Ladies and gentlemen, thank you for joining us for the Natera, Inc. First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Mr. Michael Brophy, Chief Financial Officer. Thank you, and please go ahead, sir.

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our first quarter 2020. Also on the line is Steve Chapman, our CEO; Bob Schueren, Chief Operating Officer; 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 outlook, our assumptions for that outlook, the impact of the COVID-19 pandemic on our business and operations, market size and 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-K or 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 materially 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 form. We will quote a number of numeric or growth pages 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.

Great. Thanks, Mike. Good afternoon, everyone, and thank you for joining us. Today, we’re going to review the highlights from the quarter, summarize the impacts of COVID-19 on our business and our response and give you an update on our clinical and commercial progress in transplant and oncology. On to the highlights. We posted $94 million in revenues and a 52% gross margin in the quarter, which is by far the best quarter we’ve ever had as a company and significantly above the range of $89 million to $91 million we preannounced. Q1 was the largest sequential quarter-on-quarter unit growth in the company’s history, despite the disruption in March from COVID-19. Revenues grew 41% over Q1 2019, driven by the strong volumes and another positive quarter for average selling prices. We were also very pleased to achieve a cost of goods sold of $202 per unit accessioned in our lab, very close to the $200 per unit level, we had set as a long-term target. I will spend more time on both ASP and COGS later in the call. We also witnessed a very successful early launch of our Prospera test in the kidney transplant space. In a very short timeframe, we saw orders from 45% of the top 50 and 37% of the top 100 transplant centers by volume. We also activated 18 top centers in the ProActive registry trial, enrolling 145 patients. We think these exceptional initial results indicate significant interest for a more accurate donor-derived cell-free DNA test. We also responded very well to the COVID-19 outbreak. We were very early to implement key safety protocols for our employees in our lab, which has continued running at a high capacity with no disruptions. And we were able to scale our remote ordering capabilities to new levels as…

Thanks, Steve. On the partnership front, our work continues under our development programs with both BGI and Foundation Medicine. And in both partnerships, we expect initial engagement from pharmaceutical clients this year. In our direct pharma business, we continue to see a very good momentum in terms of contracted future revenues, including prospective clinical trials, as well as retrospective studies using bank samples. In the direct clinical business, as we’ve described previously, we hired the first phase of sales reps for Signatera late last year and we started an Early Access Program with top academic institutions, now having worked with the majority of the top NCCN centers. We are pleased with our early trajectory in Q1. And although, the ramp was impacted due to COVID-19, we’ve also received significant interest in using Signatera as a way to help mitigate the effects of the pandemic. We are now seeing volumes start to grow, again, in April. Cancer care has been significantly disrupted by the coronavirus outbreak. As cancer patients are at elevated risk from exposure, many standard surveillance visits and CT scans have been canceled. Doctors are looking for remote monitoring solutions and many are reevaluating the risk benefit of adjuvant chemotherapy, which can weaken the immune system. An article published last month in JAMA about oncology practice during the COVID-19 pandemic actually called out early-stage colorectal cancer specifically, as an example of where adjuvant treatment can be adjusted in the new environment. We think Signatera can really help in these scenarios, as summarized on this slide with our adjuvant and surveillance programs for Stage II and III colorectal cancer and especially with our remote blood draw capability. As we’ve described previously, we believe this clinical indication has the opportunity to translate to over 1 million tests per year, which gives…

Thanks, Solomon. You can see the summary results for the quarter on the slide. As Steve mentioned earlier in the call, we came in at $94 million for the quarter, which is above the preannounce we gave in April. The key driver for the additional revenue above the preannouncement was additional cash receipts for tests that we reported out in prior periods. As we’ve talked about in the past, we are pleased to see our approach to revenue accruals for quarters in 2018 to 2019 has proven to be conservative and cash collections for those periods continue to exceed expectations. As Steve described, the revenue and gross margin performance was primarily driven by strong volume growth and continued improvement on both ASPs and COGS. We made progress with both BGI and SMI, and that revenue recognition contributed to the quarter, but that partnership revenue was slightly lower in Q1 versus Q4 of 2019. We are pleased that the reimbursement environment has remained stable so far this year and we are cautiously optimistic that we can maintain this performance through the balance of the year. We do expect COGS to move up, as Steve mentioned, from this low level in the next few quarters, as we deal with the additional expenses related to ensuring our lab is safe and productive and as we expand capacity. But I think, this quarter demonstrates we can get blended cost to goods sold per unit below $200 over time, particularly for the reproductive health business, which currently makes up the vast majority of our volumes. On the operating expenses front, we saw increases over last year, as expected, as we ramp the commercial and clinical trial effort in both transplant and oncology. Expenses in the reproductive health business remains stable, even as volumes continue to ramp. So that demonstrates to us that our path to cash flow break-even in that part of the business is achievable when the world gets a little more back to normal and we can resume growing volumes. As you know, we went through the guide for the year, given the unknowns around the COVID-19 situation, and Steve gave some color on where, specifically, we are being impacted. While the preliminary data on weekly received units in April and early May looks encouraging, we think it is too early for us to forecast precisely when we can return to growing volumes. So we certainly expect that to happen this year, based on everything we know today. With the convert deal now done and the overbed note retired, we feel we are in a very strong cash position, and we’ll be able to execute on our plans despite this COVID-19 disruption. With that, let me hand the call over to the operator for questions. Operator?

[Operator Instructions] Our first question comes from the line of Doug Schenkel with Cowen. Your line is open.

Hey, good afternoon, guys. So as you mentioned in your prepared remarks, consistent with what you talked about earlier, in the last two weeks of the quarter, you saw a drop versus Q4 weekly levels of around 15%. You’ve talked about seeing some improvement since then. So just to try to unpack that a little bit more. Q2 volume is typically lower than Q1, but you had a lot of momentum through the first 10 weeks of Q1. If it weren’t for COVID, would you still have expected Q2 volume to be lower than Q1? That’s the first part. Second part is, how much better has volume been since the end of Q1? And then the third part is, in hindsight, as you’ve tried to dissect this a little bit more, was the 15% drop versus trends likely a function of the population density and presumably your market concentration in certain hotspots? And is the improvement, since a function of not just your response, but also the fact that as new hotspots have popped up, maybe you don’t have as much exposure?

Yes. Thanks, Doug. This is Steve. So I’ll just clarify. What we said in the prepared remarks is the last two weeks of March were down about 15% from the average in the first 10 weeks of the quarter. As you know, that sort of first 10-week period was a blowout record period of time for us. So the drop is roughly from sort of 15% of that and it was roughly in line with our Q4 weekly volume average. We have seen the business recover actually quite nicely in April. But it varies somewhat, depending on which segment of the business you’re looking at and which region you’re looking at. So as we mentioned, some of the harder hit areas like IVF, for example, although, the outlook is positive, as we’ve seen this new statement come out from ASRM that they’ve loosened the guidelines a little bit, we’re still waiting to see that come in, as appointments get rescheduled. Other areas of the business were actually back to peak levels or in certain segments, we’ve actually now exceeded the previous peak levels. So we’re feeling good about the recovery and good about the trajectory in April. I do think, the ability to go out and close raw new customers has impacted somewhat. And so while we’re getting back the business that we lost, I do think, certain customers we will be able to close and we have seen that occur. I do think, in general, the sort of pipeline of closing a lot of new business is pushed out slightly.

Okay. That’s helpful. And in terms of new practice openings, I would think that would be a little more challenging right now, just given it’s harder to get in front of practices. So is most of your growth right now, most of your volume kind of same stores versus new volumes? And if so, is that something that we should be cognizant of, maybe not for Q2, but as we think about second-half trajectory?

Yes. Well, look, I mean, I do think, we’ve definitely seen some signs that we can close new customers in this environment, and we have put a lot of effort into digital activities like many others have, and we’ve set up this very slick mobile phlebotomy capability. And in certain areas, oncology and organ transplant, for example, I think, it’s very helpful for those patients to not have to go into the office. So we are seeing some new accounts come on, where they’re interested, particularly in the mobile capabilities or the ability to monitor patients remotely. I think, our first goal was to get – build back up the existing accounts and same-store sales. And then at the same time go out and look for new customers that may want access to the service. So we’ve seen both occur, new customers close and the base business coming back. But I do think – comparing it to an environment, where there’s no COVID pandemic, certainly the ramp of closing new customers is not going to be the same, as it would be if we were full steam ahead, reps walking into offices every day. So we can close new business and we are, but it’s not going to be at the same pace that you would have seen otherwise. Mike, would you also want to add anything to that? Yes. Mike, Solomon, anything to add?

No. I think you covered it.

And then last one for me. Any discussion with some of the payers that have moved to temporarily expand NIPT coverage into average risk patients that would suggest these decisions could be made permanent?

Yes. Mike, do you want to take that?

Yes. I mean – so thanks for the questions. The coverage policies that we’ve seen come out have had explicit addendums to them, linking them to the coronavirus outbreak and they’re limited in their time duration. So there’s nothing in the document that would tell you that it’s going to go on for an extended period of time. But we’ve just got to see. I mean, I think, it’s instructive that the expansion and coverage policies seem to come right on the heels of additional practice recommendations from the professional societies. And so I think, while we don’t know, I think, we would expect that those kind of coverage policies would follow the professional society recommendations. So it’s possible that it could continue.

Okay. All right. Thanks a lot.

Thank you. And our next question comes from the line of Tycho Peterson with JPMorgan. Your line is open.

Hey, this is Eleni on for Tycho. Thanks for taking our questions. So firstly, I was wondering, if you can help frame the Aetna opportunity. You mentioned that today, you’re seeing about $60 million in unreimbursed gross profit from average risk volumes. Just wondering, if that includes Aetna or what piece of that was Aetna? And of the remainder, how much is United?

Yes. Mike, why don’t you take that?

Yes. Sure. So just as background, there’s about 210 million covered lives – commercial covered lives in the United States. About 110 million of those lives already had a policy covering average risk NIPT. And of the remaining, Aetna is circa 20 million, 25 million covered lives. And United is bigger, they’re more in the 40 million to 45 million covered lives range depending on how you count some of their ancillary plans. So if you think about Aetna as a percentage of the total commercial covered lives, they’re circa 10% of the commercial lives in the United States. And I think, that’s a reasonably good approximation of their impact on our business. So it’s a – certainly, it’s a tailwind for us. It’s not an enormous change in our ASP trajectory, but it’s certainly a contributor. The balance of the commercial covered lives for average risk really is kind of a long tail. I mean, you’ve got Humana, maybe the next biggest one, and then it gets into an assortment of the loose plans, et cetera. So it’s a good contributor and it’s not the majority. You can see from my remarks that United is obviously quite a bit bigger.

That’s helpful. Thank you. And then, I was also wondering, in terms of the question of whether Aetna’s temporary policy could be a precursor for a permanent plan, whether you could comment on what we could see come out over the next review of Aetna’s policy, which is, I believe, scheduled for May 8? And whether you’ve had any conversations with them after the temporary policy was released?

Yes. I’ll comment on that. So generally, when you have these discussions with the plans, they keep the information flow pretty limited. They don’t want to give away anything, I mean, public companies, et cetera. So you don’t get exact road map. We do feel positive long-term with all of these large payers. They generally tend to follow the professional societies. We’ve said before that we heard that there’s something positive coming from ACOG. We continue to hear that. In fact, we’ve heard that, again, more recently and there’s something drafted that’s going to be released in the near future, that’s positive. We don’t know what it says and we don’t know exactly when it’s going to come out, but we do know that that’s there in the background. I also mentioned sort of backstopping all of this is the SMART study. So if you remember the details of the SMART study, Natera prospectively studied 20,000 patients, over a period of several years. I think, the trial started roughly five years ago, and we expect that data to be published later this year. And we think that will actually be the largest prospective NIPT study, looking at both chromosomal aneuploidy and microdeletions that’s ever been done in the field of NIPT. And we think that study has a very significant opportunity to move the market and the rest of the way forward, if we’re not there by then. With respect to Aetna and United and others specifically, obviously, we’re doing everything we can to engage with them and move the business forward, but we really don’t know exactly what their plans are going to say. We expect them to track the society guidelines.

Thanks. And then lastly, I was wondering, also in terms of the delays you’ve seen in the last two weeks of March. Just wondering, specific to NIPT, how much it can be postponed due to the seven-week testing window for NIPT? And if you can talk about whether some of those patients could come back sooner rather than later, and any other dynamics we could see there?

Yes. I definitely think, there’s a period of time where everyone would sort of figure it out how they were going to manage that last couple of weeks in March. And we sort of see that as probably the worst period of time for disruption on the business. And I think, across every sector of our business, whether it’s the different products in prenatal or whether it’s transplant or oncology, we have seen the volume recover in a pretty meaningful way, since that low in the last two weeks of March. Now some of that is – practice is figuring out how they’re going to operate in this environment and then pushing the play button and restarting. Some of that is us going out and closing new customers or enrolling new customers in our mobile and remote solutions, and then some of it is catch up on patients. We haven’t seen – we’ve gone through and looked at gestational ages and things, and we haven’t seen a big bolus of catch-up patients come back in on the NIPT front. But I don’t think that they were pushed out significantly, such that there would be a very meaningful shift in the average gestational age anyway.

Great. That’s helpful. Thank you.

Our next question comes from the line of Max Masucci with Canaccord Genuity. Your line is open.

Hi, thanks for taking the questions. Are you seeing any evidence of share gains in NIPT, as certain larger competitors are sort of inundated with COVID-19 testing? And do you have any expectations there? I know, we’ve seen the large central labs report sharp volume declines for lab testing that’s not related to COVID-19?

Yes. Certainly, we’ve been in a very competitive environment for a long time. I mean, I think, as you all know, we were the fourth NIPT to market. We’re now the market leader. So a lot of our growth does come from volume gains or competitive wins. I think, many of the smaller, more targeted competitors are offering the same sort of mobile type capabilities that we’re offering. I’m not sure, necessarily, whether the big box laboratories are going after it in that same way. I’m sure, they will, if they’re not already. But we’re continuing to win on the quality of our product and the unique differentiators and our significant focus on user experience. The advantage for us, as we entered into this period was that, we already had all these remote services set up. So remote genetic counseling. We have chat bots, that can talk to the patient in various ways that we built in-house. We didn’t go out and acquire those capabilities. We just built them. We did more than 10,000 mobile draws in 2019. So as we saw that significant ramp in mobile accessibility being requested from our physicians, we were able to step in and service it without a lot of operational challenges.

Great. And then can you just maybe speak to any COVID-19 disruption you’re seeing with the major max, namely Noridian, and how that shaped your opinion about the timing of the finalization for Signatera colon? And then any new color you might have gotten recently around pricing, or are you still expecting to be pegged to an existing monitoring test on the market? Thanks.

Yes. So we’re in constant contact with the MolDx program. As we’ve mentioned, we’ve done pre-submissions on other products in the oncology space, which we’re very excited about, and we’re continuing to have those discussions about additional products. Certainly, I think, there’s a lot to focus on at this point. By the various max, there’s generally a timeline to which they need to issue the final coverage decision and we expect oncology to issue within that time line that’s been outlined. We don’t expect there to be any sort of significant disruption. And again, we continue to be in direct discussions with the key decision makers and we’re feeling very positive about not only the colorectal test, but also the discussions that we’re having about other products in oncology. On pricing, we don’t have any additional updates at this point. We expect that to occur after the final MolDx coverage decision goes in place.

Great Thanks for taking the questions.

Thank you. And our next question comes from the line of Alex Nowak with Craig-Hallum. Your line is open.

Great. Good afternoon, everyone. This is actually Will Fafinski on for Alex here. Thanks for taking the questions. First one for me, on transplants, you recently published the progress of the ProActive study, showing enrollment among sites. How is Prospera being used beyond the registry trial? Meaning doctors who weren’t enrolling for the registry study, how is the test adoption there?

Yes. So we haven’t announced volume numbers there, but we did talk about the penetration. I think, we said 45% of the top 50 transplant centers by volume and 37% of the top 100 transplant centers by volume have used the product during the Early Access Program. Some of those are engaged in ProActive. I mean, you can just kind of run the math and figure out which ones are ProActive or not, but there’s many that are outside of ProActive that are using the test. And we see really a handful of different types of accounts. I think, some have specific patient cohorts that they want to order donor-derived testing on. I think, some want to order it more routinely, as part of their patient care. But overall, we believe this is a very large market opportunity, that’s only about 5% penetrated today. Despite all of the – I think, competitive activity between us and others in the field, there’s an enormous amount of greenfield opportunity when you just run the numbers on the total number of patients that need to be monitored per year. So we feel excited about it. The early feedback that we’ve gotten from physicians really meets our expectations, both and what they’re looking for in a product. And second, in the capability to really penetrate and make this much larger than 5%.

Got it. I appreciate the color there. And then second one for me. Mike, Natera obviously followed the approach of other companies and suspended guidance at this time. But just with the temporary coverage of Aetna, the potential UNH, share gains during COVID, ability to keep some sales with remote monitoring and is the pipeline is still on track? Is it fair to say that you could still hit the original guidance range that you guys provided at the beginning of the year?

It’s certainly possible. But Steve touched on one of the key variables, which is new account starts. And historically, in diagnostics, you just need a sales rep to be in the office or in the center with the physician to get a new account started. And obviously, physicians are much more accommodating to remote startups now than they had been previously. But that’s just – it’s very hard for us to forecast. And so as we look at it right now, we think, it’s wise just to monitor that. And over the course of the summer, we would like to get to more data points, honestly, with this new environment and then come back to you in August.

Got it. Understood. That’s it for me. Thanks, guys, for taking the questions.

Thank you. I’m not showing any further questions.

Great. Well, thank you so much. We appreciate you joining. Take care.

Ladies and gentlemen, this does conclude the program. You may now disconnect.