Natera Inc (NTRA) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Natera, Inc. Q2 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).

I would now like to introduce your host for today's conference, Mr. Mike Brophy, Vice President of Corporate Development and Investor Relations. You may begin.

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our second-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 assumptions for that guidance, the effects of recent practice guidelines, 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 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 would like to turn the call over to Matt.

Thank you, 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 second 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.

During the quarter we continued to make significant progress and reached several important milestones. Specifically, we accessioned over 103,000 commercial tests compared to roughly 69,000 commercial tests accessioned in Q2 2015, an increase of about 49%.

For Panorama, we accessioned over 80,000 tests compared to roughly 58,000 tests accessioned in Q2 2015, a 38% increase.

For our Horizon carrier screening panel, we accessioned greater than 18,800 tests compared to roughly 7000 horizon panels in Q2 of 2015, an increase of approximately 169%.

We significantly extended our supply agreement with Illumina and broadened our existing partnership to include the field of oncology. This ten-year agreement secures access to their next-generation sequencing capabilities for the long-term.

We announced a new collaboration with the University of California, San Francisco to study DNA markers of kidney transplant rejection. We have completed technology transfers for Panorama via Constellation with three additional labs including Unilabs. Unilabs is one of Europe's leading providers of clinical laboratory testing and medical diagnostic imaging services and has an extensive network of 115 laboratories.

We were very pleased to see the latest practice guidelines released by the American College of Medical Genetics, or ACMD, recommending that physicians inform all pregnant women that NIPT is the most sensitive screening option for traditionally screened aneuploidies and that all pregnant women should be informed of the use of NIPT to screen for a targeted set of clinically relevant microdeletions.

Okay, turning to the quarter, we generated Q2 total revenues of $52 million which represents 15% growth. For the first time, a significant portion of our revenues in the quarter were derived from in-network payer contracts. Our transition to in-network status has gone smoothly and I will ask Steve and Herm to elaborate on this later in the call.

Gross margin came in at 40% in the second quarter, down from gross margins of 43% in the second quarter of 2015. As we mentioned in our last call, we expected reductions from in-network pricing to reduce our revenues and gross margins in the near-term but we continued to mitigate the impact by driving more business from more profitable accounts.

As we have previously described, we are usually able to run accounts profitably even when reimbursement for average risk NIPT is poor based on good reimbursement for our Horizon carrier test and our other products. However, in our rapid expansion, we had also collected a number of accounts which due to product and insurance mix, were not likely to be profitable for us in the near-term and we have chosen to shut down these accounts as we shift more focus to profitability. We believe this strategy has paid dividends as we maintain volumes in line with our record performance in Q1 while further focusing our sales efforts and reducing nonprofitable volume. Accordingly, our mix of volumes from profitable accounts is at the highest level yet and we saw good volume growth within this cohort of our commercial business within the quarter.

Achieving further improvements in cost of goods sold remains a top priority within research and development. 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. We expect V3 performance will be in line with the performance of V2 while reducing COGS. The performance we have achieved with our V2 technology was recently published in Fetal Diagnosis & Therapy.

In this validated study using 587 samples, we maintained a sensitivity of greater than or equal to 99.4% and 100% specificity for all conditions tested while delivering a no call rate of only 2.3%. Historically, we had tolerated a higher no call rate in return for excellent sensitivity and specificity. In this paper we demonstrated that a key result of our V2 Panorama test was that we have been able to maintain best-in-class test performance while substantially reducing the no call rate.

I mentioned the New American College of Medical Genetics guidelines at the top of the call. ACMG is the professional society that we believe is most directly responsible for standards and guidelines for genetic testing in the United States and is the most recent medical society to advocate for broader adoption of NIPT including recommendations that encourage NIPT as the optimal initial screening test for all pregnant women, regardless of age or other risk factors.

These latest guidelines reflect the growing consensus among genetic experts and that the clinical benefits of NIPT are superior to conventional screening options for women of every age.

The Committee also recommended informing all women of the availability of testing options for clinically important microdeletions such as 22q11.2 microdeletion which is by far the most prevalent microdeletion and which has clear clinical interventions to improve outcomes associated with it.

The ACMG Committee also stated that labs must clearly provide fetal fraction detection rate specificity and positive predictive value or PPV and negative predictive value or NPV for all conditions being screened on the lab report including microdeletions. Many competitor labs don't routinely report fetal fraction today and many that do report fetal fraction cannot measure it accurately as we can do with our SNP-based technology.

This was highlighted by a letter Fetal Diagnosis & Therapy where nonpregnant samples were sent to a set of labs and those not using a SNP-based method either reported normal female pregnancy or in some cases highly inaccurate fetal fractions.

Competitor labs which have substantially inferior sensitivity on microdeletions such as 22q11.2, adopt strategies where they report microdeletions as incidental findings and avoid indicating both their sensitivity and NPV. We feel that these explicit guidelines from ACMG will equip us to further differentiate our unique capabilities for several aspects of Panorama including our performance on microdeletions.

ACMG specifically did not recommend the use of NIPT for genome-wide copy number variant screening. This recommendation is consistent with our belief that coverage of the genome must be rolled out commercially in tandem with excellent test performance and responsible validation studies.

Next week we intend to launch a new testing protocol for fetal 22q microdeletions which we anticipate will substantially reduce the false positive rate and increase the PPV. This effort is the first phase of deployment of our V3 technology and we expect that it will reduce costs for microdeletions while further advancing key performance metrics.

The new protocol involves reflexively re-sequencing samples that are found to be at high risk in the initial assay. Based on the analysis of our clinical experience study of more than 20,000 samples published in Obstetrics -- sorry -- published in Ultrasound and Obstetrics and Gynecology, these improvements to the fetal 22Q microdeletion test will reduce the false positive rate by more than a factor of 3 to 0.12% and increase the PPV from 18% to above 40% while continuing to offer industry-leading sensitivity of greater than 95%.

We still remain cautious on microdeletions reimbursement in the immediate term as the payers review this new information and Herm will elaborate on our guidance later in the call. However, we believe this performance combined with growing recognition from bodies such as ACMG and the American Medical Association and from data from our prospective SMART trial that we anticipate publishing next year, leave us very well positioned for stable reimbursement of microdeletions in the future.

In July, we participated in a meeting with The Center for Medical Services on how to prepare -- sorry -- that was the Center of Medicare Services on how to price the new microdeletions code that becomes effective in January. Four members of the panel recommended to price the code at $797 and eight members recommended to set the rate based on the median price of the eight local Medicare contractors reimbursement for the code, a process known as gap filling. The policy discussions are still ongoing.

This is relevant to us mostly because the state Medicaid plans often base their pricing decisions on Medicare's rate. Given that relatively few Medicaid plans reimburse for microdeletions today, we believe this process represents potential upside to our business regardless of the pricing mechanism chosen.

Now turning briefly to new indications and oncology. We recently issued a press release describing a new collaboration with UCSF in the field of transplant medicine. As many of you know, UCSF is a world leader in organ transplantation. In this collaboration, they will use our MMPCR technology and informatics solutions to analyze the level of donor derived cell free DNA in several hundred plasma samples from kidney transplant recipients with and without organ injury.

Natera and UCSF will investigate whether the noninvasive measurements of donor derived cell free DNA could improve patient management and organ survival. This kind of application is a natural fit for our technology as measuring the fraction of donor DNA in a sample is very similar to measuring the fraction of fetal DNA in our Panorama test.

By applying our deep sequencing experience in measuring fetal fraction and our understanding of what drives error rates in the accompanying informatics, we have been able in internal studies to detect donor derived cell free DNA at levels below the detection limits of the leading commercially available approaches. As a result, we think we could deliver excellent sensitivity with a cost per test below our current Panorama cost while current reimbursement levels for test in this indication are substantially higher than NIPT reimbursement.

We estimate our addressable market in transplant to be roughly $1.3 billion. Collaborations like this allow us to very efficiently expand our test menu which further enhances the value of our Constellation platform for lab licensees.

We've mentioned our plans to add to our women's health product suite this year. That is a wholly separate effort that Steve will address later on the call.

Our work in oncology continued as expected in the quarter. In lung and ovarian cancer, we have initiated sample collection activities with more than one dozen CROs and collaborators including our collaborators that we have previously discussed such as Vanderbilt, Stanford, Columbia, Cancer Research UK and others. We have also initiated sample collection efforts in breast cancer and expect to announce additional collaborations later in the year.

In most cases we are collecting match tissue and plasma samples from high risk populations with a focus on early stage disease.

We are continuing to refine our protocols to detect single nucleotide variants and copy number variants in cell free DNA as well as exploring the possibility to incorporate additional analytes such as RNA to maximize performance.

Across our key performance metrics, molecular recovery rates, on target mapping and amplification uniformity we remain on track to meet our target specifications by the end of the year.

I will now turn the call over to Steve Chapman for an update on our commercial operations.

Thank you, Matt. We were very pleased with the transition to in-network contracts in the quarter. On previous earnings calls, we announced new agreements with United healthcare, 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 smaller plans, we estimate that we now have greater than 178 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.

We were pleased to see steady reimbursement in line with our in-network negotiated pricing and we are seeing initial evidence that our status as an in-network provider is paying dividends in the field with new accounts. As our contracted payers have begun to move aggressively to tighten management of their networks, we have gained additional market share from out-of-network providers and we expect this trend to continue.

Matt touched on the effort we launched in January in which we consolidated several sales territories and rolled out a new sales plan designed to increase the fraction of our test volumes that are getting strong reimbursement and shifting our product mix towards more profitable testing. As expected, we saw some moderation in absolute volume growth compared to Q1 as our reps adjusted their sales pipelines and deemphasized less profitable accounts.

At the same time, we enjoyed a strong revenue quarter from our carrier screening business as the shift to broader panels continued in our favor. In addition, our microdeletions attachment rate remains very strong. When a physician orders Panorama through our direct channel, they also order microdeletions panel over 75% of the time.

With the new ACMG practice guidelines in hand and the launch of our new lab protocol for 22q that combines positive predictive values above 40% with best-in-class sensitivity above 95%, we look forward to winning more business with this differentiated test.

We continue to see a significant shift in our microdeletions business to the 22q only option instead of the full microdeletion panel. This shift should provide additional cost of goods sold advantage when we launch Panorama V3 this year which will include 22q on the base NIPT test and eliminate the need for separate microdeletions workflow when only 22q is ordered.

We also anticipate that the ACMG guidelines will have a positive impact on average risk in IPT reimbursement. We expect the new guidelines will support our argument when we appeal denied claims and also provide further justification for payers to update their medical coverage policy. While average risk adoption among payers remained relatively stable in the quarter, we do expect further progress on this front later in the year and in 2017.

We have had three more technology transfers via Constellation. Matt mentioned the largest of the labs that we launched, Unilabs, at the top of the call. The licensing agreement enables Unilabs to develop, validate and run Panorama out of their own laboratory and grants them access to our proprietary protocols, CE Marked reagents and algorithms within the Constellation software platform.

Unilabs has now completed validation and has launched Panorama in their lab. Unilabs is headquartered in Switzerland but has locations throughout Europe as well as the UAE and Peru. We now have 20 labs under signed contract for Constellation and many others with whom we have a signed term sheet.

I am also pleased to announce that we have added new content to the Constellation platform with our microdeletion reagents and have launched our first partner, LifeLabs, with this new assay. Matt described the differentiated performance of our microdeletions test earlier in the call and we think our constellation partners will be excited to add this content to their offering as well.

We continue to be encouraged by the uptick in our patient portal since the launch in January. Six months into the launch we now have an annualized run rate of about 57,000 patients who are creating accounts.

In the patient portal, patients were able to schedule a genetic information session, schedule a blood draw at a draw center or with a mobile phlebotomist, track the progress of their test, pay their bill and inquire about additional tests and services. This connection gives us a chance to reach these patients in new ways in the future for example, new tests and services.

As we discussed on our last call, we are encouraged by the opportunities with our sales model and our plan to expand our product portfolio in women's health and further leverage the strength of our channel.

We have identified several opportunities and are moving forward with product launch plans for one product which we will announce later in the year.

I will now hand the call over to Herm Rosenman to review our financial results. Herm?

Thanks, Steve. Our second-quarter financial results are included in our press release across the wire earlier this afternoon. Our second-quarter total revenues were $52 million compared to $45.1 million for the second quarter of 2015, an increase of about 15%.

Panorama revenues for the quarter were $32.1 million compared to $35.4 million in the second quarter of 2015, a decrease of 9%. This decrease was the result of lower in-network pricing in 2016 that we have discussed on this call.

Horizon revenues for the quarter were $15.9 million compared to $5.4 million in the second quarter of 2015, an increase of 194%. This change was driven by increasing volumes as we launched a new Horizon carrier screening panel in the middle of 2015.

Steve discussed the timing of the large in-network agreements we struck earlier in the year and the fact that average selling prices for Q2 reflected in-network pricing that is generally lower but also more predictable than out of network pricing.

As a reminder, we recognize revenue primarily on a cash received basis. Roughly 50% of our second-quarter total revenue was derived from test volumes accessioned in the quarter. The balance of our revenues were derived from tests the 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.

The majority of tests accessioned that generate little revenue today are Panorama NIPT tests prescribed for patients in the average risk category. As medical coverage policies change, we expect to generate additional revenue on a much higher proportion of our accessioned tests.

Turning to revenue breakdown by channel, the percentage of our total revenue attributable to our US direct salesforce for the three months ended June 30, 2016 was roughly 80%, up from 76% for the three months ended June 30, 2015. The percent of our total revenue attributable to US laboratory partners for the three months ended June 30, 2016 was roughly 8%, down from 10% for the three months ended June 30, 2015.

International comprised 12% of revenues in the quarter compared to 14% for the three months ended June 30, 2015. The dip in international revenue was primarily attributable to several of our partners transitioning to Constellation. In the Constellation model as we described in the past, revenues are lower but carry a much higher margin.

Gross profit for the three months ended June 30, 2016 was $21 million representing a 40% gross margin compared to $19.4 million, a 43% gross margin in the same period of the prior year.

As Matt described, gross margins were impacted by lower in-network pricing for our tests and this impact was partially mitigated by continued improvements in cost of goods sold and a more favorable product mix, as Steve described.

Research and development expenses were $10.3 million in the quarter compared to $6.7 million for the same period in 2015, an increase of $3.6 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 $33.2 million in the quarter compared to $28.1 million for the same period in 2015, an increase of $5.1 million. The increase over the prior period primarily reflects additional personnel and facilities expenses across sales and G&A. We are satisfied with our current direct sales footprint and we will continue to optimize that channel as appropriate.

Net loss for the three months ended June 30, 2016 was $23.2 million or a $0.46 loss per share compared to a net loss of $19.7 million or a $3.58 loss per share in Q2 of 2015.

Please note the difference in loss per share between the two periods is affected by the change in the share count from Natera's initial public offering on July 1, 2015, in which we sold 10.9 million newly issued common shares and 31.4 million preferred shares were automatically converted into common stock on a 1 to 1 basis. Weighted average shares outstanding were 51.4 million for the second quarter of 2016.

At the close of the quarter, the Company held $216.8 million in cash, cash equivalents, short-term investments and restricted cash compared to $232.1 million as of March 31, 2016. As of June 30, 2016, we had drawn down $49 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. This line of credit was drawn down primarily to repay previous indebtedness at a significantly lower interest rate. The line is secured by our investment portfolio which is designed to yield higher returns than the borrowing rate we incur.

We continue to think our current cash position will allow us to fully pursue all the opportunities the team has previously discussed.

Turning to our future outlook, we are leaving our previously announced financial guidance for fiscal 2016 unchanged. We expect 2016 total revenues of $200 million to $220 million; cost of product revenues to be approximately 60% to 65% from 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 our cash burn to be $75 million to $85 million.

In 2017 as we have discussed previously, 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.

On our last earnings call we walked through the components of this guidance which I would like to revisit.

First, reimbursement in the average risk NIPT setting. We have been pleased with the pace of the adoption thus far. Based on our conversations with payers, we continue to believe coverage policies will continue to change in favor of average risk through 2016 and 2017. However, because we haven't yet seen a majority of the national private plans change their policy to cover average risk patients, we continue to be cautious as it relates to the specific timing of these coverage decisions.

So we are not including rapid changes in medical coverage policies accommodating average risks this year in our financial forecast.

Second, our guidance continues to assume a substantial reduction in microdeletions reimbursement through the rest of the year. We believe that our published clinical experience coupled with the new ACMG guidelines, anticipated data from our SMART trial and the implementation in 2017 of the recently issued CPT code for microdeletions will be the foundation for stable reimbursement of our microdeletions panel over time.

We continue to assume lower microdeletions reimbursement compared to our experience thus far prior to reaching all of these milestones.

Third, Steve described our progress on entering in-network contracts with several large national plans which is crucial for the longer-term growth of the Company. As expected, our Q2 results reflect the initial impact of this change and the proportion of our tests reimbursed under in-network plans will increase through the remainder of this year.

Over time we think this near-term impact to revenues will be more than outweighed by enhancing our ability to win market share and by collecting on a higher percentage of our claims. Nonetheless, we believe we are taking a realistic but 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 should help with all of our products in development.

Finally, our planned investment in R&D during 2016 remains unchanged. 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.

Second, we are investing in both technology development and the 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 3 to 5 times the size roughly $4 billion market for our prenatal health products. 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 any oncology revenue in our 2016 guidance.

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

Thank you, Herm. I am encouraged by the progress we made in the quarter on commercial operations and product development as well as additional support on professional societies. I am 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 diseases.

With that we will now open up the call for questions. Operator?

(Operator Instructions). Steve Beuchaw, Morgan Stanley.

Good afternoon, guys. This is Liza on for Steve. Thank you for taking the questions. Just trying to understand with the sales realignment strategy, can you maybe delve into how that has been unfolding and how you guys are thinking about volume trends for the balance of the year?

I will make a brief comment and then I will hand it over to Steve. As I said in my prepared remarks, we are starting to find the balance between growth and profitability and we had in our very rapid expansion taken on certain accounts that we decided were not going to be profitable in the near-term. So as we start to focus on the bottom line, we decided that we should deemphasize those accounts and focus on the growth in the well reimbursed commercial sector where we have seen very good growth and I think the sales incentives have been consistent with that overall strategy and it seems to be going very well. So that is the high level take. Steve, do want to make more comments?

Yes, thank you, Matt. So I think we are not guiding on volumes, we are not guiding on a quarterly basis with respect to volumes. As Matt outlined, we deemphasized less profitable accounts and focused on particularly commercial business and profitable accounts where we thought we could grow. We have done well executing that strategy, the growth within those profitable accounts has in general been masked by our shutting off of the accounts that were deemed to be not profitable. We did a geography realignment to maximize the efficiency of our sales team and that was completed early in Q1. As a result of that, there is some resetting of sales pipeline and working accounts through the pipeline that was taking place in Q2 as well.

Great. Thanks. Just kind of taking in the updated ACOG and then ACMG guidelines, is there anything kind of that you can anticipate that might cause payers going forward to kind of hesitate on average risk reimbursement at this point?

Well, what caused payers to hesitate on average risk reimbursement that they have to pay for it. That is something that would cause them and is causing them to hesitate. However, we are very comfortable that we have made the right bet here. There is no question that average risk reimbursement is coming. There has been a slight uptick I think as Steve mentioned in the amount of average risk reimbursement decisions that have been made by payers, but there are a set of the big guys who have not yet made that change and it is just a question of time.

The ACMG guideline is very strong on the value of NIPT across all age groups. They have very clearly said that this was the most sensitive and specific method to use and of course the data is incontrovertible.

We have spent a fair bit of time with the payers and although we are not making any definitive statements on when some of those big payers are going to change their policy, the feedback that we have received is that the data is very strong. And certain of the payers have been very vocal saying this is something where they are going to have to make a change and it is just a question of time.

The doctors and the patients will want this and in general the payers will listen to the doctors who are in their network so they are just going to make this change at a point that is suitable for their business but at a certain point, there is too much pressure on them from the payers who are covering these services and from the doctors and patients who want these services and from the professional societies who are clearly advocating these services for them to hold out.

So I think that this is definitely the right strategy that we have adopted. As I said before, we are trying to find the balance, we are not just growing volume at all costs right now. Where there are accounts where there is a large proportion of low risk NIPT that is not well reimbursed, we are not just growing volume at all expense. We are trying to find that balance appropriately but I think that we have done very well to find that balance and I think the fundamental bet that we are making on being in a leading position in NIPT and waiting for low risk reimbursement to come along is exactly the right position to take.

In general I think that the payers have been -- we are generally quite happy with the rates of adoption of these low risk policies from the payers but obviously we are waiting for some of the big guys to still make their move.

Great, thanks so much.

Bill Quirk, Piper Jaffray.

Good afternoon everyone. This is actually Alex Nowak filling in for Bill today. So just a follow-up to Liza's first question, I was just wondering could you quantify what the volume growth was in just your profitable accounts? I'm just trying to compare your growth excluding the impact of the closed accounts and does that explain why volumes were down sequentially?

Well, I will make a high-level comment and then we will hand over to Steve if you want to add anything. We are not disclosing the numbers there and I don't actually have those exact numbers in front of me so I couldn't disclose them even if I wanted to. But I can say that when we look at our profitable business, the volumes are at a record level. So we have done very well to grow volumes in the profitable business.

In terms of the sort of flat volumes from one quarter to another, that is driven by the fact that we have deemphasized these profitable accounts and nonetheless there has been good growth in the accounts that are profitable.

So I think that is roughly just repeating what you have already heard but we are not guiding in more detail than that. Steve, do you want to say anything more?

No, I think you covered it, Matt.

That is very helpful. And then previously, I believe it was last call, it was mentioned that the impact of in-network rates would lower ASPs in Q2 and then you'd see a bigger impact going into Q3. Just with Q2 behind you, can you quantify what you expect now for the incremental ASP impact in Q3?

Yes, I was expecting Bill who always asks his baseball questions like what inning are we in so I actually gave that quite a bit of thought. We are actually in the top of the third but with two outs. So that is kind of how that is going to move through the quarters and so it is a little bit of early days because you had a small impact in Q1, more profound impact in Q2 and as we said in the prepared remarks, that is going to go throughout the year.

So I take a look at your model and what is implied by the consensus in the third quarter is a fair spike in the fourth and so you might want to just take a look at that.

Okay, perfect. Thank you. I'm not a big baseball fan but thank you for the help there.

Bill is though.

It's so nice to have people on the call that don't understand baseball.

Doug Schenkel, Cowen and Company.

This is Adam on for Doug. Thank you for taking my questions. My first one was on the evolving competitive landscape. There was a recent announcement indicating one of the bigger NIPT companies in this space is planning to acquire another large NIPT company. I was hoping you could provide any color on how you believe that pending acquisition could impact your competitive positioning if at all?

Sure, thank you for the question. I will take that and again, Steve, if you want to make comments afterwards, go for it. So the acquisition of Sequenom by LabCorp core is generally a positive for us I would say. We are obviously very accustomed to encountering the LabCorp reps in the field and the Sequenom reps in the field so this acquisition hasn't changed the people that we are encountering. And we have obviously done very well in these kinds of encounters.

We have a very well trained genetics focused sales team that tends to do very well against large labs like LabCorp, Quest, etc. So we feel that the fact that there is kind of one less player out there and Natera is a leading player with a focused sales force on NIPT and broad carrier testing is going to play out pretty well for us. And the technologies are, the technologies that have been acquired by LabCorp are technologies that we have seen in the field and we feel very comfortable with those technologies relative to our technologies. So I think overall we are left in a pretty good position.

Steve, do want to say anything else then? Steve is being the strong silent force in the corner, 0nothing more to add there.

Thank you. And my other question was you recently had success signing these long-term private payer contracts and yet at the same time microdeletions have become it seems like increasingly accepted. Is the addition of microdeletion reimbursement if the private payer does not cover it now something that can be easily added to these coverage policies that you have recently implemented?

Yes, I will take that. So we were very pleased earlier this year when the American Medical Association after looking at all of the detail of the test work flows, the peer-reviewed publications that have been published on microdeletions issued a new code specifically for microdeletion testing that will become effective in January of 2017. So with our current in-network providers because that is a new code, we will need to ad0d that code to the existing contracts.

From a coverage standpoint, we do feel like we are laying the groundwork for positive coverage policies in the future between the new code from the AMA, the SMART trial that Matt referenced, additional studies that are underway and should be published in 2017, and the recent endorsement from the American College of Medical Genetics combined with previous endorsements from the International Society of Prenatal Diagnosis give us a very strong position that we think we can leverage for positive coverage policies in the future.

Okay, great. Thank you.

I will just add that the health economic models behind microdeletions like 22q11 are very strong. Given the fact that they are often not detected by other means, they are very prevalent and there are interventions that can make a big difference to the outcome at the time of birth. You've got very strong health economic models there.

So with our technology, I think it is a similar category to low risk. We expect that that reimbursement will be coming, we cannot say exactly when but the fact that this is very important from a health economic perspective is pretty much incontrovertible.

Raymond Myers, Benchmark.

What was the microdeletions revenue that you had in the second quarter?

We have never disclosed microdeletions revenue separately and we are not going to start on this call.

Okay. Then I will transition to my second question and maybe we can answer it there. Do you yet have visibility to the point where volumes start to grow again from the support of -- sorry -- where revenues begin to grow again from the support of increased volumes surpassing the impact of the reduced in-network pricing and the reduced microdeletions reimbursement that you are anticipating?

Yes, the problem we have there in trying to nail that down are the big variables that we talked about on the call, microdeletions being reimbursed itself and exactly where that comes out for the year, we have trailed that down considerably in our financial forecast.

The other big variable we don't have a crystal ball on the date that average risk is going to be reimbursed and we don't know exactly how the volumes, not only the volumes in in-network because that we think could increase, haven't seen a lot of that yet but it is going to happen over time as well as where the prices will ultimately settle. So when all that dust settles, I can give you a better answer but right now I don't think my crystal ball is a lot better than yours.

Well, I will make another comment there and I will just repeat something that has been said in earlier calls and was alluded to in this call as well. When you look at 2017, that is kind of the timeframe that we are looking to have the volume growth be tracking the revenue growth because we think that by that point a lot of the dust will have settled. You will have stable reimbursement most likely -- well I shouldn't make strong statements -- but we are expecting stable reimbursement for low risk to come in play at some time in the reasonably near future. And we would also expect that reimbursement for microdeletions should settle down.

In the past we have looked at 2017 being the timeframe where reimbursement would be tracking volume growth and revenue growth would be tracking volume numbers. So that is a rough guide that we have given in the past and I am just repeating that rough guide now.

Great. And my follow-up question I was hoping to ask about, has the physician prescribing behavior been altered in any regard due to the increased reimbursement that was experienced earlier this year?

So we have seen a significant number of physicians at this stage that have looked at the data, they have looked at the society guidelines and they have made a decision to offer average risk or low risk NIPT to their patients.

As I think Matt mentioned, the coverage policies for average risk have been relatively stable this year. We did see four plans that we are aware of update their coverage policies from Q1 to Q2 but the net increase in the number was relatively small.

So we think that there is definitely a pent-up demand of physicians that are waiting for broader coverage and as that coverage opens up, there is going to be an opportunity for the average risk market and prescribing patterns to change more significantly than they have thus far.

Great, thank you.

Catherine Ramsey, Robert W. Baird.

Thanks for the questions. It may be too early to tell but are you seeing any slowdown or assuming any headwind from people delaying pregnancies from Zika now that we are having some local cases in the US?

Thanks for your question. We haven't seen an impact at this stage. I think recently were announced some sort of centralized cases in Miami for example but we haven't seen any impact on our business.

Okay. And then on the Austin lab and office space, just wanted to check in on that. I think in your last Q it said the majority of that project would be completed this month so any update there on the status or plans going forward?

This is Matt. I don't recall saying the majority of the project would be completed this month at all. That is a lab and office space that we are setting up because we've got a substantial operation going on and that is going to be a very good way for us to mitigate risk with just a single facility given the size of our operations and to reduce labor because the labor in Texas is so much cheaper than the labor costs in California.

The transition to Texas is happening continually for certain aspects of the staff and that is a process that is going to go on for a long time, right through 2017. So I don't know where you got that I was saying that the majority would happen this month. That is a process that is ongoing.

All right, thank you.

Bill Quirk, Piper Jaffray.

This is Alex Nowak again. I just want to follow up on microdeletion reimbursement. I know the guidance assumes it is going to decline in the back half of the year but I was just curious if microdeletion reimbursement was stable during Q2 or did you actually see a decline during the quarter?

We actually haven't given that specific guidance but we are starting to see some pressure there and I think we are taking a prudent course of action in what we are doing in modeling out the financial impact of that. I would like it not to happen at all but that is what we have done.

Okay, understood. Thank you very much.

I'm showing no further questions at this time. 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.