby strengthening our first mover advantage. This development also equips us with a vital tool for negotiating with commercial plans in the future and enhances our attractiveness as a companion diagnostic partner in the pharmaceutical sector. Looking ahead, we are eagerly awaiting the finalization of our draft LCD for immunotherapy monitoring, which is expected soon this year. We have been pleased with the initial acceptance in this arena, further confirming our belief that Signatera can aid in guiding challenging treatment decisions for patients undergoing immunotherapy, particularly when standard imaging modalities provide limited insights. The final slide outlines some near and long-term indications we are targeting with Signatera. Initially, we focused this slide on near-term indications with clear clinical utility and established use cases, which give us visibility into reimbursement with CMS and related commercial launches shortly. Collectively, these near-term indications represent an incredible opportunity amounting to around four million tests annually, which is about ten times the 400,000 tests per year typical of the traditional therapy selection market. However, despite this significant immediate potential, it represents just the beginning. With several pivotal randomized trials underway in various cancer types sponsored by pharmaceutical companies and leading academic consortia, plus a robust pipeline of additional trials expected to launch in the next 12 to 18 months, we foresee some very large opportunities to emerge in both the U.S. and globally, including in Japan. Presently, we're only looking at what we've signed or have in progress, with a potential path to coverage for another nine million tests per year. This is encouraging as we experience substantial growth now along with an excellent runway ahead, enabling us to present the case that Signatera is only beginning to realize its potential. We anticipate hitting our stride in the mid-2020s and beyond as these pivotal trials yield results, leaving us with considerable upside moving forward. Additionally, one last note not on the slide but important to our objectives: we were pleased to see two patient case studies featured in national media this quarter from different providers across the country. One colorectal case was highlighted on NPR’s Here & Now, and another breast cancer case appeared on ABC’s Good Morning America. We appreciate those patients and their doctors for sharing how Signatera has impacted their treatment journeys. Now, let’s hand it over to Mike to discuss the financials.

Michael Brophy, CFO

Thanks, Steve. The next slide here is just a summary of the financial results for the quarter. Steve covered a lot of the trends on volumes and revenues. I'll just note again the acceleration we saw on the top-line. Our year-on-year volume growth rate was 48% in Q1 and now 61% in Q2. Product revenue year-on-year growth was 36% in Q1 and now 71% in Q2. ASP stepped up in the quarter. And as Steve mentioned, more of that increase was really driven by volume mix as the new higher-priced products start to have more of an impact on our blended average selling price. Women's Health ASPs were also slightly higher in the quarter. And as Steve mentioned, I think we still have room to run over the next several quarters there. We got a substantial boost from improved reimbursement in our commercial insurance volumes if you compare where we are now on ASPs versus this time last year in the Women's Health business. And we've had some positive contracting decisions that we think can benefit the reimbursement for example in our managed Medicaid volumes over the next few quarters in Women's Health. I think it's important to note that we think there is significant upside in the current oncology ASPs which can improve over time just as the product launch matures. While the majority of our volume is in the colorectal cancer indication, we have seen many community oncologists really adopt Signatera for a broader range of cancer types. We are happy to see that because we think the data supports broad use. And we think we have clear line of sight to reimbursement in additional cancer types via the umbrella local coverage decision from CMS. As we've discussed in the past, we anticipate getting coverage for immunotherapy response monitoring this fall when that umbrella local coverage decision goes live. Then we think coverage in additional cancer types can come from a more streamlined process of just submitting the data. But for now, we're taking a lot of zeros at the moment as the launch progresses. We also haven't yet gotten the benefit from the ADLT designation which at least for our Medicare reimbursed volumes should be a lift in the second half. The story on the cost of goods sold per unit is really very similar. The COGS for the Women's Health business are looking very good. For example, NIPT now is in the $160 range per unit, and we see a path to NIPT COGS below $125 per unit over time. In oncology, we are just at the start of the roadmap to drive COGS improvements. The first step is just to build out more capacity. We significantly brought forward investments to build out lab space to accommodate both the clinical demand and also specialized capacity designed to meet the needs of the larger Phase III trials, we are now running for pharma. None of the scale-up work carries significant technical risk, and the volume trajectory we are on makes the return on capital math very clear. It does however require significant near-term CapEx and hiring in both the R&D and lab operations areas of the business. So, the gross margins in the quarter really reflect good traction in Women's Health and we will weigh down just a few points by the rapid growth phase we are in for Signatera. As we've discussed in the past, Signatera can of course be a higher-margin product than NIPT. So I view this very much as a temporary circumstance. The R&D and SG&A lines also reflect a significant upfront investment we are making in oncology. In research and development, we are adding staff to execute on scaling the lab along with the fulsome slate of clinical trial work we are doing with academic and pharma partners. We've talked a lot about the pharma partners today, but our recent publications have also generated a large volume of requests to support studies with KOLs in the field. This is the type of work that generates obvious long-term benefits even if it does not return cash immediately and we are staffing up to make sure we meet that demand. Crucially, we are also finding more products and services that can be wrapped around Signatera much like carrier screening is in the Women's Health business and what we are seeing so far from the Altera tissue CGP. While we occasionally evaluate small acquisition targets our history has been to avoid lots of M&A and invest more heavily in our own R&D efforts. That obviously leads to a bigger R&D line but we have found that approach to be much more effective and capital efficient in the past. One other line to note on this slide is the balance sheet. Steve referenced the equity offering in which we raised roughly $550 million in an upsized deal. We raised that capital for one key reason. We have a lead in this very large recurrence monitoring market and we are going to make all the necessary investments in the near term to set us up for long-term success. Okay. So, I think that gives you some background for the guide on the next page. We are significantly stepping up both our revenues and the investments for the balance of the year. As Steve mentioned, we are now guiding revenues about $100 million higher than when we started just a few months ago in March. The main driver here is the volume growth that has continually exceeded our expectations even through this summer. We've remained cautious on the ASPs in the guide. We don't assume a big step up in any of our products aside from some modest improvement in Signatera driven by the ADLT and the umbrella local coverage decision. So, for the revenues, we are assuming continued volume growth across the business. In the new products, we are optimistic that our recent launch trajectory can continue in the near term. In Women's Health, we are seeing the continued momentum that Steve described. One note on the revenue map for the guide. It's important to recall that we took a one-time revenue recognition positive bump of $28.6 million in Q1 this year related to QIAGEN. So, if you're making the comparison between first half and second half revenues on the guide, I think it's worth stripping that out. The result is you'll see the guide implies significant revenue growth in the second half of this year. On the gross margin guide, we bumped that up on our last call in May, and we're going to leave that stable for now, given the additional expenses associated with the lab expansion that will run through cost of goods sold and the potential for additional volume growth in indications that are not reimbursed yet. To balance that out there are some tailwinds associated with other COGS projects in the second half and both the ADLT designation and expected reimbursement for IO monitoring will help margins as well in the second half. The SG&A, R&D and resulting cash burn line reflect the additional work we have planned to get done this year which is almost exclusively focused on the oncology drivers I described more lab capacity, accelerated clinical trials in large indications, accelerating projects designed to reduce cost of goods sold per unit and exciting new products to pair with Signatera. The last line on the slide is the cash flow breakeven goal of women's health. Steve talked about how we've been able to get scale in women's health. And I think that's an important case study to visualize how we can get leverage on the oncology investments. As we expand into pan-cancer, we can leverage the same operating expenses we've built out for the colorectal cancer launch. So with indication expansion, increasing volumes, reduced COGS, and broader reimbursement, we are following much the same playbook to get to cash flow breakeven that we followed in women's health, but on a much larger scale. So it's an exciting time for Natera, and we are very excited to have been able to share these results with you. Operator?

Operator, Operator

Thank you. Our first question comes from Tejas Savant with Morgan Stanley. Your line is open.

Tejas Savant, Analyst

Hey, guys. Good evening and congrats on a nice quarter here again. Just one question here on Signatera, Steve. On the ADLT code upside, you're expecting a nice bump here on your Medicare volumes. But at some point I believe next year at the end of the first quarter that trend will normalize under the PAMA process yet you've got offsets to that. So can you just walk us through the longer-term ASP trend dynamics here? And also how getting that ADLT code can help with the competitive moat within MRD for you?

Steve Chapman, CEO

Yes sure. That would be great. So the ADLT is a very significant advantage and it's only available to the first mover who has an innovative test on the market. So we're very glad that we were accepted into the program, and we were able to increase that recurrence monitoring price from $795 now up to $3,500 because over time as the flywheel effect of getting patients into the recurrent ordering program occurs, you're going to have more and more and more of the patients at that recurrence monitoring time point. So it's critical that you maintain a high ASP in that time point. Now the way the program works is there's a time period. I believe it's roughly nine months where they look at your commercial claims. During that time period, you get paid the list price of $3,500. And then after that, they look at your commercial claims and they'll reset your price based on the median weighted reimbursement from commercial parties. Now the good news is that we've been very strict about how we negotiate with private payers, and we've successfully negotiated rates that are at or above this $3,500 price point with private payers. So we don't expect to see any price reductions on an ongoing basis through the PAMA process. Of course, it has to play out over time, but at this stage all the rates we've negotiated are at $3,500 or higher, and we expect to maintain the price point or have an increase.

Operator, Operator

Thank you. Our next question comes from the line of Tycho Peterson with JPMorgan. Your line is open.

Tycho Peterson, Analyst

Hey, thanks. First question on the back of the financing and congrats on getting that done. Can you just talk a little bit more about the MRD roadmap for multi-cancer? You talked about four million tests in the near term, 9 million longer-term? But maybe just talk a little bit about use of proceeds and how quickly you think you can scale up some of these efforts.

Steve Chapman, CEO

Yes. So there's a lot of work, I think, to roll out each of the different indications. The good news is that the most important thing to being successful in the Signatera market is generating the right data. And we started that process of generating the data a long time ago, roughly five years ago. You look at some of these trials; they were ongoing for that period of time. We had teams of people out hunting for clinical trials that we could get into five years ago. So now the studies are reading out and they're being published. That's the most important thing in order to unlock usage in a particular tumor type and to unlock reimbursement in a particular tumor type. So when we look at where we are in colorectal today, stages II and III, we're seeing a lot of volume come in. We're seeing a rapid increase in ordering on the clinical side, which is great and in line with our expectations. We've now generated this data in oligometastatic stage IV colorectal deepening our penetration in the colorectal space and that data looked excellent. I mean, really good data with overall survival as well, which is really the next step down in kind of raising the bar for what type of data is required to move the needle. I think we're going to continue to penetrate colorectal. We're on market with an immunotherapy monitoring product, which is going very well. We're seeing increases consistently in the usage there. We've also shown muscle-invasive bladder, lung, neoadjuvant breast, ovarian, multiple myeloma. Now we just had a publication in esophageal cancer. So all those areas where we generated data and we have published data, I think over time we'll be rolling out those indications. We're actually seeing usage today in a lot of those indications even though our sales team is not promoting. We're just getting inbound requests where doctors read the paper and then they want the test or patients hear about it and they want the test. So we are seeing usage, although the vast majority of our business today is colorectal and immunotherapy. So, that's sort of one sector that the near-term kind of 4 million tests per year opportunity. Then there's the bigger sector that's unlocked through these partnerships with pharma. And we think that's like breast treatment on molecular recurrence for example; lung treatment on molecular recurrence. And these big Phase III clinical trials take time to read out, but when they do read out, they're going to be massive market-moving guideline-changing trials. So, it's kind of a great setup where we have this significant amount of growth and work that we can do in the near term. And then when we get to the kind of mid to upper-2020s, we have the second wave of extreme growth that's unlocked by the investments that we're making today in the trials. So that's sort of how we see it playing out. And the other thing that I think is good about these big trials, like for example, the breast one that we just announced, once the competitive landscape is established here and there's maybe a handful of folks that are participating in these trials, it's going to be really hard for others to come behind. I mean these are five to seven-year prospective clinical trials. These are the types of things that really truly build a competitive moat that make it very difficult for others to come in behind. So we feel like we're in a good position in the short term and to tap into that very significant upside that's going to come in the future.

Operator, Operator

Thank you. Our next question comes from the line of Catherine Schulte with Baird. Your line is open.

Catherine Schulte, Analyst

Hey, guys. Thanks for the question. I guess first just on the guide, you mentioned being cautious on ASP outlook and not baking in a significant increase in NIPT. I guess in theory, shouldn't we see this bump up as some of the plans that updated their policies last year moved to accrual accounting? And when do you expect that that might happen in a more meaningful way?

Steve Chapman, CEO

Yes, I was going to say Mike, why don't you take that?

Michael Brophy, CFO

Thank you, Catherine, for your question. We have experienced some benefits. If I compare the NIPT average selling prices from before the coverage decisions last year to now, we've seen a considerable improvement in the number of times we’ve been compensated for NIPT contracts. This growth is primarily seen in our commercial business, but we are also starting to observe similar trends in Medicaid. However, I believe there is still potential for further improvement in the NIPT area. There are still many unpaid claims due to issues like prior authorization policies that we believe can be eliminated, along with various other reasons related to state Medicaid programs that are not yet following the updated ACOG practice guidelines. Therefore, I think there is room for NIPT average selling prices to rise. Additionally, as we gather more historical data with various payers, a natural momentum can support modest improvement in average selling prices. Much of the change in average selling prices for the company as a whole is attributed to the fact that we didn't have the ADLT significantly in the second quarter, but we will have it in the third quarter and later. The expected Medicare volume in Signatera for colorectal cancer stages 2 and 3 should also contribute positively. There's a natural progression with the Signatera average selling prices as we now have the ADLT, which can enhance the average selling prices as more patients enter the longer-term recurrence monitoring tests instead of just the upfront tests. This trend may start benefiting us in the latter half of the year. However, this involves a degree of forecasting, and as many of you who have followed the company for some time know, we prefer to approach the guidance with caution, particularly when it comes to forecasting average selling prices. So, this is more of a philosophical point than anything else.

Operator, Operator

Thank you. Our next question comes from the line of Mark Massaro with BTIG. Your line is open.

Mark Massaro, Analyst

Hey, guys. Thanks for the questions and congrats on the quarter, the raise, and all the data that you've been publishing. I guess a couple of weeks ago when you guys did the deal the financing, you indicated that you expected to make some significant announcements in the organ transplant business and potentially beyond, which I believe might be screening. Today you talked about simultaneous pancreatic-kidney transplant. So, I guess I'm just curious if you could elaborate on any potential plans for expansion beyond kidney testing, would that obviously include pancreatic and some of the others? And then, any thoughts you have on early cancer detection? Just the development work you've been doing and I think previously you talked about plans to do colorectal cancer screening.

Steve Chapman, CEO

Yes. Thanks Mark. Yes. So on the organ health side things are going really well. I think we're beating our plan, as we said, ahead of our expectations. We're starting to see some good data come out. We show this head-to-head study, which I think is now the second head-to-head study that's been performed where we've outperformed on the detection of rejection using the validated 1% cutoff. We showed now I think that our platform test works well in other organs. So the simultaneous pancreas-kidney, pancreas alone transplants are good. I think that essentially shows that we're going to be able to transport into other organs. And now that this LCD has been put in place, which is essentially an umbrella LCD that will allow us to go get reimbursed if we choose to go into other areas. So I think the groundwork is all there. The sort of proof of concept is there. And I think we'll be in a good position to sort of make those moves in the future if that's an area that we decide to go into. I think when we look sort of across the business, we have to kind of decide where we want to make the investments and so forth. But certainly, the kind of framework is in place there. On the early cancer detection side, we've basically said that we've developed a platform. We have some data that looks good. We have access to a significant number of samples and we're going to package all that up and describe it to everybody in the future when we're ready to. We just haven't done that yet. And so I think that announcements will be coming where we're going to describe what we're doing, what we have so far, and what our plans are. But we're just not rolling that out today. But we feel very good about the opportunity we have.

Operator, Operator

Thank you. Our next question comes from the line of Dan Leonard with Wells Fargo. Your line is open.

Unidentified Analyst, Analyst

Thank you. This is Lou for Dan. I have a quick question regarding the organ and oncology segments. In the prepared remarks, you mentioned seeing contributions from those two businesses. Could you provide some details on the volume or type of revenue? Additionally, you discussed a share gain in Women's Health. Could you elaborate on the share gain opportunity, particularly following one of your competitors leaving the market? Thank you.

Steve Chapman, CEO

Sure. Let me discuss the share gain, and then Mike can elaborate on how we're managing the breakdown. On the Women's Health side, we've been performing exceptionally well. Our growth has been accelerating over the past few years, and the current trajectory reflects significant progress. We have a strong position with our technology, having launched important improvements with Pano AI this year that are receiving positive feedback in the field. We've also conducted the largest prospective trial ever in the NIPT field, where real-world results exceeded our validation data, which is highly encouraging. Many major academic centers and maternal-fetal medicine practices that previously hadn’t used our services are now reconsidering, driven by this unprecedented quality of data. We are achieving competitive wins while simultaneously witnessing market penetration, which is boosting our Women's Health growth. Currently, we estimate that the market is around 30% to 35% penetrated, indicating significant room for growth just by tapping into the market. We project that the NIPT market will reach 90% penetration in the next three years, representing substantial growth. Additionally, we are outpacing competitors in growth, having gained business from them. A notable competitor exited the market, prompting our sales team to act quickly, and we've converted a substantial amount of that business to Natera. We feel confident in our position. Mike, would you like to share insights on how we are breaking out organ health and oncology in terms of units and revenue?

Michael Brophy, CFO

Yeah. So our current plan has been just to describe the business on a total company basis now. That's largely for competitive reasons as it relates to the new product launches. We've had the experience in the past of giving very, very granular disclosure, which is easier for us and easier for you all, I appreciate, but we've seen it time and again actually harm the opportunity as competitors are able to kind of dial in for exactly how well we're doing and then redouble their efforts. So we're not inclined to give that at the moment. I think the other piece is that we're still relatively early in these launches. I mean, we're a little over a year and little over six months in Oregon Health and Signatera respectively. And so we're still getting a handle on exactly what does the launch trajectory what does the growth curve look like in these businesses ourselves. And so I mean, over the relative near term, I think we'll be in a position to give more color there. I think on a total company basis, so you can kind of – you start to see some of the impact. I mean, a lot of the beat – well, all of the businesses are growing kind of ahead of our internal expectations. You don't raise guide from – $100 million from $500 to $525 million to over $600 million for total revenues without some new products really launching above your expectations. And so I think, you can see that in the guide and also just as a product revenue growth year-on-year. So clearly, it's having an impact on the business and stay tuned.

Operator, Operator

Thank you. At this time, I would now like to turn the call back over to management for closing remarks.

Steve Chapman, CEO

Great. Thank you very much for joining the call today. We appreciate it. Take care.

Michael Brophy, CFO

Thanks everyone. Cheers.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.