Natera's (NTRA) CEO Matthew Rabinowitz on Q3 2017 Results - Earnings Call Transcript

About: Natera (NTRA)
by: SA Transcripts

Natera, Inc. (NASDAQ:NTRA) Q3 2017 Earnings Conference Call November 8, 2017 4:30 PM ET


Michael Brophy - Chief Financial Officer

Matthew Rabinowitz - Chief Executive Officer

Steve Chapman - Chief Operating Officer

Solomon Moshkevich - Senior Vice President, Product & Strategy


Bill Quirk - Piper Jaffray Companies

Doug Schenkel - Cowen & Company

Catherine Schulte - Robert W. Baird & Co

Zachary Wachter - Morgan Stanley


Welcome to Natera's 2017 Third Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will hold a question and answer session. [Operator Instructions] As a reminder, this conference call is being recorded today, November 8, 2017. I would now like to turn the conference call over to Michael Brophy, Chief Financial Officer. Please go ahead.

Michael Brophy

Thanks, Operator. Good afternoon. Thank you for joining our conference call to discuss the results of our third quarter 2017. Also on the line is Matthew Rabinowitz, our CEO; Steve Chapman, Chief Operating Officer and Solomon Moshkevich, SVP, Product & Strategy.

Today's conference call is being broadcast live via webcast. We will be referring to a slide presentation that has been posted to A replay of the call will also be available at During the course of this conference call, we will make forward-looking statements regarding future events and our anticipated future performance such as our operational and financial guidance for the full year 2017, our assumptions for that guidance, market size, opportunities, and strategies and expectations for various current and future products including product capabilities, expected release dates and related effects on our financial and operating results.

We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. Please refer to the documents we file from time to time with the SEC, including our most recent Form 10-Q and the Form 8-K filed with today's press release. These documents identify important risks and other factors that may cause our actual results to differ from those contained in the forward-looking statements. Forward-looking statements made during the call are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information.

Natera disclaims any obligation to update or revise any forward-looking statements. We will provide guidance on today's call, but will not provide any further guidance or updates on our performance during the quarter unless we do so in a public forum. We will quote a number of numeric or growth changes as we discuss our financial performance. And unless otherwise noted, each such reference represents a year-on-year comparison. And now, I'd like to turn the call over to Matt.

Matthew Rabinowitz

Thanks, Mike. Good afternoon, everyone, and thank you for joining us. I will first review the highlights since we last spoke in August and Steve and Mike will additional detail on our commercial and financial progress. As Mike mentioned, we will be referring to slides that we just posted at

First, a summary of our recent highlights on Slide 3. We processed over 130,000 tests in the quarter, which represents 15% growth versus the same quarter last year and roughly 4% sequentially versus the second quarter of 2017. We were very pleased to launch a twin screening capability for Panorama in October, which is the first NIPT that can determine whether twins are identical or fraternal.

This can be done as early as nine week gestation. We believe this is a crucial addition to our Panorama franchise and has driven further momentum in Panorama volumes so far in Q4, particularly with MFM offices that handle high-risk pregnancies. Steve will spend more time on this in a moment.

We generated total revenues of $56.7 million in the quarter, which represents 5% growth over Q3 of last year despite the fact that the majority of our revenues are not derived from lower priced but stable in-network contracts. Revenues grew roughly 6% sequentially versus Q2 of this year. We spent some time on our last earnings call discussing how we are announcing stable pricing and that trend continued in Q3 as average pricing improved for the second consecutive quarter.

As Mike will describe later in the call, we don’t necessarily expect pricing to improve every quarter, but we do expect pricing to be stable in the near term with significant longer term tailwinds and the average risk NIPT reimbursement and reimbursement from microdeletions test.

Gross margins in the quarter was 39%, an increase of about 340 basis points from Q2. This was driven impart by improved pricing from certain payers and COGS continuing to benefit from version three of Panorama in Q3. We also benefited from some one-time items in the quarter and Mike will dive deeper into this later in the call.

Finally, I am excited about the progress we have made in oncology since we announced the launch of Signatera and an RUO offering in August. First, we have signed deals to perform eight pilot studies with pharmaceutical companies that are leaders in the field and we have many more in late-stage discussions. We are finding that our technology is particularly well-suited to the nation and rapidly growing field of immunooncology.

Secondly, we have initiated a number of studies intended to support the clear launch expected next year in key indications in neoadjuvant, adjuvant and recurrence monitoring applications. We were very pleased to launch a collaboration with Denmark’s Aarhus University in the longitudinal study evaluating the benefits of Signatera in screening for muscle invasive bladder cancer.

We have also launched a sample study with Aarhus University in Stage-2 colon cancer. We also recently announced the collaboration with Imperial College London and the University of Leicester to include a key study in breast cancer led by Dr. Charles Coombes and Dr. Jacqui Shaw. These studies represent populations for whom we think Signatera can make a big difference over time.

For example, we estimate that there are almost 3 million women living with breast cancer in the United States. We believe that offering Signatera to even a subset of these patients for cancer at occurrence lung change could augment or potentially replace monitoring with mammograms with low cost much more convenience for patients than regular doctor visits and none of the exposure to radiation.

Colon cancer is the third most commonly diagnosed cancer and the second leading cause of cancer death in men and women combined in the United States. Patients often receive followed by chemotherapy after surgery, but is often unclear which patients truly stand to benefit from the follow-up treatment.

We believe Signatera will help identify which patients will benefit from chemotherapy and how long to extend treatment after surgery and which patients can safely be monitored instead, again resulting in significant healthcare benefits for the patient and cost savings for the system.

Our strategy in oncology is to focus first on the most acute segments of these markers where we can quickly and efficiently demonstrate clinical utility. I will ask Solomon to spend more time on both peer studies we are running and our activities with pharma later in the call.

I believe there are many parallels between on Signatera launch and our Panorama launch four years ago. The oncology indications we are targeting are large markets, particularly since many patients will receive blood dose every few months in remission or every few weeks while under therapy. We believe analysis of the cell free DNA will offer clear performance and cost advantages over the status quo.

Several companies have started to offer blood-based genomic testing in this area and interest in these tests are reaching critical mass. Just as in NIPT, we intend to launch an offering with superior test performance than the first movers and we are poised to ride a wave of broad adoption in these well-defined markets.

Steve will talk about our team’s excellent work in streamlining the user experience in both servicing and billing our tests which has been developed in the pre-natal setting. I believe this will also place Natera in a powerful position with the roll-ons of our patient-focused oncology offering in 2018.

Now, I’d like to hand the call over to Steve to summarize our commercial progress in the quarter. Steve?

Steve Chapman

Thanks, Matt. As you can see on Slide 4, our unit volume productivity per rep continues to improve through growth in core products and our new product launches. We are making investments in our core product offering that we believe can drive further adoption. This includes three things. One, continued menu differentiation, two, streamlining our user experience and three, rounding out on core NIPT product offerings.

We differentiate our menu with the launch of Evercord and Vistara, and are still in the early stages with these two new products. On Evercord, we promote to doctors through our broad sales teams and we leverage our existing relationships to sell Evercord directly to patients. We are gaining experience with this direct sales platform that could allow us to expand to consumer-facing genetics offerings in the future.

We began offering Vistara to early adopting Ob/Gyns in the third quarter and we’ve been pleased with the clinical performance of the tests so far. To-date, we have 21 positive results, where diagnostic results were available, all of our positive calls were confirmed. Where diagnostic results are available, variance we found were consistent with the ultra-sound abnormalities or family history reported.

We feel confident the test is performing as expected. We remain on track to launch a refined offering next year to integrate Vistara on a single requisition form with our other products that reduces the amount of blood required from the patient. The current launch is important to help build awareness for Vistara, but we will need these user experience improvements to reach the same breadth of physician practices we currently reach with Panorama and Horizon.

Nevertheless, Vistara is a differentiator. The current version has generated significant interest and serves to open doors where we didn’t previously had access. We remain at a strong position with Panorama and Horizon as described on Slide 5 offering a market-leading breadth of coverage on one requisition form and one needle stick for the patient.

We are seeing momentum in both of our four products and we saw our Horizon and test degree continues to increase. As we described last quarter, we believe ACOG’s updated guidelines recommending physicians to offer spinal muscular atrophy in addition to cystic fibrosis screening to all pregnant women in the United States is an important market driver.

We are seeing this new guideline is prompting many physicians to reevaluate their practice patterns to expand beyond cystic fibrosis single-gene testing, which is favorable for Natera as we believe we have the premier menu of carrier screening offerings.

We’ve been streamlining our user experience to remove barriers to growth. We are executing key projects that are intended to achieve this objective improving patient and physician experience. For example, we’ve continued to optimize our assay to reduce our redraw rate which we believe is competitive with others in the market.

This quarter, we are planning to launch an workflow enhancement to reduce our redraw rate again and in 2018, we have two additional initiatives planned that are expected to cut it even further. We also recently launched an automatic redraw program. If a patient needs a redraw, we automatically dispatch a carrier to collect a new blood sample streamlining scheduling and logistics for our customers. We’ve received excellent feedback on the beta test and we planned to launch nationally shortly.

Combined, these redraw reduction and experience enhancements, streamline our offering and enhance sales productivity. We intend to have a very streamlined user experience while maintaining our high standards for accuracy. Similarly, we have been working to streamline our billing process and enhance our pricing transparency. The difficulty of getting patient-specific cost predictions has been an area of concern by patients and physicians industry-wide and in some cases held up adoption.

Another advantage of our network with most payers, is that we can accurately estimate what the patient’s out-of-pocket cost will be before the test is performed and before we seek reimbursement. Leveraging this, we built a price transparency tool. Patients are encouraged to log on to our patient portal where in addition to tracking the progress in their test, we communicate with their out-of-pocket co-pay and deductible costs are estimated to be and offer them payment options including not using their insurance.

The majority of our patients using insurance between $100 and $200 out-of-pocket based on previously processed claims, but with then toward high deductible health plans, some patients may have a higher out-of-pocket responsibility. With our tool, because we can estimate the patient’s out-of-pocket responsibility upfront and offer a cash option rather than use insurance for those with high deductibles, we streamline the service and address the source of frustration for our customers.

We also recently piloted a pre-test cost estimator in which patients can log on to our patient portal prior to having their blood drawn and get a personalized cost estimate. These kinds of features give peace of mind to both the patient and the clinic as one of the key barriers to adoption of NIPT is concerned about out-of-pocket expenses.

We’ve been gradually broadening access to these tools in the last six months and plan to roll them out nationally in 2018.

Moving on to Slide 6. In addition to the improvements I just described, rounding out our core NIPT offering is extremely important to our business. Historically, we have competed against other NIPT providers who have twins and egg donor testing as part of their NIPT naïve. This prevented us from accessing certain clinics, especially the high value maternal fetal medicine offices who see a disproportionately high percentage of the twin pregnancies.

In addition, most of our clients had to keep competitor kits in their offices, because we didn’t have a twins or egg donor offering. This allowed competitors to establish relationships within our customer base. We think the recent launch of a twins and egg donor screening capability could have a noticeable impact by securing and growing our existing accounts allowing us to access to customers that we previously couldn’t penetrate and further differentiating our offering.

And as Matt mentioned, Panorama is now the first NIPT that can determine whether twins are identical or non-identical with greater than 99% sensitivity and specificity. The identical twins are called monozygotic and the non-identical twins are called dizygotic. Accurately assessing zygocity early in twin pregnancies is an important product feature.

Not only do parents like to know this information, but also there is a clear clinical benefit. Overall, complications occur in about one in 45 twin pregnancies. When twin pregnancies share a single placenta, they can be at risk for significant complications including twin-to-twin transfusion syndrome, which can be lethal to one or both babies.

Today, the problem is that about one in five of the average pregnancies are misclassify using ultrasound alone. This is where Natera’s pre-needle test can help. Two-thirds of identical twins will share a placenta and maybe referred to as specialist. Our test is also uniquely able to determine the gender of each twin, which many customers find compelling. It’s still early days, but we are pleased with the initial uptake and receptivity of our offering.

In summary, we made strides to differentiate ourselves through the launch of Vistara. We streamlined our user experience and we rounded out our NIPT product offering securing our customer base and gaining access to accounts that were previously off-limits. The net result of these efforts is that we are seeing recent momentum in Panorama.

Another near-term driver growth comes from a standing state and managed Medicaid plans that cover NIPT and we summarize that expansion on Slide 7. In order to secure steady reimbursement with any given state, we typically need to be contracted and accredited with both the State Medicaid Agency and any managed Medicaid plans active in that state and we need NIPT to be included on the State Medicaid fee schedule.

As we have described previously, since Medicare included NIPT on their fee schedule last year at a price of $802, we have seen a steady increase of states adding NIPT to their Medicaid fee schedule, generally with price points above $700 per high risk NIPT. As is the case with many healthcare services, the standard of care offered by Medicaid plans generally lag the private insurance market by one or two years.

Given the relatively low cost safety and health economic arguments in favor of NIPT, we believe we are in the early stages of broad Medicaid adoption. Currently, there are about 36 state Medicaid plans that are covering high risk NIPT that is up from 23 in Q2 of last year. We expect to continue to make steady progress in expanding our reimbursement success with Medicaid, given that roughly 30% in our NIPT volume are Medicaid units today. Broader reimbursement can help improve our average selling price.

When we see stable reimbursement in a given state, we can open new territories for us to grow volumes further as well. There has been a lot of discussion about Protecting Access to Medicare Act or PAMA recently. We have largely avoided any negative impacts, first, reimbursement changes to our products we minimal and second, most of our payable business today is from private insurance companies and not from Medicare where PAMA has the greatest impact.

As a reminder, the centers of Medicare and Medicaid released their preliminary determination of PAMA base rates in September for the 2018 through 2020 clinical lab fee schedule. The PAMA is CMS’s attempt to move towards market-based pricing where rates are determined through the weighted median of private payer is from laboratories.

We believe PAMA’s proposed rates will have minimal impact to our business for 2018. First, the preliminary reprice of 81420 will drop by $43 from $802 to $759. This is a slight haircut that we expect will have minimal impact on our reimbursement. Second, while the proposed reprice of 81422 goes from $802 to $574, the actual impact is much less due to the statutory requirement that the maximum reduction assessed on a particular code is 10% per year.

So, in 2018, if the new pricing stands, the rate 31422 will be $722. For more color here, the $574 reprice is based on cross-walking 81422 to code 81436. We don’t take this cross-walk to 81436 as the most appropriate and we have appealed this decision with CMS directly.

Along with the Association of Molecular Pathology and the coalition for access to pre-needle screening, Natera has submitted comments to CMS recommending a more appropriate cross-walk to the 81420 NIPT code due to the similar workflow procedure in resources used.

CPT code 81420 was not an option when 81422 was originally cross-walked in 2016, because it did not have an assigned value of a clinical lab fee schedule at the time. However, now that 81420 has a national limitation amount it serves as a more appropriate cross-walk than 81436. We hope to hear back on the results of our appeal shortly, but either way, we expect this will have a marginal impact on our business. The repricing of carrier screening codes are not expected to have a meaningful impact either.

Moving on to private payer coverage. As we have discussed in the past, there is potential for broader insurance coverage for average risk NIPT in microdeletions to drive significant additional revenue and volume growth.

The number of covered lives under the insurance plan that covers average risk NIPT remains steady in the quarter at about 110 million covered lives, which is roughly half of the commercial insurance market and our microdeletions coverage rate also remains stable at about 10% of our microdeletions volume.

We will continue to release data on microdeletions, but the key effort on microdeletions coverage remains our efforts with the SMART trial. We discussed on the last earnings call that we enrolled our 10,000th patient in SMART in August and that study remains on track to complete enrollment of 20,000 patients in 2018. On average risk NIPT, we would have like to have seen faster coverage progress by this point in the year, particularly from United Healthcare and Aetna which are the two large remaining plans that do not cover the test for the average risk population.

We do think we will continue to see progress amongst smaller plans through the course of the year. We are in direct discussion with ACOG, ACMG and other professional societies and certain members have written complaints to Aetna and United for coverage policies that are inconsistent with society guidelines.

We are also working with the coalition for access to prenatal screening and executing our direct field efforts. While we can’t predict what any particular payer will do or when, we think that the fundamental benefits of the tests are clear.

In the mean time, we continue to focus on streamlining our cash pay business for patients where it’s clear, they won’t be covered and we continue to pursue self-insured employer groups as employer groups adopt low risk NIPT coverage, we believe the pressure on the payers who do not cover this continues to mount.

Now, I’d like to hand the call over to Solomon to discuss our progress with Signatera in oncology. Solomon?

Solomon Moshkevich

Thanks, Steve. We made good progress on Signatera since our RUO launch just a few months ago. First, let me remind you what we are selling, whereas currently available liquid biopsy solutions offer a static panel genes for all individuals, our product Signatera provides each individual with a customized assay tailored to match the somatic mutations found in that individual’s tumor tissue. The advantages are shown on the left side of Slide 8.

Our proprietary multi-point PCR technology that we first announced for Panorama allows us to build these assays quickly and cheaply. The multi-point stability mean test dozens or even hundreds of these mutations simultaneously.

Something that digital droplet PCR cannot do for example, and our targeted approach means we can achieve very high sensitivity with average sequencing depth over 100,000 x on a key variance without costly sequencing of many unnecessary genetic regions. As a result, we can offer a tumor DNA service with substantially cheaper cost of goods sold at higher sensitivity than commercially available liquid biopsy panels.

Moving to Slide 9, I would like to summarize the progress we have made with pharma in just a few months since launch. We have signed deals for eight pilot studies with leading pharmaceutical companies and with a number of additional deals expected to close before the end of the year. Pharmaceutical companies are interested in the Signatera technology for multiple reasons.

Number one, the promise of earlier treatment intervention for patients presenting with rising ctDNA levels, number two, better patient selection to improve drug performance and trial outcomes and number three, its performance in measuring therapy response during a clinical trial, often much earlier than conventional response metrics like radiology or pathology.

In the TRACERx study, we showed that our technology can potentially help determine which patients are responding well to treatment and which patients are not responding well based on what is happening with the levels of tumor DNA in their blood. This is particularly relevant in clinical trials involving immunotherapy. For each treatment it’s expensive and should be interrupted quickly if the patient is not responding.

Imaging studies alone can be misleading in the evaluation of immunotherapy response and sometimes the tumor looks larger on the scan, even if the patient is indeed responding well to the treatment. This is called pseudo progression. In this setting, regular plasma analysis was Signatera could help pharma companies be more efficient with our clinical trials and could eventually help doctors to be more efficient with immunotherapy in the clinic as well.

We envision that eventually ctDNA disease burden will be used as a standard endpoint in clinical trials to measure treatment response alongside resist imaging criteria. And that our personalized approach to monitoring will be the preferred approach. We believe that Signatera is also an attractive diagnostic tool for pharma companies who are developing an exciting new class of drugs called tumor-specific neoantigen therapies.

These are immunotherapies designed specifically for each individual. Training the immune system to attack the neoantigens found uniquely in that person’s tumor cells, but not found in any of itself at the body. These neoantigens arise due to DNA mutations in the tumor cells.

Some believe that these personalized vaccines are the future of cancer treatment and it matches perfectly with Natera’s personalized approach as we can design our patient targeting the specific mutations associated with each patient’s vaccine. Natera is seeing a lot of early interest in this application.

Turning now to our broader strategy for introducing Signatera into clinical practice. We think about this in terms of four fundamental indications. Therapy response monitoring, recurrent monitoring, the adjuvant setting and the neoadjuvant setting. I’ve already spoken about therapy monitoring in the context of the pharma research market and we’ll now turn to examples in the recurrence monitoring and the adjuvant setting.

Recurrence monitoring with circulating tumor DNA applies to multiple disease types. But here I will focus on the example of lung cancer. According to the SEER database, there are over 280,000 people in the U.S. living with early-stage lung cancer. If they relapse, which most people do, the five year survival rate in regionally advanced lung cancer is only 29%.

The obvious hypothesis is that early detection of relapse can drive earlier intervention which in theory should be more effective when the disease is still microscopic. Another part of the problem was current standard of care is that diagnostic tools for recurrence monitoring in lung cancer today, specifically MRI, and PET scans, are expensive and/or involve radiation.

So for patients who test ctDNA negative, we may be able to decrease the use visit of diagnostic tools. In the Natera study published this past summer, we showed our performance in predicting relapse. So the next step here is to demonstrate safety and utility by implementing prospective studies where lung cancer patients will draw blood every three to six months during remission and those with detectable tumor DNA in their plasma, what we call molecular relapse, they receive an intervention, the same theory applies in other diseases as well.

We recently announced studies in colorectal, bladder and breast cancers with collaborators in Denmark and the UK, and these studies may help us make prognostic claims for current monitoring in those diseases just like we do now in lung cancer. All in time for our CLIA launch anticipated for next year.

Turning now to the adjuvant setting, this is a different type of application where the patient has just had surgery to resect the tumor and now the oncologist is deciding whether to give chemotherapy to eliminate any potential residual disease. Here lets’ see the example of colorectal cancer. Among the 30,000 new patients per year in the U.S. with stage-two colorectal cancer, about 20% will receive adjuvant treatment. So clinical studies suggest that only 2% to 4% of them will benefit from it.

Determining who should get adjuvant treatment is a real diagnostic dilemma for physicians today and while current NCCN practice guidelines support the use of adjuvant therapy in this disease, the guidelines are ambiguous as to who should receive it.

We expect that ctDNA analysis of a post-operative blood sample could help CRC patients more effectively such that ctDNA positive patients who are likely headed for relapse maybe better pivoted for adjuvant therapy while ctDNA negative patients may ultimately avoid unnecessary treatment and be monitored for relapse which repeat blood samples.

We really like this indication, because it may help physicians make a decision that is already supported by the guidelines which will likely lead to faster adaption. Also we think doctors are likely to continue ordering repeat blood doses every three to six months to monitor for recurrence after the therapy regimen is completed.

We expect the results of our study with Aarhus University which follows a 130 patients longitudinally and correlates post-operative ctDNA levels with relapse free survival. To form the basis for utility studies after the CLIA test becomes available. We believe there is a similar need for adjuvant treated Hodgkin lung and bladder cancers and also to help to find the appropriate duration of adjuvant treatment across many disease types.

In addition to the studies being run by Natera, we could also benefit from tumor DNA studies run by others in the field, which could create a larger body of evidence to prompt changes in society guidelines and potentially gain insurance coverage more quickly. In that context, we believe that Natera will be positioned to win market share based on the clinical and economic advantages we described earlier as well as leveraging the footprint and infrastructure we’ve already developed in our business.

We see the market opportunity for all these indications in the CLIA setting adding up to approximately $14 billion per year in the United States alone. $12 billion for the adjuvant, neoadjuvant and recurrence monitoring indications, plus $2 billion for therapy monitoring in the metastatic setting. The chart represents our estimate of the number of patients currently in remission from those cancers, acute test on average per year and a conservative assumption of a $500 price points per blood test.

We believe that the worldwide market in time can be roughly four times that of the U.S. We plan to attack this market in 2018 through a combination of channels including partnerships with leading oncology labs, a direct channel into the key academic centers and major private practices and a robust business development channel into pharmaceutical companies.

With that, let me hand over to Mike to review our financial performance. Mike?

Michael Brophy

Thanks, Solomon. We presented Slide 13 previously and predicted pricing would stabilize as we have shown in Q2 and again now in Q3. As a reminder, we have Phase 3 distinct price reducing events in the past.

These include transitioning from billing a procedural code for NIPT to a dedicated NIPT code of 2015, choosing to negotiate in-network agreements with essentially all of the largest payers in the United States in 2016 and transitioning from a procedural code for our microdeletions tests to a disease-specific code to 2017.

In each of these cases, we chose a trade price in return for long-term stability for our business. Blended ASPs implied by our financials, which is simply total revenues divided by total test at sessions in our labs improved from $407 in Q1 to $450 in Q2 and $460 now in Q3.

As we’ve said in the past, the realized pricing implied by our financials will be somewhat volatile from quarter-to-quarter as we recognize variable amounts of revenue from test accessioned in prior periods. The key message is that, in-market pricing afforded by our in-network contracts is stable compared to 2016 and I will discuss on the next slide, there are several substantial long-term pricing tailwinds in our favor.

On Slide 14, as we have described in the past, there is a huge amount of earnings power embedded in the test volumes we run today, but are not currently reimbursed by insurance. There are two hurdles to clear to receive consistent insurance reimbursement for a test. Step one is having a negotiated rate for a specific code and second is getting the test included in the payer’s medical coverage policy.

We think that, ubiquitous NIPT coverage in the United States is inevitable but in the mean time, we estimate that in Q3 alone, we processed roughly 28,000 average risk NIPTs that will not be reimbursed by insurance. If you assume that pricing for average risk NIPTs settled at $450 over time and it could be above that, that would imply $12 million in quarterly revenues and cash flow from currently unreimbursed NIPT volumes.

Microdeletions represents an even larger opportunity. Consistent with our guidance and our experience so far this year, we are receiving positive coverage determinations on slightly more than 10% of our microdeletions volumes today which implies that roughly 41,000 microdeletions tests performed in Q3 will not be reimbursed. Many of the payer contracts have incorporated pricing for the microdeletions panel in line with the $800 rate previously published by CMS.

If you assume that we can increase the fraction of tests on which we get paid over time, and achieve an average selling price below today’s pricing but in the $300 to $600 range, that would drive an additional $12 million to $24 million in revenue and free cash flow per quarter.

Slide 15 is an update on our COGS progression so far. On the left, you see a chart that shows our blended COGs at the beginning of 2015. This number is calculated by simply dividing our cost of product revenues by our test at session in the quarter. So this includes our smaller, higher cost of goods sold in vitro fertilization channel products.

Our NIPT cost of goods sold are below this number, but this still gives you a directional sense of our progress. As you can see, we continue to innovate with our technology to improve test performance while substantially reducing our cost of goods. There are two key projects that drive most of this reduction.

Version three of our Panorama test and our carrier screening automation project. We launched version three of Panorama in late January and we mentioned on the last call, that we’ve been working carefully with our suppliers during this launch phase to ensure we are realizing the expected material cost reductions and that effort required we run the samples in order to ensure maintenance of our performance specifications.

As we expected, we received some reimbursements from suppliers during Q3 for initial supplies expensed earlier in the year that did not meet quality standards. We are still working to optimize version 3 in light of these challenges, but the overall trajectory to our goal remains unchanged. On the carrier screening automation project, we had previously expected to be launching the first module of - in our lab in Q4.

We’ve extended the validation timeline to ensure a smooth transition to the new workflow and we now expect this initiative to launch by Q2 next year. So we looped out this COGS target on the slide to Q2 of 2018, previously it was Q1 of 2018, but nothing has changed in terms of our expected cost savings to come from this initiative.

Our third quarter financial results are included in our press release that crossed the wire earlier this afternoon. Our third quarter total revenues were $56.7 million, compared to $53.9 million for the third quarter of 2016, an increase of about 5%.

As Matt mentioned, this represents significant volume growth for us and shows the benefit of the stability we've gotten from going in-network. In Q3, roughly 47% of the revenue recognized tests in the quarter were also accessioned in Q3. For Q2, this figure was 48%.

In Q2, we recognized revenue on a backlog of older tests and in Q3 we recognized revenue on payments for older tests that we had previously held as a reserve as we have determined, the reserve is no longer necessary for these tests. Overall, the timing of our cash collections on tests session has remained steady. Although we haven’t countered changes in prior authorization policies, for which we’ve had to rapidly adapt operations to minimize the effect on revenue.

Historically, about 80% of the insurance revenue we derived from a cohort of tests accessioned is collected within two quarters and almost all of the revenue we derived from a cohort of tests accessioned is collected within three quarters.

Panorama revenues for the quarter were $35.7 million, compared to $38.2 million in the third quarter of 2016, a decrease of $2.4 million, which again is driven primarily by the shift to in-network contracts and exiting our bioreference commercial partnership at the beginning of 2017. We recognized revenue on approximately 56,400 Panorama tests in the quarter, compared to approximately 56,000 Panorama tests in Q3 of last year.

Horizon revenues for the quarter were $16.9 million compared to $12.2 million in the third quarter of 2016, an increase of $4.7 million driven by volume growth. We recognized revenues on roughly 19,900 carrier screen tests in the quarter, compared to roughly 9,700 tests in Q3 of last year.

Gross profit for the three months ended September 30, 2017 was $22 million, representing a 39% gross margin compared to $20.9 million a 39% gross margin in the same period of the prior year.

Research and development expenses were $12.6 million in the quarter, compared to $11.3 million for the same period in 2016, an increase of roughly $1.3 million. The increase in research and development expenses was primarily attributable to increases in personnel-related cost associated with an increase in research and development headcount.

Selling, general and administrative expenses were $34.7 million in the quarter, compared to roughly $33.3 million for the same period in 2016, an increase of roughly $1.3 million. The increase over the prior period primarily reflects additional headcount and personnel and facilities-related expenses.

Net loss for the three months ended September 30, 2017 was $27.1 million or a $0.51 diluted loss per share, compared to a net loss of $26 million or a $0.50 diluted loss per share in Q3 of 2016. Diluted weighted average shares outstanding were $53.4 million for the third quarter of 2017.

At the close of the quarter, the company held $146.6 million in cash, cash equivalents, short-term investments and restricted, cash compared to $103.2 million as of June 30, 2017. As of September 30, 2017, we held a net carrying amount of $73.2 million under our seven year term $100 million debt facility with Orbimed Advisors and had drawn down $50 million including accrued interest under our $50 million line of credit in place with UBS.

Turning to our future outlook. As you can see on the slide, we are tightening the guidance we provided on the Q2 call in August. We expect 2017 total revenues of $212 million to $220 million, cost of revenues to be approximately 63% to 65% of revenues. Selling, general and administrative cost to be approximately $135 million to $140 million, research and development cost to be $45 million to $50 million and cash burn to be $80 million to $90 million.

As we described, we would have like to have seen faster adoption of NIPT reimbursement in the average risk setting. Compared to our guidance from earlier in the year, the current pace is slightly below expectations and can easily change with, for example, a handful of blues plans updating our policy.

Having said that, a lot of the benefit we would see from further coverage policy updates at this stage of the year would benefit us in 2018. So the updated guidance accounts for near-term impacts to revenue, gross margin and cash burn.

Microdeletions reimbursement, as I mentioned previously is a meaningful variable. But the reimbursement we have seen this year is in line with our expectations, now steady reimbursement on the new code since the start of the year. Our performance and transitioning to the bioreference commercial partnership has gone well as we expected it would and resulting growth in our Horizon carrier screening business is better than what we modeled at the start of the year.

On improvements to cost of goods sold, we’ve been pleased with the launch of version 3 of Panorama and as we mentioned we are still working out cost savings and processes with suppliers to lock in savings for the long-term.

On the carrier screening automation project, we’ve cleared the key technical barriers and we are pleased that our expected cost savings is still consistent with our earlier expectations, but as I mentioned, our timeline has delayed this insurance smooth transition and that approach carries with it a short-term cash burn and gross margin impact as communicated in the revised guidance.

On new products, we are taking a slightly more cautious approach in rolling out Vistara as we’ve described. We are pleased with cord blood so far, but we are going to remain disciplined in our investments there and continue to optimize sales by leveraging sales and marketing investments we are already making for our core products.

Two additional variables are now in play, which is driving us to offer a broader guidance range than we normally would at this time of the year. One is the uncertainty caused by new prior authorization policies that I mentioned and two, is potential revenues from business development activities.

Matt and Solomon described the subset of the exciting work we’ve been doing on the business development front. We are in active discussions on further important partnership deals which assigned in the quarter may have an impact on annual revenues.

We look forward to updating you further on our progress on this front in the near future. With that, I’ll turn it back to Matt for final comments.

Matthew Rabinowitz

Thanks, Mike. I am very happy with the progress in this quarter and we are all really excited about the rapid progress we have made in oncology. Operator?


[Operator Instructions] Sorry, go ahead.

Michael Brophy

Before we get started on Q&A, this is Mike Brophy, CFO, Natera, I’d say two corrections to the prepared remarks. Apologies for reader error. The gross margin for the prior period Q3 last year was actually 36% and SG&A spending actually decreased by $400,000 and that just related to reduction in sales and marketing expenses in the quarter. So, just want to make those two somewhat financing updates.

But, go ahead operator.

Question-and-Answer Session


Thank you. And we have a question from the line of Bill Quirk with Piper Jaffray.

Bill Quirk

Great, thanks. Good afternoon everybody. Couple questions from me. I guess, first and foremost, how should we – I realize it’s a little early to be thinking about this, but, help us think a little bit about 2018 growth NIPT volumes growing nicely. We should have some pricing stabilization. So, should we assume that volume and price kind of follow one another in 2018 and our 20-ish percent growth, is that still kind of the general right place or the right neighborhood to be in? Thanks.

Matthew Rabinowitz

Mike, do you want to take that?

Michael Brophy

Yes, I’ll take it. I’ll take the first, so, thanks Bill. Yes, I think the point on pricing, which has actually shown a nice trend here, Q1 through Q3, as I said in the prepared remarks, our expectation is that, ASPs are roughly stable from here as a result of kind of going through the specific advances that I outlined in the prepared remarks. There are some valuable long-term tailwind to ASPs which are again average risk NIPT reimbursement and reimbursement on microdeletions. We just don’t control the timing of those, Bill.

So I wouldn’t want to tell you, hey, there is a specific time in 2018 when you should expect ASPs to dramatically change from where we are here and as I said, also, the ASPs, quarter-to-quarter are going to be a little bit lumpy. So that’s on the ASP front. I think on the volume side, I think, what we’ve shown kind of as an overall business on volume growth, through the quarters here, it’s really negative of what we’ll do in the current in-market dynamics.

Although, Steve outlined a number of the investments we’ve made in Panorama. Over the year and then specifically here more recently that will be rolled out broadly in 2018. And so we are optimistic about that. We’ve seen some good early returns from volume growth.

Matthew Rabinowitz

And I’ll make one comment to – just augment that, I think you’ve alluded to this, Bill, but we previously made the comment that we expected that revenues will start to track volume growth and we are starting to see that trend. So, as revenue stabilize and you see the volumes growing nicely, we do expect that the revenues are going to start tracking volume growth as we expected through 2018.

Michael Brophy

As ASPs stabilize.

Matthew Rabinowitz

Sorry, I think, I missed that, okay, as ASPs stabilize, we are seeing the volume growth nicely and we start to see revenues tracking that volume growth.

Bill Quirk

Very good. And then just flipping over to Horizon. It looks like the pricing there has continued to slip a little bit sequentially. Help us think a little bit, when should we start to see stabilization? And to what extent do you think some pricing upside here and admittedly, I wouldn’t anticipate in the near term, but help us think overall about the dynamics for that particular upside?

Michael Brophy

Yes, I mean, so thanks, Bill. Just for context, I mean, as I run the math on just pure ASPs which is Horizon revenue divided by Horizon volumes, I get $432 in Q1, $533 in Q2 and then $516 in Q3 and I do think on a when pay basis, you saw Q3 being a little bit softer. There are some dynamics related to prior authorization that can cause some near-term disturbances in Horizon – ASPs.

But I think my broader comments, Bill, about ASPs being stable still generally holds true. And there is just going to be some volatility quarter-to-quarter based on particularly as – we are still in this cash pay revrec basis where it can be a function of older claims getting paid in the period or not can easily cause very – a trend of what you see between Q2 and Q3.

Bill Quirk

Got it. Thank you.


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

Doug Schenkel

Hi, good afternoon. Starting on COGS, I believe that you previously guided us to expect that COGS per test would get into the mid-200s early next year. Based on the updates on Version 3 Panorama and carrier testing automation that you provided late in your prepared remarks, it sounds like this is still the target, but the timing slipped, maybe a quarter or two, is that the right way to think about it?

Michael Brophy

Yes, that’s perfect, Doug. I mean, what we’ve done is, we’ve done through – we quit a lot of the technical hurdles required for this automation launch and thank you for this reasonably good visibility on the end-goal and that’s been, we’ve been pleased to see that really consistent with what we’ve guided previously and as we said, it’s just a matter of just getting the launch and getting the timing right. And so, I think what we said on the call is that, target remains the same, but we just slid that back a quarter.

Doug Schenkel

Okay, great. And – sorry, go ahead. Sorry to interrupt.

Matthew Rabinowitz

Well, little bit more color. I mean, we’ve got industry-leading panel here with Horizon and so we – as we do these automation efforts, we want to make sure that this is a very strong product offering and you see this really great growth in Horizon because it’s such a strong product offering. We do not want to sacrifice any of that quality and as even cons and issues in the automation, that’s what then delayed about a quarter, but we have actually resolved most of the – in fact, I would say we’ve resolved all of those key technical issues.

And so, we are able to get a timing now where we basically feel that that come out before or we say by in Q2 of next year, but it’s not at the process of kind of turning the crank and getting the automation done with the technical issues resolved. So, the ASPs right now – the COGS right now are around 280 bucks for Q3 and so we are not so far from the mid-200s where we said we would be, but with that launch of the Horizon, the automated version, you can expect those COGS to come down very rapidly. That’s the key next step.

Doug Schenkel


Michael Brophy

And Doug, there are couple other COGS projects in the pipe as well that should also have an incremental benefit between now and then.

Matthew Rabinowitz

There is a kind of ongoing reduction in COGS every couple of months or every month as ongoing improvement in the process. But the big inflection happens when we roll out that next version of Horizon.

Doug Schenkel

Got it. And then, Mike, I apologize if I missed this, but, on the change in cash burn guidance for the year, I think some of that’s probably just the refining of revenue guidance and the COGS guidance for the year. What are the other components of the bridge between previous guidance and updated guidance?

Michael Brophy

No, that’s really – I mean, I think, there are some working capital component to that which is just timing. But I think the key variables are the – just the ASPs from average risk NIPT, and just the delay in carrier screening.

Doug Schenkel

Okay. Couple other clean-ups. In your prepared remarks, one of the things that, one of you talked about was the positive impact of ACOG recommendations for carrier screening to move, generally speaking beyond single gene testing. It was good to hear that that had a positive impact, but would you say that that’s really just in the early innings that’s something that you would expect to have more of an impact over the next few quarters?

Matthew Rabinowitz

Steve, do you want to take that?

Steve Chapman

Sure, I’ll take that. Yes, I mean, I think that’s a large part of it as well as just the – just sort of the industry is in a position of where it is evolving over time. So, we’ve seen still, there is a large cohort of physicians that are still doing the single gene cystic fibrosis only.

But there is definitely and evolution towards those physicians expanding to panels, whether that be our large Horizon 274 or one of our more intermediate step offerings. But that’s the trend we think that’s going to continue, especially as we start to drill down and work on some of these logistical issues to make it easier for routine OB/GYNs to access these complex tests. We think there is an opportunity to speed up the adoption there.

Doug Schenkel

Okay. And that’s – I guess, the topic of Horizon and multi-marker multi-gene testing, actually is a segue for me to go back to ASPs. I just want to make sure we are clear on, I guess, one thing. As you think about multi-marker testing and carrier testing, how does that impact ASPs?

Because I think you guys made it very clear that in-network pricing doesn’t get better for high risk NIPT, at least as we stand today that NIPT ASPs overall can get better, maybe meaningfully so, over time with microdeletions and average risk testing, reimbursement improving, but there is no reason to think that that’s going to happen in the next quarter or two or maybe even three or four. What about this change to more comprehensive carrier screening? How does that impact ASPs over the next three quarters?

Michael Brophy

Thanks, Doug again. No, it can certainly be a tailwind. I think, we’ve harked on the average risk in the microdeletions, one because super focused on that, and two, because they can drive really this continuous chains, pharmacy chains. I think the evolution towards broad carrier screening panels or something that’s driven our volumes nicely this year and also, it does improve selling prices per test on our carrier screening units as well. It’s more of the things that you would expect to see as more of a steady improvement though.

Matthew Rabinowitz

Steve, do you want to add anything there?

Steve Chapman

Yes, just to give some concrete examples, I think, recently, there was an update by Aetna for example, where they started reimbursing for SMA component of the test where previously their policy was knocked to reimburse for that. So, I think there is incremental changes and that what was heard over time as the guidelines evolve and as we have conversations with payers.

Michael Brophy

All of that is still kind of embedded though, Doug in the sense that, it’s either generally stable from here and can kind of continuously improve.

Doug Schenkel

Okay. Super helpful. One last one, any pre-authorization or weather impact that’s worth calling out in the quarter?

Matthew Rabinowitz

Mike, do you want to talk to that?

Michael Brophy

Yes, so, weather did affect us in the quarter and I’ll let Steve talk to the volumes on that score. The prior authorizations were also a smaller in the quarter and that you contribute to a little bit wider range for us in the guide here just because we’ve seen some new policies just get issued.

For the prior-off policies that had been around even for a couple of months, we feel like we’ve gotten our arms around how those are executed and what we need to do to help our physicians understand what the policies are. So, I do think that was a small impact in Q3 on the prior side and so that they both can negatively affect this a bit in Q3, but Steve, just on the weather.

Steve Chapman

Yes, obviously, with these two big hurricanes in Texas and Florida, I mean, those are two markets where we do exceptionally well and we have very large books of business there. So, for a period of time, the hurricanes were extremely disruptive in those markets not only to our people on the ground some of whom had to be relocated and things like that, but just to the physicians, little word of test.

So there was a period that where just people weren’t selling. They were focused on taking care of their family as expected and it’s hard to make a determination on exactly what the numerical impact was just because, some of the volume came back in as people found the physician office in a different location that wasn’t impacted. So, I can’t give you a specific number, but those are very big markets for us and it was very disruptive for that period of time.

Michael Brophy

Probably hurt us more on Panorama than on carrier screening, it’s probably fair to say as well, so.

Doug Schenkel


Matthew Rabinowitz

Yes, so I think those are great questions and I’ll just summarize, both of those factors did play a role in Q3. We thought that the weather played a significant role, but I think that the volume still came up nicely. So, yes, there is no question that the hurricanes had an impact on the business that I still think we had grace in Q3 despite that.

And then, as far as the prior roles concerned, we just had to streamline the operations to handle the prior roles, because the policy has changed very quickly and I think the team has done a great job of improving the logistics to take care of the prior roles, but that does have an impact and that is something that we have to improve the logistics to manage and that’s incorporated in sort of the conservative side of the guidance for the remainder of the year.

Doug Schenkel

Okay. Thanks for all the details. I appreciate it.


Thank you. Our next question comes from the line of Catherine Schulte with Baird.

Catherine Schulte

Hey guys. Thanks for the questions. I was just wondering if you could give us some color on how you are pricing the RUO Signatera off range. Is there a set price for the initial tumor sequencing and then subsequent tests or does it vary by its study?

Matthew Rabinowitz

Steve, take that away.

Steve Chapman

Yes. So, we are not disclosing on list price for competitive reasons, but we know that others in this space are selling, sell-through DNA, recurrence monitoring, or MRE are selling a range like to $2000 to $4000 per price point.

We are in a position where we have lots of room because our COGS are much lower than some of these other companies that are using a hybrid capture approach. But we also feel like, because of our technological superiority and differentiation, we could charge more. So, we are in a good position, but we are just not disclosing at this point exactly what our list price is.

Matthew Rabinowitz

Yes, I do really appreciate that question, because the interest in Signatera has been strong and we’ve just been out of the gate for two months and we already have eight parted studies with leading pharmaceutical companies. And a set of trials going on to validate clinical performance largely with bank cohorts we were working with KOLs around the world.

So, that’s looking really exciting and I think that, it’s a good example of something similar to what we did in NIPT in the prepared remarks. I am just going to reemphasize now, lot of work has been done into setting up codes for the oncology testing and establishing good price points with the new PLA codes, we think we can achieve reimbursements at high level pretty rapidly with established clinical utility and particular indication.

So, although, we have looked at the TAM, assuming a conservative price point of $500 and that TAM looks great in around $13 billion in the U.S. We think that was a key indication that Signatera addresses. We can establish substantially higher value-based pricing. And so, this is a very exciting area going forward. I really appreciate the question.

Catherine Schulte

Yes, and then, just one more on Signatera, as you think about the pharma deal pipeline that you guys have. Can you talk about what kind of studies these are? Are there any potential for phase 3 clinical trials or are they more earlier-stage?

Matthew Rabinowitz

Solomon, do you want to talk to?

Solomon Moshkevich

There is a lot of potential for Stage 3 studies in the future. Right now, the ones that we’ve announced are retrospective in nature as Matt described and we think those are going to set the stage for future utility studies and to validate and prove out the utility and the value in the clinical setting as well as set the stage for us to come up with stronger claims in the pharmaceutical setting.

The pilot studies are completed and we’ve got a very strong pipeline actually beyond these as well. So, this we are really building momentum here. And then the other aspect is, there is a lot of interest in the immunotherapy area and the personalized immunotherapy area and our technology is very well suited there.

So, some of the trials are testing out not just responsive therapy or residual disease or recurrence monitoring, but really looking at neoantigen tracking for personalized immunotherapy and the dot on personalized immunotherapy is early, but it’s looking really good and Vistara’s technology fits into that paradigm really well. So, there is going to be a lot of news in that coming forward.

Catherine Schulte

Great. That’s very helpful. Thank you. And then just one housekeeping question for me. What percentage of constellation units were at Panorama?

Steve Chapman

I think with – it’s the majority.

Matthew Rabinowitz

Yes, it’s the majority. I actually don’t have that number handy, but you can follow us with that number.

Catherine Schulte

All right. Great, thanks guys.


Thank you. And our next question comes from the line of Steve Beuchaw with Morgan Stanley.

Zachary Wachter

Yes, hi, this is actually, Zach Wachter on for Steve. Just one other question on following up on the weather and the prior-off programs. On the prior-off, should we really think about that impact us just kind of one-time in 3Q as you flush out the processes there? And how was that impact split between volumes and pricing? And then, on weather, does that have a bit more of a lagged impact to the next two or maybe even three quarters, given how you recognize revenue?

Steve Chapman

Yes, so first on the split between volume and pricing, it’s going to be impacted on pricing, because we’ll still session the test, so that will show up on our volumes. It would just come down to higher rate of denials. I don’t think that prior-offs is a one-time thing.

I think for the impacts we saw in Q3, the reality is, it looks like the majority of that volume that was right in Q3 didn’t get paid on in the quarter due to prior-off. There is actually way to go back to a post-service review and get paid on that later along with the volumes were consistent with the payer’s coverage policy.

That’s not necessarily the case with all of the different permutations are prior authorization plans or they are getting launched by the various payers. I just think this is something that is going to be a reality that we are going to do is, through the course of next year, and as the guidance described, we will evolve as we see how they get executed.

Zachary Wachter

Okay, and on the weather carry forward?

Steve Chapman

The weather carry forward I think is more of a one-time thing. I think there is – that’s something that the impact is in Q3 and then to the extent that we didn’t recover in Q3 I think it’s unlikely to come back in Q4. So, one time.

Zachary Wachter

Okay, and then, on the Signatera, on the pilots, how should we be thinking about any revenue contribution if we look at other pharma companion diagnostic deals, they typically have a large upfront payment component and then revenue can be kind of recognized over the term of the deal. Are you contemplating any sort of revenue contribution in guidance yet from Signatera and how should we think about that going forward?

Matthew Rabinowitz

Okay, I’ll take that and then, Mike, Steve, if you want to comment on to it, that’s great. So, the initial revenue impact of Signatera is going to be, I mean, these are pilot studies as Solomon described. They are a lot of interest to test out the technology and see how it works. We’ve got really great answer in the papers that were published and we’ve got very strong validation packets showing that we have great sensitivity and specificity and that’s generated a lot of interest.

But the big pharmaceutical companies want to see that for themselves. So, there is great interest in the performance and the broad applicability of the technology, but these are just pilot studies that verify that performance. Those pilot studies are paid full and there are price points there that we are very comfortable with. But we haven’t disclosed them yet.

Steve, spoke earlier about pricing and I think everything he said makes sense. So, we are starting to see some revenues. We will also be seeing revenues for oncology in 2018, but the business is primarily driven in 2018 by growth in the core products, Panorama and Verizon and as we mentioned we expect that the revenues should be starting to track volumes quite nicely.

The other thing I’d say about the timing of revenues is, whereas for the pharmaceutical markets for Signatera, we are typically paid upon delivery of service in the CLIA offering which will be around the middle of next year that will be according to the most standard insurance reimbursement model with the revenues will come in over time. And I think, that is a really great opportunity just in pharmaceutical.

You can just look at how broadly applicable our technology is and I think you see that there is super impact we can have in pharmaceutical industry. But to access that $13 billion market, we describe now ten. We’ve really got to get into that broad offering with the CLIA test and start changing guidelines and go into the community oncologists. And of course we’ve got plans to do that. Mike, Steve, you want to add anything?

Steve Chapman

All things said.

Zachary Wachter

Okay, then, maybe one quick follow-up just on microdeletion reimbursement. I am just wondering if you can give any update as far as how the tenor of dialogue has gone with private payers. How do you expect that to progress as you are still enrolling in SMART trials, do you need to finish enrollment there before you have any more substantial progress or can you still get more done in the mean time?

Matthew Rabinowitz

Okay, I think, Steve, you take that and then, I’ll talk about the SMART trial.

Steve Chapman

Yes, I’ll take that. I think, there are certain specialty societies that are sort of more requiring to be forward thinking and have waiting positively on microdeletions based on the current publications and the severity of the disorders. For example, ACMG, so I think there is some conversations around existing guidelines and then about the studies that are out there, but largely, we need to execute the SMART trial and Mike talked a little bit there about our progress.

And then, after that work with ACOG update their guideline. And that’s one of the standard playbook that we done with NIPT and we will be doing with other products as get the data, publish it, work with the societies and then, some things to be worked with payers to get coverage in place and that’s what we are going to do for microdeletions.

Matthew Rabinowitz

Yes, I mean, there is a lot of activity happening within the team to generate a wealth of data to encourage the professional society and I should say, just ACOG and society singular, because we’ve got strong supports from ACMG, NSGC which is the National Society of Genetic Counselors and ISPD which is International Society for Prenatal Diagnosis.

ACOG is ready to hold out and they are just doing their job responsibly and saying that they want to see a big prospective trial before they move and so that’s what we are doing for them. And there is a lot of work in the team generating that trial data and also generating all the clinical utility data that we need to encourage the professional society and the payers to cover that very important test.

So, I mentioned in the prepared remarks that we’ve expanded that trial to 20,000 and that’s because the infrastructure is so valuable. We can use that infrastructure to validate the broader panel that we are going to be offering as part of prenatal testing as Natera continues to sort of lead the field in terms of accuracy and coverage.

So, that’s an incredibly useful infrastructure because following up with those born children is a lot of work, there is a lot of infrastructure that’s involved there. So we expanded to the 20,000 but we are working with the PI to report us on the 10,000 initial patients and look at the lot of work that’s got to be done there, because we’ve got to wait for the blood spots to come in from New York states and we got to follow-up with the born children and get – and run them on a rain.

There is a lot of work there. We are expecting to get those first 10,000 processed in 2018. I can’t say that the publication necessarily come out in 2018, but we are doing everything we can to accelerate the reporting after that first 10,000 and the recruiting is on track. We have finished the recruiting of that first 10,000. Now we just have to wait for the babies to be born.

Zachary Wachter

All right. Thanks.


Thank you. And our next question comes from the line of Mark Massaro with Canaccord Genuity.

Unidentified Analyst

Hi, good afternoon. [Indiscernible] on for Mark Massaro. First on Signatera, I apologize if this is a bit of verifications from prior questions. You signed agreements for a pilot phase with eight pharma companies, you Signatera. Can you provide any additional color regarding the interest you received from these pharma companies? And are there any agreements or types of agreements that have surprised you? Any additional color regarding liquid biopsy milestones would be great.

Matthew Rabinowitz

Solomon, do you want to take that?

Solomon Moshkevich

Yes, first I just want to clarify that we have eight pilot studies signed and I think the thing that surprised us actually is how much immediate interest we’ve received and there is so many different complications and potential indications where this technology can be applied including treatments, response and monitoring, selection of patients, we talked about the personalized tumor neoantigens applications.

So, I think, one of the things we realized is, when you give more attention on that, because the interest is frankly higher than we are ready for. And in terms of color on the type of studies that we haven’t – we announce what those studies are, but they do vary in types and disease types and I think that, once we are – once we generate data from this that’s going to add to our momentum.

Matthew Rabinowitz

I think that we should clarify and we mentioned this in the prepared remarks, but maybe it’s not clear. There are two kinds of studies going on in broad strokes. But one of the studies predominantly being done with pharmaceutical companies where we are validating the performance of the assay. And they are getting a sense of how well it works for particular areas that they are very interested in.

The other type of study that we are doing is with academics and these are clinical validation studies where we’ve identified certain clinical opportunities where this is going to make a real difference to the care of patients and where we think we can come on value-based pricing and we are doing these studies which has a clear clinical endpoint to mind. So, there could have been two kinds of studies that are going on right now.

At a broad strokes, the pharmaceutical studies are being paid for, the resect studies are being done basically for free, but we are piggybacking on studies that are already going on or being done on bank samples with key opinion leaders and so we are able to conduct those studies in a relatively cheaply and get the doctor pretty quickly.

Unidentified Analyst

Great. That’s very helpful. One more very quick one. Are you seeing any developments from the competitive landscape at our cord blood banking?

Matthew Rabinowitz


Steve Chapman

Yes, so, thanks for asking that. I mean, we did see so far with the rollout of cord blood on our side is to along with our expectations that the product is being received well both in the field by physicians and then through our unique channel that sells directly to our patients. So as we’ve outlined in the prepared remarks, for patients that previously got one of our genetic test, they are interacting with us through the patient portal and we are developing relationships with them.

So that later we can sell additional services like cord blood. It’s an interesting channel. We think there is an opportunity there later to sell some consumer-facing genetic tests. As far as competitive developments, I mean, we’ve heard in think in the last three to four months that PerkinElmer had a new born genome product.

That’s something that we’ve talked about and it could be an option for us in the future as we look at expanding our offering. I mean, there is lots of things that we can do with this channel, where there is several hundred thousand patients per year funneling through our patient portal where we are developing a relationship with the patient.

So, at the time of birth and then potentially even during pregnancy for the women that we are already interacting with and then post-pregnancy.

Matthew Rabinowitz

Yes, so, I’ll just – I can’t tell without, but add to that, we are generating half a million samples a year now, roughly. And we’ve mentioned a few times that we want to get into broader genetic testing and offering services to those patients who we are not interacting with through the portal. And that process is going very well.

Natera, we seem to have to be stabilized. We’ve launched this product in oncology. We are starting to see sequencing causes for whole exome and more genome coming down substantially. And we are in a very good position to get into that area and also to leverage all the data that Natera is generating.

So, you are going to be hearing more about those through 2018. But it is a frontier that we have been talking a lot about and waiting for the right time and I think the time is approaching where we are going to start announcing some plans there.

Unidentified Analyst

Great. That’s all for me. Thank you.


Thank you. And that concludes our question-and-answer session. I'd like to turn the floor back over to Natera for any closing comments.

Michael Brophy

I just got one closing comment just along upon Catherine Schulte’s question, there are about 6,000 of the constellation units for NIPT, Panorama events in the quarter.

Matthew Rabinowitz

Thanks, Mike. Okay, so, as I said, I think we did great in Q3 despite issues like the weather and we are very excited about the progress that we’ve made in oncology. And thank you very much for these thoughtful questions.


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