Welcome to Natera's 2018 Third Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a Q&A session. [Operator Instructions] As a reminder, this conference call is being recorded today, November 8, 2018. 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 third quarter 2018. Also on the line is Matthew Rabinowitz, our CEO; Steve Chapman, our Chief Operating Officer; and Solomon Moshkevich, SVP of Product and Strategy. Paul Billings, our Chief Medical Officer is also here today for questions. Today's conference call is being broadcast live via webcast. We will be referring to a slide presentation that has been posted to investor.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 2018, our assumptions for that guidance, market size, partnerships, clinical studies, 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 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 Form 10-Q and the Form 8-K filed with today's press release. These 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 we'll 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 cover our recent highlights and progress in the business since we last spoke in August and Mike will provide additional detail on our financial progress. As Mike mentioned, we will be referring to slides that were just posted at investor.natera.com. A summary of our recent highlights on the next slide, on volumes, we processed over 167,000 tests in the quarter, which represents 28% growth versus the same quarter last year and sequential quarterly growth over a very strong Q2 that we have described previously. Steve will go into more detail on volumes in a few minutes. For Panorama, in particular, we processed 115,000 tests in Q3, which represents growth of 26% compared to Q3 last year. We also saw continuing momentum in our Horizon carrier screening volumes, which grew 36% when compared to the same period of the prior year. We generated total revenues of $65.3 million in the quarter, up 17% versus Q3, last year. We were pleased to see that pricing remains stable in Q3, as we expected. Our revenues were negatively impacted in the quarter by a delay in reporting our samples from our lab in late September, that we estimate cost us about $1.2 million in revenue. We also benefited from improved performance in collections of claims from roughly the last two years with appealing insurance companies. Mike will go into more detail on the drivers of revenue and our guidance later in the call, but I wanted to address you briefly now. As you can see in our press release, we tightened revenue guidance for the year to $250 million to $260 million. This is primarily driven by delays in revenue recognition for volumes in our two new businesses, cord blood and…

Thanks, Matt. Just as a refresh for newer investors, our strategy is to apply our core technology across women's health, oncology, and transplant applications. These all represent large markets, and we think, combined, they represent a greater than $18 billion market opportunity. Over the past several years, we've invested in technology research and development and have now reduced the technical risks associated with the oncology and transplant applications. We're now in a position to focus our efforts on product launches and commercialization in order to realize the full value of these innovations, while maintaining our leadership position in women's health. First, an update on the women's health business; the next slide shows our recent volume progression. You can see this year's volumes are a step function higher than last year's unit volumes. Volumes so far this year are in line with our expectations and we remain on track to meet the volume guidance we gave last quarter, of 25% to 35% growth for the full-year. The chart on the right side of the page shows the year-on-year growth trend in 2017 and 2018. As you can see, our growth rate has nearly doubled this year versus 2017 despite the base business being much bigger. In our Panorama business, the mix of volumes has remained stable, at roughly 60% average risk units and 40% high-risk units. We believe that as the average risk market expands in the future we have an opportunity to grow additional volumes by receiving average risk units from existing accounts that typically offer NIPT only to high-risk patients. We continue to drive growth in long-term account retention, and our total active accounts is at a record level, and the fraction of accounts ordering both NIPT and carrier screening tests is also at a record level. In addition…

Thanks, Steve. Since our last call, we have had several positive developments in the oncology business. As a reminder, the Signatera product currently on market is for research use only available to biopharma and academic customers and the clinical version or CLIA version of the product is on track to launch in early 2019 with availability for patients and their physicians to order and receive test results as well as for biopharma to use in studies where the test results are incorporated into clinical decision-making. In this update, I will touch on the pharma business, the clinical business and data development. First, a view on our data, our colorectal data was presented on the podium at ESMO last month, where it was well-received. Our breast cancer data will be unveiled in about three weeks at the San Antonio Breast Cancer Symposium with podium and poster presentations reporting data from our study with the University of Leicester and Imperial College and from the RSY2 [ph] study. We also continue to sign new academic collaborations that will readout data in 2019. We announced one study recently in renal cell carcinoma with Fox Chase Cancer Center, and we signed another agreement to study a large cohort of metastatic patients across multiple cancer types, who all received immunotherapy. There are several unmet needs in immunotherapy even with currently approved indications in metastatic disease, where we think Signatera can help. As we mentioned in the past, the speed and efficiency of developing clinical data with these well-curated bio banks has been a major advantage thus far, as it generates the validity data that we need to pursue our clinical and reimbursement strategy across multiple indications. We intend to commercialize Signatera to the oncology community when the CLIA test launches early next year. In previous calls,…

Thanks, Solomon. In the last few quarters, we have predicted stable pricing for the year because we now have established a network pricing for most of our large payers, and are billing our test on disease-specific CPT codes. You see that on the chart on the left. Total revenues divided by test reported in the period have been increasing so far this year. Note that the Q1 number excludes a one-time revenue recognition benefit of $5.5 million from the Qiagen deal we signed in Q1, but this chart includes appeals revenues we collected from older claims and booked as revenue in Q2 and Q3. This represents cash we collected on appeals above our accrued revenues from tests reported from 2015 to 2017, and have never been recognized as revenue in the past. As we described in the last quarter, we booked roughly $2.3 million in appeals revenue in Q2. In Q3, we collected roughly $5.2 million in appeals revenue. This revenue is a result of a year-long effort to optimize our billing practices and challenge denials of older claims from 2017 and prior periods. So we're pleased to see this effort bearing fruit, and it's not strictly a one-time benefit. I expect that we will be able to generate additional revenue from future appeals as well. In this chart, we are simply showing the total revenue divided by reported units. If you strip out that appeals revenue for Q2 and Q3, Q2 pricing would be roughly $419 and Q3 pricing would be roughly $411. So as we talked about in the past, the pricing metrics can bounce around from quarter-to-quarter based on payer mix and other trends in variables. So I think that the message from this data is that underlying pricing that we saw in Q3 has been roughly…

Thank you. [Operator Instructions] Our first question comes from Mark Massaro with Canaccord Genuity.

Hey, guys, thanks for taking the questions, a nice quarter. I guess, my first question is on the -- just some housekeeping on guiding down the low-end, or I should say guiding down the high-end of revenue guidance. Can you speak to how much revenue is coming down specifically from the timing of recognizing revenue from oncology versus any other factor?

Hey, thanks, Mark. It's Mike. Yes, so the two main variables are just cord blood and oncology together, and that kind of goes in that bucket of the new product revenues we talked about at the beginning of the year. Those are the two key variables there.

Got it. And then in terms of the -- previously, you were talking about $15 million from new sources, I just want to make sure that that $15 million encompasses cord blood Signatera everything. Are you now assuming -- I think you said you're assuming $8 million by the end of the year. So I guess should we assume that the bulk of it is some other factor?

So let me clarify the $8 million. So the $8 million is contracted revenue. So this is deals that we've signed where over the course of the deal, we expect to recognize $8 million revenue. We hadn't expected to recognize that much revenue in oncology this year, but we did expect to recognize a portion of that, and so the difference between like contracted or booked revenue or recognized revenue is just that we've got -- the pharma partner has got to launch the study, send us the samples and we've got to run the samples. So that $8 million just kind of gives you a sense of what the signed opportunity is right now in the business.

Got it. And then in terms of --

I'd tell you a very little of it -- we've effectively said, you know, almost none of that is going to be booked in '18, Mark.

Got it. Okay. And then I guess, in terms of timing of when we might expect a new bulletin from ACOG, can you guys comment on any visibility you might have?

So, this is Paul Billings, thanks for the question. We're both in direct communication with ACOG and so our industry partners are also hearing that a new guidance is underway, but its exact content and then when it exactly will be published remains uncertain.

Got it. And then One last one from me on transplant, understanding that this is one site at UCSF, can you give us a sense on the potential need for developing studies across more than one location?

Yes, sure. This is Steve. I'll take that and then turn it over to Paul Billings. So I think the primary reason for generating the clinical data is to show the performance of the test and then to get reimbursement. We feel very positive about the meeting that we just completed with CMS and the execution that we've had thus far along our reimbursement roadmap that we outlined during the meeting. Just as a refresher, the clinical validation study that we presented in the prepared remarks is 2x larger than the Bloom Study, which is another clinical validation that's been published, and we feel like the performance, particularly varying [ph] under the curve is superior to that study. So we're in a good position. We've also outlined that we'll be launching a registry trial to collect additional clinical utility data and we expect to launch that in 2019. Paul, do you have any additional comments?

Yes, the only thing I would say is we've examined the clinical validity study that we've completed for geographic and ethnic diversity and it has significant elements of both. And so we think that it represents well the diversity that's present in the U.S. population.

Great. I'll hop back in the queue.

Thanks, Mark.

Thank you. Our next question comes from Tycho Peterson with JP Morgan.

Hi, this is Alleyne [ph] on for Tycho. Thanks for taking the question. Maybe to start off, you showed an encouraging trend with revenues per test, I was wondering how you were thinking about the trend going forward, and if you could give us a ballpark estimate of what we should expect by yearend and even next year if that's available.

Yes, thanks Alleyne for the question, it's Mike. So yes, if you look at the trend that we showed there, you see a steadily-increasing trend. As I mentioned in the prepared remarks, I want to just highlight for everyone on the call that there is some appeals revenue that is in those numbers. So I think a conservative baseline would be to hold ASPs relatively stable going forward based on what we've showed earlier in the year. So as I said, if you took out that appeals revenue in Q3 you'd be at about 411 on a blended pricing basis. And as we mentioned, there's lots of different tailwinds there that we can benefit from over time, but I think that's a good kind of conservative baseline to start with.

Okay. Great, thanks.

And I'll make a comment there as well. This is Matt here. So as Paul mentioned, we heard many comments from ACOG and people involved in the ACOG process that a new guidance is coming, and while Paul said, we don't know exactly the contents of that new guidance, we have heard very good -- reason to believe that that's going to be very supportive of the lowest NIPT similar to the ACMG [ph] guidance. So I think that that ASP increased from low risk [indiscernible] and then obviously in the slightly longer term, we've got the very big bonus that can from microdeletions reimbursement.

Great. Thank you, that's helpful. And then separately, you mentioned that you've successfully enrolled 20,000 patients in your smart trials for microdeletions, and I was wondering if already have sort of a timeline in mind of when you're going to be releasing that data?

Hi, thank you for that question. This is Paul Billings again. So we're currently analyzing the first 10,000 of the patients, and with the cooperation of our many principal investigators, we hope to publish an interim manuscript of that in the middle of 2019. The last trial that we've enrolled will be born in the middle of 2019, and so with analysis and so forth we expect that the full readout of this landmark study, which we think will demonstrate the importance in microdeletion management of prenatal diagnostics will probably come towards the end of 2019 or early in 2020.

Okay, great. That's helpful. And then one last one, I was wondering, in terms of the launch of a new DNA technique you mentioned with Signatera, you mentioned some net cost savings per test and improved performance. Was wondering whether you can give us some more color on the impact this will have on your margins going forward? Thanks.

Naturally, I'll take that. So the impact on margins is going to be around $6 for that. That's by reducing the number of redraws because you get a better quality higher fraction of fetal DNA and a cleaner DNA signal. There's also going to be reductions in labor because we don't have to hire [ph]. So this is something which is not even incorporated right now in the current COGS, because although we have got that operational in our lab, we have to use up all of the existing inventory. So I think that that'll be about a $6 benefit, but there's a whole set of projects where we've generated data in the lab, they pass through concept of feasibility, and we're now in a process of operationalizing these projects to continue to march to lower COGS. So we do see a path, as we've said before, to get the overall product COGS to about $200 over the next roughly 18 months. And that's based on data that has already been generated and in products that are in the process of being refined based on what we know that we can do. There are not sort of long-term Hail Mary. So I think that that's just one step in the right direction, but there are many steps moving in the right direction. And I don't want to give an exact time on that, but I can say that we have a clear path to getting to that $200 that we previously said is doable.

Perfect. Thank you.

Thank you. Our next question comes from Bill Quirk with Piper Jaffray.

Great, thanks. Good afternoon everyone.

Hey, Bill.

Hi. First question, Matt or Steve, how should we think about the draft CMS team and for advanced carrier screening. And I guess what I mean by this, is that we saw this happen a few years ago with NIPT and with microdeletions. And we saw some state Medicaid plans, as well as a few private payers, albeit small ones, jump on and start adding the code to their systems. And it took a little while, but you guys eventually did end up recognizing some revenue from that. And so I'm just trying to figure out if this new code is potentially a replay of that event from a few years ago.

Yes, thanks, Bill. This is Steve Chapman, I'll take that. Yes, so the sort of broad panel of carrier screening is a portion of our business. I mean the way that we've rolled out our offering; we have many different choices that the customer can make. And so this sort of broad panel is only a portion of business. We've been very pleased with the pricing which we've participated in ourselves and submitted written and verbal comments into CMS. That's now coming out in the sort of high 2000s, and that's looking very favorable. It's really going to come down to sort of coverage for the particular broad panel. And we saw this recent clinical utility paper come out, which I think is positive for everyone in the industry. But we really have to see how that coverage plays out. I do think that we have seen a trend in the past of CMS pricing something on their national clinical lab fee schedule, and then that rolling out to some of the state Medicaid plans. So I would imagine a similar paradigm will play through here as well, as we've seen in the past.

Thanks. Two additional quick ones for me is, thinking about some of the larger payers that are not yet paying for average risk screening. In the event that ACOG drags their feet, you've been in communication with several of them. Help us think about, I guess, other routes, other alternatives to getting some of those coverage decisions improved to cover average risk. And then secondly, is just asking about the new fetal fraction risk score, whether or not you're seeing that directly impact any of the volumes for NIPT or helping with new account adds. Any sort of metric would be very helpful. Thank you.

Yes, I'll take that again, Bill, thanks. This is Steve. So on the first one I think, obviously, as Matt and Paul outlined, we're feeling very positive about both ACOG and ACMG clarifying their position on NIPT, and we do, from direct communication with folks at ACOG, we do expect to see an updated guideline in the near future. But there's a lot of tactics that we can employ in the event that they did drag their feet, as you put it. I think one is, focusing more on employers groups that are large customers of these big health plans. And they drive a lot of the business and actually have an outsized share in decision making. So probably more than 50% of the national payers have administrative services, only business that makes up a large share of their customer base. And we think that's an opportunity. There's patient advocacy, physician advocacy. I think there's maybe more direct interactions with ACOG that hopefully could put some pressure there. So we feel positive, ultimately, about the outcome just frankly based on the communications we have with ACOG. I think on the second question, it's still pretty early days in the fetal fraction-based risk algorithm that we've rolled out. I think there's a lot of things that we're executing right now, but it's still too early to sort of talk about specific wins from that.

Okay, got it. Thank you very much.

That's Steve. I'll make a couple of comments. The first is there is a political angle on the low-risk coverage as well for those big payers that aren't covering this. And we have been in conversation with a bunch of people who have a certain amount of influence with these larger insurance companies in the political side. We haven't pulled that trigger yet because we're waiting for the strong ACOG guidelines to come out, but if the ACOG is as we anticipate it will be, there are some very strong levers that we can pull to put additional pressure in a political as well as other sort of more stronger tactics when they are not acting in accordance with a very clear ACOG guidance. Because as we know, ACOG has been supportive, but the guidance has not been as strong as we wanted it to be. And I think if the guidance is as strong as we expect it to be we can be more aggressive. Okay, enough said.

All right. Thanks, Steve. Thanks, Matt.

Thank you. Our next question comes from Doug Schenkel with Cowen and Co. Mr. Schenkel, your line is open.

Hi, can you guys hear me now? Hello?

Yes, we can hear you.

Sorry about that, I was on mute. This is actually Adam Wieschhaus on for Doug. My first question was a quick one. Did you provide the split of samples for NIPT between high and average risk in the quarter?

Yes, it wasn't our direct business, Adam, it remained pretty stable, 60% average risk and 40% high risk.

Okay, great. Thanks. And then I was just wondering on the liquid biopsy opportunity, you've mentioned that there is both a retrospective analysis potential as well as prospective. How are you guys thinking about those two markets in terms of the opportunity or the competitive dynamics in those? Thanks.

Great, thanks for the question. This is Solomon. We see large potential markets on both sides. So one of the key differences to think about is that the retrospective studies would read out much more quickly, first of all, and in some cases depending on how well curated they are and whether they come from a randomized trial with placebo control, et cetera. In some cases, those studies may actually provide enough data to achieve adoption and coverage by themselves. On the prospective studies, in that case we're reading out results to physicians and patients, and it'll take time for those trials to complete and to read out. But just like in the Bristol-Myers Squibb opportunity, could lead to a very attractive and important change in the medical system, and something that's good for our business and for our patients.

Great. Thanks, Solomon.

Thank you. Our next question comes from Alex Nowak with Craig-Hallum Capital.

Great. Good afternoon everyone. I'm jumping between a few calls here, so apologies if this was already discussed. But for 2019 -- well, I mean you've put up about 30% volume growth or so throughout 2018. So I guess looking at 2019, what is a fair volume growth rate for the entire business considering of what we know today, which is no ACOG, no United, no Aetna, just try to help us out there.

Hey, thanks, Alex. So, it's Mike. We're going to stick to the '19 guide; we normally give it in March, so of course we'll give you a lot more detail there. I mean what you've seen this year I think is what the underlying business can do in terms of absolute unit growth in that kind of scenario, being that's kind of the steady state scenario that we've been existing in. So I think that's kind of a good kind of conservative baseline. And of course, as the year progresses we're going to be out in public settings, and so we'll continue to give updates on that as we move on.

Okay, understood. And then I just wanted to touch on the insider selling. So I know there's a lot of different reasons for doing it, but the optics were kind of strange in my opinion. I mean, you're in front of the biggest catalyst for the company, with that being ACOG. You're out there, you've raised money in the market, you missed the quarter, you lower guidance. Yet there's still insider selling at the company. So I know this is kind of more of a statement than a question. But I guess how can investors get comfortable around the fact that there appears to be a lot of good things going on for the company, but the stock is getting sold by the executives?

Well, I think that's a totally reasonable question, and thank you very much for asking it, and I'll take it. It's Matthew. So, look, the selling that happened was according to 10b5-1 plans. There were a bunch of executives withholding including myself. The selling was basically because the share prices picked up a lot. The share price had been relatively deflated, I think unreasonably deflated for a long time, and they haven't been selling. And I'll speak for myself; they haven't selling to me for a long time. And so, when the share price picked up, it can be 10b5-1 plans, and the price was above the limit. So there was a certain amount of selling. It's just prudent selling. To give you a sense, I think there might have been some miscalculations. If you round the sales, I think I was around 20% of my total holdings, very roughly rounded in terms of stock and options that were vested and unvested and RSUs that unvested. So it's really just prudent selling. You want to diversify to a certain amount, but the vast majority of my and the other executives' net worth are direct up in the company. And we're very positive on the outlook. I think this company can be incredibly successful, and on just needs to balance that with a certain amount of you know, [technical difficulty] I think if there's any other questions there, fire away, but I'm very appreciative for the question. Thank you.

Yes. No, understood, Matt. Thank you for that. Mike, you might've mentioned this in the prepared remarks, but when will you plan to start breaking out the oncology revenue? I know it's small today, but looks like you have over 25 cancer programs ongoing. And it's poised to become a big part of the business, so when will we get more clarity on that?

Yes, well, so I think this quarter was a bit of a milestone in that we broke out the book of contracted business. I think gotten to a level where it's material and it's worth understanding, particularly in light of the other variables we talked about on the call. So, as a general principle, we'd like to guide to variables that really drive the fundamentals of the business, and are significant enough to be kind of well-understood and well-forecasted. And so we're going to evaluate the oncology business over the next quarter and see if it meets those criteria. And if so we'll guide to it and be more specific. If not, we won't, because we don't want to mislead you with a variable that can be noisy. I would like, perhaps on every quarter, but on a regular basis provide updates on the contracted book of business that we're seeing. So that's our goal.

Okay, understood. Thank you.

You know, Alex, I'm going to come back to this insider selling question, if I may, because the question took me a little bit by surprise, and I just want to make another comment there. There's so many factors that are beyond one's control, there are market factors, there are all sorts of very large uncontrollable factors in the public market. And I've always said to people you should do things roughly 50% when they're out of your control. So the amount of selling that we saw from the executives of the company was really low actually. From my perspective, having beet with the company for a long time announcing a share price at a more reasonable level, selling about 20%, I just feel that's prudent. And I hope that you can understand that. But anyway, thank you for the question.

Ladies and gentlemen, thank you for participating in today's question-and-answer session as well as today's conference call. This concludes the program. You may all disconnect. And have a wonderful day.