Welcome to Natera's 2019 First Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following managements prepared remarks’ we will hold a Q&A session. [Operator Instructions] As a reminder, this conference call is being recorded today, May 9, 2019. I would now like to turn the conference 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 first quarter. Also on the line is Steve Chapman, our CEO; and Bob Schueren, Chief Operating Officer. Today's conference call is being broadcast live via webcast. We will be referring to the slide presentation that has been posted to investor.natera.com. A replay of this call will also be available at investor.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 2019, 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 filed from time-to-time with the SEC, including our most recent Form 10-K 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 Steve.

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 March; 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. In 2019, we have three key goals: extend our leadership position in reproductive health and drive toward cash flow breakeven in that business, deliver real commercial progress in oncology with Signatera and to pass the key tipping points in our organ transplant business by commercializing Prospera and obtaining Medicare coverage. We've been productive thus far in 2019. Let me hit the highlights. First, we processed over 200,000 tests in the first quarter, which represents a 15% sequential increase over Q4 of last year. We were very pleased with this representing one of the fastest net unit growth quarters in our history given the evolving competitive dynamics in the market. Total revenues in the quarter were $66.8 million, at the top end of the range we had pre-announced as part of our equity raise. We stripped out the non-recurring revenue of $5.5 million from QIAGEN in Q1 of last year. We grew organic revenues at roughly 18% year-on-year. We reached a crucial milestone in our transplant business since our last earnings call. We received a very positive draft local coverage decision from Medicare, and we believe we are on track to receive a final positive local coverage decision and commercialize the tests later this year. We are also very pleased with the progress we've made in oncology recently. Since our last call in mid-March, we have announced three major publications, announced a plasma-based whole exome capability, we're awarded breakthrough designation from the FDA and conducted a successful pre-submission…

Thanks, Steve. Now to summarize our results from the quarter, the results for the quarter are across the wire this afternoon, and for brevity on the call today, I'm going to focus on the key points of the Q1 results. As Steve mentioned, our first quarter total revenues were $66.8 million at the top end of the range we pre-announced for the deal. And if you strip out the non-recurring $5.5 million revenue that we received from QIAGEN in Q1 of last year that implies roughly 18% revenue growth. Gross margins were 35% in the quarter, which again, if you stripped out QIAGEN from Q1 last year that implies a roughly 700 basis point improvement on a like-for-like basis, which has been driven primarily by the reduction on COGS per unit, as Steve described. It's worth noting on both revenues and margins that we did not materially benefit from recognition of cash-based revenue from older deals. In 2018, we booked approximately $10 million in revenues from these older appeals. I think there is potential to collect on more appeals in the future, but as we've described on the Q4 call, we don't have any of that benefits factored into our guide for this year and we didn't see a lot of it in Q1. Also as expected, you can see that realized pricing was marginally lower in Q1 versus prior periods. Net of one-time reserves and similar variables, we estimate the organic blended average selling price in the quarter was roughly $384 compared to about $407 in Q4 2018. This is largely due to the factors that we think can resolve in the medium term, as Steve described, and are an area of future opportunity for our appeals collections, where we've had a lot of success very recently. Everything we've…

[Operator Instructions] And our first question is from Tycho Peterson with JPMorgan. Your line is open.

Hi. This is Eleni on for Tycho. Thanks for taking our questions. Starting off with – on Signatera, it sounds like the colorectal setting is what you are considering the low-hanging fruit at this point in the MRD setting given your pre-submission meeting for Medicare reimbursement. And with that indication, I was just wondering what is your reasoning there. And what are your plans in terms of what will follow?

Thanks for joining. This is Steve Chapman. I'm going to have Solomon Moshkevich, who's just joined us as well. He's our General Manager for Oncology and Organ Transplant. I'm going to have him jump in on that, and then we'll follow-up.

Hi, great. Thank you for the question. So I'd say there's two key reasons that we've prioritized the colorectal indication. First is that our data is excellent there and really validates the performance of the test in that setting. And the second is that there's a real significant unmet need in colorectal cancer for localized and regionally advanced colorectal, where today physicians are making decisions for who will receive adjuvant chemotherapy and who will not receive adjuvant chemotherapy or the duration of that therapy based on prognostic factors. And the guidelines today give kind of a vague guidance for which patients should be treated one way or another. So physicians are faced with a relatively large amount of uncertainty. There's a lot of borderline cases. So this is an area where there is a great opportunity to help physicians make better treatment decisions and where the data, I think, really nails the opportunity.

Okay. Great. That's helpful color. And then on the exome sequencing RUO launch you're expecting later this year. Given the 20,000 plasma whole gene capability, what are you thinking in terms of pricing the whole test then? When can we expect to see some data – some concordance data between the tissue and plasma approach?

Yes. This is Steve. I'll take that. So as we said, in the second half of 2019, we are going to make our RUO plasma exome capability available. And there's really two areas where we think that's going to be of significant value to pharma companies. I think the first is where there's not enough tissue available to design Signatera. So in certain cancer types, sometimes you just can't get tissue. This will open up that market for us and allow us to broaden the total available market for Signatera. And then second, as a standalone capability. The plasma exome is significantly beyond what anybody else has on the market today. So we haven't announced pricing, and we'll view that as we commercialize the test.

Just to add a little bit to your question about concordance data, we were very pleased to see our preliminary concordance data published in both the colorectal and the bladder cancer papers, which came out this week. The numbers are still relatively preliminary from a sample size standpoint, but the concordance looks really, really strong between tissue samples taking – time of metastasis versus the plasma samples at the same time where we ran the whole plasma exome. So very high concordance. So it makes us feel really good that as we do more and more concordance studies over the next six to nine months with the launch of the product that it's going to be a very strong offering.

Great. Thanks. And one last one for me, maybe this one for Mike. I was wondering – you mentioned that you're seeing strong traction and an uptick in Medicaid and others in terms of increasing coverage in the average-risk setting for NIPT. Was wondering if this is in line with the higher payment rates you're expecting or embedding in your guidance for later in the year.

Yes. Thanks, Eleni. Yes. So what we're seeing in Medicaid is definitely encouraging. It is consistent with our guide and our expectations in the beginning of the year. And then Steve, if you want to comment on that as well.

Yes. I guess the key is 50% of the births in the United States roughly are Medicaid. And so I think while we talk a lot about big commercial payers like United and Aetna and the need to unlock that, I think in the background, Medicaid is still a very large opportunity both from a volume standpoint and from a reimbursement standpoint. And so six months ago, we were seeing really zero payers in the state Medicaid side that had a policy in place for reimbursing for average-risk NIPT. And today that's shifted pretty dramatically. I think it was around five or six sort of the beginning of the year, and now we're seeing maybe close to 10 or 11 where the payment coming in on average-risk is similar to high-risk. So we think that's a definite trend and we see a lot of upside there in the future, and that is key to unlocking some of the additional upside from average-risk.

Great. Thank you.

Thank you. And our next question is from Doug Schenkel with Cowen and Company. Your line is open.

Hi, guys. This is Adam Wieschhaus on from Doug. Thanks for taking my questions. Your reiterated guidance despite having the transplant draft LCD coming out seemingly sooner than expected. Maybe I missed it, but was there any thought to increasing the full year revenue guidance considering you were not initially including any transplant revenue?

Yes. Adam, it's Mike. Thanks for the question. Yes. We haven't really changed our expectations in terms of timing of that launch. If it's possible it could come sooner that's potential upside. However, I mean, our goal with the guide is to kind of give a stable guide at the beginning of the year and really only move that when we've got really clear information that the guide doesn't capture our base case.

Okay. And on ASPs, it looks like you expect pricing pressures to be resolved in the medium term and there can be a potential for appeals. So just to be clear, should we be expecting ASPs to step up each quarter throughout the year? And is there any potential for any sort of appeals collection revenue in 2019?

Thanks again. Yes. So there's potential for appeals collection revenue, certainly. I think in terms of what the pacing on the ASPs, it's same as what we've commented on this call and the last call, which is we expect there to be some pricing pressure in the first half of the year, which was just a function of things that we think are resolvable in the medium term. And in the back half of the year, we do expect some improvement driven by getting paid a higher fraction of the time on average-risk NIPT, for example.

Okay. And maybe if I could fit one more in. Did you guys provide any update on the cumulative pharma contract value at the end of Q1? I'm just trying to get a sense for how that's tracking to plan. Does that $40 million to $50 million in expected cumulative contract value by the end of the year imply any sort of assumptions on FDA approval time lines?

Yes. So we're giving an annual forecast there, and I think the $40 million to $50 million as we reiterated in the prepared remarks is intact. I mean we're feeling very positive about all the data that has just come out. I mean man, this was a super busy week with multiple peer-reviewed publications. We started off on Monday announcing the approval by the FDA, the breakthrough status. So all of those things are really important in helping us move the business forward. The $40 million to $50 million is intact. We're feeling strong about that, and that's an annual guide. We're not going to be giving an update on a sort of quarterly trajectory there.

Okay. Fair enough. Steve, thanks for the color.

Thank you. And our next question is from Bill Quirk with Piper Jaffray. Your line is open.

Thanks. Good afternoon, guys. This is Daniel on for Bill.

Hey, Dan.

Hey. So solid testing volumes. I appreciate you got some sequential color there in terms of that as well as some ASP color. Could you just help us think about testing momentum throughout the rest of the year then? Thanks.

Yes. Sure. So thanks for the question. As Steve mentioned, we expect the seasonal patterns of our volume growth to maintain consistent this year with what we've seen previously. So what we've seen in the past is that Q1 is the biggest sequential volume growth quarter for us because our existing accounts are sitting as 105%, 107% of the volume they sent us in Q4. And then behind that, we also have just steady new account growth really driving a strong Q1. In Q2 that trend just based on seasonality reverses itself with the existing accounts, where we're getting something like 90% of the volumes from existing accounts in Q2 as we got from Q1. So in order to have kind of sequential flat volumes in Q2, you got to have really strong new account volume growth, and that's roughly what we expect to see happening here in Q2. That still implies like really strong growth for the full year, and it's absolutely consistent with everything that we planned for in the beginning of the year.

Thanks. That's great color. Appreciate that. One more for me. One of your competitors is having issues with lab benefit management programs in terms of carrier stream reimbursement. Could you just provide if you're seeing anything in that market there? Thanks.

Yes. I think the verbiage can be different from company to company. I mean, I think, the prior authorization things that we're seeing may be a similar dynamic as what you've heard from other quarters – other companies.

Okay. Got you. Thanks guys.

Thank you. And our next question is from Catherine Schulte with R. W. Baird. Your line is open.

Great. Thanks for the question. Just curious, do you have any updated thoughts on ACOG guidance timing? And then realizing you don't have much control over that timing, are you in conversations with any payers about updating their policies even before a new guidance might come out?

Catherine, yes, so we didn't expect there to be a big announcement coming out of the annual ACOG meeting. I mean they're not a public corporation that's putting announcements at the right time, I think, when their committee works through the details on what they want to put out. We do expect an updated guideline to come out. We had some really good conversations at the ACOG meeting. And those were sort of generally in line with what we said previously which is we absolutely expect an updated guideline to come out. We don't know exactly when and we don't know what it's going to say. But we do believe something is going to come out, and it's highly likely it's going to be positive. From a standpoint of discussions with payers, we're certainly in discussions with multiple payers. As we mentioned, there's been some nice changes in state Medicaid. We recently saw three of the top four remaining Blue Cross Blue Shield plans change their guidelines. That was North Carolina, Minnesota and a handful of others. And we've been directly involved in those conversations. So our Medical Director, Paul Billings, will go meet with them. And then shortly after, they looked at the data. They gave an updated policy guideline. So we feel like we're making an impact there. Paul, do you want to make some comments?

Yes. I would just say that ACOG has recently announced a change in their leadership, and we feel that that's going to be a positive impetus to our average-risk efforts. And that we have had very high-level meetings at Aetna and United around their policy of considerations, and we're hopeful that they're understanding the importance of average-risk coverage.

Great. Very helpful. And for the colorectal cancer test you're submitting for Medicare coverage. As we think about the market opportunity there, what are you expecting in terms of testing frequency on the recurrence monitoring side?

Yes. This is Solomon. I'll take that one. So I'll just start out with saying that this is the fourth most common cancer type. They're most common in men. Overall, we're seeing about 145,000 to 150,000 new diagnoses per year in colorectal cancer. Less than a quarter of those are the distant kind of metastatic cases. So you've got a lot of localizing and regionally advanced colorectal cancer. In terms of testing frequency per year, we are expecting episodes of care that will include multiple tests either to determine whether or not a patient has residual disease in order to help make that decision for postsurgical adjuvant chemotherapy, and also, for monitoring during treatment to see if it's working and whether a patient might need extended adjuvant treatment or escalated treatment. And then also afterwards, it is well established that early detection of recurrence in colorectal cancer specifically is useful for treating and actually curing many patients. So we expect there to be multiple opportunities for testing in that indication as well.

I'll just add, Catherine that we've now had multiple meetings with MolDX on this particular topic, and they're very engaged. I think there's a lot of good, collaborative discussion going on about exactly how this is going to play out. And with the enormous amount of data that we just put out showing consistent performance across breast cancer, bladder cancer and now colorectal cancer, I think it's clear that this personalized monitoring approach is going to be the winner in that very, very big $15 billion monitoring segment. So we feel very positive about this very large market opportunity that we have in front of us. This colorectal indication is the first of many. But again, consistent data across multiple different cancers now.

That's a good segue into my follow-up. What could the time line be for potential Medicare LCD submissions for those other cancer types?

Solomon, do you want to – let me comment on that and then you why don't you take it. I think there's really two ways that we're commercializing the oncology business. So I think the first is pharma services, and we've talked a lot about that. We talked about this $40 million to $50 million total contracted value projection for the year. And some of those are retrospective studies, but a lot of those also are prospective studies, where they're looking at sort of enrichment trials using immunotherapy in the adjuvant setting. And there's things that will come out of that like maybe treatment on molecular recurrence in breast cancer, for example, where the study that we do with the pharma services or pharma company turns into a CLIA or an FDA-approved indication over time. And those can be very, very big indications. So for example, this early treatment on molecular recurrence in breast cancer that would be an enormous, enormous indication if that were to go through with a clinical trial and we get FDA approval. When you look at the tests that we want to take through Medicare on our own, the first one is colorectal, but there's many others. We've talked about in breast cancer, extended adjuvant treatment. I think that's an area where we could go directly to Medicare. We talked about immunotherapy setting in the metastatic context, looking at exceptional responders. That's an area where we've gotten a lot of interest, when can you take patients off immunotherapy. We think that's going to be super valuable for Medicare from a cost-saving standpoint. So we could be filing multiple LCDs in 2020. I think 2019, we will be focusing on getting the colorectal one in, and then we'll follow that very quickly with multiple additional in 2020.

That was great. Nothing to add.

Very helpful. Thank you.

Thank you. And ladies and gentlemen, this ends our Q&A session for today and conference. Thank you for participating. You may all disconnect. Have a wonderful day.