Natera Inc (NTRA) 2015 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to Natera, Inc. Q4 2015 earnings conference call.

(Operator Instructions)

As a reminder, today's conference is being recorded. I'd now like to introduce your host for today's conference, Mr. Mike Brophy, Vice President, Investor Relations and Corporate Development. Sir, please go ahead.

Thanks, Liz. Good afternoon and thank you for joining our conference call to discuss the results of our fourth-quarter and full-year 2015. 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 be making 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-Q 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 would 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. Matt, go ahead.

Thank you, Mike. Good afternoon everyone and thank you for joining us today.

Steve Chapman and I will begin with a review of our business and recent highlights of the fourth quarter. After that Herm will review our financial results and provide our 2016 guidance and then we will open the call up for questions.

We are very pleased with our performance in the fourth quarter. We accessioned roughly 92,000 commercial tests compared to roughly 59,000 commercial tests accessioned in the fourth quarter of 2014, an increase of about 56%.

For Panorama we accessioned roughly 73,000 test compared to roughly 50,000 Panorama test accessioned in the fourth quarter of 2014, an increase of about 46%. For Panorama we experienced balanced volume growth between high risk and average risk patients.

Based on these numbers, we believe we continue to be the NIPT volume leader in the United States. We believe that this test volume growth represents continued strength of our technology and commercial platform in NIPT and significant uptake of our new carrier screening panel that we launched in July. We accessioned roughly 15,900 Horizon carrier screening test in the quarter compared to roughly 6,300 Horizon tests accessioned in the fourth quarter of 2014, an increase of about 152%.

We are also very pleased with our financial performance in the fourth quarter. Total revenue was $52.9 million which represents roughly 6% growth compared to the fourth quarter last year and 18% growth compared to our third quarter in 2014.

Total revenue for the full year of 2015 was $190.4 million which represents roughly 20% growth compared to 2014. So despite the coding changes at the beginning of the year which reduced NIPT ASP we have been able to continue to grow revenues meaningfully by driving volume growth and winning market share.

Gross margin was 40% in the fourth quarter and roughly 41% for the full year of 2015. These gross margins are below the results from 2014 largely because of the NIPT coding changes. However, fourth-quarter gross margins represent roughly an 8 percentage point improvement from the third quarter of 2015.

Several factors drove our financial performance in the fourth quarter. First and most important we continued to grow volume and win market share in both NIPT and carrier screening products. Aided by the investment we have made in our direct salesforce and user experience, our customers are clearly seeing the value in our abilities of a best-in-class NIPT, microdeletions and carrier screening test from a single needle stick for the patient and a single requisition form for the doctor.

Second, we benefited from the strong volume growth we generated in the third quarter, particularly with the successful launch of our new Horizon carrier screening test. Because we recognize revenues primarily on a cash basis, the meaningful component of the revenue associated with the strong volume growth we witnessed as part of the launch in Q3 was not recognized until the fourth quarter. Finally, we have continued to drive reimbursement among a broader set of payers and improve our success rate when appealing previously denied claims.

Our R&D efforts are maintaining a focus on projects that improve test performance and reduce cost of goods sold in our core prenatal health business. And we rolled out several critical innovations in our lab during the fourth quarter. As we have discussed in the past, one reason why our SNP-based approach offers superior performance to quantitative methods used by competitors is because we differentiate between maternal and fetal DNA in the blood sample which affords us clearer view of the baby's DNA.

Historically this approach has required us to run separate workflows for maternal DNA from a sample and the plasma from a sample which is a mixture of maternal and fetal DNA. However, recent innovations in our SNP technology and bioinformatics have allowed us to eliminate the maternal workflow from our process. Because we are deep sequencing each single nucleotide polymorphism or SNP, we can infer the maternal DNA based on our analysis of the plasma DNA with no loss in performance.

We also made improvements to our statistical algorithms that allow us to provide a result on samples with a lower than usual fraction of fetal DNA while still maintaining our desired test performance. This allowed us to substantially reduce the need to reflect samples with low fetal fraction and a higher sequencing depth of read which further reduced our sequencing cost during the fourth quarter.

In summary, we feel we are in a very strong competitive position in our prenatal health business and we expect to continue to drive volume growth and win market share. Through the course of 2016, we expect to achieve significant improvements in the stability and predictability of reimbursement for our tests, drive further cost of goods sold improvements in our lab and demonstrate our potential in the oncology liquid biopsy space with a series of published data.

I would like to spend a few moments on each of these areas and lay the foundation for what we expect the business to look like in 2017. First, reimbursement.

We've discussed in the past that we are planning to make a substantial transition to in-network contracts with many of the largest payers. To that end we are very pleased to announce that we recently signed an agreement on December 31, 2015 to become part of Aetna's laboratory network effective February 15, 2016.

We also signed an in-network contract with Cigna and we are in active contracting discussions with additional plans. Going in-network will impact our ASPs in the near-term but the long-term benefits are compelling.

I mentioned that one component of our success in Q4 involved winning reimbursement from a broader set of payers and improving our success rate when appealing denied claims. This includes improved execution when appealing to private payers but we've also made significant progress in obtaining the relevant approvals and certifications necessary to bill Medicaid payers in those states with sufficient reimbursement levels for our test.

Regarding microdeletion reimbursement, we are making good progress on the enrollment of our SMART trial which is a large prospective clinical trial designed to meet the requests of the professional societies to deliver more data in microdeletion testing. We expect that data to read out in 2017.

Now we are very happy to announce that upon careful review of our data the American Medical Association, AMA, has granted a current procedural terminology or CPT code for fetal chromosomal microdeletions in circulating cell-free fetal DNA in maternal blood. This code is scheduled to go into effect in January 2017 and we believe represents further validation of the clinical importance of microdeletion testing. I will ask Steve to elaborate further on this later in the call.

Regarding the reimbursement landscape for average risk NIPT we've been encouraged by the pace of change in medical policies since last June. And we were pleased to read the latest ACOG Practice Bulletin regarding aneuploidy screening that was released last week. I will also ask Steve to provide further reimbursement details later in the call.

Second, cost of goods sold. I described the significant progress that we've made on the performance in COGS in our prenatal health business to date and over the next roughly 12 to 18 months we expect to make continuous improvements that will allow us to generate gross margins above 50% in our prenatal health products. This forecast incorporates generally expected reductions in payers and pricing as payers adjust their coverage policies to accommodate the average risk population.

Our plan improvements in performance and cost of goods sold in this area represent critical component of our R&D roadmap for the year. For example, we remain on track to launch version 3 of our Panorama test this year which is expected to further reduce COGS for Panorama and microdeletions.

Third, data in oncology, we are engaged in several research efforts with a set of leading academic centers including Columbia, Cancer Research UK, Stanford, Vanderbilt and Johns Hopkins. We are actively negotiating additional collaborations that we expect to announce later in 2016.

In our Q3 earnings call, we promised to deliver initial data in a number of indications and we are very pleased to have recently announced the first published study arising from our collaborations on the TRACERx lung cancer trial. TRACERx funded by Cancer Research UK is a national collaboration between six clinical centers and four centers of scientific expertise in the UK that is intended to study tumor heterogeneity in lung cancer patients over time. Lead investigator Charlie Swanton and his team selected Natera to provide cell-free DNA analysis for patients in this study.

The first pilot study supporting our lung therapy selection panel was recently published by Dr. Swanton and team in Annals of Oncology. This study demonstrated our ability to detect both clonal and subclonal mutations in blood samples from patients with early-stage, non-small cell lung cancer. As we have described in the past, we believe our demonstrated ability to detect tumor variants at very low concentrations in a plasma sample is crucial for detecting these sub-clonal mutations.

In the Annals of Oncology study, 25% mutations that we detected in patients with stage I and stage II lung cancer were subclonal mutations, meaning they occurred in only one part of the tumor. We believe this is critical because invasive solid tissue biopsies that sample only part of a tumor may miss these subclonal mutation. Because it generally takes six to nine months before these subclonal mutations take over a tumor, we think the ability to measure them early on in the plasma can have a meaningful impact on patient care.

So, that is why we think we have a differentiated lung cancer therapy selection panel and we are focused on that indication for our first commercial product in oncology. We remain on track to report more data in a number of additional oncology indications this year.

One more point regarding new business opportunity. As you have seen from the volume and revenue data we are presenting today, our direct sales force is proving to be a significant competitive advantage. We are planning to expand our product portfolio in women's health and further leverage the strength of our channel.

We have identified several opportunities and we expect to execute on at least one of them over the next 12 months. All of these initiatives leave us very powerfully positioned for 2017 when we expect to be operating in a very large high-growth market with both average risk and high risk NIPT patients with strong gross margins and stable reimbursement for our full suite of prenatal products.

In this environment we will expect revenue growth to predictably track our continued volume growth. We also expect to have data in hand to drive further revenues in oncology.

I will now have the call of it is Steve Chapman to elaborate on our key highlights and commercial progress in the quarter. Steve?

Thanks, Matt. We significantly advanced our contracting discussions with payers in the quarter.

Matt mentioned that we recently entered in-network contracts with national payers including Cigna and Aetna. These new in-network contracts broaden our base of direct contracts already in place which includes many Anthem plans and broad coverage with state Blue Cross/Blue Shield plans. We believe these recent additions to our base of covered lives demonstrates the strength of our offering in prenatal health and offers a new and compelling selling point as we compete for market share.

Many physicians are reluctant to order a test from a provider that they know is out of network for many of their patients and will only use in-network providers. Having in-network contracts with a critical mass of national plans is an important advantage that we have not enjoyed historically and we are very pleased to be offering improved patient access to our tests. We are in active discussions with additional key payers and expect to broaden our in-network contract base in the near future.

Matt touched on the new CPT code for microdeletion testing that the AMA issued. We submitted an application for a microdeletions code in 2015 and the AMA performed a detailed review of the published literature on microdeletions, the technology available to screen for these disorders and the current volume of testing. Based on their review they made the decision to grant a new code.

This code is independent from the cell free aneuploidy code and therefore can be billed separately. In addition to our clinical experience study published earlier this year and the SMART trial expected next year we believe this editorial action represents a critical step for sustainable reimbursement for microdeletions testing. As Matt mentioned it is scheduled to go into effect at the beginning of 2017.

We continue to invest in providing a first-class user experience for our customers. During the fourth quarter we were very pleased to launch a patient portal within our digital services platform. In this patient portal, patients are able to schedule genetic information sessions, schedule a blood draw at one of our contracted locations, access our mobile phlebotomy network, track the progress of their test, pay their bill and inquire about additional test and services.

The patient portal gives us the opportunity to connect directly with over 200,000 patients per year while delivering a high quality branded user experience. This connection gives us a chance to reach these patients in new ways in the future for example for new tests and services.

We have also seen continued uptake of our Constellation software platform by our lab partners. We recently issued a press release announcing that Genetica, a leading laboratory for prenatal diagnostics in Switzerland, is now offering the Panorama NIPT in Switzerland via our Constellation software platform. Payers in Switzerland are now covering NIPT for high risk patients, allowing for broader patient access and increased demand for best-in-class testing options from labs operating in Switzerland. We are pleased to be offering best-in-class service for our launch partners in Canada, India and Switzerland.

Since the shift towards a direct sales model in the United States we have continuously monitored our execution within the direct channel to ensure we are driving growth from profitable accounts. In many cases we have found that we were able to drive average risk NIPT volume which is not yet broadly reimbursed while maintaining positive gross margins at the account level by effectively cross-selling other tests such as Panorama for microdeletions and Horizon carrier screening.

As we evaluated the performance of our direct salesforce during the fourth quarter, we identified several opportunities to maximize productivity of the channel. We updated our compensation plan to further incentivize profitable unit growth and drive the right product mix in our business. By optimizing sales territories and reducing focus on accounts that based on the data we've gathered to date are unlikely to drive acceptable gross margins in the future, we continue to drive efficiencies in our salesforce. While we anticipate some short-term impacts to unit growth as our sales reps adjust to these changes, we feel very confident in our ability to continue to drive high-quality volume growth over the medium term and beyond.

We remain committed to our strategy of gaining market share in the average risk NIPT setting in anticipation of broader payer reimbursement. Based on the data published to date we believe our suite of prenatal health products represents a compelling offering to patients regardless of maternal age.

We have been encouraged by the pace of coverage policies accommodating the average risk population so far. Since the updated ACOG guidelines were released in June we have seen plans representing approximately 70 million lives update average risk coverage policies.

While we think that this represents positive momentum as we enter into 2016, we estimate that only one-third of commercial plans in the United States have updated their coverage policies so far. Based on our conversations with payers we believe coverage policies will continue to change in favor of average risk through 2016 and early 2017.

Several societies affect standard of care in this area like the American College of Medical Genetics and Genomics and The American Congress of Obstetricians and Gynecologists. And we expect them to continue to become more supportive of NIPT in the average risk setting in 2016 and beyond.

For example, we were very encouraged to read the latest ACOG Practice Bulletin published last week. Based on the ACOG update we believe that cell-free DNA screening is now clearly an option for all patients regardless of maternal age. This is consistent with our strategic bet that the benefits of cell-free DNA screening are compelling and will enjoy broad adoption and reimbursement for all risk categories.

Let me know hand the call over to Herm to review our financial results.

Thanks, Steve, and good afternoon. Our fourth-quarter and full-year financial results are included in our press release that crossed the wire earlier this afternoon. Our fourth-quarter total revenues were $52.9 million compared to $49.9 million for the fourth quarter of 2014, an increase of about 6%.

Matt commented on drivers for revenue growth including Q3 tests accession that were ultimately recognized as revenue in Q4. Roughly 46% of our fourth-quarter total revenue was derived from test volumes accessioned in the quarter. The balance of our revenues was derived from test accessioned in prior periods.

Total revenue for the year ended December 31, 2015 was $190.4 million compared to $159.3 million for 2014, an increase of about 20%. The increase in total revenues from 2014 to 2015 was primarily due to higher test volumes, particularly for Panorama.

The percentage of our total revenue attributable to our US direct sales force for the three months ended December 31, 2015, was roughly 79%, up from 76% for the three months ended December 31, 2014. For the full-year 2015 our direct salesforce generated 77% of our total revenues compared to 59% in the full-year 2014. The percent of our total revenue attributable to US laboratory partners for the three months ended December 31, 2015 was roughly 10%, down from 11% for the three months ended December 31, 2014.

For the full-year 2015, revenue from our laboratory partners represented 10% of total revenue, down from 26% in 2014. The percentage of our total revenues attributable to the international laboratory partners and other international sales for the fourth quarter of 2015 and 2014 was roughly the same at 13%. The decrease in revenues attributable to our lab partners was a result of our increased focus on the direct sales model in the United States in the second half of 2014.

Gross profit for the three months ended December 31, 2015 was $21.1 million, representing a 40% gross margin compared to $27.2 million, representing a 55% gross margin in the same period of the prior year. Gross margins declined due to any increase in the average cost per test and a reduction in revenue received per test. The increase in the average cost per test was related to higher volumes for our Panorama microdeletions panel which require additional material and labor costs.

Matt discussed the rollout of our V3 technology which we expect will meaningfully reduce the cost of goods sold of our microdeletions panel. The reduction in revenue received per test was associated primarily with reduced average reimbursement for Panorama due to new CPT codes that went into effect in January 2015.

Matt touched on the gross margin improvement from the third quarter of 2015 to the fourth quarter. This improvement was largely driven by continued growth of reimbursed units, reimbursement of Horizon tests accessioned in Q3 and improved win rates on appeals of previously denied claims.

Research and development expenses were $8 million in the quarter compared to $4.5 million in the same period in 2014, an increase of $3.5 million. The increase in research and development expenses was primarily attributable to increases in personnel-related costs associated with an increase in research and development headcount.

Selling, general and administrative expenses were $30.4 million in the quarter compared to $18.4 million for the same period in 2014, an increase of $12 million. The increase over the prior year reflects the net addition of 142 employees and contractors from December 31, 2014 to December 31, 2015 as we increased our focus on the direct sales model in the United States.

Net loss for the three months ended December 31, 2015 was $23 million, a $0.47 loss per share compared to net income of $1.3 million, all of which was applicable to preferred shareholders. Therefore, there were no revenues applicable to common shareholders for the same period in 2014.

Net loss for the year ended December 31, 2015 was $70.3 million or a loss of $2.68 per share compared to a net loss of $5.2 million or a loss of $1.07 per share for the same period in 2014. The weighted average shares outstanding were 48.6 million for the fourth-quarter 2015 and 26.2 million for the year ended December 31, 2015. The difference in the weighted average shares outstanding between the fourth-quarter and full-year 2015 is primarily due to Natera's initial public offering on July 01, 2015 in which we sold 10.9 million new issued common shares and 31.4 million preferred shares were then automatically converted into common stock on a 1 to 1 basis.

At the close of the quarter the Company held $232.1 in cash, cash equivalents, short-term investments and restricted cash compared to $88.5 million as of December 31, 2014. As of December 31, 2015, we have drawn down $42 million under the $50 million line of credit in place with UBS at a variable interest rate of 30-day LIBOR plus 65 basis points. We continue to think our current cash position will allow us to fully pursue all of the opportunities the team has discussed today.

Turning to our future outlook for 2016, we anticipate 2016 total revenue of $190 million to $220 million; 2016 cost of product revenues to be approximately 60% to 65% of revenues; selling, general and administrative costs to be approximately $120 million to $130 million; research and development costs to be $45 million to $50 million and cash burn to be $80 million to $90 million. Natera's research and development investments are intended to enhance the service offering and reduce the cost of goods sold to Panorama and Horizon as well as technology development, product development and clinical trials within oncology. In 2017 we expect revenue growth to closely track our continued volume growth, driven by stable in-network pricing and broad payer coverage across our reproductive health business.

We are conservatively taking into account several factors with this guidance. First, reimbursement in the average risk NIPT setting. We have been pleased with the pace of adoption thus far.

Based on our conversations with payers we believe coverage policies will continue to change in favor of average risk through 2016 and early 2017. However, because we haven't yet seen a critical mass of the national private plans change their policy to cover average risk patients we feel we must err on the side of caution as it relates to the specific timing of these coverage decisions. So we are not including rapid changes in medical policies and reimbursement accommodating average risk this year in our financial forecast.

Second, out guidance conservatively assumes a substantial reduction in microdeletions reimbursement through the course of the year. We believe that our published clinical experience coupled with data from our SMART trial and the recently issued CPT code for microdeletions represent a strong case for inclusion of microdeletions testing and a broad set of society guidelines which will be the foundation for strong reimbursement of our panel. While reimbursement for our microdeletions panel has remained relatively stable, that reimbursement could erode in 2016 prior to more positive changes in the guidelines.

And third, Steve described our progress on entering in-network contracts with several large national plants, which is crucial for the longer-term growth of the Company. As we have described in the past, however, our in-network pricing will be lower than the pricing achieved as an out-of-network provider and we expect this to adversely impact 2016 revenues.

The majority of the progress we made on entering into in-network contracts occurred later in Q4 and many of the contracts are scheduled to begin in 2016. Over time, we think this near-term impact to revenues will be more than outweighed by enhancing our ability to win share by collecting on higher percentage of our claims. Nonetheless, we believe we're taking a conservative outlook on 2016 volume growth based on our in-network status. Being broadly in-network adds stability and consistency in reimbursement going forward and helps with all of our products in development.

Finally, we are increasing our investment in R&D during 2016 to achieve two key objectives. Our first priority as Matt mentioned is to invest in our core prenatal health business to improve test performance and reduce cost of goods sold. We expect these investments to pay dividends over the lifecycle of our business.

And second, we are investing in both technology development and clinical trials necessary to develop and launch commercial products in oncology. As we have discussed in the past, we believe the size of the opportunity in oncology is three to five times the size of our roughly $4 billion prenatal health market and we feel these investments position us well to become a leading player in the emerging liquid biopsy sector. Although we are actively working towards commercial applications in oncology we are not including oncology revenue in our 2016 guidance.

I will now turn the call back over to Matt for final comments.

Thank you, Herm. We are very pleased with the progress this quarter. We believe the commercial execution we demonstrated in the quarter coupled with the R&D productivity we have demonstrated both in our lab and in publications bodes very well for the future.

Would the operator please open up the call for questions now?

(Operator Instructions) Bill Quirk, Piper Jaffray.

Great, thanks, good afternoon everyone. First question, I guess a couple for Steve, and I guess thinking about the new contracts with both the Cigna and Aetna, can you elaborate a little bit on which specific tests they cover, I guess which indications in the case of NIPT?

And any I guess any restrictions that you can speak of. I don't know if there's any geographic ones, for example one of your competitors noted that in their call. Thanks.

Yes, thanks, Bill. So we've been very pleased with our progress in coming in-network. Not just with Aetna and Cigna but also broadly with many of the regional Blue Cross/Blue Shield plans and many of the Anthem plans.

So we generally contract for our entire book of business. The coverage policy by each plan determines whether certain indications are covered or not. I think it's well established in their medical policy today that Aetna and Cigna are not covering low risk aneuploidy screening.

We feel positive about the changes in coverage guidelines that have occurred thus far and as we mentioned we continue to see a positive outlook throughout 2016 and 2017 with respect to coverage of average risk NIPT. With respect to the geographic nature, these are both national contracts.

Okay, perfect. And then is it safe to say, Steve, that in the event, and I think it's probably inevitable but you never want to say that when we're talking about reimbursement, that Cigna and Aetna changed their medical policy. Is it relatively straightforward to amend the existing contract that you have?

Well, as I mentioned we are already contracted for certain CPT codes which includes the code that we use for NIPT. So it's not necessarily clear that we would need to make adjustments. When the plan updates their policy that changes the way that they process the claims as they are submitted and it's not clear at this time that there would be a need to do that.

Okay, perfect. And then just last one for me and I will let somebody else jump in the queue here. Can you just elaborate on when you changed, or I should say when the new comp plan went into effect and if there are any sort of metrics that we can think about?

You obviously indicated that you may have an effect on volume at least in the near term. I'm just trying to get a sense as to the magnitude of that. Thank you.

I will let Steve take that.

Yes, thanks. So I mean there's no specific metrics I'm going to disclose now. But I think as we indicated in the script we're focusing on driving a certain product mix within accounts and we are also focused on business from profitable accounts.

And I think as such there are certain unprofitable accounts or even unprofitable geographies where it doesn't make sense for us to pursue growth. But there's no specific metrics I'm going to outline today.

And sorry, then just timing, when did that go into effect? Thanks.

So we have a quarterly compensation plan. So the changes that were outlined are effective for Q1.

And I will make a comment here. I think that Steve and team have done an exceptional job being data-driven and optimizing the efficiency of the sales team. So I expect that this is going to continue to work very well for the Company.

Got it. Matt, Steve, thank you.

Steve Beuchaw, Morgan Stanley.

Hi, good afternoon. Thanks for taking the questions.

First is I guess a two-parter with regard to the outlook for gross margins. It would be really helpful if you could elaborate a bit on the outlook for the deployment of V3 and give us a sense for what that might mean to COGS per test over the next year or two.

And then second, just a clarification, in the prepared remarks I believe that you said that you thought there was a path to 50% gross margin. And that was on prenatal segment of revenues. Did I catch that correctly?

Thanks. So I will take the first part and then actually I'll take both of them and then if Herm you want to comment afterwards feel free. So in terms of the COGS improvement we have already made a set of COGS improvements and we are continuing to make COGS improvements on a kind of rolling basis which will go through this year and into 2017.

One of the main COGS improvements is going to be the launch of the V3 technology and we're on track to do that by the end of this year. So I think that that's going to be a really good scenario where we are generating the same power of our technology at very good COGS.

In terms of the 50% gross margin that was mentioned, we use the term sort of generally accepted ASP levels or something to that effect. And if you look at the analyst models, most of the analysts are assuming that by the end of this year NIPT is going to be reimbursed a little bit above $400 price range. And at that level we should be generating a really healthy gross margin above 50%.

I should mention that our models are actually more conservative than that. So if those analyst models come out as expected, that would be really good news for us.

Now besides those numbers related to this the base NIPT, this AMA approval of our application for a separate microdeletions code is really great news. And so we expect that when that code comes into effect in 2017 and with the ongoing data that's published on microdeletions we should see improvement in microdeletions in 2017 if we see reduction in microdeletions reimbursement in 2016 which is what as Herm mentioned we have conservatively assumed in our guidance.

The microdeletions as I've mentioned a few times are so prevalent, you know just 22q11. It's much more common in cystic fibrosis, there is an intervention at birth that makes a really big difference. It's got a much bigger lifetime cost than cystic fibrosis.

So with that separate code, we expect that screening for something like 22q11 should become ubiquitous as well. And there are a bunch of societal guidelines which are coming down the pipe which we expect to be quite supportive, very supportive hopefully.

So with that scenario the reimbursement for NIPT plus the microdeletions reimbursement should let us operate at very good and stable gross margins. And this is a scenario when we're in-network very broadly and getting really stable reimbursement. And we would expect that the revenues would pretty closely track the growth in volumes at this point and at that point and we expect that the growth in volumes will continue as we have shown in the past.

Very helpful. And I just have one follow-up actually on your point around microdeletions.

In some of the publications that we've seen here very recently on microdeletions there was some commentary on the positive predicted values. And those positive predicted values were higher and lower in part depending on a function of whether or not there was a reflex to a higher depth of sequencing for the microdeletion test. Is it safe to assume that the Company will transition to something of a reflex strategy and get those PPVs materially higher this year?

Yes, I love that question. So in our reports we had assumed a pretty conservative positive predictive value, for example for 22q11, based on a conservative estimate of our specificity and a conservative estimate of the incidence rate.

What we actually found in practice is that the PPV was roughly three times higher, a little bit more than three times higher, than what we put in our reports. We saw PPV in practice at 18%.

When we do the reflex, and this is what was published, we saw a positive predictive value of 42% for 22q11 which was really great. And actually I've seen recent data would suggest it could actually be higher than that as the technology continues to improve. So that PPV is a really strong indicator that this is a very high specificity test and also that it's relatively prevalent in the population, and absolutely we will be implementing that reflex test in the near term.

Super helpful. Thanks so much, everyone.

Catherine Ramsey, Robert W. Baird.

Hey guys, a couple of questions from us. You've talked about you thought about a third of plans had updated their policies to include average risk and thought that they would continue to do that on a rolling basis throughout 2016 and early 2017. So I guess if we think about it that way and as you go in-network with more payers throughout the year I guess what gives you confidence that your 2017 revenue would track with volumes?

I will make some brief comments there and then I will hand it over to Steve. So firstly, the general topic, low risk reimbursement, we are pretty encouraged by the change in coverage policy. I think Bill and some of the analysts have put out notes describing the number of payers that have changed their policies.

A lot of them have changed their policies out of the regular scheduled timing for policy changes. So in general we're encouraged, and there is little doubt in my mind that we've made a really good that on leading and dominating low risk -- I shouldn't say dominating, I should say just really leading the low risk market in the United States. I think we've made a very strong and a very sound that on the general market for NIPT.

Now that said, we are erring on the side of real conservatism here because we can't predict exactly when some of the big national plans are going to change their policy. Based on the ACOG guideline of last week we are really happy that ACOG's ship is turning and they are accepting the low risk data and they have basically said that low risk sensitivity and specificity is roughly the same as the performance in the high risk population in terms of sensitivity and specificity. And they've issued guidelines for NIPT in the general population.

So I think based on the ACOG guidelines and based on the very strong data it's just a question of time before these national plans convert. And we're assuming that they are likely to be converting in the timeframe so that in 2017 we would be seeing pretty solid reimbursement in-network across the board for low risk tests.

And in that scenario there is no reason why the increased volumes shouldn't track with increased revenues. And I think that we're being very conservative in our guidance for 2016. So that's my take, Steve, do you want to say anything there?

Yes, Matt I think you summarized accurately. So I don't have anything additional.

Could you give us a quick update, I know Herm talked a little bit about the growth in your overall employee base, but could you give us an update on the size of your salesforce exiting 2015?

Steve, do you want to take that?

Yes, sure. I will talk about that. So as I mentioned we've focused on running our territories efficiently.

We have reduced some of the geographies in certain locations where we didn't see outlook for profitable growth in the future. But that shouldn't really be seen as a meaningful setback in our sales footprint as we still have a very large sales team. So there's close to 140 sales representatives including direct and hospital reps on the ground in addition to a strong management team leading the way throughout multiple geographies.

So we're pleased with the size of our team. We think it's rightsized. And our focus on efficiency will drive more profitable growth while still allowing us to reach the target market.

Perfect. Thanks guys.

I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. Rabinowitz for closing remarks.

Okay, thank you everyone very much. We had a really great quarter. And I'm very pleased with the progress of the team, both on the commercial as well as on the technology side.

So with that I think we should end this call. Thank you, all.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.