Good day, ladies and gentlemen, and welcome to The Natera’s First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's call, Mr. Mike Brophy, Vice President, Corporate Development and Investor Relations. Sir, you may begin.

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our first quarter 2016. Also on the line is Matthew Rabinowitz, our CEO; Herm Rosenman, our CFO; and Steve Chapman, SVP, Commercial Operations. Today's conference call is being broadcast live via webcast. In addition, a replay of the call will 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 2016, our market opportunities and strategies and expectations for various current and future products. 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 10-K and the Form 8-K filed with today's press release. Those documents contain and 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 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. Steve Chapman and I will begin with a review of our business and recent highlights for the first quarter. After that Herm will review our financial results and discuss our current outlook for 2016 and then we will open the call up for questions. We’re off to a strong start in 2016. We reached several critical milestones in the quarter. Specifically, our volumes continue to show strong growth, we accessioned roughly 105,000 commercial tests compared to roughly 64,000 commercial tests accessioned in Q1 2015 an increase of about 64%. For Panorama, we accessioned roughly 81,000 tests compared to roughly 55,000 Panorama tests accessioned in Q1 2015 an increase of 47%. For Panorama we again experienced balanced volume growth between high risk and average risk patients. For our Horizon carrier screening panel, we accessioned greater than 19,400 tests compared to roughly 6,000 Horizon panels in Q1 of 2015 an increase of approximately 223%. On the strength of this volume growth across our business, we generated Q1 total revenues of $61.9 million, the best revenue quarter in our history. We strengthened our management team with the promotion of Kim Martin to Senior Global Medical Director of our women’s health business, hired Dr. Ramesh Hariharan as Vice President, Marketing and Medical Education and hired Bruce Yeager as VP, Market Access. As many of you know, Kim previously served as our Medical Director for reproductive testing and is a nationally recognized expert clinician in the field of interventional genetics with more than 20 years of prenatal diagnosis, ultrasound and genetic counseling practicing in both academic and community based healthcare settings. Bruce Yeager has had held a range of sales and marketing positions at UCB, Amgen and Sanofi and has extensive experience in senior…

Thanks, Matt. We continue to be very pleased by the progress we've seen with the transition to in-network contracts. Matt announced at the start of today's call that we recently signed an agreement to become part of UnitedHealthcare's laboratory network, which is effective as of April 1, 2016. On our last call, we announced new agreements with Aetna and Cigna that significantly broadened our existing base of covered lives, which also includes many Anthem plans and broad coverage with state Blue Cross/Blue Shield plans. While we continue to enter into contracts with many smaller plants, we estimate that we now have greater than 175 million covered lives through our direct sales channel in the United States and roughly 200 million commercial covered lives through both our lab and direct channel. Given that we’ve only recently entered into contracts with many of the largest plants, our Q1 financial results benefit from pricing. It was primarily based on higher out of network rates. We expect the reduction from in-network pricing to be largely reflected in our results starting in Q2 of this year, which will reduce our revenues and gross margins in the near-term. As we have discussed in the past, however, we believe that stable in-network pricing, broad and sustainable access to payers networks, generally lower patient co-pays and faster time to reimbursement represent compelling benefits for Natera. Crucially for accounts where we have failed to win business in the past, a lack of broad in-network coverage has been a very common reason given. With our current base of covered lives in our direct channel, we believe we have now removed a key barrier to entry for our direct salesforce. At the same time, payers are aggressively managing their networks to limit access to out of network payers. For example UnitedHealthcare…

Thanks, Steve. Our first quarter financial results are included in our press release that crossed the wire earlier this afternoon. Our first quarter total revenues were $61.9 million compared to $47.4 million for the first quarter of 2015, an increase of about 31%. This increase was primarily driven by volume growth. Steve discussed the timing of the large in-network agreements, we've recently struck. And the fact that average selling prices for Q1, we’re still largely based on higher out of network pricing. As a reminder, we recognize revenue on a cash received basis roughly 45% of our first quarter total revenue was derived from test volumes accessioned in the quarter. The balance of our revenues were derived from tests accessioned in prior periods. Historically about 80% of the revenue we derived from a cohort of tests accessioned is collected within two quarters and almost all of the revenue we derive from a cohort of tests accessioned is collected within three quarters. Because our mix of in-network business is set to significantly increase. We would expect these timelines to shrink over the course of 2016 and we will provide updates on this trend as we gather more data. In total, we recognize revenues on roughly 49,000 tests in the first quarter. Since we recognize revenues on a cash basis from volumes accessioned in several quarters as I just described. The difference between tests accessioned in a quarter and tests on which revenue was recognized in a quarter is an imperfect comparison. Still I think the difference between the number of tests accessioned and the number of tests on which revenue is recognized gives you a sense of the revenue and gross margin opportunity for our business in the future. The majority of test accessioned that do not generate revenue today. Our…

Thank you, Herm. We are very pleased with the progress in this quarter. As we look forward, I’m more excited and confident in our business than ever before. We have a terrific team assembled here at Natera and I'm confident that we will continue to deliver on our commitment to provide the most comprehensive and accurate genetic testing and change the way people respond to genetic disease. With that, we’ll now open up to questions. Operator?

Thank you. [Operator Instructions] And our first question comes from the line of Bill Quirk from Piper Jaffray. Your line is now open.

Great, thanks and good afternoon, everyone.

Hey, Bill.

Hey, Bill.

So first question I guess is on the new united contract. I'm assuming based on your comments that is for the higher risk segments of your market that is not average risk at this point until they change their medical policy, is that right?

Thanks for the question Bill. I'll turn that over to Steve.

Yes. Thanks, Bill. So I think as we described previously, we contract for our entire book of business, but the medical policy determines what indications are covered. So you're correct.

Okay, got it.

To just clarify, we don't anticipate that that contract needs to change in order for us to build low risk because it will be built on the same CPT codes and the contract is for a particular set of CPT codes.

Got it. So said in another way Matt, ones and obviously just using united as an example sort of obviously supply to your other contracts as well. But presumably you’ve got pretty good insight into what the terms would look like once you start to see more of these payers change their medical policy. Is that a fair assumption?

Steve, do you want to comment on that?

Yes. Sure, I'll comment on that. I mean I think we've discussed previously that we're focused on cost of goods sold so we can have a greater than 50% margin at a price point in the $400 range if pricing converges to that level over time pretty average risk market. So we're not breaking out specific price points for these payers today. But I think we have a good sense of where the market's going to converge.

Yes. So I'll just add some color there Bill. We do have a pretty good sense of the terms of the contract as it currently stands. However, we are being conservative in projecting forward. And saying that you know as the whole market opens up to low risk, we could expect these payers to ask us to renegotiate that pricing exactly the mechanism by which they do that is an open question because the contract is in place. But we're just trying to be conservative and say that we expect that pricing might come down as the low risk market opens up. But once we have a price for the general population, we wouldn't expect that pricing to change substantially in the foreseeable future, because once you've established these rates covering a certain sector of the population those rates tend to be stable in our experience.

Understood. And then I guess just a guidance question for Herm, obviously just an exceptional quarter here. To start off the year bringing at the low end of the guidance that obviously implies some downward sequential pressure and both you and Steve talked about the mechanisms behind that. It strikes me though that given your comment about it takes about three quarters to go through all the adjudicated claims that. Is it safe to say we’d see perhaps a more dramatic effect in the third quarter than the second?

We haven’t given quarterly guidance on the gaining there Bill. But you're pretty good with your math. So yes, you probably that's the way the numbers work out.

Okay, got it. Thanks, guys.

And I'll just add another comment there. There are many ways in which this guidance is conservative. And I don’t want to sound like a broken record, but there are certain respects in which we have just made conservative assumptions because we don't want to make any strong assumptions about when the large payers, certain of the larger payers will start to cover low risk. And we've been fairly conservative in other respects that we discussed in the previous earnings call. That said this is a realistic estimate of where we reasonably expect to be.

Got it, thanks. Appreciate all the color guys.

And your next question comes from line of Doug Schenkel from Cowen. Your line is now open.

Hi, good afternoon, guys, and thank you for taking the questions.

Doug.

Hey, Doug.

Hey, Doug.

I guess my first question is for Steve and it’s specific to the changes that you made in the direction salesforce to improve productivity in the channel and also your initiative to prioritize and hopefully I’m putting it right higher paying accounts. I believe that when you told us about those changes a quarter ago, you noted that in the past when you've done that it. It's taken a couple of quarters to have an impact. It does seem like the associated benefits occurred more quickly than you anticipated this time. Is that right and if so how should we think about the momentum heading into the rest of the year?

Yes thanks Doug. I think we're still in the process of seeing that those changes play out. I mean there were some realignments in geography, some focusing on adjustment and pipeline. And then also some focus on mix within the existing customers. I think we were pleased with the progress in Q1, but you were still in the process of working through those changes in the pipeline and there may be slightly decreased momentum from resetting of pipelines.

Okay, thank you for that. And I guess I'm not sure who's best to answer this next one on the team but I'll just ask it and let you guys figure it out. We appreciate all the detail on COGS improvements and plans for further improvements in the quarter your gross margin improved by a very impressive amount about actually it was over 800 basis points sequentially. It looks like around 650 basis points of that improvement is attributable to the lower cost per accessioned test with the balance attributable to better revenue capture. Is that about right and I guess the second part of that question is, your cost per accessioned test dropped by about 25% year-over-year to just over $300 by our math. Would you be willing to comment on how the planned additional changes you talked about in terms of improving COGS, how much of that can actually improve that figure, yes, either over the next year or by year-end, clearly you're making a lot of progress there and it sounds like you're pretty enthused about what you can do over the coming quarters.

Hey Doug, it’s Mike Brophy. I’ll just – I’ll jump in there and tackle those. So first on the breakouts in terms of the gross margin contribution, that's roughly right. I mean we saw substantial contributions from both better price capture and from the COGS reductions that we outlined on Q4 and then we really saw the benefit of those cost reductions in Q1. As it rolls forward, we still want to refrain from giving a specific COGS guidance. But I think it's implicit. We're moving towards a $200 price point on our base NIPT panel over time and that's over a more than a one year timeframe.

Okay. And one last one, I just want to confirm regarding that in-network announcements that you've made over the course of the year. Very good performance of the quarter, it sounds like the in-network announcements didn't help you a whole lot in a quarter that's, that's all on the common terms of the impact is. Is that right?

Hey Doug, I’ll just – in terms of helping us, well, in terms of...

I mean – sorry, Matt, I’m sorry. And just to be clear on that more from our revenue rec standpoint. I figured that was more on the combined, I might be wrong.

Yes. It didn't really help us on the revenue recognition materially Doug, I mean we had one – we had one to one effective mid-February, one to one effective in April 1 in terms of the large contracts. So that’s something that's on the comp. And I think we're going to continue to recognize revenues on a cash basis for the foreseeable future. And then over time as we give more, more time experience with these in-network contracts, then we'll move to an accrual basis and there you'll see how that shifts to faster revenue recognition more…

Okay. All right, that’s great. Sorry.

Let me just – let me just add to that. Let me just add to that Doug on the accrual basis that’s not going to be tomorrow.

Yes. Okay, all right. Thanks, guys. I appreciate you taking all the questions.

And our next question comes from the line of Steve Beuchaw from Morgan Stanley. Your line is now open.

Hi, good afternoon. Thanks for taking the questions. I actually want to start on commercial execution go directly to Steve, but certainly open to anybody. My first is, Steve I wonder if you could help us understand the impact of the effort to run with something I guess I would think it was a bundle with the three tests on one blood, blood draw at one requisition. How has [indiscernible] time that, that the means by which somebody orders the tests is part of a bundle how's that been changing over the last year and to what extent you attribute your share gains to that dynamic?

Yes. Thanks for the question. So I think obviously when we launched the Horizon panel, I guess to refresh Horizon panel. We had a lower attachment rate that's increased partially just as we've been out promoting it over the second half of 2015 into 2016. But the – a very large portion majority of orders that we get for the Horizon panel are combined attached with the NIPT assay. And I think we announced today that we've seen about a 75% attachment rate for microdeletions and that's remained consistent after our initial promotional medical education and publication efforts throughout, I guess after the first year of launch we’ve been roughly at that level.

I'm going to add some color there. Although everything that Steve said is 100% spot on. I'm just going to add some, some thoughts that you shouldn't think about the carrier panel as just an attachment to NIPT. That carrier panel which is what we consider the leading panel in the industry full gene sequencing on 274 genes including DMD as a frontline screen and the enzyme tests, et cetera. That is a panel that is used by doctor’s offices, just because of its own merits, it is a very strong panel. And for example we’re seeing a lot of growth in the IVF business where that is not post conception, that’s preconception. I think the other thing is that when a doctor's office is using one lab, they tend to want to use that one lab for everything and especially, with the growth of our physician portal and our patient portal and all the usability that we streamline the process with at the doctor's office. We’re seeing them order these panels more from one lab. So it doesn't have to be ordered together for a single patient. That cross-selling opportunity can relate to just them ordering NIPT microdeletions and carrier screening separately.

So is it safe to say, as I attract words in your mouth that there is quite a bit of room to run on using this dynamic to package test drive share in the channel given your comprehensive offering. Are we second inning here?

Well. I'm more about a cricket game, so second inning would confuse me, but I would say the simple answer is yes.

Okay, got it. And then just one quick follow-up on that, are you seeing in the channel the ordering patterns shift if at all between OBs and MFMs. And to what if there is a shift would you attribute that to and how does it impact the business. Thanks.

Yes, sure. I’ll take that. So we're very pleased with our performance in both the maternal and fetal medicine in OBGYN space. I mean we've seen consistent growth in both the high and low risk market. The low risk opportunity particularly in the OBGYN space, we do think is where the vast majority of the growth will come from in the future. And of course after guidelines last summer and more coverage policies, we are seeing a shift to a more business coming from OBGYNs. But we're also taking market share at the MFM space and also high risk business at the OB space.

Thanks again.

And our next question comes from the line of Raymond Myers from Benchmark. Your line is now open.

Thanks for taking the questions. Now I was wondering if you could tell us the proportion of average risk coverage in the fourth quarter of 2015 and compare that to the growth in first quarter.

By average risk coverage do you mean how many payers are covering average risk as part of their policies? Or are you referring to the fraction of average risk test that we do?

The amount of patients you have covered for example I believe you said 45% of the patients were covered for average risk in Q1. Could you give a comparison for Q4?

I don't think that's the number we mentioned.

Yes, you did.

I will answer the question. Mike, you want to comment on that?

So just to clarify what we said on the call is we said that there are about $75 million covered lives under policies that currently accommodate average risk. And that's greater than a third of all commercial covered lives in the United States right now.

Yes. So I don't know if you misheard what was on the call, but thanks Mike for clarifying. I think the fraction of average risk that’s covered is somewhere in the range of 30 – little bit above 35% now. And we've just seen a steady growth of incremental addition to payer policies here and we expect that steady growth to continue. As I said earlier we're not making strong assumptions. There are a bunch of big payers that have still to change their policy. And that could happen in 2017 and so we’re just being reasonably conservative there. I will say that from what we have seen we've made a really good bet here. We are very comfortable with the bet that we've made on growing the average risk market where we are very clearly the leader. We've seen guidelines come out from ACOG, joint guidelines actually between ACOG and SMFM. That we’re much more positive on low risk testing and that's great because these tend to be very conservative professional organizations and those ships turn really slowly. But the last guideline that came out was good. They were talking about how average risk is now, how NIPT is now being used and should be used in the average risk population. And they have very clearly said that every patient should be made aware, every patient should be made aware of the availability of NIPT for their pregnancy. And in our experience when patients are made aware of the availability of NIPT given the earliness in the testing, the sensitivity, the specificity and the coverage, the vast majority of patients absolutely want it and doctors as well. So the guidelines from ACOG and SMFM have been good. And the guidelines from other professional organizations are also going to be very impactful here. We are expecting a new guideline to come out from ACMG, the American College of Medical Genetics. And they have a lot of influence on these genetic issues and a lot of experts working on their guidelines. They are – I expect them to have some fairly positive statements there, but we'll see what the guideline says and I think that they're going to be a much more ready to adopt positive guidelines based on the incredible strength of the literature in low risk testing and also the strength of the literature that we've developed in microdeletion. So overall, I think that the bet that we've made on low risk testing is a very good bet. But we have just been conservative in our assumptions of when some of the big payers are going to turn that on.

Thank you. Matt, could you describe to what extent your growth in NIPT is still coming from taking market share as opposed to expanding proportion of pregnancies which are tested.

Well. I'll answer that and then Steve, if you want to add more color. It's coming from both. And I'm not going to breakdown the exact percentages, but we are very pleased to see that our salesforce continues to do a really excellent job in both the low risk and the high risk market. The high risk market is driven by a subset of OBGYNs and a larger number of MFMs. And these are people who really see the value in our technology, although, we were the fourth player in the game. We have taken a little over two years to become from our perspective, from what we can see very clearly the volume leader. And this is largely driven by the technology and the fact that we can see things that other tests cannot see and have a offering with very good sensitivity and specificity and coverage of key things like for example 22q11 microdeletion. So that is largely what's driving the growth in the high risk market and the low risk market, I think it's a combination of taking market share from others as well as OBGYNs who are seeing the new guidelines and seeing the performance of the tests and deciding to start out for the testing. So Steve, do you want to give more granularity there or have I covered it?

Yes. I think you covered it well.

Okay.

Next.

Matt, if I could just go back to my original question with your corrections of the amount that are covered now for low risk. How many were covered for low risk ending last year’s, we get a sense of the trend line.

It was – I don't remember the exact figure, but it was less and I can say that. I think at the end of last year, we were looking at something in the range of around 30% thereabouts and now we're looking at something in the range of a little bit above 35%, maybe 36%. So you're seeing it slowly move upwards. And this is a lot of Blues that came online. And there were various other smaller organizations side the Blues that came online I think. But you are just seeing that steady trend upwards.

And as UnitedHealthcare also including low risk.

At this stage no.

Okay. Thank you very much.

And our next question comes from the lien of Jeff Elliott from Robert W. Baird. Your line is now open.

Yes, thanks. Good afternoon, guys and congrats on the good start to the year. First question from me is on the guidance, as Matt mentioned it, it does look like there's some conservatism in the assumptions that I guess there's three assumptions I want to check that last quarter you outlined it really stood out to me as conservative. And I just want to make sure those are still the case. So I guess the first one is on the assumption around additional covered lives, I believe you had said that you're not assuming additional covered lives in average risk help into the year. Second assumption is on, you're not taking any incremental tax volume benefit from going in-network with payers. And third is on the microdeletions reimbursement. I believe you said you assumed it would come down. Although from what it sounds like it's been stable year-to-date. I guess are those three assumptions still the guidance.

Yes, yes. They really are and they are – because the effect of anyone of the three can be fairly significant. And well, we said it's been pretty steady taking sort of with microdeletions that can change tomorrow. And as you know the attachment rate is very high as Steve mentioned around or over 75%. So that's really kind of a wildcard in terms of average risk I mean we've seen competitors out there talking about not much if anything until 2017. We still continue to believe we'll see some of that being reimbursed in 2016, but certainly not in the robust sense that we thought about this maybe six, nine months ago. So I think conservatism on that one certainly is warranted. Now being in-network, we think that our volumes will benefit from that, but that's also a wildcard. Steve also mentioned that we're looking to go after out of network players as well. And that could help, but – we don't do guidance by aspiration, right. So as the year progresses, as we said in the prepared comments we're always taking another look at this and will guide accordingly as year goes on.

I'm going to just add some color there. In terms of the volume growth, I just want to correct what might be a misimpression. You had said that we had assumed no volume growth because of being a network. Just to be clear, we assumed that the rate of volume growth wouldn't substantially go up because of going in-network. And as Herm said the rate of volume growth will just have to see how that pans out. Also in terms of the other areas of conservatism, we have assumed no revenue coming from additional products that are going to be added to the basket. And that is something which as Herm said we are being non-aspirational there and I would say conservative. And in terms of the microdeletions, we have made an assumption there that the reimbursement for 2016 would be lower. But I should just mention as we spoke about last time that we've had a major win in getting this code approved from the AMA. And we’re going to be generating a lot of data supporting the use of that code. And so in the long-term, we do expect that the microdeletions reimbursement will be a core component of our offering.

Okay, thanks. Really helpful guys. Thanks. Just one more topic I want to hear just on the Zika virus is capturing a lot of news headlines, but I think in some people are worried this going to affect birth trends and therefore potentially your business are you seeing any impact from Zika on your volumes? Thanks.

Yes. This is Steve Chapman. So yes, we haven't seen an impact, although it might increase the rate of women asking for different screening tests even though NIPT doesn't test for microcephaly. It's possible. There may be a just an increase in awareness about testing. But we’ve haven’t seen the impact.

Okay. Thanks, guys.

And that does conclude our question-and-answer session for today’s call. Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone, have a wonderful day.