Q2 2023 Natera Inc Earnings Call
At this time all participants are in a listen only mode.
Following managements prepared remarks, we will hold a Q&A session to ask a question at that time. Please press star followed by one on your Touchtone phone.
If anyone has difficulty hearing the conference. Please press star zero for operator assistance.
As a reminder, this conference call is being recorded today August 3rd 2023.
I would now.
Like to turn the conference call over to Michael Brophy, Chief Financial Financial Officer. Please.
Please go ahead.
Operator, good afternoon. Thank you for joining our conference call to discuss the results of our second quarter of 2023.
On the line I'm joined by Steve Chapman, Our CEO Bob.
Lastly, this is general manager of oncology and ask the.
Question, Chief Medical Officer, Today's conference call is being broadcast live via webcast.
We'll be referring to slide presentation has been posted to Investor era.
A replay of the call will also be posted to our IR site as soon as it's available.
Starting on slide two 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 projection our assumptions for that outlet market size partnerships clinical studies opportunities and strategies and expectations for various current and future products, including.
Product capabilities expected release say, its 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.
Thank you and the form 8-K filed with today's press release.
Documents identify important risks and other factors that may cause our actual results to differ materially.
Dan.
Right.
Yeah.
Forward looking statements made during the call are being made as of today August three 2023 and this call is we played a reviewed later after today the information presented during the call may not contain current or accurate information.
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 comparisons and now I'd like to turn the call over to Steve.
Great. Thanks, Mike.
As you can see we had another very strong quarter volumes were up more than 23% versus Q2 of last year with all products delivering strong growth revenues grew even faster up 32% versus last year and 8% sequentially. We paired that revenue growth with continued Cogs.
Movements to achieve a gross margin just above 45% compared to 39% in Q1.
This combined with stable operating expenses led us to deliver another significant reduction in our quarterly cash burn.
We're pleased to be significantly increasing the revenue guide this quarter to a midpoint of $1 $25 million and we remain on track for our Opex and cash burn reduction targets in the guide. We believe we are on track to hit all the financial goals, we set for this year and beyond.
We also continue to strengthen our leadership in data generation.
In June we attended the American transplant Congress and unveiled key data from the proactive trial showing the value of our prosperity casting kidney transplant rejection.
Active has proved to be a pivotal trial and I'll share some of those findings here shortly and.
In women's Health, we published a fourth paper from the Smart trial and the journal genetics in Medicine. This study was the largest prospective clinical validation of screening for sex chromosomal antibodies within ITT we.
We were pleased to earn additional peer reviewed recognition for smart further demonstrating the strength of our data and the clinical value of our Panorama test.
In oncology, we crossed a key milestone in the quarter with the publication of more than 50 peer reviewed papers. We also had a substantial presence at <unk>, including Readouts on key signature and data in collaboration with some of the most well respected healthcare institutions in the country.
We shared the excellent performance in the empower lung trial, demonstrating the utility of Cigna Terra in lung cancer, where Io is the standard of care, which supports our oil market and reimbursed Io monitoring indication and in CRC, We had key readouts from the Galaxy arm of circulate Japan in the intercept trial.
From MD Anderson.
Coupled with the completion of the enrollment in the Altair trial and several other prospective randomized studies underway. We continue building a robust platform to demonstrate the prognostic and predictive value of Cigna Terra in CRC.
Altogether, we think these trials continue to build a strong case for future NCC and guideline inclusion with Solomon will cover later in the call.
In terms of other key updates, we recently announced two very significant litigation results in our favor.
First a jewelry in Delaware reached a unanimous verdict in favor of the Terra in the patent infringement lawsuit filed against Archer <unk> Acton and VK.
<unk> found that all accused products, including personalized cancer monitoring used for MRV indication infringe three of our patents and then all three patents are valid the <unk>.
<unk> also awarded a 19 three $5 million award in past damages, including lost profits and a royalty of 10% at a future date, a judge will determine whether to grant an injunction against Archer <unk> Vk's personalized monitoring test.
If that is not granted we will ask the judge to award ongoing royalties at a rate higher than 10%.
And second we also announced in July a favorable decision the false advertising case brought by a competitor.
The court reversed findings returned by jewelry in March of 2022 and to overturn the previous damages award, thereby reducing it from $45 million down to zero.
Great so with that let's get in just some of the business trends on the next slide.
We had another strong volume quarter growing more than 23% versus last year. This represents strong year on year growth across the business and another particularly strong signature at quarter, we saw our typical trends and seasonality and process unit in the women's health business, where Q1 is usually our biggest quarter in Q.
<unk> is slightly down this trend was amplified this year, because we made a concerted effort. This spring to reduce volume from some of the larger accounts that were not generating an adequate margin. It didn't have a clear path to improvement given our scale, we think thats, a sensible exercise and we'll continue to look for opportunities to improve women.
Health product margins in the second half of this year, having said that we are still committed to the initiatives. We discussed earlier this year, where we've taken a lower margin volumes in exchange for future upside, which we will touch on later.
Overall in volumes, we're in some very large markets that are underpenetrated, and we think theres a lot of opportunity for growth, particularly in Cigna Tara given the huge market size in the very early stages of penetration.
Speaking of Cigna Terra the next slide shows yet another very strong year on year volume trends almost doubling in size once again.
Compared to Q1, we saw an acceleration in absolute units and the growth engine really continues to be in clinical indications, where we have Medicare reimbursement.
That trend was also apparent in our signature at clinical ASP.
Which were once again well ahead of the schedule.
The signature Asps, one of the $500 a couple of years ago and that progress to the mid seven hundreds in Q3 and Q4 of last year. We were very pleased to be in the low eight hundreds in Q1 and now we progressed again into the mid eight hundreds ESP range at the same time, we've made some meaningful Cogs progress.
On our tissue exome workflow and reducing supplier costs in some places, which further pushed up or pushed up our gross margin for this product. There is still more progress to be made and Mike will get into some more details on the drivers of these trends later in the call.
The volume ASP and Cogs achievements helped to drive our revenue and margin outperformance in the quarter.
I'll touch first our revenue on the next slide which highlights our sequential revenue trends over the last five quarters I highlighted the sequential trend from Q1 to Q2 of last year compared to this year as you can see we saw an acceleration of revenue growth between Q1 and Q2 of this year, despite the disruptions and the transplant business that we knew.
You did on the last call.
Revenue growth was driven by signature of clinical pharma and women's health, which Mike will discuss shortly in the call.
Finally on gross margins this quarter, we had an excellent margin of 45%. This was amplified a bit with some onetime events. So on a normalized basis, we think margins would have been around 43% in Q2.
This is a big step up from our 39% in Q1 and Mike will go over a few of the sustainable areas that led to a significant margin improvement later in the call.
Our strong execution enabled us to overcome the negative impact of some of the bets we made where we took a lower margin volume in exchange for future opportunity.
We believe these bets are on track first the California prenatal screening program volume is now largely shifted back to panorama versus versus Euro, which has helped us on both margin and revenue.
Second we still believe there is upside opportunity on expanded carrier screening as coverage improves in the future and finally of course, we believe in growing Cigna Tara Despite a dragging down the margin a signature margins improve which they have been the margin drag impact will reverse while they still have room.
Our upside with our strong Cogs in ASP execution, we feel very good about continuing to deliver our strong gross margins around the middle of our guided range for the rest of the year.
Okay now, let's move on to women's health.
We now have more than 80 peer reviewed publications in our women's health business.
As a reminder, one of those the smart study is the largest prospective <unk> study ever performed with greater than 20000 patients enrolled across 21 global centers all Panorama Ni PT results included in the analysis were confirmed with molecular diagnosis as political truth.
As I mentioned the recent genetics in medicine paper is the fourth from the Smart study was published officially in May This real world data confirm Panorama is excellent performance for screening for sex chromosome aneuploidy across over 17000 pregnancies and all screening results were validated with clinical outcomes. This is the.
The largest prospective clinical validation study of ni PT for sex chromosome aneuploidy.
In addition to this latest publication on sex chromosome Aneuploidy. We also studied the performance of Panorama to detect common antibodies such as trisomy 21.
Our results showed a very high sensitivity and specificity, resulting in a 95% positive predictive value for trisomy 21, which is very strong.
One of the most significant aspects of the smart study are the results on 20 <unk>.
The 2000 <unk> results demonstrated a high prevalence for <unk> of approximately one in 1500, a high sensitivity in a low false positive rate, 0.05%, resulting in a positive predicted value of 53% or approximately wanted to.
This PPV is excellent and as a comparison, it's more than 10 times the positive predicted value of maternal serum screening for trisomy 21, which is an approach acreage sale endorses, we feel the data supporting the performance and clinical utility of <unk> QQ screening is very strong.
Shifting gears to carrier screening also in Q2, the FDA approved the first gene therapy for pediatric patients with Duchenne muscular dystrophy, who have a confirmed genetic mutation in the gene DMD effects, roughly $1 3500 boys, causing progressive muscle weakness port issues and breathing difficulties.
One of the most important benefits of curious screenings early diagnosis for conditions like D&B so that.
Families and doctors can prepare for and have the earliest possible access to treatments like the one that just got approved our horizon carrier screen includes the option to screen for DMD along with many other conditions with treatments that are either FDA approved are currently in trials. So we think this strengthens the case for broad panel carrier screening, where we think they could.
Utility is strong with a positive <unk> guidelines supporting expanded carrier screening <unk> 2021, and a positive statement from the National Society of genetic counselors earlier. This year. We are hopeful that these and other changes can allow us to help more patients and paved the way for improvements in reimbursement rates moving into next.
Year.
As many of you know <unk> held their annual meeting in May which led to the scheduling of two prenatal committee working groups. One of June and one scheduled for September based on that timing, we anticipate having more information later this fall on any changes to future guidelines.
Okay, moving on to Oregon Health earlier in the year, we discussed the negative impact of the recent Medicare change and the change is now fully reflected in our guidance as we said before the impact was offset somewhat with our receiving heart reimbursement and now that we've seen some of the lost kidney volumes come back as well, we think we've come out the other side well.
<unk>. In addition, we've taken steps to realign the Oregon Health business, where we are now in a position to drive volume and revenue growth, while keeping our expenses stable.
I wanted to start with a few key stats on clinical adoption and volume growth.
<unk>, which is our test for chronic kidney disease. We have continued to demonstrate strong clinical utility including data that was presented at the National Kidney Foundation conference in April we're looking forward to the publication of <unk> study, which we think can provide strong support going forward.
And one we've continued to have productive dialogue with our customers, including at the recent annual meeting of the International Society of heart and lung transplantation. Thus far in 2023, 50% of the top 20 transplant centers have used <unk> heart at 50% of the top 20 transplant centers have used <unk> alone.
In addition, the number of active users on Prospera heart has nearly doubled in the past 12 months.
<unk> volume has more than doubled of course, we were pleased to receive Medicare coverage in heart transplantation earlier, this year, which provided some nice upside on reimbursement. We also look forward to the <unk> heart data. We expect we will publish later this year from their perspective <unk> study sponsored by the NIH.
In early June we had a strong presence at the American transplant Congress meeting showcasing the utility of prosperity in kidney and heart transplantation. This is.
Three oral presentations at several posters and a symposium led by medical experts in the field.
I'd like to spend a few minutes on the proactive data that was featured.
As a reminder, proactive as a large prospective multi site donor derived cell free DNA study kidney transplant patients.
The study has enrolled in renal transplant patients from 54 participating centers that are being followed over three years at ATC. We outlined several highlights from the interim analysis in the first 600 patients with 18 months of follow up data importantly, the data demonstrates that prosperity kidney is a leading indicator rejection.
<unk> antibody mediated rejection up to four months and T cell mediated rejection of the two months in advance of biopsy. This evidence is impressive and highlight the value of prosperity is a tool for rejection that can provide early insight to <unk> when used as an ongoing monitoring tool.
This proactive data bolsters recent sentiments from leading medical societies and organizations like the American Society of transplant Surgeons and the European Society of transplantation, who have endorsed the use of donor derived cell free DNA surveillance to rollout subclinical rejection.
We look forward to publishing data from the proactive study as early as the end of this year and sharing additional readouts in the future that we believe will help transform the current standard of care for kidney transplant patients. We think the evidence will help bolster the case for coverage and prosperity in the surveillance setting in the future.
Now I'd like to hand, the call over to Solomon to cover our recent progress in oncology Solomon.
Thanks, Steve the oncology team had a great quarter with strong growth in test volumes and ASP.
Improvements in our turnaround times.
Several new peer reviewed papers had a strong showing at <unk> with over a dozen posters and presentations.
We were highly energized by the feedback at <unk>, particularly from clinicians who believe that now is the time to be implementing MRV assessment into routine clinical practice. This was a sentiment we heard a number of times during the conference and we are seeing it reflected now in the volume growth as well.
Let's take a deeper look now with two key studies for Moscow for the first one I'll cover is the empower long run trial.
This was a phase III registrational trial sponsored by Regeneron, which helps to support FDA approval in 2021 of their immunotherapy agents submit format for first line treatment of advanced non small cell lung cancer using banked samples from that trial mature measured Cte DNA at three different time points pretreatment.
Week three of treatment and we cannot have treatment.
The analysis validated the predictive nature of Cte DNA dynamics in lung cancer patients receiving immunotherapy, specifically patients with an early increase in Cte DNA has the highest risk of death.
And patients who achieved <unk> DNA clearance for a deep production of at least 90% has significantly improved outcomes.
This study was well received because it was a focused assessment of iron monitoring specifically in advanced lung cancer and one of the largest datasets of its kind with 175 patients with Medicare coverage already in place for Io monitoring across solid tumors, including in lung cancer. We believe this data can help support broader adoption and perhaps broader reimbursement.
<unk>.
As a reminder, non small cell lung cancer is the largest patient population where immunotherapy is currently utilized.
We believe upwards of 150000 patients now eligible per year.
The second study for Moscow, we want to highlight is the intercept study inter.
Intercept is an independent program of the MD Anderson cancer Center, which integrates MRV assessment into routine clinical practice for all patients with resected stage, two stage, three and stage four colorectal cancer and.
And if bundles patients into clinical trials, if they test positive and the surveillance setting without radiologic evidence of disease.
In this report at <unk>, the group's shared analysis from over 1000 patients demonstrating the feasibility and utility of routine surveillance with Sigma Tara <unk>.
Two key findings were first of the patients with CTD DNA detected during surveillance nearly half or 49% were found to have radiologic evidence of disease, though in many cases, the diagnosis required reflects imaging with MRI pet CET or biopsy not just the stand.
Surveillance scan.
This created the opportunity for early intervention into metastatic disease before it became symptomatic, which is known to improve outcomes in CRC.
Second of the <unk> positive patients who were without radiologic evidence of disease.
9% were successfully enrolled into Cte DNA guided clinical trials, gaining access to novel cellular therapies cancer vaccines and other novel treatments.
This report is making waves in the Gi community because it helped to answer some key outstanding questions.
Is there a utility in Cte DNA based recurrence monitoring and what does one do with a positive result.
<unk> indicates strong clinical utility, enabling early therapeutic interventions for patients with metastatic disease as well as enrollment into clinical trials and it sets. An example for the whole community and how to successfully adopt sigma terror into routine practice in the surveillance setting.
We look forward to more data and insights from the intercept program in the future and to other leading cancer centers being inspired to replicate this model.
Also in CRC, we completed enrollment in June for the Altair trial as.
As a reminder, altera is part of the circular Japan platform, which includes three prospective arms as shown on this slide first the observational Galaxy study.
Plus two randomized phase III studies.
Terror pretreatment escalation and the MRV positive population and Vega for de escalation and the MRV negative population.
With Altair, we aim to establish the utility of extended adjuvant treatment as well as treatment on molecular recurrence in MRV positive patients with <unk>.
No. There is a significant percentage of MRV positive patients, who will not respond to standard adjuvant chemotherapy and who we believe made benefit from a drug called top one or two given that <unk> is already approved for use in the metastatic setting when chemotherapy is fail in.
In the trial already positive patients were randomized to receive <unk>, one or two or placebo after completing standard chemotherapy.
It is important to note that for anyone who was initially MRV negative and who entered the Vega trial.
If follow on signature testing changes to <unk> positive within two years, they can switch out of Vega and get randomized into the treatment arm and Altair.
This made definitively show the benefit of treatment on molecular recurrence for CRC patients that are being surveilled with Cigna Tara.
We believe this trial will demonstrate how <unk> can improve outcomes for CRC patients with detectable Cte DNA before it becomes evident on imaging.
We expect primary results on Alterra to be available mid next year and given the randomized nature of the study we believe a successful outcome can be definitive and practice changing.
Altera and intercept should be considered in the context of that serves broader clinical roadmap and CRC one of our most important areas of investment with.
With the Galaxy study, we look forward to presenting updated data in an oral presentation at the ESMO Conference. This October now with disease free survival data up to 24 months.
And we are submitting our published data for review by the NCC in Committee.
The work on these studies has been underway for many years with multiple readouts expected between now and 2026, we expect our results will continue to demonstrate both the prognostic and predictive value of Cigna, Tara and given the scale and quality of these studies, including upwards of 15000 CRC patients across different settings of care, we think this pipeline.
Creates a significant competitive advantage.
We plan to follow the same playbook and multiple other disease indications, particularly in breast cancer.
Our first study in breast cancer was the Cwms paper published in 2019, which helped us secure Medicare coverage for Sigma Tara uniquely across all subtypes of the disease.
To achieve adoption, however into practice guidelines and broader reimbursement from private payors.
We believe we need to generate more evidence.
Rooting additional high quality Biobank studies as well as randomized clinical trials.
For example, we have spoken before about the <unk> expansion cohort. This will have three times more patients at five times more plasma time points in what was previously published.
With significantly longer follow up beyond five years.
We presented the results at <unk> in 2022, and look forward to the publication of this expanded cohort.
In addition earlier this year, we published new data from the ice by two trial, which examined patients in the neo adjuvant setting before surgery.
We are now building on our partnership with the I Spy two consortium integrating the testing prospectively into their platform.
The use of neo adjuvant treatment in breast cancer is growing in popularity and there are several unmet clinical needs, where we think cigna Tara can help for example, certain patients shorten the duration or skipped chemotherapy altogether and proceed faster to surgery.
Conversely, if a patient has rising levels of Cte DNA should they switch earlier to a different type of therapy.
Across all of these settings Neo adjuvant adjuvant and surveillance, we have multiple phase II and phase III studies in the pipeline.
Across all subtypes of disease with extra emphasis and HR positive <unk> negative disease, given the size of that population.
Only studies that have been announced to date are dare and leader which are ongoing.
As a reminder, our phase III studies that monitor it HR positive hurts you negative patients in the surveillance setting and offer treatment on molecular recurrence.
This clinical pipeline gives us multiple shots on goal in breast cancer and.
And with co sponsorship from our pharma and academic partners investments are efficient enough to work within our financial goals we.
We look forward to announcing more details in the future about all of these studies on this page.
In summary, we believe the quality of our clinical data the breadth of our Medicare coverage, the volume and speed of test adoption and the strength of our research partnerships will allow us to continue extending our first mover advantage in breast cancer.
With that I'll turn it over to Mike Brophy to discuss our financial results and outlook.
Mike.
Okay. The next slide is just the standard results.
<unk> covered the volume and revenue trends and how we are seeing strong momentum in each revenues were up significantly with the majority of the outperformance driven by growth in Singapore clinical and also pharma. We also saw womens health revenues coming ahead of expectations and that benefited in the quarter from a surge.
And carrier screening volumes, we received late in Q1 and resulted out early in Q2. So we had those units in our Q1 net profit number but they were accrued as revenue when Paul when we read the results applications early in Q team I'd estimate that to be about a $4 million revenue benefit in the quarter.
The excellent gross margin performance and while we did have some one time benefits in the quarter. We also saw substantial organic margin growth driven by Cogs improvement generally negotiations continue.
H E fashion that we think can be sustainable and a shift in mix to more recurrent monitoring.
It's also worth recalling that we've intentionally panelized gross margin this year to pursue three core volume based initiatives.
You describe a little bit.
We benefited from volume mix shifting boxes Panorama in California, but the other initiatives are not fully realized yet.
So getting into the mid <unk> gross margin at this early stage I think is a very encouraging sign.
Total opex was down slightly in the quarter compared to Q1 and the balance sheet remains very strong as you can see on the slide.
All of those strengths contributed to another significant reduction in our quarterly cash flow as you can see on the next slide.
Keith mentioned, we believe we are on crops will reduce our annual cash flow this year by roughly $150 million.
As we've discussed in the past we are driving these platform reductions as we get operating leverage the commercial infrastructure. We built most recently in the oncology space. We continue to make significant investments in our Cogs reduction activity, including switching our core women's health products to more efficient sequencing and driving additional savings from improvements.
Two of <unk> and carrier screening workflows.
We saw another modest sequential quarterly reduction in our DSO slipped from Q1, as we continue to get more efficient in our revenue cycle operations and take care of it.
Okay.
As described in the past, our cash burn and DSA can vary quarter to quarter, but we have seen a linear improvement in these last four quarters. So I think thats a good evidence that we are on track to reach cash flow breakeven in a quarter in 2024 based on the volume.
In Spain, we are expecting.
As we said before that forecast leave aside any significant investment in early cancer space. We remain on track to deliver preliminary data early next year, we will share that data with you before we made the decision behind further investments.
Okay, great, let's move on to our revised guidance on the next slide as Steve mentioned, we are pleased to once again be raising the revenue guide for the year driven by stronger volumes in soup.
Previously the guidance was $995 billion to $1 billion and $15 million and we're now completing resetting the range.
Previous top and bottom end of our guidance range given the significant step up in Q2 revenue plus the onetime impact of slightly above I think the pace for the year implies stable Q3, a larger step back in Q4 revenues I think the gross margin result, this quarter highlights that while gross margins.
It will bounce around quarter to quarter. We think this range is clearly achievable on a full year measurement.
We are also modestly bumping up the SG&A for the year and powerful some noncash expenses incurred in the first half of this year, but total SG&A is still expected to be down versus 2002 until accordingly. The Castro died remains intact and we can gain about reaching our target.
Let's see manifest.
So with that let me hand, the call over to the operator for questions operator.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your keypad will post for just a moment to compile the Q&A roster.
Your first question comes from Tejas Savant from Morgan Stanley . Please go ahead.
Hey, guys good evening and thanks for the time here.
I wanted to start with.
The reproductive health business and gross margin you talked about California volume largely having migrated over to Panorama now and also the exit of certain accounts, where there wasn't enough margin upside so in light of that dynamic.
Why wouldn't sort of 45% sort of be the floor for gross margins for the rest of the year and does that sort of number contemplate the impact of bringing in exome sequencing in house for Cigna as well.
Yes, So I guess first I will say, we did benefit from both of those.
On a certain basis, but I think as Mike mentioned in the gross margin there were some one time.
Events that I think accounted for something like 250 basis points.
I think hit us in Q2, but won't necessarily be there in Q3. So we do expect margin improvement as the years go on but I think Mike you might be better to kind of get into the details on this Mike.
Yes. So in addition to the California initiative cases, there is theres two other big initiatives right. One is yes.
The growth and expanded carrier screening volume that we described in past couple of quarters and Thats been really.
We had a big step up in volumes there and then also the strategy to continue progressing in therapy and while the gross margin is clearly improving it's still.
So dilutive to that kind of a corporate gross margin so those two.
It tends to have what we think is temporary drag.
On gross margins now we get some cost cutting begin of the year to kind of making net neutral on the EBIT line for that but those are still on a temporary drag on gross margin, but both I think are pretty bullish signs for for the future. So that's.
One out of three so far and we're making good progress on the on the other two obviously.
Got it that's helpful and a quick follow up on SYGMA Dara.
I think Steve you talked about sort of over 30% of U S. Oncologists ordering signals that right now could you share what proportion of those accounts are still exclusively using signet tariff for Mardi.
And where physicians sort of dabbling across other providers as well.
I mean is there evidence for sort of that sustainable first mover advantage.
These are the staying intact for you.
Particularly as other sort of competitors make a concerted push.
And does that some of the litigation that you guys mentioned here.
Potentially delay sort of competitor entry into that market.
Yes, that's a great question. So we've seen continued growth in the number of accounts that are using us and particularly in the accounts.
They're using niche era in a sort of sustainable way.
Our account retention rates have been very high.
And I think that has to do with sort of the stickiness of the products I mean once you do.
Whole exome sequencing and set up a patient for MRV, it's not going to make sense to go back and sort of redo the exome sequencing on that patient and set them up again for.
For <unk> testing, so I think we really haven't seen any.
Of the tumor informed.
Mardi companies out in the marketplace.
If they have it's been like an extremely limited basis.
I think of course garden and <unk>.
Reveal products are out there, we see them from time to time.
There are some accounts that sort of use both products, but.
Theres always going to be competition and I think this is this is a very large market.
And we think.
<unk> in this setting.
Because of the stickiness dynamic that I described and because of the extensive lead that we have in peer reviewed publications.
And coverage and just setting up our infrastructure that the first mover advantage is going to be.
Incredibly important here.
From the IP standpoint, as we've said before we have a very strong portfolio.
The intellectual property related to cell free DNA.
Particularly in the field of oncology.
And you are seeing I think the first of those wins now with the with the suite that we described with the win that we described.
And I think there is.
Theres other ongoing suits.
Someone's infringing known alright.
We intend to defend ourselves.
Very helpful. Thanks, guys I appreciate the time.
Next question from Catherine Schulte from Baird. Please go ahead.
Hey, guys. Thanks for the questions.
First just blended ASP took a pretty big jump up in the quarter, even if I back out the 4 million benefit that that Mike called out.
We've already talked about Cigna Asps could you just talk to the ASP trends within your women's health business in the quarter.
Yeah.
Yes, Firstly I'll make a couple of comments and then maybe Mike you can you can kind of get into the details and so I think.
There is there is opportunities that we've talked about before on improving.
Asps that come from just sort of turning the crank on some of the billing operations. Thanks.
And improving our processes and protocols and obviously, we're working on those.
In addition.
We're also seeing I think the kind of first beginnings of.
There's some good coverage for expanded carrier screening.
Yes, I think I think that's still very early and Theres still a lot of opportunity there to improve the ASP, but certainly there is some upside.
Mike do you want to talk about any of the specifics.
Yes, sure I mean, I think in addition to drivers that you mentioned.
Asps were up again kind of glass, because we're up again at quarter and.
Modestly stronger Panama contribution this quarter, which kind of measuring that on a total revenue basis, we tend to Tampa Asps.
I think in terms of likelihood of per unit revenue divided by such reported basis I do feel like there are step ups, we've seen here.
Look sustainable to us there.
These are purely organic moves.
<unk>.
Other than that.
One kind of timing benefit we got on carrier screening.
We feel really good about.
About kind of the organic drivers for signet her clinical ASP for example, so.
I'm really pleased with the results.
Okay, Great and then.
SG&A is expected to put out a proposed rule on LBP regulation that have you guys had any conversation with the FDA around that potential and any other thoughts you have there.
Yes, I mean, the way the way that we've kind of set this up as we've tried to thoroughly validate all of our tests.
Deliver.
Very high quality peer reviewed publications and in the event that there is some change from a regulatory standpoint, we think we're very well positioned there.
We're obviously in touch.
With various agencies and governing bodies.
Doing well.
I think what we can to try to stay informed on what's happening to make sure that we're prepared but the key is you have to have very thoroughly validated products and extensive peer reviewed publications and we have that and.
And that puts us in a great position should the guidelines changed in any way.
Okay, great. Thank you.
Next question from Rachel event style from Jpmorgan. Please go ahead Rachel.
Great. Thank you.
The first step on women's Hap, you mentioned that <unk> had premium meeting scheduled for June in September I believe expanded carrier screening and Mike regulations around the agenda for that meeting.
Can you tell us if you have any information regarding how that meeting went and then how.
How quickly could we see a tightening doors <unk> click on right. After the September meeting or just updated timeline expectations there.
Yes, it's a good question I mean look we really don't get any information with respect to kind of what happens in these various meetings or even details all the topics and things. So I think I think we just kind of take a step back and look at kind of the trends that are happening.
From a bigger picture what are what are the topics that <unk> might be interesting I think certainly <unk>.
<unk> given the smart study.
And expanded carrier screening given that a significant portion of the community is now doing expanded carrier screening or topics that I think would be of interest what we focus on.
As publishing data like we did in the Smart study.
Largest prospective trial that's ever been done in an ITT excellent performance specs for.
<unk>, both on disease incidents sensitivity specificity positive predicted value.
We think it meets all of the criteria that one would need to.
Two issue coverage.
But again, we don't really know exactly what's happening.
We just see that the meetings are occurring and hoping that they are discussing.
Is that you put out a guideline I would imagine that we would.
We would we would find out more information kind of late fall.
On the status.
What the hurdle timing is going to be.
Great and then a follow up here just shifting over to oncology and can you give us an update on your latest conversations with private payers to understand yet Blue Cross Blue Shield of California on that Pan cancer assay, which is a positive but how are those conversations evolving, especially ahead of some potential updates from the NCC and guideline.
And then also I know that.
Cancer Society is still trying to push in a lot of the commercial payers should offer the same Medicare testing. So can you just walk us through your latest expectations, there really what could that mean for the signature business. Thank you.
Yes, So American cancer studies really been leading the charge.
Bipartisan way.
They are biomarker bill and from what we understand it's going well I think they now have.
<unk> plus states that have.
Adopted into law I think from our side, it's still early once the bill goes into place.
Let's see if they're going to pay.
And kind of what the hoops are that you have to jump over.
But it's certainly creating discussions with payers and I wouldn't be surprised to see some additional commercial coverage come in.
From from other.
Regional plans, maybe national plans in the near future.
Next question comes from Puneet <unk> from Leerink partners. Please go ahead.
Yeah, Hey, guys. Thanks for taking the questions.
This one is more.
Broadly before oncology I mean, you had CRC first and then June settings, and then you had Io indication also.
Now you have breast.
Maybe can you talk about.
The sort of the trajectory for indications and when do you think we can get a pan cancer indication here as you know that happened then.
CGP as well it took some time you obviously been leading this.
Market for some time and so I just wanted to get a sense of when do you think you can we can reach that and.
If there's a settlement and Alex online would love their thoughts too.
Yes, so why don't you take that one.
Happy to.
So yes, we are.
Obviously, we've enjoyed some.
Some good success with Medicare, thus far and we.
We have.
Multiple additional submissions.
That our plan for this year, one under review right now.
I think you can look at the data that we've generated and see where.
Where the validity is shaping up to support.
Coverage decisions, we've discussed before we think we have strong data in gastro and esophageal cancers.
In.
In melanoma.
And looking forward to generating and publishing that data in pancreatic and lung.
Recently, a paper in Merkel cell carcinoma.
There's a very nice pipeline shaping.
Shaping up keep in mind that I think that's you know that's each one of those is going to add smaller and smaller percentage of the patient population that we test as well.
So the coverage is we've gotten thus far have been super important, especially with breast cancer coming in uniquely across all subtypes.
To your question about Pan cancer coverage.
At this point, we are really planning for generating the relevant data.
Ah indication by indication and if we see an opportunity to make that inflection.
Definitely going to do that but we know how the NCC guidelines committees operated as well you know there are also structured and organized by indication and so we think the smart thing to do is just continue generating great evidence.
Got it.
And then maybe for Mike.
Or Steve as you look at the carrier testing business.
You had.
One of the competitors exited <unk> benefited from the volume just wanted to get a sense of.
The majority of the volume migrated at this point or do you expect to continue to see benefit there in the rest of the half of the year.
Yes.
I think.
Sorry My question.
Yes, I was just going to sell on a volume standpoint, I think the.
The volume kind of shifted over sort of late Q4 and Q1.
Go ahead, Mike if you want to comment further.
Yes, no thats exactly what can I say I think you had kind of a bullish kind of sysco over Q4 Q1.
Do have some you've got some seasonality here in Q2.
And I expect to see some could.
Could you just continued growth in that business in Q3 and beyond particularly in Q4 as per our normal pattern.
Great and then do you expect any ASP improvements there too.
<unk> signed.
Mike do you want to take that yeah sure. So just on the on the carrier.
Got it actually.
<unk> is kind of a modest erosion in that.
Carrier screening assay is consistent with what we've talked about on the prior.
On the Q4, and the Q1 call and Thats really just out of conservatism.
From our perspective and it just.
I think a prudent way for us to plan the business.
I think what we're looking for there to get.
Sustainably higher.
Ask you then I guess for any business is to get that guideline.
He was referencing earlier until then we're kind of in a holding iron man.
Hoping to hoping to see that improve.
Over the next few quarters.
Got it alright, thanks, guys.
Next Matthew Skies from Goldman Sachs. Please go ahead.
Hey, guys. This is <unk> on for Matt.
Congrats on the quarter and thanks for the question.
Given the Dobbs versus Jackson Supreme Court ruling enacted in Mississippi in June of last year, how do you see that impacting your women's health segment.
Test volumes if at all.
Yes.
There's been various.
Cream court rulings that have come out and I think we haven't seen any impacts in the areas.
Where theres have come out.
But I appreciate the question.
Okay got it thanks, and then what is the current mix shift of private practices and hospital systems using ni PT versus maternal serum screening and how do you see how do you see this evolving over the next six to 12 months.
Yes, we think it RPT is around 50% penetrated now overall.
Obviously, there's still a lot of room for growth there.
Portion of patients that never get screening and so theyre not going to be eligible so you're never going to get to a 100% penetration.
But we've said over the next.
Two to three years this can get up to kind of 88.
85% penetration something in that range and we do think there is continued.
Shift away from maternal serum screening toward in IPG.
Got it thanks a lot.
Next question from Dan Brennan from TD Cowen. Please go ahead Dan.
Great. Thank you maybe just one on the guidance I think on gross margins, Steve I think you mentioned kind of middle of the range is kind of a fair for the second half so should that be the base case in terms of gross margins and maybe you can walk through the puts and takes around that and then just on revenues really strong quarter and it looks like you raised the midpoint by about $20 million.
Just which is about the level of the beat versus consensus. So is that kind of conservatism and maybe how should we think about cigna and women's health kind of in the back half of the year.
Mike Why don't you talk a little about the margin consensus and sort of revenue guidance I'll make a couple of comments on.
Just cogs and A&P overall that I think can help improve the margin but go ahead.
Yes, I mean, I think our approach to guidance remains the same as it's been in the last eight years, which is we try and guide and forecast the business with what we hope becomes.
<unk> of conservatism, so I think there's certainly upside.
So the guide that we put out here and we've talked about some of the potential drivers of the upside on the call and Steve can can list a few more when when he gave some some details but that's kind of standard playbook for us on the revenue guide I think this year that also really applies in the gross margin guidance.
Gross margin in this business as you guys know those meters that have followed the story for a long time know that gross margins can bounce around a fair amount quarter to quarter and you're certainly seeing that here in the first half.
But I do feel like.
The range. We've given now is there is it is a safe range for us to get through when measured on a full year.
I would expect that to be kind of as you exit this year and going into next I feel like.
Several of these drivers are going to continue to per site gross margin up.
So I'll pause there see what did you want to add some more color and detail.
Yes, I just wanted to dig.
To jump off on some of the longer term opportunities as well I mean look we said 45% gross margin.
This quarter.
A couple of those percentage points from onetime events, so kind of net at around 43% sustainable now theres a lot of opportunities to increase that.
As we go forward I mean, theres significant Cogs reduction projects that we're working on right now so moving too.
Higher throughput sequencing instruments were at the tail end of finishing.
Some of those projects we've identified three.
Potentially for logistics.
Based Cogs improvement projects that we can we think we can say 10, plus maybe $20 million.
On the Cogs line as we move.
To implement those and then theres still room to run to bring.
Additional tissue sequencing in house and negotiate certain aspects of the business with.
With suppliers.
Deeper level.
And then lastly on Cigna, Terra as more and more and more volume moves to the recurrence monitoring setting which is the shift that we see occurring.
As the business gets bigger of course more people are staying on the tests that theyre moving shifting of a crisp. The Cogs go down so that improves the gross margin and then on the other side of things you've got ASP improvement opportunities and so we have we have just turning the crank on billing operations and just getting better and I think that is going to.
Help in the future and we haven't really seen the impact of that yet, but there's been a lot of work. That's done there and then we have getting paid for a higher percentage of the tests that we perform of course and taking the terror every time, we get one of these commercial policies every time, we get a new Medicare policy.
That that helps with expanded carrier screening as payers come on and start paying or as guidelines come out that helps theres things like 20, <unk> if that does come into guidelines that could make a significant impact so the range that we're in right now.
Well were seeing improvements and it's sustainable we will see continued improvements.
There's a lot that we can do that we are doing over time that are going to put us in really very strong position in the future.
Great. Thank you for that.
I know <unk> is not included in your guidance, obviously, you've talked about being upside driver, but just kind of remind us.
Terms of timing and when we have here on this end.
Kind of how you guys are feeling about it right now thank you.
Yes, I'll make a couple comments and then maybe some of them and so I think this is really the first year that we have a shot at NCC and guidelines because I think we were very kind of clear leading in last year that he is the galaxy papers not published its not going to be considered.
And.
In fact, it wasn't considered in the vote. So this is really the first year with galaxy being published that.
We have a chance to be considered in the vote.
There's different levels of guideline and kind of what we've said is.
We think we can be potentially included as a footnote.
Would be where they list out the major prognostic factors for colorectal cancer, and so I think getting in there is a footnote where signet terrorists listed.
That would be a win.
Then maybe down the road being listed in the <unk>.
Initial algorithm recommendation table now they are also kind of highlighted a couple of things where they said hey. This is these are areas, where we'd like to see.
<unk> data one was randomized trials and Sullivan just described the Altair study I mean, it's incredible that we have completed enrollment.
On a large scale prospective randomized study looking at extended adjuvant treatment and escalation for <unk> positive patients and treatment on molecular recurrence.
For patients that start off negative and become positive on surveillance. So the fact that the randomized trial is done enrolling is an enormous step forward and we plan on reading that data out next summer.
Other area, where they said.
They wanted to see data was on the clinical value of surveillance and the great News is the intercept study, which we werent even involved in we just ran the testing for MD Anderson.
<unk> two very significant.
Apps for clinical utility for patients that are positive with surveillance. So we think both of those are very good science.
And then.
Also you have to think beyond CRC as well I think there's other products other indications, where we have good data and of course, we're kind of looking at opportunities there as well.
Okay.
Next question comes from David Western <unk> from Piper Sandler. Please go ahead, David Hi, I got two questions I'll, just ask them both upfront.
In terms of your progress in ski and carrier.
Has it been renegotiation of expanded carrier or has it been a little bit more conversion of carrier too.
Maybe.
The more basic.
Panel.
And then just on my.
I'll pause and on the second one.
Yes, so I would say.
Initially what happened what went well.
One of our competitors I think closed up shop, we saw big influx of very low margin business coming in and we kind of swallowed that.
In Q4, and then in Q1 and what's happened. Since then is that there's been there's been some payers that have revised their policies and started paying.
In addition to I think.
Improving the sort of operations and appeals with with some of the other payers that maybe already had a policy in place.
Or that would consider paying on a case by case basis. So we have seen.
I think I think we're at the very early stages of kind of attorney.
Turning the ship here and obviously getting a.
A new call it new guideline in place from a Cogs I think is going to help.
The existing policy from a Cogs is held.
Helpful and that's why we have seen payors changed.
Change guidelines, but its something more definitive came out.
Obviously that would kind of be the tipping point.
<unk>.
There are some.
Customers as well, where we've we've kind of said hey look certain payers may not cover this test and then we kind of re educate them on what might be covered and in some cases, they make a decision that they want to order.
A smaller panel.
Got it I appreciate it.
One last question here.
Didn't see where you recognize the $19 million.
Legal payment in the quarter. So I was just wondering if is that can show up when you publish cash flow statement.
It shows up in.
That's on a great quarter. Thank you.
Yes.
So it's not a cash payment its a judgment so theres a few more steps to go there as Steve described so right now.
Jasmine, but it's not something that is accrued for in the financial statements.
Okay.
Ladies and gentlemen that concludes today's call. Thank you all for joining and you may now disconnect.
[music].
[music].
Yes.