Welcome to Natera's 2019 Fourth Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, February 26, 2020. I would now like to turn the conference call over to Mr. 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 fourth quarter and full year 2019. Also on the line is Steve Chapman, our CEO; Bob Schueren, Chief Operating Officer and Solomon Moshkevich, General Manager of Oncology and Paul Billings, Chief Medical Officer. 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 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 2020; 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, reimbursement coverage 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 or suggested by 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.

Thank you, Mike. Good afternoon everyone and thank you for joining us. I want to give a brief recap of 2019, discuss our strong annual and fourth quarter results and lay out the key goals we expect to achieve in 2020. I will then have Mike walk you through our financials in 2020 guns [ph]. The next slide is a snapshot of the most visible achievements in 2019, which was clearly a transformational year for us across all focus areas. We delivered financial results above our above the top of our previous guidance. In reproductive health we expanded our leading market share was strong volume growth, new features in new peer reviewed data. We grew average selling prices in each quarter sequentially from Q1 through Q4. We significantly reduced cost of goods sold per unit. In organ transplant we achieve each of our state of milestones. We publish compelling peer reviewed data, successfully executed clear validation and received a positive final coverage decision for Medicare all of which lays the foundation for a commercial launch in 2020. In oncology, we publish groundbreaking clinical validity data in multiple cancer types, signed significant commercial partnerships with foundation medicine and Beijing Genomics Institute, exceeded our ambitious goal for total cumulative contracted value with former partners in security draft coverage decision for Medicare in colorectal cancer. It took us years of work to get to this point, and I know many of you have been with us for that journey. We appreciate your support and continued input. On the next slide, you can see how our momentum coming out of 2019 forms the backdrop for our 2020 goals. In reproductive health, or 2020 goal is to drive the business towards cash flow breakeven while extending our leadership position. We intend to do that by…

Thanks, Steve. I'd like to start with the review of our firm business. Then our clinical testing businesses focused on colorectal cancer and then touch on our key commercial partnerships. We made excellent progress in 2019. With our pharma business, we outperformed our goal with over $55 million in cumulative signed contracts. We see that business accelerating now because we are able to clear a number of vigorous technical, operational and intellectual property reviews with our largest biopharma partners. The publication of significant clinical data across multiple disease types also played a role. And finally, because of the growing consensus on the utility of our personalized MRD approach for enriching and accelerated clinical trials. Our technology is changing drug development, enabling pharma companies to bring novel treatments out of the metastatic setting straight into the Agilent and neoadjuvant settings for patients with early stage disease. Because most early stage patients are already cured by surgery alone, and therefore not derive any benefit from a novel treatment. Drug trials in this setting are historically very large, risky and expensive, as one would have to treat so many patients benefit just one. In fact, there are multiple examples of immunotherapy trials in the adjuvant setting where the trial failed and where we believe those trials may have been successful. Had they been enriched with Signatera. With Signatera drug developers can focus the trials on the patients who have residual disease after surgery, or early signs of molecular relapse. And they can read out the trial faster by using Signatera as an early endpoint to evaluate therapy effectiveness testing for clearance of that residual disease upon treatment. This concept is gaining traction now, as we have signed that a recently announced several prospective phase two trials, in addition to multiple projects involving the…

Thanks, Solomon. Just a few housekeeping items on the next slide that summarizes the quarter. So that you will notice that we've tightened up some of the disclosure this time so instead of breaking out horizon and panorama into financials, we are giving overall product revenues, licensing and other revenues and then something that the total revenues. We talked about making that change on the Q3 call, and we had originally planned to make that change in Q1. However, because we're the only laboratory disclosing says granular performance, data, given the competitive environment wherein we brought that change for one quarter purely for competitive reasons. I can tell you that the ASP and volume trends Steve outlined at the beginning of the call were consistent across both products and clearly very strong. We booked about $3.8 million in development revenue from our strategic partners in Q4. Also in Q4, we've benefited from about $3.4 million in revenue true ups from cash collections from prior period accruals. The majority of which is also stripped out of that ASP slide that Steve presented and that's because the goal of at ASP slide is to give you a view of ongoing insured reimbursement DSPs for our products. Some of you will recall back in 2018, when we started to book revenues on an accrual basis that we've tried to accrue with some conservatism. And I think the revenue true ups now and in the last couple quarters demonstrate that we follow through on that approach. The rest of the P&L you see here I think is largely line with our other disclosures. SG&A line did grow up meaningfully versus Q4 2018. As we've invested in the initial commercialization steps in our new business, which we talked about on the Q3 call. Okay, now…

[Operator Instructions] Our first question comes from Max Masucci with Canaccord Genuity. Your line is now open.

Hi, good afternoon, apologize for any airport noise in the background. So first on [indiscernible]. Can you just give us some additional color around your guidance philosophy for 2020 with the sales of Evercord and Signatera transplant wrapping up and can you comment on the key assumptions and the pacing included in the guide?

Yes, thanks Max. So as we note on the call, overall, we're taking a cautious approach to revenue contributions in the model from the new products in terms of the pacing of that revenue, really, you won't see revenue coming into the model until we get final pricing and final covers decisions from the radian. We gave our timing in the prepared remarks, we expect for Prospera, we expect that you know, first half Q1 or early Q2, and second half of the year for Signatera colorectal cancer. So obviously, that will drive also the pacing revenues. So the revenues are volumes for Prospera. We're modeling a cautious ramp as we kind of get actual and we start that process. Same for Signatera and then the revenues translate once we have pricing kind of Q2 for Prospera and second half the year for Signatera.

Great. And then, so earlier this week one of your competitors in looking back at monitoring spoke about their intention to invest heavily in monitoring data trials, additional capabilities, can you just speak for how you're balancing the right level of investment and monitoring with your reasonable cash management?

So, this is Steve. Thanks for the question. I mean, if you look at some of the increases and investment we made going into 2020. A lot of it is expanding our capabilities, specifically around investments in clinical trials. Of course, for the new businesses, we have these investments in commercialization as well. But a lot of the other increase we've seen is in the space of clinical trials. So specifically, and colorectal cancer, we've now announced this Columbia 2 trial with AstraZeneca, the circulate idea trial with Japan and this very large, bespoke colorectal trial. So we feel like we're putting our focus in the right areas that can deliver significant revenue growth and guideline changes in the future.

Great. And one more effect dance and gross margins beat us in Q4 2020 guide is that ahead of where we were thinking, these higher than specific factors that are helping drive gross margin expansion and then expectations for the timing and the impact of automation?

Yes. So I think the number one driver for the gross margin guide is really the trajectory on COGS. And so we laid that out on the slide, we're pretty pleased to have a very strong Cost of Goods Sold quarter in Q4. And we've got projects launching through the course of 2020 that we think can get us to our target. Now, whether the target actually shows up in a quarter in 2020 is really a function of just the timing of when we can get projects launched. That's the number one variable. I would just also just keep in mind partner revenue recognition and things like that that did boost margins somewhat ahead of schedule in 2019.

Thanks, guys, congrats on a great 2018

Thank you. Our next question comes from Doug Schenkel with Colin. Your line is now open.

Good afternoon, guys. And thanks for taking the questions. Maybe again to starting on Signatera. I know you mentioned this in answering the last question. Hopefully I got it right. I think he talked about a midyear, early second half LCD finalization for Signatera. Given you already have the draft LCD in hand. Is the timing of that a little longer than you might have expected originally in it and if so, why? And then how long do you expect it to take from finalization to actually getting paid and I guess the third part for this one, any thoughts on the need for a registry study there?

Yes, this is Steve, I'll make a couple comments. The timeline that sort of second half 2020 is absolutely within the expected timeframe. And I think that that's what we've indicated before. You know, there's a window in which Medicare has the opportunity to take the draft to final and we're still well within that window. So we feel confident about that. With respect to the registry trial, we are doing a registry study, that's the bespoke trial. Bob, do want to make additional colors on bespoke?

Doug, if you're asking about the bespoke CRC trial, so we outline that that's going to be a big investment for us, over 1000 patients where we're going to be tracking all the clinical data and the outcomes data for patients who are using Signatera under the criteria spelled out by Medicare in stage two and three colorectal cancer. So, I think that's going to be important for a lot of reasons. And it's going to help us establish this as a key indication for MRB testing going forward.

Okay, super helpful. I guess the one other part of that, which maybe we got it just in terms of what's implied in guidance, but I guess, Mike, are you expecting shortly after the foot finalization of the LCD that you're going to get paid right away? Or are you expecting some delay?

Steve, you want to come back?

I'll take that. So once the Noridian issues the final LCD, you can effectively start billing patients that are that are drawn after that date. So there's a 60 day waiting period where there is sort of an administrative process where they're loading the tests in the code, but you can backfill for all those patients. So as soon as we get the Noridian LCD, we should be able to monetize the test going forward.

And presumably you're not assuming any catch up payments but it's possible that you could get those down the line.

No, there's only catch up payments back to the date to which Noridian issues the LCD. There's no catch up payments for periods prior to the issuance of the LCD, and the real commercialization efforts, you know start after we get that final LCD. Okay.

On BGI, a modeling question, given some of the associated revenue is tied to work that's being done over at BGI and milestones and working with them given what's going on in China with COVID-19 does it make sense to assume that anything that's coming in from BGI this year, at least for now is going to be a little bit more back end loaded?

Well, it's going to be more muted than it was in 2019. It's got nothing to do with coronavirus. It's just has everything to do with the fraction of the of the cast that we booked as revenue by virtue of assigning license deal versus the fraction of the cast will book as revenue via doing the ongoing work. It's really it's not a coronavirus deal.

Well, yes, I understood it. I heard what you said in your prepared remarks about it being lower this year than last year, because I thought the upfront but I also thought that some of the additional funding that was going to come in the revenue was tied to them actually doing work. So does that comment might mean that you're not assuming any that that right now, there's no reason to assume there's any disruption related to anything that t you're selling right now?

We're expecting a disruption that’s still going to work and that been great.

Okay. And that last one, the obviously foundation in BGI were nice developments in 2019. Doesn't sound like you're assuming in your guidance that any more types of deals like that come in, but it is their bandwidth and potential for more of those types of deals in 2020 that that would potentially drive outside what you're targeting for revenue this year?

So over the years if you look at -- sort of materials history, I mean, we have a very novel technology that is proprietary and can be used in many different ways. And of course, we're always involved in various business development discussions whether that be with partners or now with pharma, where we've done extremely well, in driving our total contracted value, and now we're seeing that accelerate. And some of those are sort of more unique projects. So, there's nothing necessarily that you should bake into the guidance, but this is always an aspect of the business that we're working on and we keep a keen eye on.

Okay, super helpful. Thanks, guys.

Thank you. Our next question comes from Will Quirk with Piper Sandler. Your line is now open.

Hi, good afternoon. This is Rachel on for Bill and first question. Can you give us an update on the second oncology testing your conversations that you've been having with CMS?

Yes, so we said previously that we had a second pre submission meeting. I mean, if you look at the total available market for Signatera, it's enormous. So colorectal cancer, we project to have a potential of over a million tests per year, which would make it one of the largest specialty diagnostic tests ever approved by Medicare on its own. And that's just colorectal cancer. So when you look at the data that we've generated in breast, lung, muscle, invasive bladder, and now recent data that was presented at ASCO and asthma last year, on therapy, effectiveness monitoring, and there's lots of different opportunities for us to expand using the same tool with very limited additional research and development work to open up a lot of new markets. Now with respect to our pre submission meeting we had very positive discussions with Medicare. We haven't released specifically what our second indication is going to be. But there will be many indications and Signatera in the future.

Great. And then next question. Can you just give us the latest on ACOG and if you've had any conversations with endorsing average risk, I know we've been waiting on a while. But if you have any updates, that would be great?

Yes, we said previously that we have heard that there's a guideline coming. We haven't heard anything contrary to that. But we really don't control the timeline. And we don't have a lot of insight into the timeline. When we look at some of the factors that are happening in the background there's a lot of positive momentum. So a year ago, there was really no state Medicaid plans that were covering average risk and IPT. Today, there's roughly 15 or so they cover a significant portion of the breast in the United States. And we're now starting to see national payers covering average risk in IPT through their managed Medicaid programs. So one of the two national payers, who doesn't cover the test commercially, has now issued a coverage policy for one particular managed state Medicaid. So all of these things start to add up over time and are sort of pointing in the right direction. Again, we feel positive about it. But we really just don't control the timeline. Now, the great news for Natera, because we've done such an awesome job reducing our cost of goods sold and managing some of these prior authorization policies. We do not need average risk and IPT to come in to get the women's health business profitable. And we have not included it in our guideline, or excuse me, in our guidance in 2020.

Great, that's it for me. Thank you.

Thank you. Our next question comes from Catherine Schulte with Baird. Your line is now open.

Hey guys, thanks for the question. First, you talked about seeing some of your Signatera pharma discussions accelerating? Do you guys have an updated goal in terms of where total contracted value could be by the end of this year?

Hey Catherine, thanks for the question. So we're going to sunset, that goal discussion. We put that out there last year because the business was really nascent, and we were just responding to investor questions about just trying to frame what the opportunity can be. So we beat that goal. And we're no longer going to get a focus on that as a metric. You can see from where we landed, though, that the demand is really meaningful and can be a serious contributor to our business. What we saw over the course of 19 is that that business accelerated through the course of the year and we're seeing continued momentum here in 20.

Okay, great. That's helpful. And then I guess also with some of these new products launching later in the year, and I think you've also historically seen some seasonality impacts in the first quarter. Can you just help us frame how to think about first quarter revenue?

Yes. So I think that there are a couple of puts and takes there. On balance though, because you got new products coming in kind of in the second half of the year. I think that is, as I think about kind of seasonality of the revenues. I think that's going to be something to keep in mind, as relates to Q1 it's just the puts and takes around revenue true ups, we've had a couple of good quarters here we've gotten some true-ups. We had some in Q4. I don't think that's not included in the guide. I wouldn't necessarily bake that in two quarters into 20. And then as I mentioned with Doug, I don't expect the partner revenue recognition to be a substantial in 20, so I think what that sets up for is a modest back in waiting to the revenue quarters of the year.

Okay. And then, last one for me on foundation, any updated thoughts when we could see the clinical version of that tests come to market? And how should we think about the checkmarks along that that path to commercialization and from a reimbursement perspective?

Yes, Catherine. Just one last comment on the previous question as well. I mean, as Mike said in a prepared remarks, the volumes are looking very strong in Q1, as we've seen in historical years, and you can see, just looking at the quarter over quarter growth between Q3 and Q4, there's an acceleration going into the beginning of the year, like we've seen in previous years. So Solomon, you want to just comment on the foundation Partnership, which is going really well.

Yes, happy to so as we announced the time to deal the initial focus of the partnership is to enable personalized ctDNA monitoring in biopharmaceutical trials. And we expect that to be enabled this year, we're on track for that. I think that's where companies are staying focused as a first step. As we've got new information, we're going to share that.

Great, thank you.

Thank you. Our next question comes from Alex Nowak with Craig-Hallum. Your line is now open.

Good afternoon, everyone. Steve or Mike, your competitor here had a bit of a blow up due to prior authorizations. But can you just confirm you're not seeing any sort of change in this pair environments, so far in the February you're just being prudent here, putting some sort of conservatism into the 2020 assumption?

So, I'll come in just briefly on sort of some of the building operations stuff and then Mike can talk about you know what's in the assumptions. If you go back and look at our ESP is so as we turn the corner into 2019, we saw a pretty significant drop off, both some reductions in Q4 2018 and then a pretty significant reduction in Q1 of 2019. And so we dealt with a lot of these prior authorization, coding change issues at that point, and we worked super hard over the course of the year with daily stand up meetings and a lot of initiatives to try to put ourselves in a better position. And we're pleased to see the fruits of that effort now. As we showed on the slide, Mike, you want to talk about the conservativeness in the guidance?

Yes. Just -- Alex, you did hear that correctly. That's not a reflection of anything we're seeing currently. It's been pretty stable environment over the last few quarters, and it's just erring on the side of caution as relates to forecasting for the full year.

Okay, got it. And then I get Noridian hasn't issued the final decision here for Prospera. But shouldn't there be a price out by Palmetto given the LCD is effective February 3, again, I understand that Noridian needs to have their policy out there and final for you to get paid, but I've got to imagine Palmetto must have mentioned something around pricing here?

Yes, the discussions are sort of in the later stages. I mean, they're very positive. We'll be announcing something in the near future. We're feeling good.

Okay, understood. And then Mike, can you just say what the mix of the incremental $120 million OpEx spend is for 2020. What is the next for prenatal transplant cancer roughly?

So, overall, so the contribution of OpEx in women's health business is remarkably stable, and not consistent with what we said previously, we feel like we can continue to deliver volume growth for a relatively stable level of investment and then the incremental total OpEx spend is really dedicated to ecology and transplant.

Okay, I understood. Well, congrats on a great end of the year.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect. Goodbye.