Natera Inc (NTRA) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Natera, Incorporated second-quarter earnings conference call.

(Operator Instructions)

As a reminder, this conference call may be recorded.

Good afternoon, thank you for joining our conference call to discuss the results of our second quarter of 2015. Also on the line is Matthew Rabinowitz, our CEO; Herm Rosenman, our CFO; and Steve Chapman, Senior Vice President of 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 the future events and our anticipated future performance, such as our guidance for the third quarter and full year 2015, our market opportunities and strategies, and trends for various products. We caution you that such statements reflect our best judgment based on the 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, specifically our prospectus dated July 1, 2015, and our current reports on Form 8-K, including 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 to 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. Now, I'd like to turn the call over to Matthew.

Thank you very much. Good afternoon, everyone, and thank you for joining us today. I will begin with a review of our business and then will ask Steve Chapman, Senior VP Commercial Operations, to cover recent highlights for the second quarter. Herm will then review our financial results and after that, we will open the call up for questions.

Since this is our first earnings call and some of you may be new to our story, I'll start with a brief overview of Natera and our strategy. Natera is a leader in cell-free DNA testing. In the 12 months ended 6/30/2015, we accessioned roughly 251,000 tests and generated $188.7 million in revenue.

We now have about 685 employees and generate most of our revenues from our CAP CLIA certified laboratory in San Carlos, California. We now also generate revenues from our cloud software called Constellation, where US and international customers can run samples in their own labs and process the data with our proprietary algorithms in the cloud to generate clinically meaningful information.

I would like to summarize our technology platform. Our technology is a combination of molecular techniques and bioinformatics. The bioinformatics leverages signal processing technology, similar to what is used to improve the reception of your cell phone, so that we can detect genetic variations from tiny amounts of DNA, down to a single molecule.

The molecular techniques enable these accurate measurements on thousands of positions on the chromosome from samples as small as a single cell, using standard equipment that is available in most labs and a range of sequencing systems of the lab's choosing. We think our mix of molecular technology and software is fundamentally differentiated and it allows us to offer diagnostics for genetic diseases from a simple blood draw with best-in-class sensitivity and specificity.

Our strategy has three components: leading women's health genetic testing in the United States, applying our existing technology and commercial channels to large markets in oncology, and making genetic testing ubiquitous by allowing labs around the world to run samples locally using our protocols and access our algorithms via Constellation in the cloud. I will walk you through each of these components.

The first part of our strategy is to lead women's health genetic testing in the United States. Based on test volumes for Panorama, we are already a leader in non-invasive testing. Panorama measures traces of fetal DNA in the mother's blood from a regular blood draw as early as nine weeks into a pregnancy to screen for chromosomal abnormalities in the child.

We believe Panorama is the most accurate NIPT commercially available in the United States. Based on Panorama data published in the Green and Gray Journals, we have about three times lower chance of missing a pregnancy affected by autosomal aneuploidies, such as Down Syndrome, compared to our competitors, while also achieving specificity of greater than 99.9% for each of these disorders.

Panorama is also able to identify fetal sex with leading accuracy. While other NIPTs make wrong gender calls, roughly 0.5% to 1% of the time, we had no mistakes in gender calls in validation studies. This is particularly relevant in the commercial setting because the average OB/GYN sees about 200 pregnancies a year and gets a gender call on every report. When the doctors see a wrong gender call from the competitors, they tend to distrust any other result that those tests produce.

While the difference in performance Panorama offers on aneuploidies is significant, we believe our performance in the identification of the most common genetic diseases caused by microdeletions is equally important. The combined prevalence of microdeletions covered on our test is higher than 1 in 700 pregnancies, which together makes them more common than Down Syndrome for pregnancies typically considered average risk. These disorders, which can cause retardation, schizophrenia, and organ abnormalities occur independently of maternal age.

The most common of these conditions Term 22q11.2 deletion has three times higher incidence than cystic fibrosis, for which screening is ubiquitous. The published sensitivity for our microdeletions panel is above 95% for each of the conditions compared to published sensitivity of our competitors' NIPT of roughly 20% for the crucial 22q11.2 deletion at about 10% fetal fraction, which is fairly typical fetal fraction in the first trimester.

The most recent addition to our product portfolio is an improved version of our carrier screening panel, which screens for up to 274 conditions and which we believe is the most extensive panel available on the market. We have included Duchenne muscular dystrophy, which has historically been very difficult to offer as a front-line screen, although it has birth incidence rates in males roughly similar to that of cystic fibrosis. To our knowledge, we are the only commercial lab to offer DMD on a front-line screening panel and we have a roughly 90% detection rate for the inherited disorder.

What's great for the patients and the physicians about our NIPT and carriers screening products is that we can offer our Panorama NIPT, the Panorama panel for microdeletions, and our carrier panel all from a single blood draw from the mother nine weeks into the pregnancy. So that's one blood draw, one shipment, one test report back to the physician for all three tests, which is highly streamlined for the doctor.

We have a network of over 2,000 phlebotomy centers in the United States, so patients can enter their zip code on our mobile app and find nearby phlebotomists who can conveniently perform the blood draw. We have invested heavily in our direct OB/GYN focused sales force in the United States in order to deliver the full value of this comprehensive offering to physicians and patients, and we've been able to capture much more value for Natera as a result.

We believe that, over time, NIPTs will be widely prescribed and reimbursed within the average risk population. Our investment in our OB/GYN sales channel is designed to capture significant market share as the market matures among average risk patients, not only for aneuploidy screening, but for our full suite of women's health products, as well as the oncology products that are in development.

That brings me to the second component of our strategy: to apply our technology and seek to leverage our commercial channel to deliver high-value tests for cancer. Similar to prenatal testing, most of the traditional cancer screening methods are based on imaging modalities and protein markers with poor sensitivity and specificity compared to what we can target with cell-free DNA tests. We have demonstrated our ability to detect both copy number variants, or CNVs, and single nucleotide variants, or SNVs, from very low concentrations of tumor DNA circulating in a blood sample.

Initially, we are focusing our efforts in breast, ovarian, and lung cancer. Because breast, ovarian, and lung cancer are driven by both CNVs and SNVs, we believe that our approach is well-suited for early detection, recurrence monitoring, and therapy selection for these cancers. We are initially developing these tests as reflex tests over after nodule has been detected, or for disease load and recurrence monitoring once cancer has been diagnosed, but ultimately, we expect these tests to be offered for early detection of cancer. By improving early detection, we expect to substantially improve survival rates.

In order to access the many opportunities in oncology beyond the products we develop ourselves, we have developed an automated tool for assay design that we offer as a service to researchers and CLIA certified laboratories, allowing them to design their own oncology diagnostics assays and perform their own studies with the data analyzed using our Constellation cloud software.

Many top principal investigators from leading cancer centers around the world are collaborating with us in oncology. We currently have a number of clinical trials ongoing and in discussion or development in various indications within ovarian, lung, and breast cancer, including reflex testing, recurrence monitoring, and therapeutic monitoring. Our collaborators and advisors include top investigators at the Feinstein Institute, Stanford University, University of Pittsburgh Medical Center, Johns Hopkins, Columbia University Medical Center, and Vanderbilt Medical Center.

I will highlight just one trial that's being run by Charlie Swanton at Cancer Research UK, which is a trial partially funded by the NHS in the UK. Professor Swanton's laboratory is focused on understanding the molecular origin and evolution of cancer and how addressing intratumor heterogeneity will limit treatment failures and improve survival rates. They evaluated several cell-free DNA technologies and ultimately selected Natera based on our ability to measure a lower fraction of tumor DNA in the plasma samples than others. This trial will use our therapeutic monitoring panel, as well as our minimal residual disease testing and recurrence monitoring panels.

The third component of our strategy is to make genetic testing ubiquitous by expanding and broadening our lab distribution channels. We are currently partnered with more than 70 labs and partners that distribute our tests worldwide, under a CLIA model, and that augment our direct sales force in the United States. These include many of the large genetics labs in each continent.

In addition, we have begun to offer our lab partners, both in the US and internationally, the ability to access our proprietary algorithms by our Constellation, our cloud software, as a web service. We manage the data storage, provisioning, compliance, and quality control monitoring so that labs can choose which sequencer they want, run the samples locally, and upload the data directly from the sequencer to be analyzed in the cloud.

This approach offers several key advantages. We can provide results to the patient more rapidly, reduce costs by eliminating sample shipments, and reduce international reimbursement and regulatory complexity by enabling a local lab to run the test. This model also allows us to achieve scale at attractive gross margins without having to build international infrastructure.

While revenues from the cloud model are a small component of our current revenues, we have announced commercial partnerships for this model, for both NIPT and oncology, with a number of prominent labs, including a MedGenome, one of the leading esoteric labs in India; and GE Clarient, a world leader in oncology testing; BioReference Laboratories; DNA Diagnostic Center; and the Feinstein Institute for Medical Research. There are several additional labs where we are in the process of negotiating commercial arrangements based on our constellation software.

Now turning to our key accomplishments for the quarter. We are pleased to have completed our initial public offering in July, raising net proceeds of approximately $179 million. We believe that with this capital, combined with $62 million in cash and cash equivalents on hand as of June 30, we are well-positioned to pursue all of the strategic objectives I've outlined today.

Our second quarter revenue was $45.1 million, compared to $35.8 million for the second quarter of 2014; an increase of about 26%. We accessioned roughly 69,000 tests, compared to 54,000 tests accessioned in the second quarter of 2014; an increase of about 28%.

As many of you are aware, ACOG released a committee opinion on cell-free DNA screening for fetal aneuploidies with a revised list of recommendations during the second quarter. While highlighting the risks and limitations of NIPT, the opinion indicated that any patient may choose cell-free DNA analysis as a screening strategy for common aneuploidies, regardless of her risk status. The International Society for Prenatal Diagnosis provided favorable guidance in their updated position on NIPT, stating that there is now increasing evidence indicating that cell-free DNA screening can be applied to average risk women, representing roughly 80% of the market.

We are aware of three Blues plans and one additional private payer that have recently issued positive coverage policies on average risk patients. While we don't expect these updates to materially impact our business in 2015, we do believe that, as clinical utility and cost-effectiveness data continues to accumulate in favor of the use of NIPT, payers will increasingly opt to reimburse NIPT for all risk categories.

I will now turn the call over to Steve Chapman to provide updates on milestones in the quarter related to product development, clinical evidence, and user experience. Steve, take it away.

Thanks, Matt. We reached several product development milestones in the quarter. We launched V2 of our Panorama test, which we think decreases our redraw rate by roughly 40% and allows the test to perform at a lower fetal fraction than previously possible, down to 2.8%, while we believe improving our sensitivity and specificity. We remain on track for the launch of our V3 technology next year, which is expected to further improve performance and reduce costs.

We also achieved a CE mark for a Panorama reagent kit, which allows our international lab partners to order a Natera-branded reagent kit specifically developed for Panorama that includes a library prep and other reagents necessary to run the test in a local lab. We think this meaningfully simplifies the process for our international lab partners to offer an NIPT powered by our Constellation software.

We continued to build on our library of clinical evidence and health economics data in prenatal diagnostics in the quarter. We formally submitted for publication a clinical experience study on the 22q11.2 microdeletion syndrome based on over 20,000 NIPTs performed in the quarter.

22q11.2 microdeletion syndrome is by far the most prevalent disorder we screen for, as part of our microdeletions panel. The key findings of this study were presented at ACMG and showed that our microdeletions panel performed better than predicted in validation studies with significantly superior positive predicted value than the standard of care. We expect our performance to improve further with additional technology improvements expected this year.

In addition, we enrolled our first patient in the SMART study, which is a large, multi-center prospective study designed to evaluate the performance of Panorama as a screening test for the 22q11.2 microdeletion in a cohort of 10,000 pregnant women. We designed this study to support an FDA approval of our microdeletions panel and expect data to be available near the end of 2016.

Earlier this week, we issued a press release detailing a study led by Dr. Peter Benn, professor of genetics at the University of Connecticut Health Center, that supports the use of noninvasive prenatal testing as a front-line screening condition for chromosomal aneuploidies and related conditions. The study was a comprehensive economic analysis of NIPT and alternative methods and was one of the first studies to incorporate US-based clinical and cost models in a general patient population. The study concluded that replacing conventional screening with NIPT could reduce healthcare costs if it can be provided for $744 or less in the general population.

We also continued to invest in our customers' user experience. In the second quarter, we launched a mobile phlebotomy service that allows patients to call in and schedule a mobile phlebotomist to perform the blood draw at their home or office. This service is intended to augment the network of roughly 2,000 phlebotomists we mentioned earlier.

We also significantly broadened access to our genetic counselors for our patients in the quarter. We launched an online service that allows any patient to log on and schedule an information session with a board-certified genetic counselor before or after receiving their test results. As the NIPT patient population expands, our goal is to ensure that every patient has access to high-quality information before and after their screening. We now have more than 35 genetic counselors on staff and can often schedule these appointments for the same day.

With that, I would now like to turn the call over to Herm Rosenman, who will review our financial results for the quarter.

Thanks, Steve. Our second-quarter financial results are included in our press release that crossed the wire earlier this afternoon. Our second-quarter revenue was $45.1 million, compared to $35.8 million for the second quarter of 2014, an increase of 26%. The increase in revenues from 2014 to 2015 was primarily due to higher test volumes, particularly for Panorama. We accessioned roughly 69,000 tests in the second quarter of 2015, compared to 54,000 tests accessioned in the second quarter of 2014, an increase of about 28%.

Revenue for the six months ended June 30, 2015, was $92.5 million, compared to $63.1 million for the same period in 2014, an increase of about 47%. We accessioned over 134,000 tests for the six months ended June 30, 2015, compared to 99,000 tests for the six months ended June 30, 2014, an increase of about 35%. This increase in volume is again primarily due to the commercial growth of our Panorama test.

We significantly increased the number of our domestic sales specialists in the third and fourth quarters of 2014 in an effort to both deliver and capture more of the value we offer to customers in the United States, as Matt discussed earlier in the call. The percent of our revenues attributable to our US direct sales force for the three months ended June 30, 2015 was 76%, up from 46% for the three months ended June 30, 2014. The percent of our revenues attributable to US laboratory partners for the three months ended June 30, 2015, was 10%, down from 39% for the three months ended June 30, 2014.

The percent of our revenues attributable to our US direct sales force for the six months ended June 30, 2015, was 78%, up from 43% for the six months ended June 30, 2014. The percentage of our revenues attributable to US laboratory partners for the six months ended June 30, 2015, was 8%, down from 42% for the six months ended June 30, 2014. The decrease in volumes attributable to our lab partners was a result of our increased focus on the direct sales model in the United States beginning in the second half of 2014.

Gross profit for the three months ended June 30, 2015, was $19.4 million, representing a 43% gross margin, compared to $16.8 million, representing a 47% gross margin in the same period of the prior year. Gross margins declined due to an increase in both 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 Panorama microdeletions panel, which requires more material and labor costs.

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. In addition, with our increased focus on the direct sales model in United States, beginning in mid-2014, cost of product revenues in the second quarter of 2015 includes costs for tests performed in advance of related revenue recognition. We now recognize revenue primarily on a cash received basis.

Research and development expenses were $6.7 million in the quarter, compared to $4.1 million for the same period in 2014, an increase of $2.6 million. The increase in research and development expenses was primarily attributable to a $1.6 million increase in salaries and personnel-related costs associated with an increase in research and development headcount.

Selling, general, and administrative expenses were $28.1 million in the quarter, compared to $13.9 million for the same period in 2014, an increase of $14.2 million. The increase over the prior year reflects the net addition of 218 employees and contractors from June 30, 2014, to June 30, 2015, as we increased our focus on a direct sales model in the United States. While we expect selling, general, and administrative expenses to continue to increase, as our sales reps continue to improve productivity, and therefore the number of tests accession, we think that the expansion in headcount is largely complete at this point.

For the three months ended June 30, 2015, we reported a net loss of $19.7 million, which includes non-cash expenses of approximately $3 million related to a change in the fair value of warrants, and approximately $300,000 related to a change in the fair value of long-term debt. Without these adjustments, our net loss would have been $16.4 million.

For the six months ended June 30, 2015, we reported a net loss of $29.7 million, which includes non-cash expenses of $3.9 million related to a change in the fair value of warrants, and $2.1 million related to a change in the fair value of long-term debt. Without these adjustments, our net loss would have been $23.6 million.

Turning to our future outlook, we previously announced preliminary financial guidance for FY15 and FY16, which I will reiterate here. We expect 2015 revenues to be in the range of $175 million to $190 million; 2015 cost of product revenues to be approximately 65% of revenues; selling, general, and administrative costs to be approximately 60% of revenues; and research and development costs to be 15% to 18% of revenues.

We believe revenues may be adversely affected by entering in-network contracts with certain payers, which has long-term strategic benefits and which we expect to occur in the second half of the third quarter or in the fourth quarter of 2015. We expect to achieve revenues of $220 million to $240 million in 2016, assuming robust adoption and reimbursement of the Panorama test within the general population in 2016. We will now take your questions, after which, Nicole will hand the line back to Matt for final comments.

(Operator Instructions)

Doug Schenkel, Cowen and Company.

Hi, good afternoon, and thank you for taking my questions. My first question is really just looking for some more detail on test volumes. Would you be willing to give us the number of tests delivered in the quarter and then specifically, how many of those were Panorama and what the risk of average versus high risk was in the quarter?

Let me first -- hi, Doug, this is Herm. Let's talk really about the granularity of the information we give on the tests.

We have not given so far the differentiation between high risk/low risk. We have said that low risk does represent a significant portion of the total market leading up to 70% to 80% of the total market, so you can kind of read into that what you will.

We have made a concerted effort to try, as Matt indicated, to try to capture the, quote, average risk market and that was our big bet and that's a lot of the investment that we've made and part of the reason for the IPO. In terms of those actually delivered, it was about it was a little more than 64,000 and most of that was our Panorama -- much of that was our Panorama test.

Okay. In terms of the revenue per test data you provided, you attributed that largely to the new CPT code. Is that dynamic behind you at this point?

Then beyond that dynamic, isn't also a big part of the reduction in ASP attributable to an increased mix of average risk tests as a percentage of total and a reduction in the number of test done with lab partners?

Let me hand this one over to Matt,

Great, Doug, thank you very much for the question.

So yes, I think that the reduction in the ASP on NIPT was largely a function of the new code that came into play at the beginning of this year. So that did reduce the ASP quite significantly, but we've power to that with substantial growth in the volumes.

Your question about whether that's behind us, I can't say that it's exactly behind us, but I can say this, we are very encouraged to see that low risk coverage policies are coming into play now. I mentioned that three of the Blues have now issued low risk coverage policies and one other plan that we know of. One of those Blues is Anthem and that's one of the biggest plans in the country and their coverage policy was really strong and supportive of low risk testing, which reflects the strength of the data behind the low risk testing and the need that we're seeing doctors express to offer this to the patients. So the fact that these plans are starting to cover low risk testing I think is going to be a substantially good thing in the years to come.

As I mentioned, I don't think it's going to substantially change the plan for this year because it does take time for these coverage policies to permeate through the system and for doctors to change their ordering practice. But we have made a substantial bet on low risk because we believe the strength of the data that we and others have produced here and I think that bet is going to pay off substantially in the years to come. So I think there were some open questions in the industry about whether the ACOG guideline was sufficient to have plans cover low-risk. And I think those questions have been quite well answered because with these substantial plans covering low-risk, we expect that the other plans will follow.

That's really helpful, Matt. One last one, I think it's for Steve, any data you can provide on cross-sell rates for Panorama to some of the other products. I know we were looking for signs that we might get some improved efficiency in selling some of other products. Anything that would suggest that's starting to improve this quarter? Thank you.

Yes, thanks. So of course, our strategy is to be a leader in genetic testing in the women's health space. We're recently launched the Horizon product with a soft launch in June and a harder launch in July.

We continue to be pleased with the performance of our sales team when it comes to cross-selling and growth. We're targeting the OB/GYN market, primarily who does do carrier screening as well as NIPT.

We believe, based on conversations with our Advisory Board, focus groups, and customers, that our panel is the premier offering in the industry and it is being well-received. We're not giving any specifics right now on Q3 performance, but that will come at a later date.

Okay, thanks again.

Thank you. Our next question comes from Steve Beuchaw of Morgan Stanley.

Hi, good afternoon and thanks for taking the questions, everyone.

The first question is actually on coverage from a different angle. I'd say in 2016, the guidance -- the language around the guidance suggests you anticipate robust adoption in low-risk. Can you just clarify a little bit what that means? Does the achievability of the guidance require, let's say, a majority of the major commercial payers to reimburse in average or low-risk or is there more cushion embedded in the 2016 outlook?

So hey, Steve, thanks for the question. It really does mean what it says. I mean, our anticipation of $220 million to $240 million in revenue assumes robust adoption. What does that mean?

It means that we have targeted certain payers over the course of the next year or so that we expect to go into contract with. We have some sense of what those rate schedules might look like and therefore, it is our estimate of how that's going to pan out.

Does it mean that were going to be in contract with all payers at high rates? No. So we've handicapped this thing best we can see at present.

Thanks, Herm. One, I'm not sure if this is for Matt or for Steve Chapman, but I'd be interested in getting a view on how things are evolving in microdeletions. It sounded like, from the comments around the cogs trend in the quarter, that microdeletions might've actually have been pretty strong here in terms of volumes as a driver of that incremental cost. But I know there was a little bit of hand wringing after the publication of the ACOG guideline with regard to microdeletions.

It would be helpful if you could talk just about how microdeletion attachment rates are trending here and I'll drop there. Thanks so much.

Okay, I think Steve has comments that he wants to make there and then I'll add color as needed. Steve, go for it.

Yes, thanks. So our microdeletion ordering in the post-ACOG has been roughly consistent. I would say the majority of physicians are ordering microdeletion testing because they've looked at the incidence and the severity of the disorder and they're making a decision that this is the right test for their patient. So we haven't seen a necessarily adverse effect on ordering.

This is consistent I think with some of the other products that are ordered routinely by OB/GYN doctors that might be recommended by ACMG by not recommended by a ACOG, for example, SMA testing. So it's fairly common for physicians to make their own independent decisions based on the data as to what they think is appropriate for their patients.

Okay, I'll make some comments there as well. I think it's a really good question and a very important question for us.

What ACOG said in their guideline essentially was that they needed more data and I think that's a completely reasonable and appropriate thing for a professional society to ask for. As we've said before, there are very big differences between the tests out there. There are some tests that are using this quantitative method that look at microdeletions and they just don't work very well, in our opinion.

So for example, the most crucial microdeletion is this 22q11.2 microdeletion, which is associated with DiGeorge syndrome and other phenotypes and this causes retardation and schizophrenia and organ abnormalities. The incidence rates of this microdeletion is about roughly one in 1,000 in the population and if you include the duplication, it's higher than one in 1,000. So you're talking about incidence rates that are of a similar order of magnitude to the incidence rates of Down syndrome, just for that one microdeletion.

And so this is an incredibly prevalent condition, but the other methods of screening for this where they use a quantitative approach just don't seem to work reliably. If you just look at the amount of DNA that's in the plasma, you see a highly variable amount of DNA there because of the [app up mechanisms] and the proteination structures and who knows what else which varies from one sample to another.

So there are substantial differences for the different technologies and we have a very high sensitivity and a very high specificity for this condition. And I think what ACOG has just said is we need to see prospective data and that's exactly what we're doing.

We have the smart study underway, which is to establish the sensitivity and specificity of that 22q11.2 microdeletion. We have other trials underway as well and we expect that the performance is going to be very similar to the performance that we've established in the validation papers that we've generated and what we submitted to New York State to get New York State approval for offering this test.

So the incidence of something like 22q11 is three times higher than cystic fibrosis. You have a lifetime cost which is very high compared to cystic fibrosis.

You have treatment at the time of birth which makes a significant difference to the outcome. If you treat that child with calcium at the time of separation, you reduce the effects of hypercalcemia that cause the cognitive impairments.

So for all of these reasons, it's a really important condition to be able to screen for and we are generating the data to show how well our test performs. We'd mentioned earlier that we've actually submitted data on a commercial follow-up and I should mention that we are seeing a positive predictive value in that commercial follow-up, which is three times higher than what we've placed in our reports.

The PPV that we put in our reports is pretty well accepted by the doctors and as Steve said, the attachment rate of asking for the microdeletions testing is very high. It's well above 80% for the doctors that are ordering Panorama directly.

So we are doing what ACOG has asked for. There are other organizations, such as American College of Medical Genetics and ISPD who are strongly supportive of microdeletions testing because of the incidence of things like 22q11. And I think it's just a question of time for this data to report out and for us to have general support from organizations, including hopefully, ACOG, who tends to be a pretty conservative organization.

Matt, I just can't tell if you're passionate about the issue. (laughter)

Well, our goal is to make healthcare better in the world and I think being able to screen for conditions like 22q11 up front and center with admission. So yes, I think it is a big deal.

Thanks so much everyone.

Our next question comes from the line of Bill Quirk of Piper Jaffray.

Great. Thanks and good afternoon, everyone. I just wanted to go back to the volume question for a second, maybe just asking it a different way. Did the mix meaningfully change at all in the second quarter from we've seen here in the most recent couple of quarters?

Yes, Bill. Hi, thanks for the question.

It did not. The mix remained fairly consistent.

Perfect. I guess a bigger picture competitive landscape question for Matt.

Back of the envelope math suggests that Ariosa may be slowing down. We obviously saw the Sequenome numbers that were lower than expected. I guess I'd love to hear your thoughts, Matt, on what's helping to drive the incremental share here?

Is it the accuracy in the gender call, the overall test performance, microdeletions? Just love to hear your -- what's, on the margin, kind of what's helping drive this market share?

That's a great question. I would say that the drivers are sort of equally split between the excellence in the technology and the excellence in the sales force.

We do have a highly differentiated approach where we use [snips], we can detect things with higher sensitivity and specificity, we believe, than our competitors. And we can also detect more things in our competitors detect, for example, things like triploidy, vanished twins, et cetera. So there is substantial differentiation in the technology and I've spoken about the importance of that with something like microdeletions.

So the doctors get this. When we show them the data that our test produces relative to the other tests, the doctors understand those are clinically significant differences for the most part.

And I think gender calling is just an interesting one because, although the doctors will tend to understand the differences on an academic level between our performance and other tests' performance, gender is something which they understand practically. Because they see about 200 samples -- about 200 pregnancies a year, and so if you've got an error rate of about 0.5% to 1% on gender, they will sometimes see these other tests produce wrong gender calls in the course of the year.

And so practically, they will actually see the difference themselves between our test and another test. So I think all those factors have a significant role to play.

On the other side, you have the excellence of our sales efforts and we've made the decision around the middle of last year that we wanted to focus on our direct sales efforts. And that was because we saw how quickly they were converting accounts at the time and also, we saw how they would need to be co-traveling with certain of our partners in order to convey that scientific message.

Because some of the partners were more focused on just cost reductions, et cetera, and they weren't really conveying the strength of the science behind our testing and we thought, well, if our sales force is really doing the work here and having so much success, we shouldn't be offering reduced pricing to certain partners, we should focus on the direct sales force and we grew that team. As Herm has mentioned, we're pretty much done now growing that team and they are delivering very well. So I think that's the other component is just the excellence of the people that we've hired and the strength of the message that they convey.

I guess the last thing that I would mention is just the cross-selling opportunities. This horizon 274 gene panel is a very compelling panel. To our knowledge, it's the broadest carrier test in the world right now and this is something where the doctors are very keen, often, to offer Duchenne muscular dystrophy. And they are seeing all of the bells and whistles on that panel, for example, the enzyme tests, the SMA 2.0 et cetera.

So there's a lot of capabilities on that panel which doctors appreciate and by combining that panel with our other offerings, we are able to service the OB/GYN market as a one-stop shop. I think that complete value proposition that we represent where we can streamline the operations at the doctors' office and we can really give the doctors ways of tracking the samples with Natera Connect and enable easy phlebotomy draws for the patients and that the patients track the samples as well with our mobile apps. That level of streamlining really does make a difference to the doctors and it's leveraging the complete offering that we have in our tests.

Very good and actually that's a nice segue, Matt, to my last question, which is a two part one. Steve, I realize it's early on both of these, but could you talk a little bit about some of the feedback with the expanded Horizon panel? And then, also just what you're hearing from OB/GYNs regarding the ACOG guidance change and whether or not you're seeing any, albeit, again, early, impact in volumes, thanks.

Thanks, Bill. I'll mention first, NIPT, so we were very pleased, as Matt indicated, to see several payers in past week issue updated coverage policy. In speaking with physicians, I think that there's a similar point of view that this guidance does now allow them to offer front line screening tests, but we think it's going to take a while to play out. I think the data has been out there now for quite a while that front line NIPT testing meets the various validation end points and I think it's more about reimbursement.

So as we see various payers come out and start covering the test, we expect to see more physicians offering low-risk testing. And I think that we anticipate sort of steady-state and more of a pickup as we move into 2016. We don't expect to see a big impact on either the release of these few coverage policies in the doctors' ordering patterns over the next couple of months or second half of the year.

On carrier screening, I'll go back to what I said earlier, we've met with focus groups and we've met with physicians that are part of our advisory board and the feedback has been very good. We've also completed some market surveys, particularly around Duchenne muscular dystrophy, which, I would say, confirms our thinking that this is what -- this is something that doctors want. So we're not talking about our volumes here in July after the hard launch, but we're hearing feedback from advisory boards, focus groups, and from clinicians that they like the content of the panel.

Very good. Thanks, guys.

Jeff Elliott, Robert W Baird.

Good afternoon and congrats on the progress, guys. First question is really on Anthem and some of the bigger contracts or coverages you've seen so far.

I noticed that Anthem mentions a lot of the other competitors, but doesn't specifically mention Panorama. Is that going to be an issue? I see the clause in here that their list is not inclusive, but is that an issue that they don't specifically mention your test?

I'll comment on that. We're in network with the vast majority of Anthem plans. We're in sort of very close contact with them and no, we don't think it's an issue.

As you mentioned, their list is not comprehensive. We're listed in the vast majority of policies by name and we don't think that's a concern.

I don't think that's a significant issue. I hope I'm understanding this issue correctly, I've just skimmed through it because I haven't had time to read it carefully over the last couple of days, but they mention certain tests in the context of particular codes where those tests have asked for particular codes. We're going on the 81420 code, which is the code that we established with the NexGen Sequencing Consortium.

So Natera with was very involved with the AMA in working through to have that code issued. And to the extent that code is being used by a couple of NIPT providers, it didn't necessitate them calling out each of the providers who are going under that code, particularly.

Got it. Okay, that's useful.

For the payers that have updated post-ACOG, but have not yet moved forward for the average or low-risk population, is there any general feedback on why they haven't? The data does seem overwhelming, but why aren't they including coverage for that group?

Well I would say, when you look at high risk or some of the other industry precedents, you don't see everyone move within an extremely short period of time. What we generally see is sort of what we predicted that it takes a while for the majority of the health plans to change their policy, even in the face of society guidelines and evidence. So we're meeting with health plans consistently. We have many meeting set up where our Chief Medical Officer or Medical Director will come in and present the evidence and the plans will ponder a change.

We also know that there's a cycle that many plans are on. So some plans will call an ad hoc meeting to review the evidence in the face of guideline changes and others won't. They'll just continue on their cycle.

There's also been, I think, plans that have gone one way and then re-reviewed the evidence and gone another way. So just going back to sort of the timeline of sort of now until the next 12 months, we think it's going to take a little bit of time for everyone to fully start covering low-risk NIPT.

I'll add some color there. I'll make a few comments.

I think that the rate at which these plans have moved is really impressive. I mean it surprised us that they moved so quickly. There's a whole procedure that's got to be undertaken by the plans to change these kinds of substantial policy positions and these have substantial implications. The fact that these plans have moved so quickly in the wake of the ACOG guidelines, I think, is very impressive.

The guidelines also were not sort of pushing the payers' hands. The guidelines said that NIPT should be offered to all patients. and I think that, from our perspective, to the extent that NIPT is offered to all patients, the vast majority of patients are probably going to want it, not just for the clinical benefits, but because women want to know the gender of their baby and they can learn that with our test at nine weeks.

So the guidelines from ACOG did say that it should be available to all women. But they did mention the strength and the weaknesses of the different tests and it wasn't a guideline that was really forcing the payers' hands by any means. So the fact that the payers have moved this quickly and now that we see these plans coming in place, we expect that the vast majority of other plans are going to have to follow in a reasonable timeframe. I think that's faster than we would've expected, actually.

I agree with that. I was just wondering. There's been a couple that have said no and I was just curious if there's any consensus on why. But that feedback you provided is good.

Last question is really for Herm. On the second half implied gross margin, it does step down. I know you've talked through some of the drivers of that, but could you just kind of walk through, I don't know if you can rank, say, the top through the reasons why we're going to get a pretty big step down in the second half in terms of gross margin?

Thanks for the question. I wouldn't se it as the top three, I see it as the top two, if you're looking half to half.

One certainly are the changes that happened beginning in January of 2015 in the coding, that's the revenue side of the equation. The other one was in price on the [s1], we had pretty high attachment rate for microdeletions. That's separately run so that's adds a whole new dimension to the cost side of the equation.

Those are probably the two biggest reasons right there. I wouldn't rank a third, actually.

We are, I might add, though, certainly taking hard look at cogs all the time. We've got a couple things we mentioned in the prepared script, but we do have many projects underway to try to wrestle cogs down and I'm sure we'll be successful over time. But it is taking us some time to do that and I wouldn't expect to see many of those bear fruit until probably 2016. But definitely a focus.

Okay thanks guys

Zarak Khurshid, Wedbush Securities.

Super. Hey, good afternoon, guys. Thanks for taking the questions.

Can you break out quantitatively how carrier screening and the PGD side of the business, both volume and revenue-wise trended in Q2 versus Q1?

We really haven't gotten that granular, as you know, Zarak, but PGD is a pretty small piece of the business compared to carrier screening. Carrier screening was doing fairly well in terms of volumes and with the introduction of 2.0, that hard launch was very, very recent. We're seeing some pretty good signs there, but certainly nothing as granular as numbers of tests.

Got it. So in [exing] out the claim adjudication issues you've been facing, how is the reimbursement level for your high risk volume trending? A competitor called out their reimbursement level the other day and it suggests that there's some fairly significant pressure on their reimbursement levels. Love to get your thoughts on the high risk?

Yes. Thanks, Zarak.

I mean we've talked about that, right. We've talked about it in the S-1, even we've been under pressure since the coding change. Beginning in January of 2015, it hurt.

That's primarily a high risk situation -- it's all high risk situation. So I think that covers the answer to the question unless you had something else in mind.

What I'm getting at is the way I understand the adjudication issue is that's actually more of a kind of timing problem, but as far as the actual size of the check when you receive it, how is that shaping up? How do you think that will shape up over the next couple years?

I can certainly -- I'll speak to how it did shape up. The check was smaller for the ones we got reimbursed for and that was the whole point of the disclosure. Where it goes in the future -- Steve you might want to embellish.

Yes, sure. I think we expect there to be some pricing pressure over time. I think that's sort of natural.

You know we also have modeled in going in-network with certain plans and I think that can affect ASP somewhat. So overall, I mean I would say it's in line with the forecast that we've given looking at how we're going to finish out the year in 2016, so it's sort of built-in there.

I'm just going add comments there. I think the key issue here is going in-network.

We are planning to go in network with some of the big plans. And that's going to happen second half of Q3 and Q4, most likely. This is something which does involve shifts in pricing, but strategically it's a really good thing for us to do. What I didn't mention earlier when I was talking about our growth relative to competitors is that we are growing, despite the fact that we are premium priced.

And I think one of the significant factors that has affected our growth has been the fact that we are substantially premium priced, which I think has been the right way for us to position ourselves. However, going in network with these payers and we are negotiating as we go in-network so we are going to try to command some level of premium pricing there as well. That process of being in-network, I think, will eliminate some of the barriers that we've had to growing even more. So this is a good strategic decision, although I think that is the most important factor which is going to affect pricing in the timeframe of the next year or so.

Got it, thanks for the clarity there. A couple questions for Steve, first on the mobile phlebotomist strategy.

Wondering how exactly that is additive to your business? Part two, can you just update us on where the newer reps are in terms of being fully trained and productively selling? Thanks, guys.

Yes, sure. We're pleased with the performance of mobile phlebotomy. We continue to launch new products that positively enhance user experience.

This is one that we launched during the quarter, as Matt announced. We have over 2,000 contracted lobotomy sites that can be located on our website, mobile phone, where one can go schedule an appointment. To augment that, we have this mobile phlebotomy capability.

We're pleased with the uptick and we've gotten very positive reviews when that service has been used. Physicians use it at their discretion for various patients and it's very easy to access. We're pleased with adding that product to the menu of user experience services that we provide.

Second question -- the sales force, we have an extensive, really world-class training program and we focused a lot on training for both live meetings, content available online, consistent updates, and things of that nature.

So we are very pleased with the performance of the new sales representatives that have come onboard. We're not -- I think at this point, we're not breaking out new versus old class other than to say everyone is equally well-trained. And we're pleased with the performance of all of our sales team members at this point.

Great. Thanks, Steve.

I'm showing no further questions at this time. I'd like to hand the call back over to Matt Rabinowitz for any closing remarks.

So thank you, everyone. We are pleased with the progress that we have made in the quarter. We are also happy to be a public company and to have generated interest among such a high caliber of investors, which will enable us to continue to execute our strategy. We look forward to changing the face of genetic medicine worldwide and I'd like to thank everyone who participated in this call.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Have a great day, everyone.