Good day, ladies and gentlemen, and welcome to the Natera Incorporated Q4 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 call maybe recorded. I would now like to introduce your host for today's conference, Mr. Mike Brophy, Chief Financial Officer. Sir, you may begin.

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our fourth quarter 2016. Also on the line is Matthew Rabinowitz, our CEO 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 2017, our assumptions for that guidance, our market opportunities and strategies, and expectations for various current and future products including product capabilities and expected release dates. 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 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 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 we 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.

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 fourth quarter. After that, Mike will review our financial assets, our results and discuss our current outlook for 2017, and then we will be opened for questions during the call. Since our last earnings call, we continue to make significant progress and reach several important milestones. Specifically, we processed greater than 117,000 tests in the fourth quarter of 2016 compared to approximately 96,000 tests processed in the fourth quarter of 2015, an increase of approximately 22%. These volumes include tests processed via our Constellation software platform. We processed 5100 Constellation units in Q4 of 2016 and roughly 3,000 in Q4 of last year. Greater than 447,000 tests were processed in the full year 2016 compared to 317,000 tests processed in 2015, an increase of approximately 41%. This includes 17,000 Constellation units in 2016 and 7,000 Constellation units in 2015. For Panorama we accessioned greater than 84,000 tests compared to roughly 73,000 Panorama tests accessioned in Q4 2015 and roughly, a 15% increase. Roughly 332,000 Panorama tests were accessioned in the full year of 2016 compared to roughly 255,000 Panorama tests accessioned in 2015, an increase of approximately 30%. For our Horizon and carrier screening panel we accessioned greater than 22,000 tests compared to roughly 16,000 in Q4 of 2015, an increase of approximately 38%, greater than 80,000 Horizon tests were accessioned in the full year of 2016 compared to roughly 42,000 Horizon tests accessioned in 2015, an increase of approximately 90%. We recently announced the launch of our Evercord, cord blood and tissue banking service, a new cash paid product that enabled expectant parents to collect, store and retrieve their newborn's…

Thanks Matt. We were pleased to deliver sequential growth in volumes again in the fourth quarter despite the headwind from the BioReference termination discussions which began in December. I would like to provide a bit more context for our decision to shift that business to our direct channel. As many of you know, our initial commercial strategy in 2013 and 2014 was to rely on large reference laboratories for the bulk of our sales efforts in the United States and complement lab partners with a small direct sales force. We quickly saw that our direct sales channel was substantially outperforming our lab partner channel. We found that we could communicate the benefits of our tests, incentivize unit growth and collect insurance reimbursement much more effectively and efficiently ourselves. As a result we embarked on a significant expansion of our direct sales presence and we deemphasized our reliance on national lab partners. That strategy has proven to be very successful as evidenced by our market share in volume growth since that time. We still enjoy productive partnerships with several labs in United States, and we find those work especially well when the partner lab enjoyed a strong presence in a particular market niche such as hospital systems or partner labs that plan to launch an internal test using our Constellation platform. We feel we can affectively cover the accounts that were previously ordering Panorama through BioReference. In addition, we now have the opportunity to market our full suite of products including Horizon and Evercord to these customers which was not part of our previous distribution agreement. As a result, we believe the right long-term strategy is to pursue this business through our direct channel. This approach will of course take time and we will not be able to replace the full…

Thanks Steve. Our fourth quarter financial results are included in our press release that crossed the wire earlier this afternoon. Our fourth quarter total revenues were $49.3 million compared to $52.9 million for the fourth quarter of 2015, a decrease of about 7%. As Matt described, there were two different unusual impacts to revenue in the quarter. One was the delay in receiving payment from BioReference as we negotiated the conclusion of our partnership. We received a payment of roughly $9 million in January and about $1.8 million of that total will be recognized on a cash received basis in Q1. The second issue which we estimate is roughly $1.5 million related to a delay in submission of claims to insurance companies in the quarter. During Q3 and Q4 we transitioned most of our insurance billing operation to our facility in Austin, Texas. While we anticipate this move will yield roughly $1 million in cost savings during 2017, we experienced a delay in claims submissions as the new team came up to speed. It's important to note that this is a timing issue only and we expect to have worked off a backlog and recognize most of this revenue by the second quarter of 2017. Because we have already incurred all the cost associated with these volumes, these revenues would also flow directly to gross margin. Panorama revenues for the quarter were $34.3 million compared to $35.2 million in the fourth quarter of 2015, a decline of about 2%. As Matt mentioned at the top of the call, Q4 of 2016 includes the impact of most of the pricing decreases we took to broadly go in network with payers earlier in the year and for Panorama we have largely replaced that revenue with volume growth. Horizon revenues for the quarter…

Thank you, Mike. I’m encouraged by the progress we made in this quarter. In particular, we believe the launches of Evercord, Version 3 of Panorama, and a key new component of our noninvasive prenatal test with substantially broader coverage coupled with the selection for the I-SPY TRIAL and further pay policy changes in average risk NIPT represents important milestones for the Company. With that, we are now open up to questions. Operator?

[Operator Instructions] And our first question comes from Steve Beuchaw from Morgan Stanley. Your line is open.

Hi, good afternoon and thanks for taking the questions. I just wanted to clarify first of all on a couple of the assumptions, first is on the carrier screening guidelines that we've seen come out recently that Steve Chapman referred to, my sense is that you're not incorporating that as a positive for the guidance for 2017. Am I hearing you correctly there and that I hear you correctly that on carrier screening, it sound like volumes will be slightly more significantly positive than pricing will be significantly negative, is that correct?

Hi Steve, thanks for the question. I think all of that's correct, so as Steve mentioned we just very recently received that news from ACOG and we're trying to better understand exactly what the impact is to our business although we think it's certainly positive. So that is the incremental benefit from ACOG there is not factored into the guidance. On your question on the mix between ASP declines versus volume improvements, I think you're right. And I think carrier screening volumes, we've got a real opportunity to grow those volumes down particularly as it relates to offering Horizon to those accounts that were previously served by BioReference. So I think that's also a correct assumption.

So then if I take a step back and I include that information and I consider there's probably order of magnitude $10 million to $15 million of pressure from BRL anticipated in the 2017 guidance. I get to a view that the underlying panel growth in revenue terms is relatively modest and so that makes me wonder - well maybe I was a little too whether is a little too optimistic on Pano pricing in 2017. So can you just talk a little bit about how you expect pricing to evolve over the course of the year now that we're - seen a number of quarters through the transition to in network. Thanks.

So I think Mike you can take that first.

Just to comment on Pano revenues, I think that's rightly so, if you think about that downdraft from BioReference, I think you have that roughly right although I think it's - if you do 8% of our 2016 revenues, you get to number slightly above 15 million and then if you anticipate a growth I think the target that we need to fill is slightly larger than that. So that's the – that's just the background on the financials. I’ll let Matt comment more on just kind of Pano uptake and other parts of your question there.

Well you can do the math so I think you got a reasonable sense of what we're assuming in the model. To a large extent the model is driven by our conservatism related to payers coming in to cover low risk. We are seeing steady growth in volumes in Panorama for both high risk and low risk and as Steve mentioned we've seen really great numbers in Q1 and it looks like Q1 is actually going to be a record volume quarter despite the BioReference reduction in volume. However, we are just being prudent in modeling volumes through the rest of the year because we can't say what the big payers like Aetna and United are going to do. We are seeing payers transition to be covering low risk sort of on a steady flow every few months. We see payers come online and you know now that we've got more than 50% of payers covering low risk. The train is very clearly left the station. This is definitely the right bet that we made and the other payers are going to come in line in time - well I should can say are I mean we believe pretty strongly that they will come in line I mean if it seems very hard for them to hold out with more than 50% of payers covering and the trend just continuing every few months. However, in our guidance we got to be a little bit conservative in modeling the uptake that we would expect to happen in low risk when all of the payers come online and when the doctors can expect that a low risk test order is going to be covered by insurance.

I think Steve maybe one more comment for - and I know you know that’s for just for others listening, our microdeletions revenue is recognized through our Panorama revenue line. And so if you think about modeling Panorama revenues, our comments on the reimbursement we’ve seen so far microdeletions would certainly affect that Panorama revenue line for 2017.

Thanks so much. Really appreciate the help there.

Thank you. Our next question comes from Bill Quirk from Piper Jaffray. Your line is open.

Great, thanks. Good afternoon. I guess first question is just trying to bridge consensus which was at 250 with the mid part of guidance is about 30 million, Mike if I’m hearing correctly BioReference is about 20 of that and so I guess first question is microdeletions essentially assume to be down about $10 million or is there something else here that I guess history is missing as I’m trying to bridge from guidance to where consensus was?

Yes, I think the main bridge points here are BioRef in order of magnitude are the early experience we’re seeing on the 2017 the new code for microdeletions in 2017. That is by far the biggest delta and then second is BioReference which I think you're roughly in the zone on Bill. So in the background we also have carrier screening improving as we've alluded to on the call. But really the main delta is the reduction in ASP that we’re seeing on microdeletions so far this year on the new code.

Got it, okay. And not to acute on this but if microdeletions was greater than BioReference, I guess we normalized for that we actually would have implied fairly decent revenue growth and guidance that is and so is that a function of some of the Medicaid states coming on and pricing tests that are perhaps in your slight upside surprise, so trying to bridge this a bit?

Yes, I understand. So what’s on the positive side of that would be carrier screening revenues two components there, one is just the volume growth opportunities Steve alluded to it in his section. We still think we have a lot of Greenfield there with the cystic fibrosis only population to convert those. We got a real opportunity in carrier screening as a result of the - our ability to offer that to BioReference accounts and that’s one and I think you’re right, you do have incremental improvements and reimbursement assumed in our guidance for both average risk and then Medicaid coming on and NIPT. And then finally we talk about Evercord and the new NIPT extension on this call and we do model revenues from both of those products in 2017 although it’s late in the year.

Got it. And then just last question from me here I guess getting to the comment about that one Q volumes they hold could be kind of a record for you which is obviously good to hear. That said it looks us like NIPT was pretty flat sequentially I think you accessioned little over 84,000 tests in each quarter, maybe just add a little bit of color here on such performance. I suspect BioReference may have been a factor here but again any additional color will be great? Thanks

Yes, absolutely. So I’ll just give a couple comments and then Steve will provide some color. So I think we started breaking on Constellation units on this call to kind of help you get more color on this topic as we see labs transition from testing our business which would counter tests accessioned and when they started launching Constellation, those are Constellation units. So if you kind of normalize for those things, we grew Panorama units by little over 1,000 units in the quarter. So that's just kind of just level setting on the map with the Constellation units going in there as well. So Steve what other comments would you add to that.

Yes, so I think it’s really three or four things there that we're contributing. The first is BioReference, we did see downward draft in the volume from the channel business overall in Q4 that mashed some of the direct growth in Panorama. As Mike indicated, there was a transition to Constellation for a certain portion of the units that is further masking growth. Additionally, we put a larger emphasis on growth of our carrier screening product as we started to gain more traction there. We are also putting a larger emphasis on generating more units from our committed customers and from customers that have tried us in previous quarters as opposed to just continuing to bring on new customers. And so we starting to see the results of that activity in Q1 but that was a strategy that we initiated right around the beginning of Q4.

Okay, got it. Thanks for the color guys.

Thank you. Our next question comes from [indiscernible] from Robert W. Baird. Your line is open.

Hi, guys thanks for the question. You guys talked about on last quarter's call expecting 2017 revenue growth to track volume growth. Does that still hold true as we think about the volume versus ASP puts and takes in your guidance?

Yes, so I think the first driver Katherine is just the reimbursement on microdels will affect that as we've commented the microdeletions revenue is flowing through the Panorama line. So we would expect that to affect the Panorama revenue ASP as you calculate in our financials. So with that level set, Matt if you had other comments.

Sure, I don't want to be cute but we were looking at the timing and the comment that we made was by the end of 2017, we would expect the reimbursement to be in a roughly steady state at which point we would expect revenues to be tracking volumes more closely. So we are seeing reduction due to microdeletions reimbursement, we are seeing what we expect to be ongoing improvement in NIPT reimbursement and when this is sort of flashed out, we do expect that the numbers that we provided for the steady state revenues in the ASPs will be tracking the growth and volume. In fact I think we are actually in a much better shape in the long-term than where we were when we made this comment because at the time that we made this comment we expected that the order in reimbursement for NIPT would be about $400 and we would add about $200 on to that for microdeletions. What we are seeing now is that for the CMS pricing, we expect in the long-term to do a whole lot better than that. You know with the microdeletions code at $802, we think that the long-term additive affect on the microdeletions could be much more than $200. So we are going to take some time for these new code issues to stabilize and for the payers to start to reimburse microdeletions but that long-term trajectory where we expect the revenues to track the volumes is absolutely still what we believe to be the case.

Okay, that's helpful. And it seems like you guys made some pretty meaningful improvements on recognizing revenue on test that have been processed in the period 63% for Panorama and earlier in the year it was more on the low 50. So just curious as if there were unique dynamics going on in the fourth quarter if that's a new trend that will continue going forward?

Yes I think the trend there is when we went in network with the payers early in the year and we got some experience with those payers we were able to negotiate terms on kind of bolus of claims of older claims that we had held up and not be paid on that were holding in the appeal queue. And so we really get those in Q2 and Q3. So that inflated the number of volumes on which we recognize revenue that were actually accessioned in prior periods. The same hold true for BioReference. As we switch to an accrual basis for BioReference in starting in Q3 and then into Q4, we were also receiving payments for the cash recognized units from prior in the year and that again depressed that number. So I think going forward I think that is a steady state number.

Great. Thank you.

Thank you. Our next question comes from Mark Massaro from Canaccord Genuity. Your line is open.

Hi, guys. Thank you for taking the questions. Your OpEx in Q4 I think was $49 million if I got that number correctly. Can you speak to your comfort level around that level hovering roughly in that ballpark throughout the course of 2017 and maybe the cadence of how that might change throughout the year?

Yes, I mean - Mark thanks for the question, I think the guidance incorporates what we think in terms of the total SG&A through the year. I think that cadence will be something that remains relatively steady through the course of the year. There are not massive initiatives that wouldn’t cause meaningful changes in different quarters there. So roughly stable through the course of the year and again roughly stable on dollar terms versus 2016. Why is that is because we're comfortable with our sales footprint and the investment we’ve made in our Austin facilities for example. So we are feel like we’re ready to go with this expense base.

Great. And going back to the guidance I understand that you guys are the speaking to air on the side of caution and in your prepared remarks said that you're not including rapid changes in the immediate term. Can you just clarify if those comments are specific to microdels are you also including average risk NIPT in that bucket?

No those comments are actually specific to average risk NIPT, so we do expect to see continued improvement in the reimbursement for average risk NIPT through the course of the year but we just don't expect a sea change in the reimbursement and that’s great for average risk NIPT in the immediate term. And as we discussed on prior calls, once you see changes in positive coverage decisions, it takes a bit of time to - for those decisions to flow through the system and actually show up in our revenues. So that’s an impact for NIPT. For microdeletions we don’t anticipate - our guidance does not contemplate improvements in the reimbursements we've seen so far even though we may see that as we have an opportunity to execute on appeals and we are able to get more data points back in.

Okay, great. And then on the new product launch on the cardiac and neurological condition, given the fact that it is higher incident than down and in most other genetic abnormalities. Can you just speak maybe to the size of the market opportunity you're seeking to address and maybe given the higher prevalence should we be thinking of a premium price relative to your other tests?

I love that question Steve do you want to take and then I’ll make some comment.

Yes sure, I’ll take that. So I think initially as we described we plan on launching to maternal fetal medicine specialist in key opinion leaders. While there are some disorders on the panel that are relevant for ultrasound findings, a large portion of the panel has no prior indications. So we think ultimately this is a test that once we go through the phase launch it have support from the appropriate key opinion leaders could be a routine test that is offered alongside Panorama. As we look back at the launch of microdeletions for example, we do have a very high attachment rate there to our base aneuploidy test. So I think in the long-term this is a test that can generate substantial revenue. We think on commercial launch there will be a good revenue opportunity with the premium priced product

Thanks Steve. So I’ll just add to that we’re being relatively conservative in the guidance there as well because we’re assuming that the majority of the revenue will come later this year. We do expect that this should be well reimbursed right out of the gate upon the commercial launch and what you say is exactly right, this is very high incidence, serious conditions that when does occur in the screen fold so from our perspective this should be a really big deal. We have just learnt that the right approach to these things is to offer them to the key opinion leaders before you try to rapidly change the field, you want to get the key opinion leaders comfortable with this new technology. You want to get the doctors understanding your capabilities and also you want to be flushing out some of the technical issues that are involved in launching a new product especially in new product that's pretty cutting edge like this. Once we flush those out, we expect that the volume upticks will be substantial. And I think you've seen some sort of points of reference here. You've seen the uptick of the microdeletions offering, you've seen the uptick of the broader Horizon carrier panel and given the importance of this test, we expect the uptick should be really substantial in the coming year. So this is we think going to be a big deal.

Great, thank you. And my last question is by chance have you seen any change in competitive dynamics. Obviously we have LabCorp by Sequenom, just curious if you're seeing any changes relative to maybe even a year ago as it relates to market share or competitive activity?

Yes, I'll take that. We haven’t seen significant changes, I mean obviously there was the Sequenom of acquisition you referenced. We've been competing against Sequenom and LabCorp for a long time and we haven’t really seen changes there even though there was a change in ownership. There is a couple other I think changes in product offerings for example Roche is now offering the sort of good start carrier test. We haven't seen that broadly within our customer accounts, but we know it's out there but overall it continues to be a pretty competitive space and we continue to compete on a daily basis very aggressively for new business.

Yes, so I would say that Natera has competed extremely affectively if you look at the volumes for Q1 we've grown through that loss of volume from BioReference very quickly. So I was very happy to see that. It’s difficult to say exactly what competitive dynamics are in place but it’s possible that part of Natera's growth is because we have removed the shackles from some of the salespeople who were dealing with the channel conflicts with BioReference. So people are selling much more easily and it’s much more streamline process without dealing with those channel conflict issues. And the other thing is it possible that because Sequenom is no longer in the market and has kind of been taken under LabCorp, we are seeing much more powerful position for our salespeople being very clearly by far the leader in NIPT testing and being sort of the strongest player out there that’s offering broad carrier testing together with a very strong differentiated NIPT test. So some of those factors might be giving rise to the great numbers that we seen in Q1, it's just difficult to say exactly what the factors are.

Okay. Thank you.

Thank you. And I am showing no further questions from our phone lines. Ladies and gentlemen thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.