Natera, Inc. (NTRA) Q3 2021 Earnings Report, Transcript and Summary

Welcome to Natera's 2021 Third Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, November 4, 2021. I would now like to turn the conference call over to Michael Brophy, Chief Financial Officer. Please go ahead.

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our third quarter of 2021. On the line is Steve Chapman, our CEO; Paul Billings, our Chief Medical Officer; and Solomon Moshkevich, General Manager of Oncology. 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 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 correct or accurate information. Natera disclaims any obligation to update or revise any forward-looking statements. We will provide guidance on today's call but will not provide any further guidance or updates on our performance during the quarter, unless we do so in a public forum. We will quote a number of numeric or growth changes as we discuss our financial performance. And unless otherwise noted, each such reference represents a year-on-year comparison. And now I'd like to turn the call over to Steve.

Thanks, Mike. Good afternoon, everyone, and thank you for joining us. We've got a packed session full of announcements, so let's get into the recent highlights. The very strong momentum in Q3 continued as you can see from the metrics in the first bullet. We processed 407,000 units in Q3, which was approximately 55% growth over the same period of last year. Total revenues and product revenues were both up 61% and 62%, respectively, over the same period last year. That acceleration is being driven by continued strong growth in the women's health products and big contributions from oncology and transplant products. Those products are now large enough to shift our growth rates upward. We heard a lot in the market during the quarter about the impact that Delta variant was having on the health care businesses. But as you can see from our Q3 volume, we were able to blow through any headwinds COVID-19 presented. As a result of the continued momentum, we are raising our revenue guide beyond the range we just gave a couple of months ago in August. We are now guiding revenues to be $615 million to $625 million for the full year. We started the year guiding revenues at $500 million to $525 million. So the top end of our range is now roughly $100 million above where it was at the start of the year. That gives you a sense of the traction we're having and we continue to see across the company. Mike will get into the full details of the guide later in the call. In addition to the significant unit and revenue growth, we've got a set of transformative announcements in the transplant space. In kidney, we've continued to make significant progress. First is the launch of Prospera with quantification, which is a new technique only offered by Natera that has shown improved performance over earlier methods that report donor-derived cell-free DNA fraction alone. Second is the announcement of the results of the Trifecta study, which we believe is the largest prospective, multisite, fully biopsy-matched study ever performed in the kidney transplant space. The initial results exceeded our expectations and we believe can eliminate the need for costly multi-modality approaches to bolster test performance. I'm also excited to discuss the major new Prospera commercial launches in heart and lung. In both organs, the commercial launch announcement was supported by significant new prospective data sets that we believe can redefine these fields. In oncology, the major announcements continue to unfold. We had another strong colorectal study published in clinical cancer research where we introduced Signatera velocity as a clinically useful metric. The study demonstrated the value of calculating circulating tumor DNA growth rate over time or velocity, such that patients with fast-growing tumors fear much worse than patients with slow-growing tumors. Velocity can't be calculated if you're only reporting out a positive or negative result. So we believe this will become a competitive advantage for Natera in recurrence monitoring, and we'll spend some time on this later in the call. More broadly, I think the launch of quantitative approaches in both oncology and transplant has a lot of parallels with our launch of the fetal fraction metric for Panorama back in 2013. At that time, no other NIPT reported on fetal fraction, but physicians really gravitated to our test because of that result, and the metric has now become the gold standard in a requirement for the field. These new oncology and transplant metrics provide a window into a patient's underlying biology, which can offer a physician crucial context when designing how to incorporate a test result into clinical decision-making. Our technology lends itself to these types of metrics, further differentiating the clinical utility of our products across all areas of our business. I'm pleased that Natera continues to be a leader in the industry in this area of innovation. We were also very pleased to secure another major competitive win by being selected by NRG Oncology for the U.S. arm of the CIRCULATE trial. You have seen the significance of the data sets coming out of CIRCULATE Japan, and we now think winning the critical U.S. arm puts us even further ahead in terms of developing prospective validation data for colorectal cancer. These 2 trials, together with the work we are doing with BGI in China, make up the largest commercial CRC MRD markets when you consider both the incidence and the reimbursement landscape. Although we aren't going to do a deep dive on our Signatera pharma trials today, we are now fully enrolling patients into both the Phase III IMvigor and ZEST trials we discussed on our last call, and our pharma pipeline continues to build. We are also now offering a broad plex product to our pharma partners in the RUO setting. As you're aware, Natera can multi-plex thousands of probes in a single reaction. So offering a broad plex test in the range of 50 or 100 or more targets is easy for us to do. We've only seen very targeted interest thus far in the broader plex offering. But for those who want it, we now have it available. We've been doing this kind of work upon request for a long time, but we've now made it available as part of our standard menu. In addition, Natera has developed a series of Signatera innovations that it intends to introduce in 2022 and 2023. As you know from our NIPT business, we're constantly innovating and pushing the limits of the technology. I'm also pleased to announce the progress of the clinical launch of Signatera in China with our partner BGI. Recently, BGI kicked off a multisite prospective trial in GI cancers, including colorectal cancer. The study plans to enroll roughly 500 patients and includes many of the top academic centers across China. BGI plans to expand on this initiative and is kicking off a series of investigator-initiated trials across other cancer types. Gaining support from top academic centers and KOLs is important for broader clinical launch, which requires the Chinese FDA approval and we expect will take several years to achieve. Finally, we're excited to announce the details of our road map in early cancer detection. We've signed a partnership with Aarhus University that gives us access to a prospective 40,000 sample biobank of patients screened for colorectal cancer. In addition, we've got an exclusive option to license Aarhus' IP, and we have access to their methylation signature, which is performing very well across all stages, which we plan to combine with our own methylation and ctDNA technology. As you can see, we've had a very busy quarter. I'll now jump into each of these, starting with the unit growth on the next set of slides. Our unit growth has really been accelerating recently, and I think this longer-term historical view gives us some context to the growth trajectory we've been on for the last 4 quarters. You could see that while we made steady, if lumpy, progress in prior years, the business has rocketed upward on a much steeper ramp since Q3 of last year. That is not a coincidence. In women's health, the new ACOG guidelines came out roughly 12 months ago, and we launched both our transplant and oncology products in the second half of last year. We don't think this is a 1-year trend. The NIPT market is still very underpenetrated compared to the 4 million to 5 million pregnancies in the U.S. So there's a long way to go, and of course, we are just getting started in both transplant and oncology, both of which we're starting to see play out as significant opportunities. On the next slide, you can see the volume growth is clearly translating to revenue growth as well. You can see once again the scale-up in growth we've experienced in the last year. This is driven by both the volume trends and also continued improvement in the realized revenues per test or ASP. We saw another nice increase in the blended ASPs in the business over Q2, which continues a multi-quarter trend going back to last year. We benefited from the volume mix shifting toward the newer, higher-priced products, and we also had some healthy appeals wins on older claims that came in through the quarter in women's health. Mike will spend more time on ASPs later in the call, but we still have plenty of room to run on ASPs across their various products. Okay, so we've got a fantastic set of milestones to now review in organ health. I want to start off by highlighting some broader trends that are occurring with our organ health products. First, we've expanded from a single organ product to now multiple organs with the launch of heart and lung. Our technology is robust, and we're seeing it translates well across the organs in a very cost-efficient way, which we think offers a great expansion opportunity for Natera. Second, whereas, at one point, we only had retrospective data, that's now no longer the case. We now have significant prospective multisite data. In some cases, we believe we now have the most significant prospective data in the space. Third, we focus on innovation to improve test performance. For example, with the launch of quantification and now we're seeing AUCs that are exceptional from just ctDNA alone. These trends, expanding other organs, producing high-quality, multisite prospective data sets and delivering exceptional AUC through innovation, all support a path for rapid growth in Prospera. In kidney, it's been a little more than a year since we were awarded our local coverage decision for Prospera, and we started our commercial launch in earnest, and we are very pleased with the level of commercial traction we're generating so far. Of the top 100 transplant centers, 45 have now implemented Prospera routinely into their practice. We've also been pleased with the enrollment in our registry trial, PROACTIVE, where we now have more than 2,500 patients enrolled. You may recall there was external skepticism about whether we would be able to successfully enroll patients into this trial, but clearly, we've done an exceptional job. This level of adoption among top centers just a little more than a year into the launch gives us confidence that our commercial plan is working. Now with the addition of new organs, very strong multisite prospective data and our innovative quantitative approach, we're in an even better position to build on the momentum we've seen thus far. Let me talk now for a minute about Prospera with quantification. Prospera is now the only commercially available cell-free DNA test for kidney rejection that provides 3 values: the quantity of the donor-derived cell-free DNA, the fraction of the donor-derived cell-free DNA and the total amount of cell-free DNA, on every report. Other available cell-free DNA tests only report on the fraction of donor-derived cell-free DNA alone, which has limitations, especially when the total cell-free DNA is high, which may result in false negatives. As you can see here on the left side of the slide, the percentage of the donor-derived cell-free DNA is a fraction that incorporates the absolute quantity of donor-derived cell-free DNA as the numerator and the total amount of cell-free DNA as the denominator. The donor-derived cell-free DNA comes from the donated organ, and the total cell-free DNA mostly comes from the recipient. The fraction of donor-derived cell-free DNA can change significantly if the denominator or the recipient cell-free DNA is artificially increased. When reporting donor-derived cell-free DNA fraction alone, like our competitors do, doctors need to be very careful about any factors that might impact the denominator. There are 10 items on the right hand of the slide that we've identified in the literature that can impact the total cell-free DNA. Our hypothesis was that incorporating a measurement of the absolute quantity of cell-free DNA rather than just a fractional loan into the result would improve the sensitivity of the assay, and that's exactly what we're now seeing in our studies. To test our hypothesis, we performed a validation study of the Prospera with quantification method with UCLA that resulted in a peer-reviewed paper published in the Journal of American Nephrology, one of the premier journals. The paper showcased the improved performance from Prospera with quantification in 41 kidney transplant recipients, 9 of whom were experiencing rejection. Incorporating the quantity of donor-derived cell-free DNA with the fraction of donor-derived cell-free DNA improve the sensitivity of the Prospera test from initially identifying 7 out of 9 cases of rejection to then 9 out of 9 cases of active rejection, which were then confirmed with biopsy. This improvement has now been seen across several different independent data sets, a number of which are in submission for publication. The most significant data set comes from the Trifecta study, which I'll go into on the next slide. Yesterday, we announced the results of the Trifecta study. The Trifecta study is a multisite prospective trial being led by Dr. Phil Halloran from the University of Alberta, a leading KOL in the field. The study, which included more than 300 biopsy match samples and greater than 100 biopsy match rejections, is the largest multisite prospective fully biopsy match study ever performed in the space. In the study, we tested the AUC of Prospera with quantification to distinguish rejection from nonrejection using BANFF 2019 criteria, and we showed an AUC of 0.81. We then used molecular pathology as the standard and showed an AUC of 0.89. There are recent studies that suggest that molecular pathology may be a better standard than BANFF, suggesting that Prospera may be performing better than previously suspected. Finally, we also compared rejection versus quiescence crescents or essentially, rejection versus exceptionally stable patients, resulting in AUC of 0.91. This last analysis, the comparison of rejection to quiescence is similar in concept to that used by some of our competitors in their recent multi-modality publications. Unfortunately, it isn't a very useful analysis clinically, which I'll touch on in a minute. Overall, the AUCs from the Trifecta study are exceptional. The definitive data is now in. Prospera with quantification performed very well, and Natera now has the largest fully biopsy match study that's ever been performed in the kidney transplant space. I want to take a second to quickly touch on rejection versus quiescence because it's easy to get confused on the different types of analyses that are out there. Rejection versus nonrejection is different from rejection versus quiescence. Quiescence includes essentially only the most stable of stable patients. As you can see below, this type of analysis excludes intermediate patients, which it really isn't practical in a real-world setting. In most cases, it's not possible to determine a patient is quiescent without doing a biopsy first to determine if there are any nonrejection pathological findings. That is why the vast majority of the papers in the field have assessed rejection versus nonrejection, which remains the main benchmark for performance. As you assess the landscape of testing available, keep in mind that the analysis being performed may be different than the intended use population, and just - and thus, the results may be less clinically useful. So far from what we've seen, multi-modality approaches have not been validated in rejection versus nonrejection cohorts, and their performance in that intended use population remains to be seen. On the next slide, I'm really pleased to provide details on the recent launch of Prospera in the heart transplant setting. As I said before, it's been relatively easy for us to expand beyond kidney to other organs because of our robust core technology. In addition, it's also proving to be commercially efficient because we're able to leverage a lot of the same infrastructure in terms of nurse coordinators and customer support. So it's also been cost-efficient for us to enter this space. We think Prospera Heart offers compelling advantages versus our competing tests. Our validation study is a multisite study that included greater than 250 prospective samples collected during 2020 and 2021 for the purpose of validating Prospera Heart and another 100 samples from a biopsy match biobank. You can see the results of the study on the right-hand side of the page. The initial results were impressive, but then further improved with quantification where we were able to achieve an area under the curve of 0.88. These are really exceptional AUCs in the heart transplant monitoring space, further underscoring the power of our technology. What's critical about these results is that the Prospera Heart test is delivering this exceptional AUC by performing cell-free DNA alone, and therefore, we believe there is no need for cumbersome and costly multi-modality approaches to bolster test performance. Competitor test in heart must be collected at a site that is set up for specialized handling because the sample must be immediately spun down and shipped on dry ice. Since our test is a simple blood test, patients can access our convenient mobile phlebotomy service, which can be important given the frequency of testing. In addition, the competitive test in heart charges Medicare twice for every multi-modality patient time point since separate DNA and RNA tests are being performed on each patient. Because we are delivering excellent performance on a cell-free DNA-based test alone, Prospera Heart reduces the cost of the system and is less than half the price of the expensive multi-modality approaches. We think this combination of test performance, convenience and cost represents a compelling offering for physicians and patients. We keep the product expansion opportunities rolling on the next page with our lung transplant launch. We are getting a lot of the same efficiencies with this launch, the same robust Prospera workflow and leveraging a lot of the same commercial infrastructure that we've built. The sales and commercial teams overlap with the heart team, so again, it's very efficient for us to go after this opportunity. We think the validation data and results in lung are very strong. The study was run by the lung transplant program at the Ohio State University, was presented at CHEST a few weeks ago and very well received. Prospective study examined 204 plasma samples obtained with concurrent bronchoscopy biopsy procedures from 104 lung transplant recipients between September of 2020 and June of 2021. Using the Prospera lung test, donor-derived cell-free DNA levels were compared across clinical histopathologic diagnostic cohorts. During the study, 35 episodes of acute rejection were analyzed. This study represents the largest trial of a commercially available donor-derived cell-free DNA test for lung transplant assessment. And once again, the AUC was incredibly strong, underscoring the power of our technology. For both the heart and lung products, we plan to submit dossiers for Medicare reimbursement under the existing local coverage decision, and we anticipate receiving coverage in 2022. As you can see, we have a lot of exciting opportunities. We've made a lot of progress in kidney. And we're now expanding to other organs. We've been hard at work in developing very strong data sets, and now we have, in some cases, the largest prospective data sets available. We're innovating. We're launching improvements such as Prospera with quantification. We're seeing exceptional AUCs. I think we're in an excellent position long term to compete very well in the organ health space. I'm going to hand it over to Solomon in a minute to walk through all the recent news on Signatera, but first, I want to spend a moment describing the effort we have underway in early cancer detection. Our strategy here is to pursue a capital-efficient development program that is not distracted from the work we are doing with Signatera, but instead leverages the technology we are already developing, along with the data we are generating with our growing base of clinical volumes in oncology. That last item is critical because we run an upfront exome on every Signatera sample. We're accumulating a data set of tens of thousands of early-stage cancer exomes that has never existed before. We can now interrogate that data set to assist in the design of a DNA-based signature that maximizes test performance. We've already completed the initial design of the colorectal cancer early screening DNA component. Now we're excited to validate and expand on that effort with our new partnership with Aarhus University. In the partnership, we've secured access to a biobank of 40,000 colorectal screening samples, prospectively collected and would match outcomes data. More than half of the affected samples are stage I or II cancers. We've also secured an exclusive option to license IP and access to a methylation signature from Aarhus, which demonstrated strong potential in a recently published study. The methylation signature alone reported an average sensitivity of 85% with a specificity of 99% across stage I through IV colorectal cancers. The performance was also very strong in early-stage cancers with an 80% sensitivity in stage I and 85% sensitivity in stage II cancers. We'll, of course, need to replicate these results, and we also believe we can improve upon the methylation signature by incorporating it into our own unique methylation workflow and adding in our DNA technology. We'll start off with the colorectal assay and then have the potential to add additional cancer types in the future. So while we continue to build on our lead with Signatera and MRD, we've got a targeted program running in this adjacent and very large market. I look forward to providing periodic updates on our progress here in the future. With that, let me now hand it over to Solomon to cover the other oncology updates. Solomon?

Thanks, Steve. I want to start on the next slide with our selection as the MRD partner for the U.S. arm of the CIRCULATE trial. We were very pleased to win a competitive process for this trial, which is funded by NCI, the National Cancer Institute, and led by NRG Oncology, a leading academic consortium with hundreds of clinical sites across the U.S. We have just started to see some of the potential for practice-changing data emerge from the Japanese arm of the CIRCULATE trial. And we think the U.S. arm is similarly destined to be the definitive prospective U.S. trial for MRD-guided management of colorectal cancer. You can see a summary of the trial design on the right-hand side of the page. Stage II and III colon cancer patients will get surgery as per the standard of care and then get serial MRD assessment with Signatera. Patients that are MRD-positive on Signatera will go on to chemotherapy, and that will be randomized between standard of care chemo, which is 3 to 6 months of FOLFOX; or an intensified regimen with FOLFIRINOX, which is standard treatment today for patients diagnosed with stage IV colorectal cancer. Also, just like in CIRCULATE Japan, Signatera MRD-negative patients will be randomized as well between standard of care, chemotherapy, versus no chemotherapy at all, just active surveillance. This is called de-escalation. We've highlighted this arm of the study on the slide because we believe it can eliminate unnecessary treatment for the majority of patients. Right now, adjuvant chemotherapy is standard for all stage III and high-risk stage II patients, even though we know that most patients are already cured by surgery alone and will not benefit from the chemotherapy. The Japanese group may be able to report preliminary results from this de-escalation arm in the next year, and we think those results plus the data from the U.S. will be enough to impact NCCN guidelines and could make it very unlikely that a study like this would ever be run again. I think this really highlights our competitive advantage as we have developed a multiyear lead in prospective clinical data, and we think winning this trial is going to significantly extend that leadership position. Okay. Excited to get into a little more detail now on the new velocity data that Steve touched on earlier in his opening comments. In early October, we published a prospective study with 168 stage III colorectal cancer patients with a total of just over 1,200 blood samples analyzed. First of all, the study recapitulated our strong test performance in early-stage CRC that we published before, this time with a nice homogeneous population of stage III colorectal cancer. But in addition, we also introduced and validated the new concept of ctDNA velocity. So as Steve mentioned, Signatera gives more than a qualitative positive or negative result. Every Signatera test result comes with a count of tumor molecules per milliliter of plasma, which represents disease burden. As patients receive serial testing over time, physicians are able to monitor both the direction and the rate of change in that disease burden. You can visually see this rate of change on the chart on the right-hand side of the page. So each line represents one patient with ctDNA levels tracked over multiple time points. You see the patients represented by the light-blue lines have ctDNA levels increasing rapidly, while the patients represented by the dark-blue lines have ctDNA that is still present, but it's growing more slowly. The data from this study confirms the intuition that patients with fast-growing tumors have much worse outcomes. So specifically, the box on the bottom left makes clear how stark the difference is. While all MRD-positive patients ultimately went on to relapse, for patients with fast-growing tumors, less than half of them were still alive at the 3-year mark. Meanwhile, for patients with slow-growing tumors, 100% of them were still alive at the 3-year mark. We expect this prognostic feature to become increasingly important for oncologists as they work out exactly how to manage their MRD-positive colorectal patients. And we also expect the concept to apply in other cancer types, similar to how PSA velocity is already measured today for prostate cancer. To our knowledge, Signatera is the only MRD test that has been validated for the assessment of ctDNA velocity, which is made possible by our unique approach to quantitation. So I'm not going to touch on everything we have going on today in oncology because of time. But as Steve said at the top of the call, we're making a lot of progress in pharma in China and of course, with product innovation. So we're looking forward to provide more updates on those fronts in the future. Now, I'd like to hand it over to Mike to discuss the financials. Mike?

Thanks, Solomon. The next slide here is just the summary of financial results for the quarter. Steve covered a lot of the trends on volumes and revenues. You see the revenue growth modestly outstripping the volume growth as ASP stepped up in the quarter. Underlying ASPs for our products stepped up modestly again in Q3 as we continue to add some wins from additional NIPT coverage. We also benefited from roughly $5 million in revenue from cash collections from prior periods, which historically is more in the $1 million to $2 million range but can be lumpy as we've discussed in the past. I called that out to give you some context for the revenue guide for the rest of the year, which implies significant sequential organic growth in Q4. We also got a bump in our realized collections per unit for Signatera from the ADLT pricing going into effect in Q3. We think that ADLT will continue to help grow Signatera ASPs as more and more patients that started with Signatera this year moved to the recurrence monitoring setting, which is covered by the ADLT pricing. Overall, though, we've chosen to let Signatera ASPs be much lower than they otherwise could be because we are taking in growing volumes from a range of indications that are not yet reimbursed. Signatera adoption across cancer types has exceeded our expectations so far, which is tough on gross margins in the immediate term but we think is a very bullish sign for the longer-term potential of this market. You can see we improved gross margins meaningfully year-over-year, but still, our gross margin for this quarter and for the rest of the year reflects this investment, if you will, in test volume ahead of reimbursement, particularly for Signatera. And that's been balanced out by a strong and growing gross margins for our NIPT and Horizon products that are now well above the blended average. To that point, COGS per unit in the quarter were on track as NIPT COGS remained in the 150 range, and the path to reducing COGS over time remains intact. But we still have a road map in place to meaningfully reduce Signatera COGS per unit over time, as we've discussed in the past. As we covered on our Q2 call, the R&D and SG&A lines also reflect the 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 said before that we are not planning to sit back with our current product offerings with Version 1.0 of Signatera and Prospera. And I think the updates Steve and Solomon provided make clear how quickly we can turn OpEx investments into differentiating new features for Signatera and Prospera, in addition to the entirely new product launches Steve covered. This productivity also allows us to get more scale more quickly on the commercial operation we've built for these call points. We've needed to build sales channels into transplant and oncology setting this year, but now we can leverage these sales channels across organ types in transplant and a huge range of cancer types in oncology. Okay. So I think that now gives you some background for the guide that's on the next slide. We are raising the revenue guide for the third time this year. As Steve discussed, this is a function of our efforts hitting on all cylinders across products with commercial wins coming from all the new data we have generated and the sales teams getting increasingly productive in the transplant and oncology call points. We are trending slightly on gross margins versus the most recent guide but still better than where we started the year. This is driven by the new volumes outside of what's currently reimbursed is accelerating, as I described, and we think that's definitely worth doing. The build-out of the commercial effort continues to roll out as we described this summer. So we are holding that steady for the rest of the year. And we are bumping up R&D to accelerate our participation in a range of clinical trials that have become available to us with the performance we've seen in both Prospera and Signatera. We are still very comfortable with where we stand on the balance sheet. We can see the demand for our products in the field, and we see opportunities to capture share in markets that can endure for a very long time. So we think the decision to remain in aggressive growth mode remains the right one. So it's an exciting time for Natera, and we are very pleased to have been able to share these results with you. Now, I'd like to turn it over to Q&A. Operator?

[Operator Instructions] And our first question comes from the line of Tejas Savant with Morgan Stanley. Your line is open, Please goa head.

Hey guys good evening. Steve, one for you on the Aarhus biobank sample project. Can you share some color on time lines for the launch and completion of your validation study? And at what point do you expect to launch a prospective trial and launch commercially? And then I have a quick follow-up on the guide.

Yes, thanks for the questions. So we're really excited about this partnership. I mean the methylation data that they published looks very strong. The biobank obviously is very significant, so we're very pleased to get access to this. We hope to generate some combined data on the performance of DNA and the sort of Version 2 of the methylation platform in 2022. But there's still a lot of work to do, so we're not putting out any time lines right now, but we do think we can generate some data during that time frame. That doesn't necessarily mean we'll complete the entire validation of the 40,000 sample cohort in that time frame, but just that we would make some additional data available on the combined performance of the assay. Frankly, we actually hope that we can use this cohort itself to go to the FDA. We plan on going and speaking with the FDA about the use of this cohort. We ultimately don't know what they're going to say, and we're not sort of hanging our hat on the fact that they're going to accept this as the final validation. So once we go through that process, we'll have more insight into whether we need to execute a prospective trial or not. But certainly, this cohort alone will provide, I think, very strong validation data that will give us significant confidence about making that decision to move forward and make the investment in a prospective cohort, if we do that.

Got it. Very helpful. And then, Mike, a quick follow-up on the guide. I mean as you look at the fourth quarter in '22, anything to worry here in terms of supply chain disruptions or consumable shortages or even sample shipping delays that could constrain upside in the near term for you?

No, I don't think so, Tejas. I mean you can see what the - the implied growth in Q4, I think, tells you that all the trends that we're seeing here in Q3 are looking really stable. It's not really - not a onetime benefit or anything like that. And so we were able to blow right through any concerns related to the Delta variant, as you can see in our Q3 performance. So maybe that affected us, but you just can't tell that in the numbers. So we're feeling great about the trajectory that we're on.

Thank you, And our next question comes from the line of Tycho Peterson with JPMorgan. Your line is now open, Please go ahead.

Hey thanks and Congrats on all the progress, guys. On Prospera, is Prospera with quantification, is that an incremental pricing opportunity? Or is that more about capturing market share? And then secondly, on Prospera, obviously, your competitor has got in a fair amount of trouble. I'm just curious if there's blowback and how you think about that. I know there's not a direct read-through for you guys. And then I had one follow-up on screening after that.

Yes. So the Prospera with quantification technique is obviously something that's unique to Natera. It's performing exceptionally well. We've designed this in a way that we really don't have to do any additional workflow. And so although I think we could go try to take price, we made the decision to just pass this through as a benefit to patients and to physicians without increasing the price in any way. But it's an exceptionally streamlined workflow where we've leveraged some novel microbiology and novel bioinformatics techniques to be able to provide this without really increasing our COGS. With regards to some of the challenges with the competitive landscape, we don't think that there's any blowback to Natera. I think we're in a very good position, and we look forward to competing hard.

And then on the screening, I'm just curious...

There's one last one there.

Go ahead. Yes. On screening, I was just curious how you're thinking about kind of the multi-cancer opportunity. I mean, obviously, it's great you've got the biobank of 40,000 samples for colorectal. But as we think about additional cancer indications, any rough sense of the time line? I mean will this be over the next year or 2? Or how do you think about multi-cancer?

Yes. So I think our plan includes the ability to extend into additional cancers, and I think we've enabled that opportunity through the partnership with Aarhus. As far as our internal methylation and DNA discovery work, we've built discovery platforms that aren't specific to colorectal that can extend into other cancer opportunities. So while our initial focus is on generating a proof of concept and then validation data for colorectal moving towards the commercial launch, longer term, our plan is to have a pan-cancer assay. But the initial work will be focused on colorectal.

Okay, thank you.

And our next question comes from the line of Puneet Souda with SVB Leerink. Your line is open, Please go ahead.

Hi, Thanks for taking my question. Just on the screening point, I just wanted to understand how are you positioning in terms of potential trial there for CRC. And in terms of given the competition that's already out there, there are 3 trials in the space. So just wanted to understand how you're positioning for that. And for the multi-cancer timing for these trials, the large-scale trials, those are obviously more than 50,000-patient or 100,000-patient trials. So how are you thinking about that sort of investment overall and the timing for that?

Yes. I mean our approach, thus far, is to take a very sort of cost-efficient approach and sort of have some phase gates as we move along here. And so far, we've leveraged the significant amount of information that we have coming from all the tumor exomes that we've run, and we use that to build a proprietary DNA-only aspect of the test. Now we're combining that with this methylation signature that we gained access to through the partnership with Aarhus and is performing very well, plus some internal discovery work and methylation workflow work that we're doing at Natera. So we plan on putting those 2 things together, generating some proof-of-concept data in early '22 and then running the 40,000 sample biobank thereafter. Our hope is that, that 40,000 biobank itself is enough for us to get approval from the FDA for the test. Now we don't know if that's the case. We haven't yet gone and spoken with the FDA when it's very likely that it won't, in fact, be sufficient to get approval, but that's what we hope. And if that turns out to be the case, that would be a massive win for us because we wouldn't then subsequently have to do the prospective study. I think we plan on having that conversation with the FDA sooner rather than later, so we can understand if we do have to do a prospective trial, we can start planning for that and start executing on that. Now in colorectal alone, we think that the trial - when you look around it, competitive trials are taken like in that kind of 3-year range. Now that's okay because we don't have to be the first test on the market. I think this is such a huge opportunity that it's not necessarily just about being the first on the market; it's about doing it right and having the right test, having the right customer experience, having the right performance. So if we see in the proof of concept and the subsequent validation data that we really have something here that we think is going to be a winner, we're not going to hesitate to pull the trigger on that prospective trial. As far as the much broader expansion to pan-cancer, we're going to have to get through some of these phase gates and hit some of these milestones before we can really talk about the time line for doing a prospective study of that size.

Got it. That's super helpful. And then on Signatera, I just wanted to get a sense of the sort of the catalyst path ahead, events that we ought to be watching out for in terms of data sets and readouts for Signatera. We obviously saw your data on Yeovil [ph] and a number of other data sets. So there is momentum here. But in - sort of in terms of thinking of larger indications, more impactful studies, just if you could just walk us through what are some of the things to watch out for and the potential conferences where we should be expecting more data readouts around Signatera that are more meaningful.

Yes. Sure. So I'll make the comment and then maybe, Solomon, you could comment. So we have, I think, more than 50 different trials that are ongoing at any time or biobanks that are ongoing at any time, and various of those are going to be reading out over the next kind of quarter, the next 6 months, the next 12 months. So we've got a lot of data coming out, and that's really sort of broad across different cancer types. I'm not going to go through and sort of name each one, but there's additional data in GI. There's additional data in some of the cancer types like melanoma, for example, or other areas where we haven't had significant readouts that we're pretty excited about. So stay tuned for what's coming. I do think, in the near term, one of the most significant readouts, or has the potential to be one of the most significant readouts, is coming at the ASCO GI Conference in the beginning of 2022 where we expect there to be another very significant report on the CIRCULATE Japan study in the colorectal space. And I think that's going to be exciting, and I think that has the potential to be market changing Solomon, do you want to add any additional comments there?

Sure. I want to reiterate our - looking forward to the data at ASCO GI, we also have multiple studies that have been submitted as manuscripts that are under review across many different GI cancers as well as skin cancer, ovarian cancer, some of the data, which you'd - people had seen previously in a conference, multiple myeloma. And then, we have - we're looking at a pretty exciting slate of abstracts to send to AACR as well, which will be in the spring. And I think it's a little early to say exactly to what extent - how we're going to use these for - to extend our reimbursement pathway. So we have those discussions with Medicare and with our other payers, but there's a lot to look forward to here.

Got it. Super helpful. And last one, if I could just squeeze in. In terms of ADLT reimbursement, was there any contribution in the quarter? And I apologize if I missed that.

Yes.

Mike, do you want to take that?

Yes, I'll take it. Yes. So we did get a modest bump in the quarter from the ADLT pricing, and I think that's something that can be a continued tailwind for Signatera clinical volumes in these kind of reimbursed cancers, particularly as you get more and more patients that have started Signatera that go through that first - that 6-month kind of adjuvant window, and then they go - they flip into the recurrence monitoring indication. That's the indication that's reimbursed under the ADLT. So as you kind of build a bigger base of patients that have kind of gone through that first 6 months, the mix of your volumes is going to shift toward that recurrence monitoring indication, and that will tend to be a tailwind for ASPs. But we did start to see a little bit of that in Q3.

Super helpful. Thanks, guys.

And our next question comes from the line of Catherine Schulte with Baird. Your line is open, Please go ahead.

Hey guys, thanks for the questions. I guess first for Signatera. I believe you were waiting on the IO or umbrella LCD to be finalized, and then you could submit data packets for other indications to amend the billing article. Is that still your plan? And if so, what are the indications that you kind of have ready to go once we have a final LCD? And then, obviously, Medicare is running behind the schedule here. Have you heard anything from them in terms of timing?

Yes. Thanks, Catherine. So just first on the timing. I think we had initially understood that the final LCD had to publish publicly in September. However, we've now clarified that September was the deadline for MolDx to send the LCD to CMS National for approval. And we understand that that's taking place. We've had a lot of consistent and positive dialogue with the MolDx program, and their feedback is that the administrative process is just ongoing. And ultimately, it's their process, but everything we've heard makes us think that it's on track and it's going to be published soon. And so we'll have more updates on the time line as we get them. As far as submitting additional indications, you can basically go back and look at anywhere where we published a paper, a muscle invasive bladder cancer, neoadjuvant breast, lung, et cetera, anywhere where we published a paper, we think we're eligible to submit for reimbursement. And as Solomon said a moment ago, we have other papers in ovarian and so forth that are already submitted where we've - in some cases, we've gotten editor comments back already, and so we have a pipeline of papers coming out. And as a reminder, we've already submitted our tech assessment for stage IV colorectal cancer, which we think would fall under the CRC LCD, which is already in final stage.

Okay, got it. And then, maybe just going back to early detection; can you just talk through how you envision that playing out commercially? Is this something you plug into your women's health channel? Or do you plan to go after the primary care market as well?

Yes. I think there's some different options there. I mean, look, we're - we still got a long way to go before we're actually pulling the trigger on commercialization. So ultimately, if we have a product that works well that's reimbursed, the commercialization part is easy, and that's something that we do exceptionally well. So I think we'll have to deal with that when the time comes. But our women's health channel, I think, is an exceptional channel for commercialization. We're now broadly covering the vast majority of women's health providers. And as you know, many women use their OB/GYN or GYN as a primary care provider. But yes, lots of opportunities for commercialization, and we'll cross that bridge in the future.

And our next question comes from the line of Max Masucci with Cowen.

Congrats on a great update across the board. To start, it's been over 8 months since the launch of Altera. Still early days, but how has the adoption then? Have customers been purchasing more on a stand-alone basis? Or are most using the test in tandem with Signatera?

Yes. Thanks, Max. So things are going well. I think, obviously, Signatera as a whole is going well. I mean I'm looking at our volume growth just in that clinical sector, and I think we're growing exceptionally well there. I think Altera generally has been ordered alongside Signatera. That's how we've been promoting it thus far. We really haven't been promoting it as a stand-alone indication. I think we might in the future, but Signatera is such an enormous market that I think we want to keep our energy focused there. And as we bring on additional products in this space, whether that be tissue-based comprehensive genomic profiling or a liquid biopsy-based comprehensive genomic profile, we're going to do it in the context of supporting Signatera.

Yes. Makes sense. Maybe one question for Mike on the core NIPT business. Are you still seeing around 80% of NIPT tests include add-on microdeletions testing? And I think you're getting paid somewhere in the range of 5% to 10% of those microdeletions volumes about 1.5 years ago. Has the attachment rate for microdeletions testing or the percentage of volumes that you're paid on changed at all over the past 1.5 years?

Yes. Thanks for the question, Max. Yes, so on microdels, the attachment rate has remained remarkably stable. It's - any given quarter, it's in that 75% to 80% attachment to NIPT within our direct channel. And the pricing for microdeletions in terms of our contracted rates with commercial payers is remarkably similar to that which we have with NIPT. I mean the contracted rates are in that kind of $600 range for microdeletions as a stand-alone product. So a lot of volume that we run, a lot of results when you return to patients and then submit for reimbursement with a constructive contracted rate. And then as you alluded to, the last time we get paid is quite low. So I mean, percent paid rates on microdels are in that kind of single-digit percentage kind of range, and so the resulting in ASPs are - it's only a few bucks out of ASP. That can change really meaningfully when we can get the publication out on the SMART data that we talked about earlier this year. And if we can use that data to see some guideline revisions in favor of microdeletions testing. So I think that's something that we're very excited about seeing more developments on going into 2022.

Make sense. Thanks, guys.

And our next question comes from the line of Alex Nowak with Craig-Hallum Capital Group. Your line is open, please go ahead.

Very good afternoon, everyone. What is your sales team hearing out in the field among OB/GYNs? Is that level of training around average risk now increasing with the ACOG decision out there? And then does the field commentary at all change your expectations of this market ultimately having 80% to 90% penetration? And then just what is penetration right now?

Yes. Thanks. So I think, obviously, since the guideline came out about a year - a little over a year ago, we've seen an acceleration in the percentage of business that we're doing that's average risk versus high risk, and that's something that we tracked. We've also seen just an acceleration in volume overall. I think there's still some big opportunities where average risk is not fully rolled out yet, whether that's big MFM practices that are still sort of working through exactly how they're going to offer it and how they're going to roll it out to their community-based OB/GYN practices; or whether it's big hospital systems that are sort of working through exactly how they're going to integrate it routinely into practice; or whether it's state Medicaid programs that are figuring out how they're going to deal with coverage. So it's not sort of this overnight switch where everybody immediately starts doing the testing. But we still do firmly believe that, that sort of 90%-plus market penetration will be hit in this sort of 3-year time frame. And that matches, I think, to the prior testing methodologies on the market. I think that we're kind of tapping out maybe low 80s, but given some of the performance improvements in NIPT, I do think you'll get to that kind of 90% penetration range. We think, overall, high-risk testing is probably in the high 70s, low 80s. An average risk testing is probably in the kind of high 20s, maybe low 30s at this point. And we think Natera's market share now is close to 40% or something in that range. We track our market share, and we can see the competitive market shares as well through these detailed market surveys that we do. And we've been gaining share relative to the rest of the market, and we hope that trend continues.

And if you take that penetration benefits still to go on prenatal, Signatera still in this very early phase of launch, just in a single cancer and then the big efforts you're making here in transplant, how are you thinking about growth going into 2022?

Yes. Well, I mean, obviously, there's a lot of stuff going on, continuing to execute well across the business, a lot of exciting momentum in transplant as we announced today. A lot of exciting momentum on Signatera, very, very long way to go in NIPT. So there's a lot of excitement. Mike, do you want to comment specifically on sort of how we're thinking about forecasting or what we're thinking about for '22?

Yes. I mean, I think that the trends that you saw in Q3, we think, are pretty stable trends. I think you can see that through the guide that we have out there now for the full year. And we've got a couple of pretty important product launches going with Natera and Prospera, and there's a lot for us to learn as we go through the next quarter or so on those launches. So I mean, I anticipate providing a guide for '22 on kind of the typical time line. We'll give an update at the JPMorgan conference, and then we'll likely return with the formal guide in Q4, but all these kind of trends, you can kind of see them. Q2 and Q3 have been pretty stable and quite constructive.

Thanks for the update, I appreciate it.

And our next questions comes from the line of Mark Massaro with BTIG. Your line is open, please go ahead.

Hey guys, Congrats on a strong quarter. I guess curious when you'd be able to comment on how much revenue contribution you're getting from transplant and oncology. For what it's worth, I'm modeling about $20 million apiece for the full year of '21. And so that's the first part. The second part is that I've seen some data that would suggest that the transplant centers are using both your test as well as the market leader at this current juncture. And I haven't seen much evidence that we're seeing the incumbent getting swapped out for you. And the other thing I'm hearing is that a lot of the revenue that perhaps you're generating is coming from registry trials as opposed to full-blown clinical use. I'd be curious if you could comment on those 3.

Yes. Maybe I'll comment on the transplant stuff, and then, Mike, you could comment on the rest.

Yes.

I think when you look at - I think we showed a slide today that about 45 of the top 100 transplant centers are using Prospera regularly. I think that probably including some centers that are splitting with CareDx, but that certainly includes some where we displaced CareDx, and they're using a very significant amount of testing. I think, look, the - we've always seen a diagnostic. Some doctors want to use 2 different providers, or maybe different doctors within a center want to use 2 different providers, and that's fine because the overall market is still about kind of 8%, 9%, 10% penetrated. And there's just a very long way to go here in kidney. And now we're talking about going into heart. We've launched to go into lung, and there's other organs that we think are going to be important in the future as well. So it's a long way to go. As far as registry trials and so forth, I think that that's not accurate. It's just simply not true. There's a very small portion of the business that we're doing that's part of a registry trial, and the remainder is commercial testing.

Yes. And I'll pick up on - just on the breaking out of the different products. I think, for us, it's a matter of just getting to learn how these products perform quarter-to-quarter and what the right trends are, what the right growth trends are, so that we can feel great that we're accurately forecasting them and then being able to share those with you guys. Similar to my comment on the last question is that we clearly still have a lot to learn with these products. I mean I think in a lot of ways, Q3, it was really the first full quarter where we had sales teams in place, and they had been in place long enough to kind of know which end is up and have a lot territory and be able to be productive. And so, it's not long until we'll be able to give more detail and give more guidance on it. But we're at the - at the moment, we're still learning and still watching the launches happen.

Awesome. And then if I can sneak one last one in. Congrats on the 40,000 samples from the university in Europe. I guess can you speak to why you decided to pursue that option as opposed to something else? And then I'm just curious, the - I believe the university is based in Denmark. Can you speak to the homogeneity of - or heterogeneity of the samples and whether or not you think that the sample types would be rich enough for U.S. equivalents.

Yes. So I think the first thing is, the public health sector there, I think, does an exceptional job of collecting these extensive outcomes data, and that's what gives you the opportunity to piggyback on something as exceptional as a well-curated 40,000 sample biobank. Part of the reason why we partner with them is because they have this exceptional biobank, they have great researchers, and they this methylation signature that is delivering just exceptional performance. If you look at, I think, across the different stages, 85% sensitivity with a 99% specificity, that by itself actually is exceptional. We're augmenting that to include our own methylation targets and DNA signature that we've mined from tens of thousands of colorectal exomes. So the partnership made sense based on what they brought to the table, what we brought to the table, and again, it's a cost-efficient way for us to go after this. As far as the population goes, I mean, look, that's one of the things we've got to have discussions about when we go for a pre-submission meeting with the FDA, among other things. And as I said before, look, this probably or may not end up being the end-all, be-all set that we need to get the test reimbursed. We hope it will be, and we think we have a good case when we go make the pre-submission meeting. But ultimately, we might end up having to do a prospective trial. Now, if the test performs as we expect it to and we continue to believe the market opportunity is as big as we think and others think it is, we will not hesitate to pull the trigger and run that trial, even if we're not going to be the first to market, which we don't think matters. If you look at NIPT, we were the fourth to market multiple years after others, and now we have 40% share. So you want to have the best test, you want to have the best distribution, the best customer experience, and you don't have to be first to market to deliver that.

Great. Congrats, guys.

Thank you. And this concludes today's question-and-answer session. And also, ladies and gentlemen, this does conclude today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.