Good day, ladies and gentlemen, and welcome to The Natera's Q2 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to introduce your host for today's call, Mr. Mike Brophy, Vice President, Corporate Development and Investor Relations. Sir, you may begin.

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our second quarter 2016. Also on the line is Matthew Rabinowitz, our CEO; Herm Rosenman, our CFO; and Steve Chapman, SVP, Commercial Operations. Today's conference call is being broadcast live via webcast. In addition, a replay of the call will be available at investors.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 guidance for the full year 2016, our assumptions for that guidance, the effects of recent practice guidelines, our market opportunities and strategies, and expectations for various current and future products. 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 10-K and the Form 8-K filed with today's press release. Those documents contain and identify important risks and other factors that may cause our actual results to differ from those contained in the forward-looking statements. Forward-looking statements made during the call are being made as of today. If this call is replayed or reviewed after today the information presented during the call may not contain current or accurate information. Natera disclaims any obligation to update or revise any forward-looking statements. We will provide guidance on today's call but will not provide any further guidance or 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 Matt.

Thanks, Mike. Good afternoon, everyone, and thank you for joining us. Steve Chapman and I will begin with a review of our business and recent highlights for the second quarter. After that Herm will review our financial results and discuss our current outlook for 2016 and then we will open the call up for questions. During the quarter we continue to make significant progress and reach several important milestones. Specifically, we accession over 103,000 commercial tests compared to roughly 69,000 commercial tests accession in Q2 2015 an increase of about 49%. For Panorama, we accession over 80,000 tests compared to roughly 58,000 tests accession in Q2 2015 a 38% increase. For our Horizon carrier screening panel, we accession greater than 18,800 tests compared to roughly 7,000 horizon panels in Q2 of 2015, an increase of approximately 169% percent. We significantly extended our supply agreement with Illumina and broadened our existing partnership to include the field of oncology. This ten year agreement secures access to the next generation sequencing capabilities for the long term. We announced a new collaboration with the University of California San Francisco to study DNA markers of kidney transplant rejection. We have completed technology transfers for Panorama via constellation with three additional labs including Unilabs. Unilabs is one of Europe's leading providers of clinical laboratory testing and medical diagnostic imaging services and has an extensive network of 150 laboratories. We were very pleased to see the latest practice guidelines released by the American College of medical genetics for ACMD recommending that physicians inform all pregnant women that NIPT is the most sensitive screening option for traditional screened proprieties, and that all pregnant women should be informed of the use of an IPP to screen for a targeted set of clinically relevant micro deletions. Turning to the quarter;…

Thanks, Matt. We were very pleased with the transition to in-network contracts in the quarter. On previous earnings calls we announced new agreements with United Healthcare Anthem, Cigna that significantly broadened our existing base of covered lives which also includes many anthem plans and broad coverage with State Blue Cross Blue Shield plans. While we continue to enter into contracts with smaller plans, we estimate that we now have greater than 178 million covered lives through our direct sales channel in the United States and roughly 200 million commercial covered lives through both our lab and direct channel. We were pleased to see steady reimbursement in line with our in network negotiated pricing and we are seeing initial evidence that our status as an in network provider is paying dividends in the field with new accounts as our contracted peers have begun to move aggressively to tighten management of their networks. We have gained additional market share from out of network providers and we expect this trend to continue. Matt touch on the effort we launched in January in which we consolidated several sales territories, and rolled out a new sales plan designed to increase the fraction of our test volumes that are getting stronger reimbursement and shifting our product mix towards more profitable testing. As expected, we saw some moderation in absolute volume growth compared to Q1 as our reps adjusted their sales pipelines and de-emphasis less profitable account. At the same time we enjoyed a strong revenue quarter from our cures screening business as the shift to broader panels continued in our favor. In addition, our microdeletions attachment rate remains very strong. When a physician orders panoramas through our direct channel, they also were micro deletion panel over 75% of the time. With the new AGMC practice guidelines…

Thanks, Steve. Our second quarter financial results are included in our press release that crossed the wire earlier this afternoon. Our second quarter total revenues were $52 million compared to $45.1 million for the second quarter of 2015, Increase of about 15%. Panorama revenues for the quarter were $32.1 million compared to $35.4 million in the second quarter of 2015 a decrease of 9%. This decrease was a result of lower in network pricing in 2016 that we discussed on this call. Horizon revenues for the quarter were $15.9 million compared to $5.4 million in the second quarter of 2015, an increase of 194%. This change was driven by increasing volumes as we launched a new Horizon carrier screening panel in the middle of 2015. Steve discussed the timing of the large in network agreements we struck earlier in the year, in the fact that average selling prices for Q2 reflected network pricing that is generally lower but also more predictable in added network pricing. As a reminder we recognize revenue as primarily a cash receive basis, roughly 15% of our second quarter revenue was derived from test volumes accessioned in the quarter, the balance of our revenues were derived from tests accessioned in the prior periods. Historically, about 18% of the revenue we derived from a cohort of tests accessioned is collected within two quarters and almost all of the revenue we derive from a cohort of tests accessioned is collected within three quarters. The majority of test accessions that generate little revenue today our panorama and NIPT test prescribed for the patients in the average risk category. As medical coverage policies change we expect to generate additional revenue on a much higher proportion of our accession tests. Turning to revenue breakdown by channel; the percentage of our total…

Thank you, Herm. I am encouraged by the progress we made in the quarter on commercial operations and product development, as well as additional support from professional societies. I'm confident that we will continue to deliver on our commitment to provide the most comprehensive and accurate genetic testing and change the way people respond to genetic diseases. With that we will now open up the call system operator.

Thank you [Operator instruction] and our first question comes from the line of the Steve Beuchaw of Morgan Stanley Your line is still open.

Good afternoon guys, this is Layla on for Steve thanks for taking the question. I'm just trying to understand the sales realignment strategy, can you maybe delve into how that has been unfolding and how you guys are thinking about volume trends for the balance of the year.

I'll make a brief comment and then I'll hand it over to Steve. As I said in my prepared remarks we are starting to find the balance between growth and profitability and we had in our very rapid expansion taken on certain accounts that we decided we're not going to be profitable in the near term. So as we start to focus on the bottom line we decided that we should deemphasize those accounts and focus on the growth in the world reimbursed commercial tax where we have been very good growth. And I think the sales -- The sales incentives have been consistent with the overall strategy and it seems to be going very well. So that's the high level take. Steve you want to make more comments.

Yes, thanks Matt. So I think we're not betting on volumes for guiding on a quarterly basis with respect to volumes. As Matt outlined, we deemphasize less profitable accounts and focused on particularly commercial business and profitable accounts of where to grow. So we got them well executing that strategy the growth within those profitable accounts is in general been masked by or shutting off of accounts of were deemed to be not profitable. We did geography realignment to maximize the efficiency of our sales team that was completed early in Q1 as a result of that there's some resetting of sales pipeline, and it working accounts through the pipe line and it was taking place in Q2 as well.

Great, thanks. And just kind of taking in the updated ACOG and ACMG guidelines, is there any kind of that you can't anticipate that might cause payers going forward to kind of hesitate on average risk reimbursement at this point.

Well what cause payers to hesitate on average risk reimbursement so that they have to pay for it, and it's causing them to hesitate. However we are all very comfortable that we have made the right bet here. There is no question that average risk reimbursement is coming. There has been a slight uptick, I think as Steve mentioned in the amount of average risk reimbursement decisions that have been made by payers. But there are sets of the big guys who have not yet made that change and it's just a question of time. The ACMG guideline is very strong on the value of NIPT across all age groups you know they very clearly said that this was the most sensitive and specific method to use and of course the data incontrovertibly, we have spent a fair bit of time with the payers. And although we are not making any definitive statements on when some of those big payers are going to change their policy, the feedback that we have received is that the data is very strong. And you know certain of the payers have been more vocal saying this is something where they have to make a change and it's just a question of time. The doctors and the patients also want us and in general that the payers will listen to the doctors who are in their network, They are just going to you know make this change at a point that is suitable for their business but at a certain point there is too much pressure on them from the payers who are covering these services, and from the doctors and patients who want these services and from the professional societies who are clearly advocating these services for them to hold out. So I think that you know this is definitely the right strategy that we've adopted as I said before we are trying to find a balance, we are not just growing volume at all cost right now where there are accounts where there's a large proportion of the risk NIPT That is not well reimbursed. We are not just growing volume at all expense, we are trying to find that balance appropriately. But I think that we've done very well to find that balance and I think the fundamental the fundamental bet that we are making on being in a leading position in NIPT and waiting for low risk reimbursement to come along is exactly the right to position to take. In general, I think that the payers have been -- we are generally quite happy with the rate of adoption of these low risk policies from the payers. But obviously we're waiting for some of the big guys to still make that move.

Great, thanks so much.

The next question comes from the line of Bill Quirk with Piper Jaffrey Your line is now open.

Thanks, good afternoon everyone. This is actually Alex actually in for Bill today. So just a follow up two lines, is first question I was just wondering could you quantify what the volume growth was just your profitable accounts, just trying to compare is your growth excluding the impact of the closed accounts and does that explain why you vines were down sequentially.

Well, I'll make a high level comment and then we'll hand over to Steve if you want to add anything. We're not disclosing the numbers there and I don't actually have those exact numbers in front of me, so I couldn't disclose them even if I wanted to, but I can say that when we look at our profitable business the volumes are at a record level we have done very well to grow volumes in the profitable business. In terms of the sort of flat volumes from one quote it to another that is driven by the fact that we have deemphasized the profitability counts and Nonetheless there has been in good growth in the account that are profitable. So I think that's roughly just repeating what you've already heard but we're not guiding in more detail than that. Steve, you want to say anything?

No, I think you covered that.

Okay, that's very helpful. And then previously, I believe the last call it was mentioned that the impact of never rates was lower ASPs in Q2 and then you see a bigger impact I think going into Q3. Just with Q2 behind you, can you quantify what you expect now for the incremental ASP impact in Q3?

Herm, you want to take that?

Yes, I was expecting Bill who always asks his baseball questions like what inning are we in? So I actually gave quite a bit of thought. We're actually in the top of the third with two outs. So that's kind of how that's going to move through the quarters and so it's a little bit of early days because we had very little small impact in Q1, more profound impact in Q2 and as we said in the prepared remarks. That's going to go throughout the year. So you know I take a look to model and what's implied by the consensus in the third quarter a fair spike in the fourth and so you might want to just take a look at that.

Okay, perfect. Thank you. I'm not a big baseball fan but thank you for the help there.

Really nice that people on the call that don't understand baseball. We got to do cricket next time. Okay, who's next?

And our next question comes from the line of Doug Schenkel with Cowen & Company. Your line is open.

This is Adam on for Doug thank you for taking my questions. The first one was on evolving competitive landscape, there's a recent announcement indicating one of the bigger NIPT companies in the States is going to acquire another large NIPT company I was hoping you could provide any color on how you believe that pending acquisition could impact your competitive positioning at all.

Sure, thanks for the question, I'll take that. And again Steve, if you want to make comments off to it go for it. So the acquisition of Sequenom by LabCorp is generally a positive for us I would say we are obviously very accustomed to in country in the lab core reps in the field and you know the second reps in the field. So that acquisition hasn't changed the people that we are encountering and we've obviously done very well in these kinds of encounters, you know we have a very well trained genetics focused sales team that tends to do very well against large labs like LabCorp. So we feel the fact that there is kind of one less player out there and Natera is leading player with a focus sales force on NIPT and broad carrier testing is going to play out pretty well for us. And the technology as all you know, the technologies that have been acquired by LabCorp are technologies that we have seen in the field and we feel very comfortable with those technologies relative to our technology. So I think overall we are left in a pretty good position. Steve, you want to say anything? Okay, Steve is being the strong silence force in the corner, nothing to add there.

Okay, thank you. And my question was you recently have success signing these long term private para contracting at the same time micro deletions have become -- Seems like increasingly accepted, that if it's not micro deletion reimbursement if the private payer does not cover now thing that can be easily added to the uncovered policies that you've recently implemented.

Yes, all take that so you know we were very pleased earlier this year when the American Medical Association after looking at all of the detail of that test work flows, the peer reviewed publications that have been published on micro deletions issued a new code specifically for micro deletion testing, that will become effective in January of 2017. So with our current network providers, we because that's a new we will need to add that code to the existing contracts, from a coverage standpoint we do feel like we are laying the groundwork for positive coverage policies in the future between the new code from the AMA this March trial that Matt referenced additional studies that are underway, and should be published in 2017 and the recent endorsement from the American College of medical genetics combined with previous endorsements from the international society of prenatal diagnosis give us a very strong position that we think we can leverage for positive coverage policies in the future.

Okay, great. Thank you.

To add to the health economic models behind microdeletions like 22q.11 are very strong given the fact that they are often not detected by other means, they are very prevalent and there are interventions that can make a big difference to the outcome at the time of -- You've got a very strong healthy economic policy, health economics models there. So with our technology I think it's some of the category too low risk you know we expect that that reimbursement will be coming. We cannot say exactly when that the fact that that is very important from a health economic perspective is pretty much incontrovertibly.

And our next question comes from Raymond Myers of Benchmark. Your line is now open.

Yes thank you, what would the microdeletions revenue that you had in the second quarter?

We have never disclosed the micro deletions revenue separately and we're not going to start on this call.

Okay. Then I'll just ask my second question and then you can answer it there. Do you have visibility to the point where volumes start to grow again from the support of increased -- revenues begin to grow again from the support of increased volumes surpassing the impact of the reduced network pricing and the reduced microdeletions reimbursement that you're anticipating?

The problem we have there and trying to narrow it down just the big variables that we talked about on the call you know micro deletions being reimbursed itself and exactly where that comes out for the year, we have trail that down considerably in our financial forecast You know the big variable we don't have a crystal ball on but I think that average risk is going to be reimbursed. And we don't know exactly how the volumes not only the volumes in networks that we think could increase we haven't seen a lot of it yet but that's going to happen overtime, as well as where the prices will ultimately settle. So when all that dust settles I can give you a better answer but right now I don't expect Crystal was a lot better than yours.

I will add another comment there and I'll just repeat something that been said in earlier calls and was alluded to in this call as well when you look at 2017 that's kind of the time frame that we're looking to have the volume growth be tracking the revenue growth. Because we think that by that point a lot of the dust will have settled, you will have stable reimbursement most likely. Well I said make strong statements that we are expecting stable reimbursement for low risk to come in place at some time and then you know arena being your future and we would also expect that reimbursement microdeletions should settle down in the past we've looked at sort of 2017 being the time frame where reimbursement would be tracking volume growth and revenue growth would be tracking volume numbers. So that's a rough guide that we've given in the past and I'm just repeating that rough guide now.

I agree. And my follow-up question, I was hoping to ask about has the physician prescribing behavior altered in a regard due to the increased reimbursement that was experienced earlier this year.

Steve, I will take that. We still have a significant number of physicians at this stage that have looked at the data and they've looked at this Society guidelines and they've made a decision offer average risk or low risk NIPT to their patients. You know as I think Matt mentioned the coverage policies for average risk have been relatively stable this year we did see four points that were aware of their coverage policies from Q1 to Q2 but net increase in the number with a relatively small, so we think that there's -- There is it is definitely pent up demand positions that are waiting for the broader coverage. And as that company opens up there's going to be an opportunity for the average risk market and prescribe patterns to change more significantly than they have thus far.

Great, thank you.

And our next question comes online of Katherine Ramsey with Robert W. Baird your line is open.

Hi guys, thanks for the questions. And maybe too early to tell that are you seeing any slowdown or assuming any headwind from people to laying pregnancy from the Con out that were having some local cases in the U.S.

I think your question is, if we haven't seen this recently announced some sort of centralized cases in Miami for example that we haven't seen in any impact on our business.

Okay. And then on the Austin lab and office space, I just wanted to check in on that. I think in your last Q it said the majority of that project would be completed this month. So any update there on the status or plans going forward?

This is Matt. I don't recall saying the majority of that project would be completed this month at all that is a lab an office space that we are setting up because we've got a substantial operation going on and that's going to be a very good way for us to mitigate risk with just a single facility given the size of our operation and to reduce labor because the labor in Texas is so much cheaper than labor costs in California, the transition to Texas is happening continually for certain aspects of the stuff and that is a process that's going to go on for a long time through 2017. So I don't know where you caught that I was saying that the majority would happen this month that is a process that is ongoing.

Alright, thank you.

And we do have a follow-up question from Bill Quirk with Piper Jaffray. Your line is now open.

Thanks, this is Alex Novak again. I just want to follow up on microdeletion reimbursement. I know the guidance assumes it's going to decline in the back half of the year but I was just curious if microdeletion reimbursement was stable during Q2 or just if you actually see a decline in the quarter.

We actually haven't given that specific guidance but we are starting to see some pressure there and I think we're taking the prudent course of action in what we're doing in modeling out the financial impact of that. I'd like to [ph] that but that's what we have done.

Okay, understood. Thank you very much.

And I'm showing no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, you may all disconnect. Everyone, have a wonderful day.