Welcome to Natera's 2017 Second Quarter Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded today, August 8, 2017. I would now like to turn the conference call over to Michael Brophy, Chief Financial Officer. Please go ahead.

Thanks, Operator. Good afternoon. Thank you for joining our conference call to discuss the results of our second quarter 2017. Also on the line is Matthew Rabinowitz, our CEO; and Steve Chapman, Chief Operating Officer. Today's conference call is being broadcast live via webcast. We will be referring to a slide presentation that has been posted to investors.natera.com. A replay of the call will also 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, market size, opportunities, and strategies and expectations for various current and future products, including product capabilities, expected release dates 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 then 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 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.

Thanks, Mike. Good afternoon, everyone, and thank you for joining us. I will first review the highlights since we last spoke in May and Steve and Mike will additional detail on our commercial and financial progress. As Mike mentioned, we will be referring to slides that we just posted at investors.natera.com. First, a summary of our recent highlights on Slide 3. We generated total revenues of $53.6 million in the quarter, which represents 3% growth over last year despite the fact that the majority of our revenues are now derived from in-network contracts and last year's second quarter benefited significantly from higher out-of-network pricing. So we have successfully made up those revenues with volume growth and now we believe that we can reap the benefits of stable in-network pricing. Revenues grew more than 14% sequentially versus Q1 of this year, where the in-network volume mix was similar. Crucially, in the second quarter, we actually showed improved average selling prices compared to Q1, which is the first time we have done that as a public company. I will spend more time on this later in the call. As pricing has improved and the COGS benefit from the Version 3 of Panorama began to take effect in Q2, gross margins also expanded significantly. Gross margin in the quarter was approximately 36%, an increase of about 800 basis points from Q1. I will spend more time on this later in the call and Mike will dive deeper into this financials generally. We processed approximately 125,700 tests in the quarter, which represents 17% growth versus Q2 of last year and roughly 3.6% growth sequentially versus Q1 of 2017. Given our decision to exit our commercial relationship with BioReference Labs in the early January, we are particularly pleased to have now delivered sequential volume growth…

Thanks, Matt. As you can see on Slide 4, our unit volume productivity per rep continued to improve in the second quarter and we are in the early launch stages with 2 additional products that we believe will further increase unit volumes per sales rep. As Matt mentioned, we grew Panorama volumes approximately 8% compared to the second quarter of 2016 and roughly 1% sequentially from the first quarter of 2017. The sequential growth was slower than we would normally like to see for a few reasons that we think are temporary. One, we made a significant push to retain BioReference accounts and close our direct pipeline in Q1. We were very successful in doing so. We grew volumes in our direct channel in Q1 by about 16%, just compared to Q4 2016. Our outperformance in Q1 resulted in fewer pipeline accounts entering Q2 than usual. Two, we made carrier screening attachment within our existing account a point of emphasis so far this year and our commercial team has responded to that challenge. Our carrier screening attachment rate measured simply by dividing Horizon volumes by NIPT volumes, was over 36% in the second quarter compared to just 26% in Q4 of last year when we started this initiative. Horizon cross-selling requires spending time in our existing Panorama customer base resulting in less time hunting for new customers. Finally, the most fertile ground for new product launches is existing accounts and our reps initially introduced Vistara and Evercord to these accounts rather than new customers. These three items together put pressure on Panorama volume in Q2 but we think the sales team now has the time needed to refocus on rebuilding new account pipelines. As we move through the rest of 2017, we think we can adjust our focus back to…

Thanks, Steve. Now I would like to shift gears and provide an update on our upcoming commercial launch in oncology. Let me give you a sense of how that launch is going to happen. First, we are launching the pan-cancer research use only offering for pharma and academic research studies and we will then leverage that data to support reimbursement for the clear launch slated for next year. We view the launch into the research market as a critical first step in our oncology strategy. As we have seen with others in the space, revenues from academia and the pharmaceutical industry can initially be more meaningful contributors to the business than revenues generated from CLIA test for patients. These initial customers have access to patient samples that are crucial for clinical validation and utility studies. These are often trials that would be prohibitively expensive and risky for us to run our ourselves. We are encouraged by the discussions we have had with partners prior to the launch and look forward to updating you on our progress in future calls. The CLIA launch will be focused on recurrence monitoring for specific cancer types under the brand of Signatera. This name refers to our ability to uniquely customized the assay for a particular patient. We are in active discussions with a number of partners that can provide access to over 3,000 samples in 6 different cancer indications, where we believe there is clear value in learning about a cancer relapse as early as possible, monitoring the progress of the cancer during therapy or checking for residual disease after an intervention. In addition to the core areas like breast, ovarian and lung cancer we have discussed previously, these include examples in indication like bladder cancer, colorectal cancer and kidney cancer, where we believe…

Thanks, Matt. Our second quarter financial results are included in our press release that crossed the wire earlier this afternoon. Our second quarter total revenues were $53.6 million compared to $52 million for the second quarter of 2016, an increase of about 3%. As Matt mentioned, this represents significant volume growth for us and shows the benefit of the stability we've gotten from going in-network. In Q2, roughly 48% of the revenue recognized tests in the quarter were also accessioned in Q2. For Q1, this figure was 51%. This reflects ongoing improvement in winning appeals of older claims. As we've discussed previously, we recognized most of our revenue on a cash basis and the timing of our cash collections has remained steady. Historically, about 80% of the insurance revenue we derived from a cohort of tests accessioned is collected within 2 quarters. And almost all of the revenue we derived from a cohort of tests accessioned is collected within 3 quarters. Panorama revenues for the quarter were $32.9 million compared to $32.1 million in the second quarter of 2016, an increase of about 3%, which again is driven primarily by strong volume growth, balanced by the shift to in-network contracts. We recognized revenue on approximately 54,600 Panorama tests in the quarter compared to approximately 40,000 Panorama tests in Q2 of last year. Horizon revenues for the quarter were $16.3 million compared to $15.9 million in the second quarter of 2016 but the fund is due to the change in in-network rates. We recognized revenues on approximately 18,600 carriers tests in the quarter compared to approximately 8,600 tests in Q2 of last year. As Matt mentioned, and as we expected, we saw ASP as not only stabilize but improve in Q2, dividing total revenue of $53.6 million by total accessioned units…

Thank you, Mike. We are pleased with a very successful second quarter. We are looking forward to the growth of our recently launched products and the launch in Q3 of our first product in oncology. We are now open to questions.

[Operator Instructions]. And our first question comes from Doug Schenkel of Cowen.

This is actually Chris Lin on for Doug today. I just wanted to go back to the commentary on the sequential Panorama volume growth. I think you know that, that was a bit lighter than expected, but that you have implemented actions to rectify this issue going forward. So just a few questions related to this. Could you elaborate a bit further on the actions you are taking? Two, when do you expect to return to a more normalized sequential growth rate? What are you seeing so far in Q3? And then just -- can you talk about the sales rep hiring plans?

Yes. This is Steve Chapman, I'll talk about that. So as I outlined in the prepared remarks, there are really 3 reasons why we felt the quarter-over-quarter growth in Panorama was a little lighter than expected. And the first, just to reiterate, was that we had such an outstanding Q1 that we closed a lot of the accounts in our pipeline. The second was that we were focused specifically on cross-selling our Horizon product. And generally, when we're cross-selling that, we're selling to our existing Panorama customers, so we're spending less time out prospecting for new business. And then number three, we launched 2 products Evercord and Vistara. And the best place to sell new products is to your existing customers. And therefore, again, as less time out prospecting for new Panorama customers. So we feel like those things are sort of normalizing and it will be back to sort of status quo and business as usual going forward.

Thank you very much, Steve. I'll make another comment on that question. If you focus on the superb growth that we've seen on the Horizon product line, you can see that the sales team was incentivized to push on Horizon, especially given the changes in the ACOG guidelines. So we see very good reimbursement from Horizon. It's a very profitable business for us. And so where the sales team is incentivized to grow Horizon, they might not have been pushing Panorama as hard. If you look at the overall volume growth, it's been really great.

And our next question comes from Steve Beuchaw of Morgan Stanley.

So many things to cover. One, Matt, I think if you would look across the landscape in molecular testing and commentary and news from around the space over the last few months, it's becoming increasingly clear that, I guess, you could say there's an agreement with the Natera view that to make the business really work, you want as many products in the bag as you can get and you guys are clearly moving in that direction. I wonder if you could give us a sense from here where your ambitions are on continuing to add products to the bag? And if you think there are any low hanging fruit, maybe high-margin low hanging fruit that would be helpful to consider. Second, I don't know, if this is for Matt or for Steve, I wonder if you could just spend a minute in more qualitative terms, you're talking about the tone of your conversations at this point with United, number one, and with the private pay community on microdel reimbursement, given the publication of the data on the screen with a significantly improved PPVs?

Thanks very much for those questions. So I'll take a stab at both of them and Steve if you want to come after with the comments that would be great. So in terms of additional products, we're not going to announce here things that are in the plan for competitive reasons. But I can say that we're going to be focused on Evercord and Vistara for a time. Those have been really great products. We haven't announced the numbers for Evercord, but pieces there seems to be working very well. That we have a lot of touch points for the patient, we've got a very targeted sales and marketing strategy for that product. So we're very happy with that decision. And there's a lot of growth there. As we both have said, that is going to be a foray into offering more extensive genetic testing. We've said that we will over time be producing a whole exome and the whole genome for individuals, which will be used from birth to adulthood, and Evercord is going to be the first foray into that business but you can see over the next several years that that's where NIPT is probably going as well. And we expect to be on the forefront. We're not going to be sacrificing our technology lead and our competitive edge in NIPT. As far as Vistara is concern, the data there looks great. We've seen a number of positives. We're managing that rollout quite carefully. And we are just making sure that people understand how to use it and that the product is performing as expected. As we mentioned, we've seen a number of positives. Two of those positive have had invasive tests for confirmation and we've had 2 out of 2 true positives and I believe there…

I think you covered it. Thanks, Matt.

And our next question comes from Bill Quirk of Piper Jaffray.

Three questions. First off, Steve, on Vistara, curious how we should think about coding for that? Are there existing CPT codes that you can use or maybe some other approach, would be curious about that? Mike, if we think about what cost of goods -- gross margin would have been without the additional kind of call it onetime or in-process charges that you had, would be curious about that. And then Matt, on the Signatera in terms of the 3,000 samples, should we be thinking about this as a training set or a test set for the assay? And then just an update around kind of how long you think it will take to complete that, when we might see some data?

Yes, Thanks, Bill. So I'll take that first one on Vistara. So the genes that we're testing for in Vistara are already established genes that have molecular pathology codes that map over to them specifically. So we are using the existing coding infrastructure that is out there today. It's similar to because they are used largely for genetic carrier screening in Horizon assay. As we look forward into the future, at some points, we will likely apply for an individual code as we've done with other assays, but you have to have a certain amount of volume in order to do that.

Great. So thanks, Bill. I'll just tackle the question on the COGS. We estimate that there was about $1.7 million in onetime temporary qualification efforts in the cost that we incurred. So if you -- if we haven't incurred those that would imply the math would be as the gross margin went a bit closer at 39% in the quarter. We've gotten -- assume we gotten all that. I'll just point out that that's not money that's spent and gone. We are actually working with our suppliers to try and get reimbursed for those expenses and we'll provide further updates there's a decent chance that we get that back later in the year.

Thanks for the question, Bill. In terms of the Signatera launch, those 3,000 samples are clinical validation set. So we know the performance of the assay very well. These are samples that come across multiple indications for different cancers. And we're going to be running those samples in the second half of this year to show the performance of the assay for particular clinical indications in cancer. So most of this is coming from bank samples, where either patients have been drawn longitudinally or there are particular time points that are critical in the management of the cancer patients and we know the outcomes for these patients. So it's going to be a really valuable set of samples where we can then say that with a CLIA launch, it's being offered across a set of clinical indications where we have produced data to show how it works for those clinical indications.

Sorry, Matt, just to finish that up. So would it be safe to assume that we would see potentially a clinical studies associated with that in, call it, first half of '18, is that reasonable?

For some of them, I think, it would come out in the first half of '18. For some of the studies that are being processed in the second half of this year, it's going to take a while to write up and submit the papers and that would come out in second half of '18. But there are going to be multiple studies that are included in this cohort of 3,000 samples. These are across many different cancers.

And our next question comes from Catherine Schulte of Robert W. Baird.

This is actually Emily Stent on for Catherine. So at this point and roughly 8 months test of BioReference agreement termination. How many of those accounts have begun to use carrier screening?

Yes, thanks. I'll take that. This is Steve. I think when we look at the account retention rate, I believe roughly 30% or so of the accounts were retained from an NIPT standpoint. Our carrier screening attachment rate, we announced in the call it's somewhere around 35% to 40%. And that what we've seen within the BioReference retained business is this is a similar rate to what we see across the board. So the message of single blood draw, the ability to do Panorama and Horizon at the same time is resonating very well as we would expect with the former BioReference customers. We think our Horizon assay is very competitive, both clinically and from the standpoint of user experience and ease-of-use, which is an important component for carrier screening.

Great. And then last one for me. How would you characterize the competition you are seeing so far in the cord blood banking market and have there been any changes to your thoughts on pricing there?

Yes, sure. This is Steve, again. So obviously, there's several very well-established competitors in the cord blood space, 2 Notable competitors and then there is a series of smaller groups. We believe our message of quality and longevity builds around our bank and our partner, Bloodworks Northwest, is resonating very well with the physicians and with patients. And we're going about things a little bit differently as we're leveraging our existing patient base that are coming in for our Panorama and Horizon products, and we are able to speak to them about the benefits of cord and tissue banking very early in pregnancy, rather than buying big list of patients and trying to approach someone that we don't have already have a relationship with. So our thesis is working thus far. We've been pleased with the results. But we're not releasing our numbers at this point for competitive reasons, but we do feel like the message and the product that we built, and our thesis on how we're going to sell the product are all working well.

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Mr. Rabinowitz for any closing remarks.

Thanks very much, guys. We are very pleased with the progress in Q2. Thank you for the questions. And thank you for the Natera team.

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