Good day, ladies and gentlemen, and welcome to the Natera Incorporated Q3 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] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Mike Brophy, Senior VP-Finance and Investor Relations. Sir, you may begin.

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our third quarter 2016. Also on the line is Matthew Rabinowitz, our CEO; Herm Rosenman, our CFO; and Steve Chapman, Chief Commercial Officer. 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-Q 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 updates on our performance during the quarter unless we do so in a public forum. We will quote a number of numeric or growth changes as we discuss our financial performance and unless otherwise noted each such reference represents a year-on-year comparison. And now, I'd like to turn the call over to Matt. Matt?

Thank you, 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 third quarter. After that Herm will review our financial results and discuss our current outlook for the remainder of 2016 and then we will be opening the call for questions. Since our last earnings call, we continue to make significant progress and reach several important milestones. Specifically, we accessioned over 109,000 commercial tests compared to roughly 84,000 commercial tests accessioned in Q3 2015, an increase of over 31%. For Panorama, we accessioned over 84,000 tests compared to roughly 67,000 Panorama tests accessioned in Q3 2015 a 25% increase. For our Horizon carrier screening panel, we accessioned greater than 20,000 tests compared to roughly 13,000 Horizon panels in Q3 of 2015, an increase of approximately 58%. We were very pleased to see that CIGNA made an out-of-cycle medical coverage policy update to include coverage for non-invasive prenatal testing in the average risk setting. DNA first, the first peer-reviewed clinical trial providing evidence that primary obstetrical care providers can effectively offer cell-free DNA aneuploidy screening to the general population as part of routine clinical practice has been accepted for publication in Genetics and Medicine. The study was led by Glenn Palomaki of Brown University, a widely recognized thought leader in prenatal health and featured the use of Panorama. The study supported the clinical utility of NIPT in the general population screening and demonstrated that Panorama offer substantially better performance than older screening methods. The National Society of Genetic Counselors issued an updated physician statement on cell-free DNA screening endorsing NIPT as an option for all pregnant patients. Okay, turning to the quarter. We generated Q3 total revenues of $53.9 million, which represents 20%…

Thanks, Matt. With the transition to in-network contracts largely complete. We experienced steady reimbursement in line with our contracted rates and we saw continued evidence that our status as an in-network provider is paying dividends in the field with new accounts. As our contracted payers move aggressively to tighten management other networks, you gain market share from out of network providers. And we expect this trend to continue. Matt touched on the effort we have made to focus our volume growth in our most profitable accounts. We think this effort has been successful in the transition is largely complete at this point. Our sales force has now had an opportunity to adjust their sales funnels accordingly. And we were able to deliver sequential quarterly growth in the third quarter. We expect this trend to continue. It's important to note that our strategy in the average risk NIPT setting remains unchanged. We believe we have a line of sight to broader reimbursement in this market. And we continue to build market share in advance of full reimbursement. As a reminder, the high risk market comprises about 800,000 births in the United States. While the average risk setting represents about 3.3 million births. As a result of our early focus on the average risk market and differentiated content such as our microdeletions panel that we believe is particularly relevant in the average risk setting. We believe we have a dominant market share position. We remain very well positioned to capitalize on our investment here as reimbursement expense and penetration of NIPT in the general population continues. Specifically we are starting to see large hospital systems update their departmental policies to offer NIPT for all pregnancies which we think represents the next stage of penetration within the general population. Given consolidation in the…

Thanks Steve and good afternoon, everyone. Our third quarter financial results are included in our press release across the wire earlier this afternoon. Our third quarter total revenues were $53.9 million compared to $44.9 million for the third quarter of 2015, an increase of about 20%. Panorama revenues for the quarter were $38.2 million compared to $34.2 million in the third quarter of 2015, an increase of about 12%. We were able to grow Panorama revenues despite entering into in-network contracts earlier this year that reduced our ASP. We did this largely by growing volumes and executing on getting paid for order claims. Horizon revenues for the quarter were $12.3 million compared to $6.3 million in the third quarter of 2015, an increase of 95%. This change was driven by increasing volumes as we launched a new Horizon carrier screening panel in the middle of 2015. As a reminder, we recognized revenue primarily on a cash received basis. Roughly 51% of our third quarter total revenue was derived from test volumes accessioned in the quarter. The balance of our revenues were derived from tests accessioned in prior periods. Historically about 80% of the revenue we derive from a cohort of tests accessions is collected within two quarters and almost all of the revenue we derived from a cohort of tests accessions is collected within three quarters. The majority of tests accessions that generate little revenue today are Panorama NIPT test prescribed for 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 as a percentage of our total revenue attributable to our U.S. direct sales force for the three months ended September 30, 2016 was roughly 79% up…

Thank you, Herm. I am encouraged by the progress we made in the quarter on commercial operations and product development, the data we have generated and the additional support garnered from insurance companies and key 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 worldwide respond to genetic disease. With that, we will now open it up for questions. Operator?

Thank you. [Operator Instructions] And our first question comes from Bill Quirk from Piper Jaffray. Your line is open.

Great, thanks. Good afternoon, everyone. This is Alex Nowak on for Bill. I just want to start first on the guidance, it implies based on the new revenue range, it implies Q4 down sequentially. So I just wanted to provide some color on your expectations for Q4 and why you do expect a decline quarter-over-quarter?

Mike do you want to take that one?

Yes. Sure, I'll take that. So previous just to summarize – the previous guidance was the $200 million to $220 million and we're tightening our guidance for the top end of the prior range. As far as our revenues for Q4 you’ve heard the comments on the call in particular of note it’s just the – our average ASP, where they're headed as a result of going in-network. I mean I think that’s the major driver, but essentially just trying to tie to the top in the range, Alex.

Okay, that's fine. And then just saying real quick on pricing. It sounds like the transitions in-network pricing going to complete and also the transition to profitable accounts is also complete. So I mean going forward should we expect most of your ASP increases to be driven just by more averages coverage by payers as well as more payers cover the microdeletion panel. And then I just have one more question, after that.

Okay. You want to take that as well.

Yes. I will take. It's Mike. So on the transition to in-network pricing that will be complete largely by Q4. So that’s a new launch, I think you heard correctly Steve say that this transition to our kind of our focus on a more profitable accounts is largely complete. We feel good about that. And so Alex your question was ASP increases from here is a function of average risk NIPT reimbursement. Is that right?

Yes. That's correct.

Yes, I think that's right – if you think about the drivers for upside to ASP from here certainly average risk, medical coverage policies will help us. In addition, we've got a new microdeletions code coming in – coming into effect Q1 of 2017. Over not making a comment on early 2017, but over the longer term as Matt, Herm and Steve have described here and previously. We think we're in great position to improve the rate at which the microdeletions panel is reimbursed as well. So that can also be an important source of outside the ASP over the longer term.

Okay. That's great. And then just last question it’s a two part. First it’s CIGNA help with ASPs in the quarter or is that going to be a Q4 benefit. And then second could you just give some high level thoughts on your expectations for 2017 volume growth?

Mike, I'm going to punt this to you as well.

Yes, sure. So CIGNA ASPs as far as their average risk coverage policy, yes, I mean – it’s you'll see more benefit in Q4 than you did in Q3 because they went into – they change their coverage policy in mid-August. And as you know there's a lag there between when we accession test and when we recognize the revenue. The coverage policy is effective as of the service date. So test accessioned after their change in the coverage policy is where we see that change. Preliminary views on 2017 volumes, we're not going to guide right now to 2017, Alex we're going to just like we did this year. We're just going to – we're going to provide a full set of guidance at the Q4 call.

Thank you. Our next question comes from Doug Schenkel from Cowen & Company. Your line is now open.

Okay. Hi, good afternoon guys. Can you hear me, okay.

Yes.

Hi, Doug.

Okay, great. Thanks for taking the questions. So I guess my first one – is recognizing that you're not going to provide 2017 on this call understandably. So your volumes have been growing. You've been making notable progress getting in network. And there is pretty good progress being made with average risk coverage. So recognizing that there are some timing elements to how those things come together and how they affect revenue rec. Is there any reason that we shouldn't assume you are on the comp of an inflection when it comes to reigniting and reaccelerating revenue growth?

I'll make a high level comment. And then Steve if you want to anything go ahead. So very high level, yes, we’re seeing improvement in average risk coverage. We are very comfortable at we’re making the right bet there. The professional societies’ guidelines are coming in increasingly supportively. We’re seeing insurance companies cover at a sort of steady pace. CIGNA is the last substantial one but now we have the $90 million covered lives in the United States on low risk. The total number of covered lives in the United States is about $200 million to $220 million. So although the progress has been steady and we are very comfortable with our positioning right now. We are from all the data that I'm able to see the clear market leader in the United States in NIPT. And we're very well positioned as kind of the focused company on that segment which is a very big segment. So very comfortable with a bet we've made. We’re very comfortable in our position. None the less in order for low risk to become standard of practice you want to have insurance reimbursement be covering the vast majority of patients because if only roughly half the patients are covered, the doctors are going to get half the time a patient not getting their test covered by insurance and whereas we will do our very best to collect from those patients that create all sorts of glitches which the doctors usually don't want to deal with. So will there be a growth in low risk that roughly 3.5 million pregnancies, absolutely. Can I say that it's going to happen overnight? No it's going to happen steadily and in order for that to be a substantial inflection. We think that the insurance coverage of the lower segment has to be well more than 50%. Steve, do you want to add anything to that?

That’s it.

That’s it, okay.

Okay. That's really helpful, with good color. You did I guess pivoting a little bit over to Constellation you know that you now have eight out of the 22 constellation labs that launched commercially. Does that mean all eight of those launched in the quarter. I can touch that it first time we talked. We've heard you talk that specifically about commercial launch. So is that the case and if so how should we think about revenue generation from commercial Constellation partners will these revenues be recognized in the services revenue line. It doesn't look like that increased sequentially, so I’m just wondering if that something we should be contemplating in our models either in Q4 or Q1.

Mike, you want to take that.

Yes, sure. So the eight labs are not eight labs just in the quarter. That's a eight lab total in those are largely over the course of this year and last year. We did have lab launch in the quarter and we do expect some more launches coming in as Matt mentioned the overall pipeline for deals remains strong. As far as where the revenues for Constellation will be recognized. We'll see those revenues recognized just in the products revenues line. There's not going to be any kind of difference there. And we do, we generate some revenues from Constellation today. I think it is that we get more of launches from these large labs and those launches become more mature. We'll spend more time detailing Constellation volumes on revenues step.

Thank you. Our next question comes from Steve Beuchaw from Morgan Stanley. Your line is open.

Hi, good afternoon. And thanks for the time everyone. First question actually relates back to the focus on profitable accounts. Now that you’ve had some time to reflect on the experience over the last two quarters and you got about how that transition within the sales force is impacted, the tactics if you will the sales force. What do you think in a scenario where you had not made that change? The same-store if you will sequential volume growth might look like relative to what we’ve seen say over the 2Q, 3Q span. How much more could the volume growth be – as it would be a helpful baseline for it, thinking about volume growth going forward.

Yes, this is Steve, I’ll take that. So I think we’ve seen pretty consistent growth over time, when we change the way we were operating toward the end of Q1, we physically went out and shut down some accounts that we didn’t see a path to profitability. We reset the sales compensation plan. So that the representatives were incentivized to focus on more profitable accounts and subsequently they had to reset their sales funnel in sales pipeline. So we’re pleased in Q3 to see the return to sequential growth that is consistent with what we’ve seen historically. I think the growth is really related to the sales reach and scale. And we feel like we’re well positioned there. Now they’re spending their time selling in the right customers and we think there should be some consistency with their ability to close accounts in the future as what we’ve seen in the past.

So Steve, you asked question of how it affected our growth.

If we hadn’t gone out to shutdown on the accounts and I think Steve answered you, but the simple answer is our growth has been higher.

I appreciate it. That’s certainly the direction we were hoping for. So I guess maybe just one sort of filling in or maybe one or two sort of filling in the gap questions. Can you give us a sense for on hereditary carrier screening, where you think the possibilities are in terms of the going forward attach rates and then sort of just last one for me also circling back on the turnaround in Horizon. Do you have a sense for what percentage of those recognized from the current period versus the prior period just for some accounting clarification in the quarter. Thanks so much.

Do you want to take that one?

Yes, sure, I’ll comment.

Steve, why don’t you start?

Yes, so since we launched Horizon test in 2015, we’ve seen continued interest both on the clinical differentiation that is offered on our panel, but also on the ease of use in our user experience platform. So we’re continuing to see a trend in increased attachment rate and we think that as the market shifts more and more to broader panels and moves away from that single test like for example cystic fibrosis only, which is many times ordered on the just the base of V panel doctors are focused more on clinical relevancy the broader panel there’s an opportunity for us to further increase our attachment rate.

Yes, and then Steve on the percent of Panoramas with test accession with revenue recognized in the quarter. That number for Q3 was roughly 53%. It was also – is also roughly 53% for Q2. Just keep in mind, as Herm mentioned on the call, we’ve done a little bit better on our appeal of execution. And so that will – because those are older tests that we’re now appealing. That will have the effective kind of pushing the number down. We did particularly well with Panorama and that respect in the quarter. So I think run rate – that metric continues to kind of improved gradually as we’ve talked about in the past.

And I’ll make one more common variants, in terms of the attachment rates of carrier testing to Panorama that is just steadily growing and when you do the math. We’re not going to give you an exact number now, but you can just take out the international segment, because you tend not to get carrier testing attach to the international markets. But in the United States, the attachment rate is high and steadily growing.

And I mentioned something else. So some of the common carrier conditions that we are sort of, I would say, from my perspective world leaders on being able to do the carrier testing for. We have data which is very compelling in terms of incidents rates. So lot of these things we’re seeing higher incident rates than people would have expected for conditions that are not additionally screened for in pregnancies. So the ongoing use of carrier testing and the ongoing increase in the attachment rates I think is a trend that is going to have – its going to continue over the next couple of years.

You can calculate that right off at the call script actually Steve.

And this has been you can calculate that right off the call script.

Thank you. And our next question comes from Katherine Ramsey from Robert W. Baird. Your line is open.

Hey guys thanks for the question. You talked about going into an exclusive arrangement with the hospital. I was just wondering if you could talk about how those conversations come up and what those discussions look like?

Yes sure. So I think one of the things we mentioned was part of the growth opportunity to unlocking the potential of the low risk market is going to be from hospital systems setting up a policy for their system, whether that's in integrated network or whether that's you know a maybe less constrained system there's generally some policy from maybe the Chairman of OB or from the laboratory director with respect to how physicians within that system should practice. So I think when they look at NIPT options it's very clear that we are clinically differentiated. And we work with the hospital system to implement our technology as a test send out within their system or if they are interested in licensing our access to our Constellation platform. We have those discussions. So we do think that there's a growth opportunity there. And it's an area of focus for us, an area where we're seeing some success.

I will make another comment there, these hospital systems are usually not competitive with our direct sales force. And they often have the sort of leading hospital systems in the United States are closed systems with a lot of leading MFMs. So when they want to be offering a test within their closed system. It's enabling them to do that with Constellation or the test send out doesn't really pose a conflict with our direct sales force in fact often those connections with these large hospital systems will just add win to the sales force in the area. Because they've got a lot of KOLs who are focusing on the use of Panorama and this is going to be increasingly important over the coming years. These conglomerated hospital systems are becoming more important over time. We'll see how that evolves with the new change in government but so far that's a clip. That's a trend that's been important.

And Katherine, I’ll also just to add to augment our direct strategy into the hospital systems we've announced previously we have a very strong partnership with ARUP which is one of the leading esoteric distributors to hospital laboratories in the United States and they have a very large. Book of maternal serum screening business like roughly 80,000 samples a year for example that flow through their system from hospital labs and we expect over time that relationship. We’ll see a lot of conversion from those maternal serum screening units into average risk NIPT units. So we're approaching this from multiple fronts through partners and through a direct strategy.

Okay. That’s really helpful and then you gave that session test numbers and I was wondering just for modeling purposes if you could give. Panorama and Horizon test that you’ve recognized revenue on in the quarter?

Sure, so we recognize revenue on roughly 56,000 Panoramas and on carrier screening we recognized revenue on roughly 9,700 tests.

Great. Thanks

Thank you. Ladies and gentlemen that does end our question-and-answer session for today's conference. I would now like to turn the conference back over to Matt Rabinowitz for any closing remarks.

So I want to say thank you everyone. And we will see you again at the next earnings. Go well.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.