Earnings Call Transcript - NTRA Q2 2025

Operator, Operator

Hello. Welcome to Natera's 2025 Second Quarter Financial Results Conference Call. As a reminder, this conference call is being recorded today, August 7, 2025. I would now like to turn the conference call over to Michael Brophy, Chief Financial Officer. Please go ahead.

Michael B. Brophy, Chief Financial Officer

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our second quarter of 2025. On the line, I'm joined by Steve Chapman, our CEO; Solomon Moshkevich, President, Clinical Diagnostics; and Alex Aleshin, General Manager of Oncology and our 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 made as of today, August 7, 2025. 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?

Steven Leonard Chapman, CEO

Thanks, Mike. Let's get to the highlights on the next slide. We had a phenomenal quarter. We generated $547 million in revenue, which is 32% growth over Q2 of last year, and ex revenue true-ups, our revenues grew 34% year-on-year. We had a very strong volume quarter as well, which included strong growth across the product portfolio and an all-time record for Signatera. We processed 189,000 oncology tests in the quarter, which represents nearly 20,000 units of growth compared to our first quarter of this year. 20,000 sequential growth units significantly beats our previous growth record and is a new milestone for the company. Part of this growth acceleration was driven by a significant increase in new patient starts, which was double our previous quarterly record. Gross margin ticked up again in Q2 at 63.4% compared to approximately 59% this time last year. Ex true-ups, gross margins were consistent sequentially versus Q1 due to strong ASPs despite the fact that Signatera COGS actually went up meaningfully because we ran so many exomes for first-time patients, which, of course, is very good news. Given all that momentum, we are in a position to level up the financial guide for the year. We are raising the revenue guidance by $80 million at the midpoint, and we now expect revenues in the range of $2.02 billion to $2.1 billion, which is a full reset of the prior revenue range. We are raising the gross margin guide to 61% to 64% in recognition of the gross margin performance we saw in the first half, which still accounts for factors like growth in new patients in the second half. We are not increasing our operating expenses, which are remaining flat versus the prior guide as we get scale in the business despite being in full investment mode for the future. In addition to the financials, we have a full slate of new data and product updates to discuss today. We are particularly excited to launch Fetal Focus, a new NIPT for inherited conditions that leverages our proprietary SNP-based method for NIPT. We've never had better momentum in organ health, and the Prospera data that we'll talk about today shows the path we're on to transforming care for organ transplant patients. In oncology, the data pipeline continues to grow, and we're going to take some time on the call today to do a deeper dive on our strong and broad data across breast cancer and new data in GI cancers beyond CRC. Finally, we've been working in the background on the next major wave of innovation at Natera. First, we'll go over the rapid progress we're making on early cancer detection, where we're gearing up for a big readout of the prospective colonoscopy match PROCEED trial for advanced adenoma late this fall. Next, we will introduce Natera's AI-based foundation models, which are being used to develop new diagnostic biomarkers, molecular therapeutics and speed clinical trials. Okay. Let's get into some of the business trends on the next slide. The first slide just shows our Q2 volume progression over prior years. This was another great quarter for us across the board as we were able to grow significantly against the Q2 2024 comparable that was elevated due to a sudden influx of Invitae units. Signatera was phenomenal with growth records in both sequential growth and new patient starts. In women's health, we saw our second-best volume quarter ever coming off what was a blowout Q1 number. We saw the same Q2 seasonality trends that we always see, given our large base of existing customers, but we continue to blunt that impact by winning new accounts. Our organ health products have been on a tear this year, with major new account wins driving growth on the back of some very strong clinical data, and there's more new data that we're going to talk about today, which sets us up very well for the future in that space. We also recently exited our legacy paternity business, which was contributing to our volume numbers historically. The next slide shows our Signatera clinical units over time. This quarter, we grew by 20,000 growth units versus our average over the prior 4 quarters of about 13,000 per quarter. This overperformance was a result of a wave of new patient starts driven by the compelling data we generated in the last year. Growth in new patient starts was about 3x higher than our quarterly average and about 2x higher than the previous record quarter. As we said before, Signatera quarterly volumes could fluctuate, so I don't think 20,000 growth units is a new normal, but clearly, this strong growth is a great sign. Historically, a lot of our growth has come from colorectal cancer, breast cancer and immuno-oncology monitoring. Again, we saw very strong growth in these areas. In addition, we're now seeing broader adoption in many other tumor types as physicians really start to generalize the use of Signatera in their clinics, which is helping drive volume growth but also creates a large revenue opportunity. We're in the process of seeking Medicare reimbursement for this longer tail of cancers. Based on our current growth trajectory, gaining Medicare coverage for these noncovered histologies over the next few years should be worth approximately $250 million to $300 million in annual revenue and gross profit, further contributing to the financial sustainability of our growth strategy and supporting our path to a $2,000 ASP. We're in an excellent position to achieve this given the significant amount of data we generated so far. Of course, we have over 100 clinical trials underway, many of which support these types of initiatives. I mentioned we grew revenues 34% organically year-over-year, and you'll recall, Q2 of last year was a very strong quarter for us, so I'm pleased to see the strong growth numbers over some tough 2024 comparables. We had about $45 million in revenue true-ups this quarter as we continue to improve reimbursement for covered services. Sequentially over Q1, we grew revenues 9% overall and 7% organically. We've already covered the strong volume levers driving this growth, but we also saw excellent ASPs across the board. The next slide shows our gross margin traction over time, and we posted another strong gross margin quarter in Q2. Stripping out the revenue true-ups, we were still able to generate gross margin steady with Q1 despite the big step-up in exome volumes this quarter. We drove that with better ASPs for Signatera, which is now roughly at $1,175, along with steady results in ASPs in Panorama, Horizon and growth in the Prospera ASP. We were also very pleased to see continued revenue true-ups in the quarter, which means that cash collections exceeded our prior history. The speed at which we're converting receivables into cash is one of the most promising business trends we're seeing, and DSOs are now down to 57 days, which is a record for the company by a wide margin. All of these trends allow us to generate cash while aggressively investing for future growth. Although this slide shows how much progress we made over the last 2 years, I really think we are just scratching the surface of the margin improvements we can achieve. We think about margin expansion opportunities across 4 primary vectors: continued execution of revenue cycle operations; expanded coverage for products, including Signatera; further COGS reductions; and AI-driven efficiencies. First, we embarked on a major investment in our revenue cycle operations, leadership systems and staffing in the fall of 2022, and that project has yielded significant returns for the company. Our team sees ample additional opportunities to continue to improve, which could drive ASPs higher, and we've seen good results so far this year. One example is on appeals. Historically, it is very difficult to do an individualized appeal for each denial. But as our systems improve and we invest, we're building these types of capabilities that will allow us to get paid on a higher percent of cases. Second is expanding coverage for our products. We mentioned on the last call that we think $2,000 is an achievable ASP for Signatera. I mentioned the new opportunity in front of us to drive reimbursement in a number of additional tumor types, and I'll stress that this opportunity has gotten much larger over the last couple of quarters as our volumes in noncovered tumor types have grown, and we expect to have several additional coverage decisions within the next 12 months. We continue to see positive early signs in biomarker states, which are still at the early stages, and we still have opportunities with Medicare Advantage execution. Outside of oncology, we still have major opportunities for improved coverage with expanded carrier screening, 22q and broader coverage for our organ health products, which could all drive ASP improvements. The third area of improvement on margins is by cutting COGS. One of the constants for us over the last decade is our commitment to investing in R&D projects that reduce the cost of goods sold for new tests that we launch. This tends to have a relatively lower technical risk compared to new product innovation and deliver high returns. We now have a full suite of COGS projects we're initiating and some that are getting close to launch. Finally, we're going to spend some time later on the call on the investments we're making in artificial intelligence. While there are some exciting steps we're taking in AI-fueled innovation, there are many areas in the business where AI is already having an impact and allowing us to scale our volumes without a one-for-one increase in headcount. Many of these opportunities hit COGS as well as OpEx, and we expect to see some significant savings from this over time. So in summary, we have several very concrete ways that we can increase the margin. Not all of these are under our direct control, and the path won't always be linear, but it's great that we have these opportunities that we're executing across. On the next slide, as I mentioned at the top of the call, we're holding OpEx steady even as we raised top line revenue guidance by $80 million. So we're getting scale even as we keep our foot on the gas with growth investments. We think these growth and margin expansion opportunities clearly warrant the investment required to deliver them, and this slide gives some additional color on where the incremental investments in 2025 are going. To be clear, the vast majority of the OpEx increase in 2025 is not yet driving revenue, either because it's pointed at a longer-term project like gaining reimbursement for uncovered services or completing a major clinical trial or delivering on new product launches or because our commercial hires are just coming on board and are not yet productive. I'll follow up on that example of commercial hires. We've recently expanded our commercial footprint primarily in oncology. We added these additional oncology reps, and we expect to start seeing meaningful contributions from these new people late this year and early next year. As with a lot of these investments, there's a slingshot effect where they're hitting the expense line this year, but they don't start to impact revenue and volume growth until about 6 to 12 months later. The strong growth we've seen thus far this year wasn't really driven by these new hires. In addition to the commercial team, we continue to invest in the success of the revenue cycle management. As we said earlier, investing in revenue cycle management is one of the primary opportunities we have for margin expansion. So this makes a lot of sense to pursue. Once this team has scaled up and the optimal tools and systems are in place, we can get significant scale on top of this infrastructure. We've been moving quickly here, which includes many manual processes that can be automated so we don’t have to keep scaling at the same pace going forward. The forecast also includes a meaningful addition of AI-focused technical staff that we think is very promising. We've also shored up our ability to scale with more lab footprint and additional basic company infrastructure to accommodate our growth. The R&D incremental investment in 2025 is really driven by both the oncology clinical trial expansion and investing into new MRD products. We think this is important because there's so much opportunity in MRD. So we're continuing to expand our already vast set of meaningful clinical trials in an effort to change guidelines, accelerate adoption and gain coverage where we don’t yet have it. Our pace of new product launches has also increased this year. Earlier this year, we launched Signatera Genome, and we have many other MRD-related opportunities we're working on that will be announced in the future. In addition, we're excited today to have announced another innovation within the prenatal product line with single-gene NIPT. Finally, we're continuing to make rapid progress on early cancer detection, which we now think has the potential to be a major opportunity for Natera. We've executed well on the PROCEED trial, which now has about 3,500 patients enrolled, and we intend to read out in late fall. We have also launched the FDA-enabling FIND trial. We think ECD is a very significant opportunity for Natera, especially given the high ASPs that are being established and the existing distribution footprint we can leverage. Finally, we're investing in AI and AI-enabled technology, which we will outline on the call today, which we think could revolutionize care and make a big impact. We plan to stay nimble on our investment strategy throughout the rest of the year. If we see a clear opportunity to deploy capital, we're going to do that while maintaining our commitment to generating cash later this year. Having said that, I think we're reasonably well positioned to hold OpEx in the current range as we continue to grow. With that, I'm very pleased to hand it over to Solomon. Solomon?

Solomon Moshkevich, President, Clinical Diagnostics

Thanks, Steve. Let's start with the news from women's health, where we had an exciting launch of our new Fetal Focus NIPT for inherited conditions. Let me walk you through some of the background first on the clinical unmet need that we're addressing with this new test, how the test works and the exceptional performance that we're seeing from our clinical validation study called EXPAND. Today, when a pregnant mother is identified as a carrier of a recessive gene like cystic fibrosis, medical guidelines recommend testing the biological father to assess the baby's risk of inheriting the affected gene from both parents. But in some cases, the father is not available for testing. With the launch of this new test, if a pregnant mother has screened positive on Natera's Horizon carrier screen for 1 of the 5 most commonly tested genes, the Fetal Focus test can directly assess the baby's risk of inheriting the genetic condition just from a maternal blood sample. The test is validated to analyze 5 key genes, as you can see outlined on this slide. It's backed by data from the EXPAND trial, a large prospective clinical trial that we've been running for nearly 2 years. I want to tell you more about the EXPAND trial. So far, the study has enrolled about 1,300 participants from a diverse multiethnic population, including patients from leading academic centers and MFM clinics, as well as a decentralized trial arm that leverages Natera's nationwide base of over 1 million Horizon patients per year. Natera is uniquely positioned to enroll quickly into the trial. We see EXPAND as similar to the SMART study in that it's designed to be the definitive trial in this test category with all positive and negative outcomes confirmed by diagnostic genetic testing, either prenatally or after birth. In the first milestone readout of about 100 patients from EXPAND, the Fetal Focus test demonstrated 91% sensitivity to affected pregnancies, where the baby inherited the recessive genes from both parents. The test successfully identified all 5 affected cases with homozygous variants, which are particularly challenging to detect in cell-free DNA. Fetal Focus uses Natera's proprietary LinkedSNP technology, which enhances detection of these challenging cases across diverse ethnic populations. These early results not only highlight the clinical accuracy of Fetal Focus, they underscore the real-world value of Natera's proprietary technology. Together, the product launch and the clinical data strengthen Natera's leadership in women's reproductive health, and it reinforces our commitment to being a trusted partner to OB/GYNs, MFM specialists and patients across the country. Turning now to organ health. This quarter, we announced the publication of the PEDAL study in the American Journal of Transplantation. AJT is the highest impact transplant journal, which speaks to the importance and rigor behind the study. PEDAL is a first-of-its-kind prospective multicenter trial evaluating how donor-derived cell-free DNA can help predict long-term outcomes after a rejection of a kidney transplant. You can think about this as similar to immunotherapy monitoring in oncology because it answers the question of whether the treatment is working or not after someone has been diagnosed with rejection. The PEDAL study enrolled 488 kidney transplant recipients from 28 participating U.S. and international transplant centers over 4 years. 96 of those patients had biopsy-proven acute rejection and were monitoring with Prospera during treatment every 2 weeks for 8 weeks. 66 of those patients had clinical outcomes recorded at the 12-month mark. The findings showed that transplant patients whose donor DNA levels remained high during and after treatment did poorly, with 97.5% having negative outcomes at the 12-month mark. By contrast, the patients whose Prospera levels dropped and stayed low were 60 times more likely to experience positive long-term outcomes. This is the first clinical evidence showing that serial monitoring with Prospera can inform patient management during treatment for acute rejection, potentially enabling earlier interventions and more tailored care. We've received incredible feedback on the data and the study quality. Doctors were really eager for this type of readout. It took a long time to run the trial, and we’re very pleased with the results. This new use case for Prospera complements the existing utility in detecting rejection and surveillance. As you know, Medicare has recently released a draft LCD updating its coverage policy for surveillance, which we also believe is positive news. Turning now to oncology. We had several important events for Signatera in the past few months, continuing to fuel the adoption of this amazing technology. At ASCO, we presented interim results from the DARE trial, which has accrued over 400 early-stage breast cancer patients with HR-positive, HER2-negative disease. This trial is what we call a TOMR trial for treatment on molecular recurrence. TOMR has the potential to become the new frontline of metastatic treatment, where the recurrence is detected first by Signatera even though the scans are still negative. The DARE study has been recruiting and randomizing patients since 2021 to either receive CDK4/6 inhibition at time of Signatera positivity versus continuing standard-of-care observation. There are 3 key takeaways from this readout at ASCO. First, patients who test serially negative have extremely good outcomes with over 99% remaining recurrence-free. This reflects excellent test sensitivity. Second, the test was so sensitive that 73% of the recurrences detected were purely molecular, with the reflex scans showing no evidence of disease. 93% of those patients were then successfully randomized. This is a major sign that the TOMR strategy is viable, unlike prior attempts that resulted in lower patient randomization rates. As a reminder, the other 27% of patients in whom disease is detected on a scan also stand to benefit from early detection and treatment of metastatic disease. Third, we saw a twofold higher ctDNA clearance rate in one of the trial arms, providing a promising signal that early treatment intervention can make a difference at this stage. We look forward to further readouts from the DARE trial and to doubling down on the TOMR strategy with our partners in biopharma and academia in breast cancer and other cancer types. Turning now to the neoadjuvant setting of breast cancer, where we had several important announcements. Earlier in the quarter, we presented new data from the ISPY-2 trial, which showed again that patients who tested Signatera negative at baseline or at diagnosis had extremely good outcomes after treatment. Natera's multiyear collaboration with the ISPY-2 team has yielded many important insights and peer-reviewed publications, systematically studying hundreds of early-stage breast cancer patients and correlating Signatera dynamics with treatment response and long-term outcomes. This insight about the great prognosis when the baseline sample is negative has triggered many doctors to ask whether those patients might safely avoid chemotherapy. They might be treated just with endocrine therapy instead, which is much less toxic. This approach is now being formally investigated in a new clinical trial led by ABCSG, known as the TEODOR trial, and it randomizes patients who were Signatera negative at baseline to just receive endocrine therapy versus chemotherapy prior to surgery. The trial is open at 15 sites in Austria and aims to recruit 250 patients. This is a great example of how strong biobank data generated over many years can lead to a randomized clinical trial that ultimately has a chance to be practice-changing. Our plan is to replicate this strategy as much as possible. We've built up a significant clinical pipeline in breast cancer, which we believe is hard to replicate. To date, we have 18 peer-reviewed publications and, by our count, presented over 60 abstracts at top medical meetings. We have broad Medicare coverage across the neoadjuvant, adjuvant and surveillance settings. All of this sets the foundation for the next wave of randomized trials, many of which are currently underway and others still to be announced to solidify Signatera and ctDNA monitoring as the new standard of care across all settings of this disease. We've invested heavily into the data generation strategy in breast cancer, having spent and budgeted over $150 million on breast trials alone. This is going to be hard for others to replicate given the extent of the capital investment required. Now turning to gastrointestinal cancers. The adoption of Signatera has obviously been strong, especially in colorectal cancer, but it's now growing quickly in other GI malignancies, including pancreatic, liver and gastroesophageal. We had 2 strong peer-reviewed publications in GI over the past 3 months. In gastroesophageal, the PLAGAST study was published in Nature Communications, validating Signatera in the neoadjuvant and adjuvant settings. This study followed 62 patients with locally advanced gastric and GE junction cancers and showed that patients who failed to clear their ctDNA during neoadjuvant therapy had very poor outcomes. The study concluded that those patients would likely benefit from a change in therapy after surgery instead of just continuing the same treatment, which is a common strategy today with perioperative chemo or immunotherapy. Signatera also detected recurrence with a median lead time of 6 months ahead of imaging. Gastroesophageal cancer is a deadly disease with no good biomarkers, where Signatera has the potential to really improve patient management and outcomes. In liver cancer, also known as hepatocellular carcinoma, or HCC, we published a great paper in JCO Precision Oncology that followed 125 patients. Early-stage liver cancer can be treated with either surgical resection or with a liver transplant. This study saw about half and half contribution. Contrary to esophageal cancer, there is a guideline-recommended biomarker called AFP that simply does not work very well. In this study, we showed that Signatera significantly outperformed AFP in detecting recurrence with approximately 2x longitudinal sensitivity and 100% longitudinal specificity and with diagnostic lead times of up to 16.5 months. We're getting positive feedback about this study and growing interest in using Signatera for recurrence monitoring in both resected and transplanted patients. Finally, looking forward, Q3 will be another important quarter for Signatera as we expect data readouts from the IMvigor011 trial in bladder cancer and other studies. Now I'd like to turn it over to Alex to discuss our roadmap in early cancer detection and some of the exciting foundation models that we're building to fuel the next wave of AI-based innovation. Alex?

Alexey Aleshin, General Manager of Oncology and Chief Medical Officer

Thanks, Solomon. We continue to make steady progress on our ECD program. We have now consented over 3,500 patients for our PROCEED-CRC study, which is a prospective average-risk colonoscopy-matched trial. This study is being conducted in a manner to closely mirror our FDA-enabling FIND study to minimize the risk of performance degradation. We plan for the next readout from the study in the second half of 2025, which will assess assay performance in over 100 advanced adenoma samples and 500 normal controls. Additionally, we're excited to announce that the FIND study has now started enrollment and is on track to prospectively accrue the necessary patients to enable our FDA readout in 2027. We continue to phase-gate the program and remain disciplined in our investment. We want to highlight that our investment in our ECD program is already baked into our operating expenses. On the next slide, I want to highlight one of the most exciting areas this quarter as we continue our investment in our AI initiative, which we're deploying across the entire company to scale our operations, improve user experience, and drive scientific innovation. On the operations side, for the entire history of the company, many roles have had to scale linearly with commercial volume. For the first time, we have an opportunity to change that relationship, with AI allowing us to scale more efficiently and open up additional operating leverage worth approximately $200 million in savings over time. On the U.S. side, we're also building a whole new suite of AI-enabled user experience tools, which are intended to change the way we interact with physicians and patients. Finally, we are leveraging AI to develop new algorithms that will power the next generation of diagnostics and clinical insights. On this front, today we're announcing our AI-based discovery care platform that is designed to support various stages of therapeutic development from early target discovery to clinical decision support. This consists of 3 components. The first is the genomic and clinical data foundation layer on which our models are trained. The second is the core model layer that powers discovery. The third is the application layer that supports clinical decision-making as well as providing genomic insights. The foundation for this effort is built on a rapidly growing set of de-identified data from over 250,000 patients and over 1 million longitudinal time points, along with abstracted clinical data and information on drug treatment and outcomes. Taken together, this comprises one of the largest multimodal longitudinal oncology datasets that has ever been created with over 1 billion parameters. Utilizing this dataset, we train a multimodal foundational model on our de-identified Signatera and Altera data to power our core AI platform. This supports several key use cases. The first, Natera can create digital twins that can virtually simulate patients for treatment optimization as well as outcome prediction. This can help make therapy recommendations, such as suggesting the next line of therapy and opportunities for treatment de-escalation. It can also better predict outcomes and run virtual in silico clinical trials to optimize study design and reduce clinical development risk. One recent pilot demonstrated that our algorithm can accurately recommend immune therapy based on real-world EHR data, while another pilot showed that it outperformed both TMB and stand-alone pathology-based metrics in predicting immunotherapy response. Next, Natera's real-time clinical trial matching software leverages molecular and clinical data to improve patients' and researchers' ability to match individuals to appropriate clinical trials. This capability uses LLMs to interpret eligibility criteria and in structured clinical records, which holds the potential to improve enrollment efficiency, reduce screen failures and accelerate trial timelines. Finally, Natera has developed an immune therapy response prediction algorithm and a molecular therapeutics design model, which we'll review on the next slide. NeoPredict and NeoSelect are the first of many algorithms that Natera has developed to predict immune therapy response and identify potential neoantigenic mutations, respectively. This historically has been one of the most challenging computational problems. Natera developed these algorithms by utilizing our foundational genomic large language model trained on our longitudinal genomic dataset and has allowed us to demonstrate market leadership in this space. The Tumor Neoantigen Selection Alliance, or the TESLA, database is a reference dataset for benchmarking neoantigen prediction tools. We ran our NeoSelect algorithm against the TESLA database, and our algorithm outperformed 25 established models and beat the second-place model by around a factor of 2 when identifying highly prioritized neoantigens. While we continue to optimize our prediction and selection algorithms, we believe that these capabilities have very exciting potential in many areas that could improve patient care. We look forward to providing future updates on this program at both academic conferences and in publications. Additionally, Natera has created the NeoPredict algorithm to identify patients who are likely either responsive or resistant to immune therapy treatment. Shown on the right of the slide, NeoPredict significantly outperformed tumor mutational burden in Natera's prospective, BESPOKE IO clinical study. There has been increasing interest in these capabilities from KOLs, hospital systems and pharma companies, and we look forward to providing additional updates in the future. Now let me hand it over to Mike to cover the financials. Mike?

Michael B. Brophy, Chief Financial Officer

Great. Thanks, Alex. The next page is just a summary of the financials compared to last year. We've already spent a lot of time on the revenue and OpEx trends, so I won't repeat those. A couple of the stats that stand out to me are: first, the top line revenue growth over Q2 last year, where we had the big influx from the Invitae acquisition, as Steve mentioned. I was pleased to see us grow very rapidly over and above that very tough comp from last year. Second, the major ramp we've seen in gross margin jumps out, driven by the ASP progress we've delivered over the last year. Steve talked about several near-term drivers to ASPs, and I'm cautiously optimistic that we'll be able to make more progress in the second half, particularly related to Signatera ASPs. For example, we had previously set a goal to get some ASP traction from biomarker states by Q3 2025, and I'm pleased to see some notable progress on specific payers in several states. So I feel confident that our Signatera accrual in Q3 will have some biomarker state benefit. On the quarterly trajectory of gross margins, I'm very happy to see some COGS headwinds in Signatera when that is driven by an influx of first-time patients, which is what we saw in Q2, as Steve described. Finally, I was pleased to see us continue to generate cash even as we double down on the growth investments Steve described for this year. Obviously, that's driven by the revenues and the margins, but also the rapid improvements in the cash conversion dynamics that we talked about earlier in the call. This is part of the revenue cycle operations that improved ASP, and also allow us to get reimbursed for coverage services in a much more timely manner by optimizing the initial claim submission to payers with all the documentation they need to pay the claim on the first pass. As you can see from the bottom row, we've added approximately $47 million in cash from operations to the balance sheet this year and remain extremely well-capitalized with a clean balance sheet. One other comment on the bottom line. We took an accrual of approximately $30 million in noncash stock-based compensation and legal expense accruals in the quarter, which I view as nonrecurring. Without that charge, we estimate EPS loss per share would have been roughly $0.53 instead of the $0.74 we showed in the press release. Okay. Let's get to the guidance update on the next slide. We are completely resetting the revenue guide to a new range, as Steve described, now ranging from $2.02 billion to $2.1 billion on the strength of the revenues and the volumes we've seen so far this year. The gross margin, we are bumping the bottom end of the range by 100 basis points to account for the good results we've generated so far this year. This guide implies that ASP trends will continue to improve while also building in expectations for continued increased adoption in first-time Signatera patients through the rest of the year. The net impact of those drivers should be that organic gross margin will continue to pick up modestly in the second half. For both revenues and gross margins, I will stress that we do not include revenue true-ups in the guide because they can be lumpy and challenging to forecast. I do expect some true-up revenue through the course of the year as the most recent reimbursement trends have been outpacing our historical results as you see here in Q2. On both the SG&A and R&D lines, we're holding that guide flat to the guide we set in May. I'll reiterate the point that Steve made on the slingshot effect with respect to these investments. Very little of the 2025 growth in OpEx is driving revenues this year, but we do expect those to drive growth in 2026 and beyond. We will remain opportunistic regarding OpEx. If we see a chance to fund an important clinical trial or expand a territory beyond the current plan, we're going to do that because we are seeing such steady returns come in reliably on these investments. Finally, just reiterating our cash guide to be cash flow positive this year. The cash flows can be very lumpy, and it's possible for variables like DSOs to bounce around, but our first half performance puts us in a great position for the full year. I'm biased toward the business generating cash again in the second half of 2025. Okay. With that, let me open it up to questions. Operator?

Operator, Operator

Your first question comes from Daniel Brennan with TD Cowen.

Daniel Gregory Brennan, Analyst

Obviously, congrats on the quarter. Maybe just starting off with Signatera volumes, given the 20,000 sequential, and it was a record. Maybe you can just give us some more color on what drove it. Could you speak a little bit about maybe like existing docs and new docs? I think you talked about new patient starts versus maybe surveillance. I know, Steve, you also talked about new indications. So maybe you could just give us some more flavor on what drove it? And I guess the question would be, I know you want to keep things conservative, but is it unrealistic to think something in the high teens to 20% could continue?

Steven Leonard Chapman, CEO

Yes. Thanks, Dan. So I'd say, first, if you look at the broad amount of data that we've been putting out over the last year, particularly at the beginning part of this year, we had some strong data at ASCO GI with the 702 study around the celecox abuse. I think that has filtered its way in, and doctors are really starting to take hold of that. So we saw excellent growth in colorectal, excellent growth in breast cancer and immunotherapy monitoring. As we said on the call, when doctors start using our product, they want to broaden their use either to more patients or to more use cases. We also saw an incredible record in new patients, which is one of the most important metrics to look at: are the doctors continuing to order not just on patients that they ordered a year ago but when a patient walks in the door, are they choosing our tool to make a decision or are they choosing a competitor tool or are they not using MRD at all? We saw absolute blowout record, twice the growth than we’ve ever seen before in new patients. So we think that’s a very good sign. Of course, it’s a mix of new customers that are coming in for the first time and then customers that have started using us and are now starting to broaden their use either to more patients or more use cases.

Daniel Gregory Brennan, Analyst

Terrific. And maybe just as a follow-up for Solomon or Steve or anyone on the team here. Just in terms of the clinical readouts, you went through a lot of the studies that are ongoing in breast. You talked about the treatment on molecular response. Could you just give us a sense over the next, say, 12 or 18 months? You mentioned IMvigor011, which I think could be guideline-inclusive. So we have that one coming up. What are some of the other ones that you would point to across the next 18 months or 2 years? I’m sure they’re all important, but are there any more that are important than not that could actually be either guideline-inclusive or really drive some meaningful change in practice?

Steven Leonard Chapman, CEO

Yes, Dan, that's a great question. I will just make a couple of comments and then maybe Solomon or Alex, if you guys want to comment. I think first IMvigor011. I mean that's obviously a big one, FDA-enabling trial. We believe the results will be released in the future. We’re super excited about that, and a very good indication, muscle-invasive bladder cancer. Hopefully, we will also have new data readout at ESMO this year, which I think will be good. We talked about the gastroesophageal and liver papers. Those have actually just been published, which is super exciting. That's an important step to kind of putting yourself in a position to get coverage. Solomon, do you want to walk through a couple of the other or maybe Alex? I know we talked a little bit about data, when the next readout might be from that.

Solomon Moshkevich, President, Clinical Diagnostics

I think the other one that we've talked about before are the NRG sponsored colorectal trial, the CIRCULATE U.S., and there are a few other CIRCULATE trials globally that are likely to have either an interim or a primary readout over the next 18 to 24 months. This includes, hopefully, the deescalation arm VEGA from the Japan CIRCULATE trial. I would just highlight those 2 in CRC that could definitely make a difference for guidelines and beyond. We'll keep everyone up to date.

Operator, Operator

The next question comes from Puneet Souda with Leerink Partners.

Puneet Souda, Analyst

Steve and team, first off, congratulations on a strong quarter and the guidance increase. The Signatera volumes have been impressive from one quarter to the next. Can you share if there was any impact from the post-ASCO boost? There seemed to be a greater recognition of MRD at ASCO. While the audience has been aware of MRD for years, it looks like its visibility has increased. I would also appreciate your perspective, and perhaps Mike's as well, on how investors should view the current penetration of Signatera and its potential for further expansion. How do you assess the penetration across different indications?

Steven Leonard Chapman, CEO

Yes. That's a good question. So yes, ASCO this year had an enormous amount of oral presentations, posters on Signatera, and there was just a huge buzz at the conference around MRD. I mean everywhere you went, talking about MRD. A lot of excitement came out of that. I think we did see a lot of strong momentum in the last month of the quarter coming out of there after a lot of the presentations. So that's a great sign. I think that buzz is continuing. From a penetration standpoint, we think this is very under-penetrated, I mean low single-digit penetration when you look broadly. What we're starting to see is that this opportunity is very broad. When you look at doctors, especially community practice, they start using Signatera for colorectal, then they kind of start with gastroesophageal, then they may order for lung, maybe for bladder. They really begin to expand throughout the practice. We're in a great position to now increase volume over time based on the infrastructure we’ve put in place.

Puneet Souda, Analyst

I wanted to understand your strategy and timing regarding the PROCEED and FIND trials. This is clearly a challenging issue, especially after seeing a trial failure. The trial met the primary endpoint but fell short of the NCD. The company later licensed the technology from another firm. Can you discuss the technology's performance, sensitivity, and AAs? What are your targets, when can we expect to see the data, and when might we anticipate FDA approval, reimbursement, and launch? There is already a product available in this market, and it appears there is now a competitor gaining traction. I'm looking to clarify your timing and perspective on this market.

Steven Leonard Chapman, CEO

Yes. Let me make a couple of comments and then I’ll hand it over to Alex. But I’ll just say first, we have a long history of doing in-house R&D and developing products ourselves, entering into new markets successfully and also competing very well in highly competitive markets. We think we're in a good position long term to make this a significant component of Natera's overall business. From a timing standpoint, the next major readout is going to be the PROCEED trial. PROCEED was collected exactly how you would collect samples in the FDA protocol, effectively drawing the blood and then the patient goes and gets a colonoscopy. It’s a screening protocol that aligns to what you’d see in an FDA trial. When we have the results from that readout, we'll have a very good sense of how the test performs, focusing particularly on advanced adenomas and specificity. This puts us in a great position to gauge the performance in the FDA enabling study. If you look back at the CRC data from earlier this year, we had a lot of screening identified asymptomatic colorectal cancer patients in those cohorts. This strategy reduces the likelihood of drop-offs going forward. Stay tuned for the readout; it's super exciting.

Alexey Aleshin, General Manager of Oncology and Chief Medical Officer

Yes, great question. The only thing I'll add is we're very aware that degradation can occur. We believe that the biggest source of degradation is poorly matching the FDA study with the case-control studies used to assess early assay performance. We’ve taken a thoughtful strategy launching the PROCEED study and using it as the foundation for the FIND study. The enrollment criteria, processes for enrolling patients are very similar, if not the same. This allows us to accrue samples from PROCEED, nearly matched with the final FIND study. Although it may be difficult to get enough prospectively collected colon cancers, it’s much easier to collect advanced adenomas for a well-powered performance estimate. We will read out some data at the end of the year, with further guidance on enrollment for the FIND study in 2027.

Operator, Operator

Got it, super. And then just if I could squeeze one in, given the number of inbounds that I'm getting very quickly. Briefly, if you could provide me with a number of product launches this year, just if you could encapsulate that? And how quickly can you monetize the AI initiatives that you talked about and turn them into assays and products and to start to see revenue there?

Steven Leonard Chapman, CEO

Yes, I’ll take that. We just announced Fetal Focus. We’re excited about that. We launched Genome earlier in the year. We've got several other things coming, largely focused on MRD. So stay tuned; as those launch, we'll keep you updated. There’s a lot of cool stuff happening, a lot of MRD-related activity on track. On the AI side, there are efficiency improvements in user experience tools that will roll out over time. Some of that work is just beginning. The more technical, medically focused stuff is super exciting, and we believe there are opportunities to commercialize through big multimillion dollar deals with pharma companies or partnerships. We also expect to commercialize many capabilities through our existing diagnostic platforms either as add-on capabilities alongside existing tests or standalone biomarkers.

Catherine Schulte, Analyst

Maybe first, you talked about the $250 million to $300 million of revenue from potential Medicare coverage of noncovered indications. Can you just give us a bit more in terms of details on the timeline for some of these submissions? And how should we think about those being paced going forward?

Steven Leonard Chapman, CEO

Yes. Good question. For that, we looked at all the noncovered indications and the volume that we have there that we're not billing. We said, what would it be worth if we got covered in the next 12 to 18 months? It could be worth $250 million to $300 million in revenue. So there’s a lot of upside opportunity from the business that is already coming in just from getting these coverages. This is a big focus for us. There are at least 7 opportunities for submissions; it could be as many as 15. But as you've seen, it’s not always straightforward; you need the right data, and the trials must be done correctly. We’ve developed expertise in completing MRD trials and submitting those to get coverage, and that's what we’re pursuing for other indications.

Solomon Moshkevich, President, Clinical Diagnostics

Yes, I think breast has always, from the beginning, been a major focus for us, along with initially colorectal and immunotherapy monitoring and now really pan cancer. If you look back at some of the trials we presented, I think the DARE study, which now has like 2,000-plus time points started in 2021, so 4 or 5 years ago now. So this isn't like a new thing. There are continued new investments, such as the TEODOR study. But we've been investing heavily into breast the whole time. We’ve spent and are in the process of investing over $150 million just in breast cancer clinical trials. This is in our budget and forecast. It’s a big effort to do these things, and there’s a lot of trials we need to conduct. We think it will be challenging for someone to replicate that, especially given breast cancer’s unique personal significance to many at the company.

Douglas Schenkel, Analyst

First, on gross margin. In a period of strength, how much was gross margin adversely affected by the launch of whole exome? I'm trying to get a baseline in advance of whole exome gross margin improving over the next few quarters, especially given the first half strength. So that's the first one. The second is on volume trajectory. You've been signaling that we should be modeling an expectation for 12,000 incremental clinical Signatera units each quarter. The trailing 4-quarter average is already about 16,000. At what point would you consider bumping that up? The last one is on revenue strength and operating spend. So in the first quarter, on a strong top line, you increased operating spend. This quarter, again, strong at the top line, but you maintained your operating spend guide. Is this a sign that you are where you want to be in terms of things like headcount and number of R&D programs for the next several quarters?

Michael B. Brophy, Chief Financial Officer

Yes. I think gross margins, ex the big step-up we had in new patients, would have been similar to what we saw in Q1. You would have had steady improvement in gross margins, driven primarily by the bump in Signatera ASPs. I'm very happy to see that we had another strong ASP quarter in women's health as well. For volume, yes, you have to move it up modestly, but I would caution you not to anchor on any single quarter. There will be fluctuations up and down. Beyond that, I covered kind of the fundamental drivers. Our operations are running incredibly smoothly. We're past a lot of the daunting challenges faced in launching this category, and things are rolling now. The data is coming in and reading out well, so I think it’s a fantastic time for the whole MRD space.

Rachel Vatnsdal, Analyst

So I wanted to push a little bit further on the sales rep dynamics. So you talked about expanding your sales force. Can you walk us through how large your sales force is at this point? And where do you think that needs to be over the medium to long term? And then just specifically on some of the recent sales rep adds, how should we think about the productivity for those new reps as we get into later this year and into 2026 as well?

Steven Leonard Chapman, CEO

Yes, that's a good question. Traditionally, we have like 150 to 175 oncology reps. We executed a meaningful step-up, and that was completed during Q2. Many of those reps are just coming out of training or getting their feet wet in the field. It usually takes 6 to 9 months for them to become fully productive, given the complexity of the material they need to understand. Metrics we look at include the number of new accounts they bring on, account retention, and their ability to expand use of Signatera within their respective practices. We don’t have specific revenue targets for new reps; we focus on the growth trajectory and returns for each rep.

Michael B. Brophy, Chief Financial Officer

On new patients, if you had a normal mix, it would have been about 40 basis points, but this was multiples of that. The growth in new patient starts is a very volatile metric, so I don't want to lay that out as a consistent KPI. However, when looking forward into 2026, the strong pattern of volume growth together with consistent data give me confidence.

Operator, Operator

That is all the time we have for questions. This will conclude today's conference call. Thank you for joining. You may now disconnect.