Welcome to Natera's 2018 First Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will hold a Q&A session. [Operator Instructions]. As a reminder, this conference call is being recorded today, May 8, 2018. I would now like to turn the conference call over to Michael Brophy, Chief Financial Officer. Please go ahead.

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our first quarter 2018. Also on the line is Matthew Rabinowitz, our CEO. Steve Chapman will be joining for Q&A. Today's conference call is being broadcast live via webcast. We will be referring to a slide presentation that has been posted to investors.natera.com. A replay of the call will also be available at investors.natera.com. During the course of this conference call, we will make forward-looking statements regarding future events and our anticipated future performance, such as our operational and financial guidance for the full year 2018, our assumptions for that guidance, market size, partnerships, clinical studies, opportunities and strategies, and expectations for various current and future products, including capabilities, expected release dates and related effects on our financial and operating results. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. Please refer to the documents we file, from time-to-time, with the SEC, including our most recent Form 10-K and the Form 8-K filed with today's press release. These documents identify important risks and other factors that may cause our actual results to differ from those contained in the forward-looking statements. Forward-looking statements made during the call are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. Natera disclaims any obligation to update or revise any forward-looking statements. We will provide guidance on today's call, but 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 Matt.

Thanks, Mike. Good afternoon everyone and thank you for joining us. I will cover our recent highlights and progress in the business since we last spoke in 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 investors.natera.com. First, we are pleased and excited to see the key components of our long-term strategy coming together. We substantially expanded our leadership position in women’s health genetic testing by posting unprecedented quarter-on-quarter volume growth in Q1. Besides our superior technology and service offering, this volume growth is driven in part by the long-term decisions we made to sign Natera contracts with payors. Based on these decisions, we expect the pricing environment going forward to be stable. Ongoing strong volume growth in Q1 and stable pricing is driving anticipated return to revenue growth for the year we described on our Q4 call, and as we have predicted for some time. In addition, we continue to improve our cost of goods sold consistent with our roadmap. More will be said about this later in the call and particular with regard to Horizon carrier testing. Furthermore, we are seeing new DNA sequencing platforms emerge as we expected. That is contributing to our business already as we described with QIAGEN deal in March and will enable Natera to distribute our leading content broadly at high gross margins. Lastly, we continue to release exceptional data on oncology that has the potential to substantially improve patient care. And as with Panorama, we are establishing a strong and differentiated position in this market that is even larger than prenatal testing. We are starting to see the beginnings of oncology’s contribution to Natera’s revenue. A summary of our recent highlights on Slide 3. On volumes,…

Thanks. As Matt described, this is the first quarter in which we report revenue on an accrual basis as required by the accounting standard 606. In the past, we booked cash received in a given quarter as revenue. Now we book revenue on just the tests whose results were reported out to customers in the period based on our estimated total collections we expect to get from each test. So going forward, we will disclose tests reported in a given period as well as tests processed and tests accessioned in our clinical lab. I think tests processed is still a good metric to measure volume growth overall since it includes both tests accessioned in our lab and tests performed via the Constellation platform and tests accessioned remains a good metric for assessing cost of goods sold per unit. As we described on the Q4 call, our goal is to take a conservative approach in our collections estimates particularly since this is our first quarter under the new accounting standard. We presented this slide previously and predicted stable pricing for the year for the reasons Matt mentioned. We also have a number of current and future pricing tailwinds. These include payor coverage for average risk NIPT and microdeletions that we have discussed in the past as well as broader Medicaid coverage. For example, we recently became a credential Medicaid provider in New York which allows us to pursue broader reimbursement for testing we were already performing. In addition, four states have either priced NIPT on their fee schedule for the first time or improved their rate during Q1. We are monitoring all these types of changes in our collections progress and we think there is scope for our actual collections for Q1 to exceed the current estimate as we get more…

[Operator Instructions]. Our first question comes from the line of Bill Quirk with Piper Jaffray. Your line is now open.

Great. Thanks. Good afternoon, everybody.

Hi, Bill.

Hi, Bill.

First question, just thinking about the guidance and the rev rec on the QIAGEN payment in the quarter, will that recur here in Q2 through Q4 and how do we kind of sort that out with the no change in the guidance?

Thanks, Bill, for the question. So the upfront revenue recognition just came from the portion of the deal that we were able to book upfront. Obviously the balance of the 40 million that we received is going to be booked as we reach certain milestones in the development process and as we earn off the prepaid royalties that we described previously. So it’s not going to be a recurring 5 million every quarter or anything like that. It’s going to be much smaller going forward.

Okay, very good. And then just thinking about the significant increase in sequential growth. Can you just add a little color in terms of kind of what’s driving this? And obviously we caught your comments about not being – not necessarily maintaining the same sort of sequential pace but was the inference that we should continue to see sequential volume performance throughout the year?

Well, you will see great volume growth on a year-by-year basis as you’ve seen before in the terms [ph] established about a 25% year-on-year growth which is pretty phenomenal and we expect that to keep going. But as far as the quarterly dynamics is concerned, maybe Steve you want to talk to that part.

Yes, sure. So we talked a lot I think in the second half of the year about improving user experience, rounding out our NIPT offering with the addition of twins and then our 2017 launch of new products that really differentiate us and give us the opportunity to break into new customers and that is Evercord and Vistara. So in continuation of our increased pace of new account closing that we saw in Q4 continued in Q1, we now at record levels of customers. And then when you look at the volume from each customer, we’re seeing increases in same-store sales. So more customers and then each customer sending more volume largely driven by increases in same-store sales. So obviously we’re very pleased with the record growth that we’ve just seen in Q1.

Bill, we did make that comment in the prepared remarks. There is some seasonality. We do tend to see Q1 be a high quarter. So you can’t expect that kind of growth to continue in subsequent quarters. But on a yearly basis we think our growth is going to continue strong.

Okay, got it. Thanks, guys.

Thank you. Our next question comes from the line of Steve Beuchaw with Morgan Stanley. Your line is now open.

Thanks for the time. Good afternoon. I actually want to follow up on Bill’s second question. If we take the guidance and we consider the full year guidance and we consider the first quarter results and then the commentary around new product revenues if you’re considering the seasonality is normal and the QIAGEN cadence over the course of the year is frankly sort of difficult to get to the guidance, meaning that it seems like the natural progression would be to drift a little higher. So I’m wondering if ex-QIAGEN, if there might be anything you’d flag that they may not be so obvious that we should consider for the balance of the year on the top line.

Hi. Thanks, Steve. It’s Mike. Yes, so just keep in mind Q1 has 5.5 million from QIAGEN and that’s not going to recur for the balance of the year. It’s going to be much, much smaller if anything quarter-to-quarter. And as far as pricing is concerned, you tend to assume kind of stable pricing and then the growth dynamics that the guys characterized, that would still win you within the 250 to 275 range. Happy to elaborate from there.

But I do appreciate upon the sentiment for Q1. It was a great quarter. I’m not very good at math. That’s the real issue here.

I wonder if you guys, maybe Steve Chapman and the group can talk about going in the environment and then I’ll jump back in queue. One is prior authorization. If you spent some time out in the field, you hear from time to time that prior authorization is – this may be actually reversing a little bit given some of the fairly intense clinician pushback on some of those policies. And then second, I don’t know if you could comment on the competitive environment. It seems like some might have been making a push at one point or another may not be pushing quite as hard. And again, thank you so much for everything.

Thanks. So let me answer your comment on prior authorization. So this is still an evolving dynamic that we’re seeing in our markets. A lot of the plans, as a reminder, rolled out prior authorization policies in November of last year in that timeframe and consistent with the choices they made about which parts of their books of business are subject to prior auth and how they actually adjudicate those prior authorization claims just kind of continues to evolve. Everything that we’ve seen so far is consistent with the expectations that we had at the beginning of the year and we incorporate it, some of the inevitable challenges we have in our annual guidance. So we’re continuing to monitor that. But I appreciate that there has been some pushback and that’s encouraging. I think that’s going to continue. But for now it’s kind of steady as she goes for the rest of the year.

Yes, I’ll comment on the competitive environment. Thanks, Mike. So there have really been any significant changes. I think they are notable recently in the competitive environment, so nothing necessarily to add there. It’s still an extremely competitive space. We’re obviously very pleased with our performance in the first quarter and we think that we made some of the right moves as far as launching additional products and working on our user experience and so forth. But it’s pretty much the same environment we’ve been facing now for a while.

Thank you. Our next question comes from the line of Doug Schenkel with Cowen & Company. Your line is now open.

Hi, guys. This is Adam Wieschhaus on for Doug. Thanks for taking my question. On your Signatera RUO --

Hi, Adam.

Hi, Mike. On your Signatera RUO product, I might have missed it but did you sign any new biopharma partnerships in this quarter and is there any limit to number of biopharma deals that you’re able to sign? Thank you.

Well, there is a limit to the amount that we can sign but it’s a large number and it just has been really strong. So yes, we did sign a bunch of new deals this quarter and there’s a lot more in the pipeline. So you’re just going to see a steady cadence of deals being signed and results reporting out to those pharma. We’re not going to be able to report most of those out to the public because these are proprietary relationships that we have with these pharma. But the data that we are seeing on Signatera is just consistently fantastic. The prognostic power of this test is amazing. The trial that we’re doing and the study that we’re signing up to test out the technology for a range of different applications from residual disease detection to know whether you’re done in the adjuvant setting with therapy, obviously recurrence monitoring and that’s one of the most exciting things here. The specificity of the test is so high. What we see is when the ctDNA starts to pick up in these patients even being detected at very low levels, those patients will recur and that specificity is such a strong, strong tailwind for this test, because that 18 million people living with cancer and remission from cancer in the United States along and a large portion of that market is interested in catching early recurrence. And you can start to treat patients upon molecular recurrence with all sorts of different methods the next few years if you got such a high specificity test. So that’s the second big application. The third area is looking at all of the immunotherapy work of personalized – new antigen tracking for the personalized cancer vaccines. And the fourth area is just as a new endpoint for clinical trials. If you look at Kaplan-Meier curves, the data is so strong to use this as a prognostic indicator. You use the level of cell for your DNA and you can substantially accelerate the trial and reduce the cost of the trial. So across all of those different indications we’re seeing a lot of interest from the pharma companies and the process in negotiating these deals and signing up new deals is ongoing. I think that we are going to be a little bit bandwidth limited in our team. We can’t just take on all the trials as fast as we want to, but obviously that bandwidth is growing as we start gearing up for a midyear launch.

Okay. Thanks. I appreciate all the color. And maybe one more on Q1. I was just wondering what the size of the negative headwind due to ASC 606 shift as big as maybe you had previously anticipated to be in Q1? I think you expected Q1 to be a little lighter than other quarters due to that transition, but 26% growth [indiscernible] strong start to the year. I’m just wondering maybe that negative impact in Q1 which might mean it could have less of an impact in Q4? Thank you.

Thanks. So the phone broke up a little bit there but I think the summary of the question was, was the quarterly impact of the ASC 606? There’s a bit more pronounced impact in Q1 but I think for modeling purposes it’s simpler to think about that is having pretty balanced through the course of the year. It’s not enough to make a huge difference.

Okay. That’s helpful. Thank you.

Thank you. Our next question comes from the line of Mark Massaro with Canaccord Genuity. Your line is now open.

Hi, guys. Thanks and congrats for a strong quarter. I wanted to ask to what extent do you think Evercord, Vistara and your recent ability to screen for twin pregnancies might be impacting competitive dynamics and wanted to get a sense if you – do you have a decent feel for where you stand in the marketplace in terms of market share?

Yes, I’ll take that. This is Steve Chapman. So I think when you have differentiated products like Vistara that allows us to get into customers that maybe weren’t open to visiting with our sales team previously, particularly in the maternal fetal medicine sector. So as Mike outlined, we see consistent growth in the high and low risk space and we are getting into maternal fetal medicine offices more regularly than we were previously. So it’s nice to have something differentiated. When you look at the twins offering, again, an offering that is significantly differentiated than anything else on the market, the only company that can determine zygosity which has very important clinical considerations, there’s really two benefits to having that. One is, you can get into customers that maybe want something unique and they want something differentiated. And the second is we can keep competitors out of our core account. So previously many of our big clients had Natera and then they also had a competitor because they needed to use that competitor to offer a twins NIPT offering. So today we’ve largely been able to remove those competitors from our offices and I think that’s part of the reason why we’re seeing an increase in account retention rate because the barriers to entry for competitors in our accounts have been raised. When you look at market share, we think the high risk market is around 65% or so penetrated and average risk is now between 15% and 20%, probably closer – getting closer to 20% penetrated and we think we have about one-third of the overall market as it stands today.

That’s really helpful. And the ACOG annual meeting has come and gone. I wanted to get a sense for any chatter that you heard out of the meeting as it relates to greater adoption of commercial payor coverage for average risk NIPT?

Thanks for these questions. They’re great. This is Matthew. So first I want to just add some color to what Steve said. We’ve got about a one-third share of the total market with so many competitors out there. That’s a pretty impressive growth trajectory that Natera has been on and continuing on. And our share of the low risk markets is much higher than that. Our share of the low risk markets are probably well above 50%. We reported about 55% in the past and maybe even low, but higher now. So this question about the payor coverage is very pressured [ph] to that issue. We are reluctant to make any strong statement about the timing of ACOG making a stronger push, kind of stronger policy statement that’s sort of more in line with ACMG and others and also reluctant to make statements about timing for the payors, like Aetna, United are holding out. But we are seeing payors – every month of so, we see additional payors cover low risk and it is a steady ongoing process. And I can say from the ACOG and ACMG meetings that the pressure is continually mounting. So it’s becoming harder and harder for these insurance companies to hold out. Obviously they have – some of them have held out, but now more than 50% and the growing number of covered lives are covering low risk and so the pressure is continually mounting. And we hear from key members of these professional societies that they are concerned, that there are some payors who are holding out and that there is a certain ambiguous response from the payors. So the fact that they will cover low risk is pretty much a given but we are reluctant to say exactly when they will fold. I can just say that at these society meetings, we see the pressure continuing to mount and that’s all I’m prepared to commit to you that it will happen and hopefully soon, but we haven’t been aggressive on this in our guidance. Our guidance has assumed hardly any change in coverage of low risk.

That’s really helpful. And if I can sneak one last one in. Matt, clearly you’re making strong progress building your biopharma collaborations and putting out some encouraging data on cancer liquid biopsies. Can you give us a sense – I might have missed it, are you on tack to launch clinically in oncology liquid biopsies this year? And then can you provide a comment on how you’re thinking about potentially submitting something to the FDA or maybe just going the LVT pathway?

Great question. Look, the data in oncology I don’t think is just encouraging; the data that we’re generating in oncology is phenomenal and I would encourage you to look at the Kaplan-Meier curves on the prognostic tests that are dominant in the oncology market to just see how our data compared to those curves. The data that we’re showing is really unprecedented. I got to be careful when I say unprecedented because who knows where in some corner of the world data is being produced. But that data is pretty phenomenal in terms of this prognostic path and its ability to differentiate Signatera negative versus those that are positive. In terms of the launch timing, we are still on target and pushing to get the launch out for the clear version at the end of this year and we will keep you guys updated. If it doesn’t happen at the end of this year, it will happen very soon in next year. But right now it looks like it’s going to be Q4 and we got a lot of the team working around all the logistics in the operations to build an infrastructure to build customized panels per patient. We’ve got this amazing technology that enabled that capability, but there’s a lot of logistics and operational support that’s got to go around that as well. So we are right now on target for the end of the year. And as far as the FDA is concerned, yes, we are going to be submitting this to the FDA and we haven’t made commitments about the timing but that is the track that we are on and very likely it’s going to be a joint submission to CMS and the FDA and others have done and which we think will be very advantageous for the market that Signatera is going to play in. And besides that, I’ll just mention something else that you didn’t ask. There’s a very big cash pay opportunity for Signatera because as we’ve said a few times, the assay is very low cost for us and we can go down this roughly single molecule level of detection with the relatively small amount of sequencing with insurance. But in the situation that insurance doesn’t cover, we will be able to bill the patients. And for patients that are in remission from a cancer and can potentially catch the recurrence much earlier in imaging without having to subject themselves to all the radiation and ongoing doctor visits of the imaging, this is a very attractive offering. So there’s a big cash pay opportunity and Natera has become very good at managing the logistics of cash payment from a very broad patient base. So I think that we will leverage our existing infrastructure of phlebotomist and our existing billing infrastructure to get into this market in a significant way over the next few years.

Great. Thank you very much.

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

Great. Good afternoon, everyone. Any update on the Illumina lawsuit? Just curious if you’re looking here to settle or do you plan on taking this through the court process?

I’ll take that. So we’re not going to comment on the lawsuit beyond what we’ve already commented. As we said before, this was not a big surprise. We knew [ph] Illumina may react this way to the announcement with QIAGEN. We think we’re in a very good position here. We’ve reviewed the IP landscape very carefully. And besides that, we have this long-term supply agreement with Illumina. So it’s not disrupting our business at all and we think that we’re in a very good position. And it’s just running the course that these litigations follow. There’s nothing very surprising there.

Okay. That’s helpful, Matt. And then Mike, understanding you’re being cautious around estimating the cash collection with regard to ASC 606. Can you just remind us if you do receive more cash than your prudent revenue in Q1, for example, how does this flow through the P&L and show up in future results?

Yes, it’d be a year from now we would come back and we would assess where our total cash collection for Q1, we would likely make an adjustment in that quarter, although the precise mechanics would have to be worked out.

Okay. That’s helpful. And then Matt, just another question from me. I would congrats on the continued data releases for Signatera. I appreciate there’s a huge opportunity here but I think it’s also a drag on the overall company’s profit. So I’m just wondering would it ever make sense to spin Signatera out into its own business and essentially give that technology some more visibility, because I think there’s an argument to be made here. The Signatera asset today is kind of being undervalued when being folded into Natera.

It’s a good question. Well, would there ever be an argument for spinning out Signatera in a separate company? Yes. There are arguments. At this stage, we’ve looked at this in various ways and we don’t think that it makes sense right now. The first thing is, it’s not that much of a drag as you might think. We’ve made an enormous amount of progress with Signatera. Doing the clinical trials were really cheap. We’ve been piggybacking on existing trials and the performance of the technology is so strong that a lot of the top KOLs around the world who have been collecting banks [ph] of samples and are looking to do liquid biopsy as part of their trials are working with us. In some cases, paying us but in many cases just working with us without the company, Natera, having to spend significant money on these very expensive samples. So we’re getting a lot of work done, a lot of very profound data collected at a high speed and low cost. In terms of the R&D budget, I think we had a figure last year which was around 17%, 18% of R&D budget was on oncology. And I think now we’ve got budgets for oncology which is around 25% of R&D spend. So this is not a huge drag on the company’s profits. And the other thing is speaking practically, we’ve got a lot of overlap in our technology. We’ve taken this mass review multiplex PCR capability that we developed and refined in the prenatal space and we’ve applied that with a bunch of tweaks to oncology and we also expect Constellation of which is a really beautiful software package that we built for the cloud in the prenatal space is also going to have bearing on the oncology opportunity worldwide. And so there’s a lot of overlapping skills in the R&D team and it would not be efficient for us to be dividing out the R&D team across these lines nor would it be efficient for us to be dividing out the management of the company along these lines. So at this stage, we think that the team is working very well together. We’ve got a very good sort of matrix organization right where we’ve got a lot of very well established protocols over the last couple of years to manage these different projects and to use overlapping expertise in an efficient way. And so all these things being weighed, we don’t think we would be doing the right thing to spin it off right now. Could that happen in the future? Yes. It is a possibility in the future but not something we’re looking at in the near term.

Okay, understood. Thank you. Great quarter.

Thank you. And that does conclude today’s Q&A session. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all disconnect. Everyone, have a great day.