Natera Inc (NTRA) 2015 Q3 法說會逐字稿

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

(Operator Instructions)

As a reminder, this conference call may be recorded. I would now like to turn the conference over to Mike Brophy, Vice President Investor Relations and Corporate Development. You may begin.

Good afternoon, folks, it's Mike Brophy, VP of Investor Relations here at Natera. We're actually going to have to hold for one minute. We're just making sure that the 8-K has cleared the wire. So please bear with me. Legal requirement here. Nasdaq, making sure that we've cleared the 8-K. Again, legal requirements, so please bear with us. Okay, guys, thanks, and sorry for the delay. This is Mike Brophy, VP of Investment Relations and Corporate Development at Natera. Thank you for joining our conference call to discuss the results of our third quarter of 2015.

Also on the line is Matthew Rabinowitz, our CEO; Herm Rosenman, our CFO; and Steve Chapman, SVP Commercial Operations. Today's conference call is being broadcast live via webcast. In addition, a replay of the call will be available at investors.natera.com. During the course of this conference call, we will make forward-looking statements regarding future events and our anticipated future performance, such as our guidance for the full year of 2015, our market opportunities and strategies, and trends for various products.

We caution you that such statements reflect our best judgment, based on factors currently known to us, and that our actual events or results could differ materially. Please refer to the documents we file from time to time with the SEC, 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 on our performance during the quarter, unless we do so in a public forum. We will quote a number of numeric or growth changes as we discuss our financial performance. And unless otherwise noted, each such reference represents a year-on-year comparison. And now, I'd like to turn the call over to Matt.

Thank you, Mike. Good afternoon, everyone, and thank you for joining us today. Steve Chapman and I will begin with a review of our business, and recent highlights for the third quarter. We will then provide an update on our progress on oncology. After that, Herm will review our financial results, and we will open the call up for questions.

We were very pleased with our performance in the third quarter. We accessioned roughly 83,000 commercial tests, compared to 57,000 commercial tests accessioned in the third quarter of 2014, an increase of nearly 46%. For Panorama, we accessioned roughly 67,000 tests, compared to 49,000 Panorama tests accessioned in the third quarter of 2014, an increase of about 37%. Based on these numbers, we believe we are the NIPT volume leader in the United States. It is also worth noting that our volume growth has occurred as we have transitioned from a lab partner model in 2014 to a direct sales force in the United States, highlighting the success of our direct sales strategy.

We believe this test volume growth represents continued strength of our technology and commercial platform in NIPT, and significant uptake of our new carrier screening panel that we launched in July. We accessioned roughly 13,000 Horizon Carrier Screening tests in the quarter, compared to roughly 4,800 Horizon tests accessioned in the third quarter of 2014, an increase of about 171%. We accessioned approximately 7,000 Horizon tests in the second quarter of 2015, so the sequential quarter-on-quarter growth was roughly 86%.

We were very pleased with this performance early in the launch of the new and improved Horizon test, which Steve will address in more detail later in the call. Our third-quarter revenue was $44.9 million. As expected, revenues for the quarter were roughly flat compared to the third quarter last year. This is largely due to the coding changes at the beginning of the year, which reduced NIPT ASP. We continued to drive NIPT volume growth in the average risk population, which is not yet broadly reimbursed. Also, because we recognize revenues primarily on a cash basis, a meaningful component of the revenue associated with this quarter's increase in volume was not recognized as revenue in Q3, due to billing and collection cycle.

This lag was heightened in our Horizon business, as we made adjustments in billing operations to accommodate the new panel. As a result, many of the cases from Q3 were not adjudicated in that quarter. This issue has now been resolved. Despite these factors, I think it is important to note that, on tests where we were reimbursed by private insurance, our average revenue per test was roughly stable during the course of 2015.

While we expect to see an impact to ASP with payers when we enter into in-network contracts, we haven't seen price erosion in the US due to competition. We have been encouraged to see a number of payers make out-of-cycle decisions to reimburse NIPT in the average risk setting. We know of 17 plans, representing approximately 55 million covered lives, in this category. While we continue to believe these updates will not materially impact our revenues in 2015, we do think 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 in all risk categories, over time.

We believe our volume growth demonstrates that we are well-positioned to capitalize on this trend, and we have invested in building market share in the average risk setting, ahead of anticipated broad reimbursement coverage. As we continue to grow our commercial business, we have remained focused on providing a first-class user experience to our customers. In particular, we believe the digital services we offer are best-in-class, and serve as a meaningful barrier to entry. More than 60% of our customers are using Natera's digital services, which means we are directly integrated into their electronic medical record platform, or they have signed up for our physician web portal, Natera Connect.

In the third quarter, we dramatically increased the number of customers that are integrated on our EMR platform. This allows us to seamlessly integrate with the physicians' patient management software, to receive orders and send back test results. When customers are integrated on our EMR platform, we see significant reductions in paperwork required, and missing or inaccurate insurance information. Because our reports drop right into their existing patient management system, physicians are able to access reports on their tablet, which can be available in whatever format physicians use to manage their practice.

More than 30% of our top 1,000 customers are now connected directly with an EMR, and we continue to see expanding penetration. I will now hand the call over to Steve Chapman to elaborate on our key highlights and commercial progress in the quarter. Steve?

Thanks, Matt. We launched V2 of our Panorama test in the second quarter, and V2 has performed very well so far. We are experiencing substantially improved redraw rates and turnaround times. For example, 94% of our tests are reported out within seven calendar days. We're very pleased with our account retention rates, and are experiencing good growth in both high and low risk markets. We expect to launch V3 of our Panorama test next year, which is expected to further reduce COGS for Panorama and microdeletions.

Matt touched on our new and improved Horizon Carrier Screening Panel. I think there are three key reasons why we've see rapid uptake. First, we've invested heavily in our direct OB/GYN focused sales force in the United States, in order to deliver a comprehensive offering. And we're succeeding in cross-selling NIPT to our customers. As we have discussed in the past, we offer Panorama NIPT, the Panorama panel for microdeletions, and the Horizon Carrier Screening Panel, all from a single blood draw from the mother, nine weeks into pregnancy. That's one blood draw, one shipment for all three tests, which is highly streamlined for the doctor.

Second, we have a differentiated test. We've included Duchenne muscular dystrophy on that panel, 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. We've been very pleased with the response from customers and the clinical community. Third, we provide our user experience that allows OB/GYNs to offer complex genetic tests in a streamlined way. Matt discussed our progress on digital services, which enhances her customer experience. We have streamlined access to the Horizon Carrier Screening Panel, both ordering and results through these platforms, providing a logistical advantage to sample procurement.

In addition to those services, and important for the OB/GYN segment, we have exceptional phlebotomy and genetic counseling capabilities. Patients can now access over 2,000 phlebotomy centers in the United States. Patients for both Panorama and Horizon can enter their ZIP Code on our mobile app, and find nearby phlebotomists who can conveniently perform that blood draw. In addition, any patient can go online and schedule an information session with a board-certified genetic counselor, before or after receiving their test results. We believe our user experience is truly differentiated compared to our key competitors in the NIPT space.

We've also seen continued uptake of our Constellation software platform by our lab partners. We recently issued a press release announcing that LifeLabs, one of the largest reference laboratories in Canada -- in the world, excuse me -- and a leading reference laboratory in Canada, is now offering Panorama NIPT in Canada, via our Constellation software platform. After a competitive bidding process, the Canadian Ministry of Health awarded LifeLabs a license to offer NIPT in Ontario, which represents approximately 40% of the births in Canada, and we were very pleased to participate in that process with them. Currently, four labs have launched Constellation commercially, and several more are in progress.

We advanced our contracting discussions with payers in the quarter, and entered into or signed in-network contracts with commercial plans representing more than 24 million lives. These new in-network contracts broaden our base of direct contracts already in place, which includes many of the Anthem plans and broad coverage with state Blue Cross Blue Shield plans. While in-network contract pricing is generally lower compared to out-of-network reimbursement, going in-network with payers offers many long-term benefits, including enhanced reimbursement predictability and access to patients enrolled in those plans. We are in active discussions with additional key payers, and expect to broaden our in-network contract base in the future. We continue to build on our base of clinical evidence in both NIPT and oncology in the quarter.

Our first major clinical experience study, covering the first six months of offering prenatal screenings for 22q11.2 microdeletion syndrome, was accepted for publication in the Ultrasound in Obstetrics and Gynecology Journal, and is now available online, on their website. This study was based on over 20,000 NIPTs we have performed in the field, and demonstrated best-in-class performance of our microdeletion panel. The incidence of 22q11.2 deletion syndrome was found to be more than 1 in 1,200 in this cohort, which is more common than Down Syndrome for women under the age of 28. The study demonstrated a positive predicted value of 18%, and a false positive rate of 0.38%, before any reflex testing was performed. We also demonstrated that sequencing high risk samples at a higher depth of read increased the positive predicted value to 42.3%, and lowered the false positive rate to 0.12%, with no loss of sensitivity. We expect to implement this improved methodology in 2016, during the first quarter. Let me now hand the call back over to Matt to go into more detail on our progress in oncology.

Thank you, Steve. As we have discussed in the past, we believe that in order for a liquid biopsy product to be successful, the test must be able to detect genetic mutations, particularly copy number variants, or CNVs, single nucleotide variants, or SNVs, and gene fusions at very low concentrations within a plasma sample. Using similar core mmPCR and informatics approaches we have developed for NIPT, we have demonstrated, in our initial studies, the ability to detect these mutations with best-in-class sensitivity.

A few weeks ago, we announced the publication of a proof of concept study, demonstrating best in class detection of breast cancer CNVs from a blood sample in the October 2015 issue of Translational Oncology. We detected copy number variants at concentrations below 1% in the plasma sample, which is about 4 times lower detection level for CNVs, compared to other sequencing methods that require circulating tumor DNA concentrations, of at least 4%. To our knowledge, this was the first published study in which subclonal mutations, meaning CNVs that occur in only part of a tumor and can be missed with a localized biopsy, were accurately detected in a plasma sample. This is a key capability for therapy selection, since many targeted therapies currently on the market, or in development, depend on CNV status for selection.

We believe the performance of our technology confers a meaningful competitive advantage. With a focus on breast, ovarian and lung cancer, we are initially developing tests for therapy selection and recurrence monitoring, in patients where cancer has already been diagnosed. And for screen high risk populations, where either a genetic predisposition exists or a nodule has been detected. Ultimately, we believe these tests will be offered for early detection of cancer.

I'm going to focus my attention today on providing a more granular update on our ongoing oncology efforts and near-term milestones. Across cancer types, we're engaged in several research efforts with a set of leading academic centers, including Columbia, Cancer Research UK, Stanford, Vanderbilt, and the University of Pittsburgh Medical Center, amongst others, to collect the following five types of specimens. First, plasma and matched tissue from patients undergoing surgical biopsy, to demonstrate concordance of ctDNA with sequencing analysis of the solid tumor tissue.

Second, longitudinal plasma from metastatic cancer patients undergoing treatment, to study how genomic signatures change over time under therapeutic pressure, to show how ctDNA can be used to improve therapy selection instead of repeat biopsies and to measure tumor load in conjunction with imaging modalities. Third, longitudinal plasma from patients in remission, to validate the use of our ctDNA technology in detecting minimal residual disease, MRD, and predicting relapse before imaging technologies, which are standard of care, and making personalized treatment and patient management decisions in that context.

Fourth, longitudinal plasma from patients at high risk for cancer, but not yet diagnosed, to demonstrate our performance as a screening test. And fifth, banked samples from academic centers and contract research organizations that fall into one or more of the categories I have described, to help accelerate the research and validation programs.

We expect many of these studies to generate data in 2016. Including, one, therapy selection studies evaluating our ability to find clinically actionable mutations in lung cancer. In 2016, we expect to read our data measuring concordance between our ctDNA analysis and sequencing of the solid tumor. We intend to use this data to provide the groundwork for commercialization of a therapy selection panel, initially for lung cancer patients, to be followed in the future by therapy selection tools for other cancer types. Two, results from the initial phase of the TRACERx study are expected to read out in 2016, evaluating the ability of our ctDNA technology to track clonal and subclonal mutations, including resistance mutations as a lung tumor evolves over time. We also plan to use the specimens from TRACERx to demonstrate the analytical performance for disease load and recurrence monitoring applications. And three, initial results from ovarian studies, evaluating sensitivity and specificity of our ctDNA product to screen for cancer in high risk populations.

As we demonstrate our performance, we will consult with our medical advisory board to design clinical utility studies intended to demonstrate to community physicians, medical societies and insurance companies how these tools can be used cost effectively to change the practice of medicine. I'd like to give you more detail on one of the indications we are initially targeting, namely lung cancer.

We expect this will be a key disease area for therapy selection. About 220,000 patients are diagnosed with lung cancer annually, the majority with stage III or IV cancers. Roughly 20% of diagnosed patients are not amenable to an invasive lung biopsy. Our therapy selection panel is being developed to identify clinically actionable mutations present in the ctDNA of these patients. So we would offer a test for newly diagnosed patients, and also re-test patients with progressive tumors who are considering a pivot in treatment.

We believe that if we can show strong concordance in clinical trials between the results of our blood test and the results of a biopsy, our blood test would represent an attractive alternative to biopsy for many patients. One final comment on oncology, relating to COGS. Those of you who have followed the since the IPO will recall that the reimbursement levels CMS recently announced were roughly where we expected pricing to converge. We are leveraging our protocols and infrastructure from NIPT to accommodate those price points.

Cost-effective panels will require efficient use of sequencing, and we believe we expect to achieve that because we are building targeted panels that, combined with our informatics capability, reduce the costs compared to competitive approaches. With that, I will hand the call over to Herm to review our financial results.

Thanks, Matt. Our third-quarter financial results are included in our press release that crossed the wire earlier this afternoon. Our third-quarter total revenues were $44.9 million, compared to $46.3 million for the third quarter of 2014, a decrease of about 2.9%. Matt commented on our increasing volume growth in the average risk population, which is not yet broadly reimbursed, and Steve commented on our progress in establishing in-network contracts with payers.

As Matt mentioned, because we primarily recognize revenue on a cash received basis, a significant portion of the growth in tests' accession that we experienced in the quarter is not yet reflected in our revenues. Roughly 54% of our third-quarter total revenue was derived from test volumes accession in the quarter. The balance of our revenues was derived from tests accessioned in prior periods. We also saw decreased total revenues from older legacy products, which decreased $1.8 million, but were slightly offset by increased Panorama revenue of $400,000 during the three months ended September 30, 2015.

Total revenue for the nine months ended September 30, 2015, was $137.4 million, compared to $109.4 million for the same period in 2014, an increase of about 26%. The increase in total revenues from 2014 to 2015 was primarily due to higher test volumes, particularly for Panorama. The percent of our total revenue attributable to our US direct sales force for the three months ended September 30, 2015 was 73%, up from 64% for the three months ended September 30, 2014. The percent of our total revenue attributable to US laboratory partners for the three months ended September 30, 2015 was 13%, down from 22% for the three months ended September 30, 2014.

The percent of our total revenues attributable to international laboratory partners, and other international sales for the three months ended September 30, 2015 and 2014, was 14%, down from 15%. The percent of our total revenues attributable to our US direct sales force for the nine months ended September 30, 2015 was 76%, up from 52% for the nine months ended September 30, 2014. The percent of our total revenues attributable to US laboratory partners for the nine months ended September 30, 2015 was 10%, down from 33% for the nine months ended September 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 in the second half of 2014. The percent of our total revenues attributable to international laboratory partners, and other international sales for the nine months ended September 30, 2015 and 2014, was about the same at 14%. Gross profit for the three months ended September 30, 2015 was $14.5 million, representing a 32% gross margin, compared to $25.5 million, representing a 55% 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 primarily to higher volumes for our 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, cost of product revenues in 2015 includes costs for tests performed in advance of related revenue recognition. So we incurred costs associated with running an increased volume of tests in our lab, but have not yet recognized revenue on much of that volume. As previously discussed, we now recognize revenue primarily on a cash received basis.

Research and development expenses were $7.3 million in the quarter, compared to $4.4 million for the same period in 2014, an increase of $3 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 $27.9 million in the quarter, compared to $16.3 million for the same period in 2014, an increase of $11.6 million. The increase over the prior year reflects the net addition of 203 employees and contractors from September 30, 2014 to September 30, 2015, as we increased our focus on a direct sales model in the United States.

As we have discussed in the past, we think the expansion in headcount in our sales organization is largely complete at this point. Net loss for the three months ended September 30, 2015 was $17.6 million, or negative $0.39 per share, compared to net income of $3.7 million, or $0.04 of basic earnings per share, and $0.03 of diluted earnings per share for the same period in 2014. Net loss for the nine months ended September 30, 2015 was $47.3 million, or $2.53 loss per share, compared to a net loss of $6.4 million, or $1.35 loss per share for the same period in 2014. Weighted average basic shares outstanding were 44.9 million for the third quarter of 2015.

Subsequent to the close of the quarter, we paid off the entire $20 million in borrowings under our secured loan agreement with OrbiMed. The total payment of $28 million included $20 million in principal, $2 million in prepayment penalty, and a $6 million royalty payment, releasing the Company from our entire royalty obligation under the secured loan agreement. In September 2015, we entered into a $50 million line of credit with UBS. In October of 2015, we borrowed $32 million against this line of credit, at a variable interest rate of 30 day LIBOR plus 65 basis points. At the close of the quarter, the Company held $224.2 million in cash, cash equivalents, short-term investments and restricted cash, compared to $88.5 million as of December 31, 2014. We continue to think our current cash position will allow us to fully pursue all the opportunities the team has discussed today.

Turning to our future outlook, I would like to provide an update to our previously announced preliminary financial guidance for FY15. We previously expected 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. While our guidance on margins and operating costs for the year remains unchanged, we now expect 2015 revenues to be in the range of $180 million to $185 million. We have no change to our 2016 guidance, which I will reiterate here. We expect to achieve revenues of $220 million to $240 million in 2016, assuming robust adoption and reimbursement of the Panorama test within the average risk population in 2016. I will now turn the call back over to Matt for final comments.

Thank you, Herm. We are very pleased with the progress in this quarter. We believe that the substantial growth in volumes is a testament to both our leading technology and sales channel. Will the operator please open up the call now for questions?

(Operator Instructions)

Bill Quirk, Piper Jaffray.

Great, thanks, and good afternoon everybody.

Hi, Bill.

First question, to Steve. So per your comments about signing deals with some of the Anthem plans and several of the Blues in the quarter, can you talk at all about some of the early trends that you are seeing in the fourth quarter, in terms of average risk payments? Are these meaningfully different than what you are seeing on the high risk side?

Yes, that's a good question. I think we're pleased to see that 17 plans have now started covering average risk, roughly 55 million covered lives. We don't really expect to see an impact in 2015. I think as we've said previously, we're looking forward to a continued trend of coverage policies in 2016. But at this point, we are not anticipating any impact in 2015.

Okay. And then as it relates to the new Harmony -- or excuse me, new Horizon test. Can you talk a little bit about some of the synergies that you are seeing with Panorama? Obviously, Horizon was up, as Matt noted, substantially, on a sequential and year-over-year basis. I'm assuming this is -- or perhaps the combination of multiple tests are helping drive some new account wins for you?

Yes, I think it's similar to what I said in the prepared comments. There's really three things. One is the strength of our US direct sales team, and the ability to cross sell to our existing NIPT customers. We have the right market segment, and we are broadly reaching OB/GYNs, maternal and fetal medical doctors, and IBF centers. The second is that the clinical content is differentiated. We are getting very positive feedback on Duchenne muscular dystrophy.

But overall, the way that we have designed the panels, and the way that we offer the test, meets the needs of our customers. And then third, we have an extensive focus on user experience. And many of the things that prevent OB/GYN doctors from offering a complex genetic test, many of the limitations on things like phlebotomy, we have solved those problems. And we're seeing that our user experience platform is helping to differentiate us from the competitors. So we are very pleased with the current trends, and we're pleased with the performance of the team.

Okay, got it. And last question for me, and it's more of an accounting question. And that is, of the greater than 67,000 Panorama tests, and also, obviously, as it relates to Horizon, were there any research test in there? Or are these all clinical tests that you can go ahead and pursue billing on those? Thank you.

You are welcome, Bill, and thanks for the question. There was a very, very small portion were research tests. Most were commercial.

Perfect. Thanks guys, appreciate it.

Thanks, Bill.

Steve Beuchaw, Morgan Stanley.

Hi guys, thanks very much for taking the questions this afternoon. First question, I'd like to actually follow up on Bill's question, and ask a very open-ended one for -- I imagine it's Matt and Steve. It would just be helpful to hear a little bit more perspective on how the dialogue is evolving with the payer community. When you reiterated the 2016 guidance, you again used the language about your expectations for broad reimbursement. Could you give us a sense for what you're learning in the conversations, here lately, subsequent to Anthem? And how you might be thinking differently about how that all evolves, based on what you've learned over the last quarter?

I guess I'll give some high-level comments, and then I'll hand over to Steve, who is managing most of these conversations under his organization. So the general conversations are about the value of the NIPT test in the low risk population, to the extent that OB/GYNs and women want this test. The data is compelling. I think we have seen that, from our studies, and from other people's studies, we show substantially improved clinical performance, relative the existing screening modalities. And what we're seeing in the field is that pregnant families want to have this information earlier in the pregnancy, not just for the clinical performance, but also because they want to know the gender of their baby. And so the OB/GYNs are pretty strongly messaging that they want to have this capability to test the pregnancies at nine weeks and onwards.

We can't speak for the insurance companies. The data that we have is the data that we have quoted. It's about 55 million covered lives now. And we do expect that, over time, the vast majority of insurance companies are going to get in line, because there is so much demand that we are seeing from the OB/GYN's and the pregnant women. But we really can't speak for them. You have to ask them directly, when their timing would be, or what their thinking is, other than the data that we have presented. Steve?

Yes, thanks, Matt. I don't really have much more to add than that, other than, we're in conversations with several of these groups, and we have given presentations, and showed the data in peer-reviewed publications. And we've gotten positive feedback. We never had an expectation that everyone's going to switch on day one. There's always a cycle to these things. And over time, we anticipate that most plans will get in line with what the pure view data shows, which is low risk makes a lot of sense, from a clinical and economic standpoint.

Got it. Very helpful. And then one model question. I wonder if you could give us a sense -- not necessarily for LifeLabs specifically, but broadly speaking -- on the collaborations that you have with labs outside the United States, those on Constellation? Can you give us a rough sense for the potential contribution from any one lab or group of labs, over time? How should we think about that as a part of the model, going forward?

I'll take a high-level comment, and then I'll hand it over to Herm, and maybe Steve wants to comment, as well. High level, we're not giving that guidance right now, so I don't want to be giving numbers on this call. I will say that, in the long-term, we do anticipate that Constellation is the way that you are going to enable the international market effectively. You are taking out the shipping costs, which is a big deal. You are enabling the local insurance companies in those countries to be bold -- LifeLabs is a great example of that -- by running the sample in the local territory. And you are accelerating the turnaround time for the doctor and the patient.

So this is where the market is trending in the long-term, and we do think that there are many different sequencing systems that are going to be able to service that need. As the sequencing systems get faster and cheaper and more powerful, we think there is going to be ongoing interest in labs to be offering the testing themselves. And we hope to service that need. So I'm not giving numbers at this stage, but I do think in the very long-term, this is where the international market is really going to go.

Steve, (multiple speakers) as you would expect, I'm going to throw less words at it than Matt. I would say that for 2015, I would not affect your model much at all, because our N is so low, right? But we are in the process -- and I'm going to hand it over to Steve -- and in negotiations on several more. That said, I'd be pretty cautious, because the N is very low right now.

Yes, thanks, Herm. I agree. I think we announced we have four live partners on the Constellation Software. We been pleased with our performance. We have a very healthy pipeline. Partners are looking for a differentiated technology, and we think that the SNP-based assay is going to have a space in most countries around the world, long-term.

As always, really helpful perspective, guys. Thank you.

Doug Schenkel, Cowen and Company.

Thank you, this is Adam Wieschhaus on for Doug. Thanks for taking my questions. My first one, I just had a quick one on microdeletions. Was that attachment rate this quarter roughly in line with what it's been in the previous quarters?

I'll take that. Yes, roughly in line.

Okay. And then I just had a follow-up, on the Horizon, to an earlier question. Do you believe the increased volumes this quarter were due to taking shares from other [complexion egg] tests? Or was it more attributable to converting orders from more traditional methods?

Yes, I'll take that. So we do look at those trends. I think there is a little bit of both. And we're not going to give the specific breakout there, but there is some of both.

Okay. Great. Thank you.

Jeff Elliott, R.W. Baird.

Good afternoon. And first question here is on the guidance. I guess I'm really looking at 2016, and I realize you reiterated the range. But I'm wondering, the assumptions you have baked in, in terms of coverage and adoption. From what you have seen so far in the second half of this year, are you tracking towards what you need in order to hit that 2016? Can we assume that, based on the reiteration tonight?

I think you can assume that in our model, which also, in turn, assumes robust adoption, that the adoption we assume for 2016 is greater than we have seen.

Got it. And just a follow-up on the gross margin, the 2015, you reiterated the range. That does imply a big step down in the fourth quarter. Is that conservatism? Is that -- is there some new costs coming on? Can you help me understand the fourth quarter gross margins implied by the annual guidance?

Yes. We've also got this lag of four to six months, which really exacerbates the other things that have been said on the call, thus far, relative to ASPs and volumes. And as you have -- in a quarter, if you were to have tremendous volume increases, like we did in the third quarter, particularly for carrier screening, but also for Pano, with a high microdeletion attachment. And you were to have billing operational issues, which were resolved, that Steve talked about, all of that combines to what we've said already in the prepared remarks, which is we've got a lag there, right? So we're going to see some of that lag taken up in the fourth quarter.

I will make some comments there. I will make a few comments on that question, as well. We've also mentioned in the past that we are going in-network with certain payers. And that is the right thing to do strategically, for the long-term, but that will tend to reduce the ASP when we go in-network. And so that is going to be a different trend, which will reduce the gross margins. But in the long-term, we expect the gross margins to improve. We are continually improving the COGS of the test.

There is going to be COGS improvements at the end of this year, and there is going to be COGS improvements around Q2 of next year, which are pretty substantial. And this is going to be an ongoing process. I would just mention that the amount of sequencing that we do on the test is well below $50. So a lot of the COGS in the test are from shipping, accessioning the Natera electronic services. A lot of that can be reduced with operational efficiencies, over time. And this is going to be an ongoing effort.

That's great. Thanks, guys.

Zarak Khurshid, Wedbush Securities.

Yes, this is Zarak at Wedbush. Good afternoon, thanks for taking the questions. Apologies if I missed it. Can you break out the number of delivered Panorama tests in the quarter, when you strip out the redraws and the clinical trial-related samples?

We give the number of tests -- I refer you, Zarak, to the Q, which has been filed this afternoon. And if you look at MD&A, and specifically at the second paragraph, under the revenues for the three and nine the months periods, you'll get all the test accessioned, the revenue recognized on those tests accessioned, and the percentage that actually was accessioned in the quarter. So I think that will give you a lot more information about just what this lag is doing to us right now, and what you could probably expect for the rest of the year.

Got it. I will check that out. And then congratulations on the in-network contracts. Can you describe how those contract, and positive pressure from the payers, may have helped to drive greater Panorama and Horizon volumes in the quarter? And if you didn't see a benefit in Q3, how should we be thinking about a positive impact on volume, going forward? Due to the in-network contracts?

I think Steve can take that.

Yes, I'll take that. So I think we're very pleased with our coverage for Panorama. We've previously announced, accessed over 150 million covered lives through our direct and partner network. We're continuing to expand our direct network. We had a great quarter in Q3, adding more than 24 million covered lives. We do see certain regions of the market, in certain areas, where you need to have those contracts to get access. And we think it's important, as part of our growth strategy, to get in-network.

As Matt mentioned, we're deep in multiple conversations, and we have high expectations there. We do see some downward pressure on pricing, as we go in-network. But in exchange for that, we have access to a broader base of lives that we otherwise wouldn't. And we have more reliability in the payment cycle. So I think those are known and established trade-offs, and we will see access to more patients, as a result of going in-network.

Thanks, Steve. And just a follow-up on that. Do these contracts, and the ongoing discussions, have provisions for average risk pricing?

Yes, I'll take that one, as well. So generally, the medical policy is separate from the contract. And so we contract for covered codes, and then we work with the plans on updating their coverage policy and providing them all the evidence on clinical information necessary to do so. We haven't seen bifurcated models being proposed by the payers that we are in-network with. But we do know that there is some discussion of that out there.

We haven't seen it. And I think ultimately, our perspective is that, in the low risk market, a broader panel that includes 22q11.2, which is more common than Down Syndrome in women under 28, is going to be necessary. And it's going to be what doctors and patients want in that segment of the market. So the bifurcated strategy, where there's two completely different tests, one is very limited, one more broad, with two different pricing schemes, is not something that we are observing at this time.

Got it. Thanks. And then last one, just on the Horizon. How is the reimbursement shaping up?

So as we announced earlier, on an average payment when paid basis, we've seen consistency throughout the year. We haven't released our ASPs, but it's been fairly consistent throughout the course of the year, in line with our historical numbers. We do anticipate, again, as we go in-network, that there will be some pricing pressure. So say that we're going in-network, in exchange for that, we have access to more covered lives and more consistency on the payment cycle.

Thanks, everybody.

Thank you, and I'm showing no further questions at this time. I'd like to hand the ball back over to Management.

Thank you.

Thanks, guys.

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.