Signatera: Sales Efficiency Nearer the Gods

Natera’s market-leading cancer minimal residual disease (“MRD”) test, Signatera, has been one of the most important growth stories in healthcare over the last year. It is now a relatively consensus opinion that Signatera will become the best-selling advanced diagnostic test of all time. This optimism has driven Natera’s stock to increase 2.8x since the beginning of 2024 and 4.1x over the last 2 years, a remarkable rise. Natera has reached valuation levels that are unprecedented for the advanced diagnostics world: at $23B enterprise value, Natera is on par with Illumina ($23B), and nearing Quest ($27B) and LabCorp ($25B).

But I think the more interesting - and perhaps overlooked - question is whether Signatera will be the most profitable diagnostic of all time. I believe the answer is yes, due to its potential to have industry-leading sales efficiency. I’ll explain below.

First, a brief description of what Signatera is and why it’s exciting.

Signatera is a diagnostic test that assesses whether cancer patients have residual cancer DNA in their bloodstream. Over the last 10 years, researchers found that when you take a simple blood draw from a cancer patient, you can often find trace amounts of cancer DNA. Cancer DNA in the bloodstream is rare: perhaps 1 molecule of DNA per 1,000 molecules of DNA coming from normal cells. But, it’s there. And since cancer DNA is highly mutated compared to normal DNA, it can be detected.

Moreover, the concentration of cancer DNA in the blood correlates with the severity of the cancer. Generally speaking, patients with late-stage, aggressive cancer will have more cancer DNA in their blood than patients with early stage cancer. This intuitively makes sense if you consider that aggressive cancers metastasize to other parts of the body, a process that happens by cancer cells infiltrating the bloodstream. More aggressive cancer leads to more cancer cells in the blood, which leads to more cancer cell DNA in the blood.

So we have a test that can find cancer DNA in the bloodstream in trace quantities. Why is that important for the future of oncology? 4 reasons:

1. Prognostic information: MRD is an excellent prognostic indicator of how likely a patient is to survive. More cancer DNA in the blood, the worse the prognosis. Less cancer DNA in the blood, the better the prognosis.

2. Therapy response: MRD tests can indicate whether anti-cancer therapy is working. If cancer DNA levels go down or disappear after therapy, the therapy is working. If not, it’s likely not working.

3. Therapy de-escalation: MRD tests can be used to stop therapy early after the cancer DNA has been cleared, avoiding excess toxicity from too much chemotherapy.

4. Recurrence monitoring: After patients are (hopefully) in remission, they can do MRD tests every 3-6 months for the next several years to see if the cancer has come back. Many studies have shown that MRD tests detect cancer recurrence 6-12 months earlier than standard monitoring methods like CT scans.

To be clear, there remains much debate about the utility of MRD tests in each of these settings, and the evidence is stronger in some cancers vs. others. Currently, MRD testing is most often done in colorectal cancer, with breast gaining steam (together, colorectal and breast cancer represent about 25% of the 2M total cancer diagnoses each year in the US.)¹

While these debates will continue, I expect MRD testing to steadily become a ubiquitous measurement tool to monitor and assess cancer burden. Indeed, cutting-edge clinical trials are already using MRD to guide treatment (e.g., the moment that cancer DNA is detectable via MRD, the patient goes on a new therapy), and even more provocatively, using MRD clearance as a surrogate endpoint (e.g., if the drug clears out the cancer DNA from the blood, this implies the drug works and you don’t need to wait 18 more months to assess whether the trial led to improved survival.²) Unless there is some entirely new method of cancer detection that comes out several years from now and is even more sensitive than MRD, I expect MRD will be ascendant for years to come.

Signatera Growth Trajectory

Signatera has been growing at a blistering pace and is an increasingly large share of Natera’s revenue, as shown in the chart below.

Signatera’s launch trajectory has been historic in the world of diagnostics. The current best-selling advanced diagnostic test in history is Cologuard, the colorectal cancer screening test sold by Exact Sciences³. Cologuard is a $2B per year franchise as of 2024.

Based on early launch trajectory, Signatera is outpacing Cologuard (14% higher revenue in Year 3 post-launch). Right now, I’d take the over on Signatera being a $2B franchise.

To be sure, there are things that could slow Signatera down. Perhaps it will fail to gain as much traction outside of colorectal cancer. Perhaps new entrants take share (Natera currently has 95%+ market share)⁴. Perhaps Medicare and/or other payers negotiate pricing downwards in the future. But all else equal, Signatera is currently on track to be the top selling advanced diagnostic in history.

However, the part I find most interesting - and perhaps most important for Natera’s valuation - is the sales efficiency. Based on my napkin math, Signatera should be much more efficient from a sales & marketing perspective than Cologuard. I believe that Natera will not only be the best-selling diagnostic to-date, but also the most profitable.

Signatera Sales Efficiency

The way I analyze sales efficiency is “addressable market (TAM) per customer,” or in this case, addressable market per doctor. Since the go-to-market motion is similar across diagnostics companies (sales reps calling on doctors and trying to convince them to use the test), a high addressable market per customer is beneficial because it means each doctor a rep covers has higher revenue (and profit) potential. The higher the addressable market per customer, the higher the sales efficiency.

There are two key factors that give Natera a higher TAM per customer compared to other diagnostics:

1. Oncologists are a very concentrated customer base compared to other physician types (e.g., primary care physicians)

2. Each patient does many Signatera tests per lifetime. Natera currently estimates each patient will get ~10 tests per lifetime.

There are ~26,000 practicing oncologists in the US, and approximately 5,000 oncology nurse practitioners. These 31,000 prescribers are Signatera’s core customer base.

Compare this to Cologuard’s prescriber base of primary care physicians: there are 280,000 primary care physicians in the US, and approximately 270,000 additional primary care nurse practitioners, for 550,000 total potential prescribers.

You can already see that Natera’s TAM per physician will be much higher, especially if they have approximately the same sales potential. And the launch trajectory chart above shows Signatera slightly outpacing Cologuard from a revenue perspective, so we might actually believe Signatera has more sales potential.

But to keep things easy, let’s assume that both Signatera and Cologuard have an annual addressable market of $4B.

In this case, Signatera’s TAM per physician is $129,000 ($4B / 31,000 oncologists) vs. Cologuard at $5,500 ($4B / 550,000 PCPs.) Thus, Signatera has a 24x higher TAM per doctor than Cologuard.

Even if you are much less charitable to Signatera (assume their physician callpoints is actually 50K, because they have to cover doctors like OBGYNs who see cancer patients once they are many years in remission) and much more charitable to Cologuard (assume only 350K callpoints), there’s still a large gap: $80,000 for Signatera vs. $11,000 for Cologuard.

A deeper analysis of the TAM is even more flattering to Signatera.

In the fullness of time, I expect the MRD TAM to be about 5M tests per year, inclusive of ~700K newly diagnosed cancer patients per year where Signatera could be useful, multiplied by 7 tests per patient per lifetime. For context, there are 2M new cancer diagnoses per year in the US, so this assumes Signatera addresses about a third of them⁵. With respect to tests per patient lifetime, Natera has said on prior earnings calls that their early cohorts reach ~10 tests per patient (e.g., 2-4 in the first year post-remission; 2 per year for the next several years). While there’s a reasonable argument that this number could go higher, I think a slight compression in tests per patient is the best assumption, especially if and as Signatera is increasingly used in early stage cancer where there is less worry about long-term recurrence.

There are wide error bars here: bears would probably argue that TAM is 1.5-2M tests per year (500K patients per year * 3-4 tests per lifetime), while maximalists might go as high as 23M tests (1.5M patients per year * 15 tests per patient lifetime.)

Using our estimate of 5M, I get to a TAM per physician of ~$209K for Signatera. This is much higher than not only Cologuard, but all other major diagnostic tests, such as Guardant360 for liquid biopsy, ClonoSeq for blood cancer MRD, and NIPT for pregnancy genetic testing.

This excellent sales efficiency should translate to industry-leading margins⁶. But let’s put a finer point on it.

Signatera’s Margin Potential

Assume that Natera ultimately reaches 2M tests per year, 40% TAM penetration of the 5M (I think they could get higher, but let’s be conservative). Let’s also assume that they call on all 30K physicians. This means the average physician is writing 67 Signatera tests per year. At an ASP of $1,300 per test, each physician generates revenue of $87,100 per year for Natera (67 tests * $1,300).

Now let’s make some assumptions on how much Natera spends on sales & marketing per physician. Assume that the average sales rep covers 75 physicians, and all-in rep compensation is $250K. On a per physician basis, this means there are $3,333 of sales rep costs ($250K rep compensation divided by 75 physicians per rep.)

Assume reps are about 30% of Natera’s total sales & marketing spend. The other 70% goes towards marketing, sales infrastructure and support, medical affairs, travel, conferences, etc. Thus, on a per doctor basis, there are also $7,777 worth of other sales & marketing costs.

In total, then, each physician generates $87,100 revenue for Natera, and Natera must spend $11,100 in sales & marketing on that physician ($3,333 rep costs + $7,777 other S&M costs).

Thus, S&M as a percentage of revenue is 13% ($11,100 / $87,100)

This is an extraordinarily efficient sales motion. For reference, Exact Sciences (company that markets Cologuard) currently spends 29% of revenue on S&M.

So, can Signatera get to 25% EBIT margins? I think it’s eminently possible

• 70% gross margin

  (-) 13-15% S&M (from above calculation)

  (-) 10-15% R&D (assumption for mature R&D costs)

  (-) 12-15% G&A (assumption for mature G&A costs)

• = 25-35% EBIT margins

25%+ EBIT margins would be unprecedented for diagnostics, and indeed, would closely resemble EBIT margins for biopharma and medical device companies. The maker of Cologuard, Exact Sciences, currently does only 14% EBITDA margins (more generous than EBIT), with a goal to reach 20% EBITDA margin by 2027.

As mentioned above, there are surprises that could happen such that Natera doesn’t ultimately achieve these margins, chief among them pricing compression, hidden TAM constraints, and/or competition.

But this analysis shows that even if a some things go wrong, Signatera has the bones to be an extraordinarily profitable diagnostic test.

1. You may wonder why lung cancer - the cancer responsible for the most deaths per year - does not have as much MRD usage as colorectal and breast cancer cancers. The answer is that lung cancer tends to shed less DNA into the bloodstream than colorectal cancer, making MRD harder to detect. However, recent trial results show that if you increase the sensitivity of the MRD test (by moving from an exome to a genome backbone), you can create a sensitive MRD test for lung cancer. And indeed, in January 2025 Natera announced a whole-genome backbone MRD test for exactly this purpose.

2. This idea - using MRD as a surrogate endpoint - is controversial, but it is happening. Most recently, an FDA advisory committee ruled that MRD could be used as a surrogate endpoint in multiple myeloma, a specific type of blood cancer.

3. Yes, I hate their ads too. Not looking forward to a visit from the little blue guy in 10 years.

4. Competition in fast-growing markets can always surprise you, but I’m slightly less worried about Signatera facing real competition anytime soon. The key factor that leads to success in diagnostics is evidence that convinces physicians the test is both accurate and useful, and convinces payers to reimburse for the test. Natera has an enormous trove of evidence from 5+ years of studies, which will be hard for competitors to replicate. But, given the size of the prize, many companies are trying (Guardant, Exact Sciences, Neogenomics, Personalis, etc, etc)

5. There are a few areas that Signatera will likely not penetrate as deeply. Signatera is unlikely to address blood-based (hematological) cancers, where Adaptive Biotechnologies’ ClonoSeq has already built out a commanding lead. But of the 2M cancer diagnoses each year, only about 200K are blood-based. Prostate cancer is another place where it may be less useful: prostate cancer is a huge indication (300K diagnoses per year), but the PSA test is common, cheap, and easy. Also, Signatera may not be as useful in very early stage cancers, where there is less worry about recurrence post-surgery.

6. This assumes gross margins are relatively consistent, which should be a safe assumption. EXAS reports ~70% GM; Guardant 360 has high-60s GM; Signatera has mid-60s GM that should increase to 70% as more volume shifts towards recurrence monitoring (higher GM than the upfront exome test)