Mike Brophy - CFO Matthew Rabinowitz - CEO Steve Chapman - CCO.

Steve Beuchaw - Morgan Stanley Bill Quirk - Piper Jaffray Mark Massaro - Canaccord Genuity.

Good day, ladies and gentlemen, and welcome to the Natera Incorporated Q4 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call maybe recorded.

I would now like to introduce your host for today's conference, Mr. Mike Brophy, Chief Financial Officer. Sir, you may begin..

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our fourth quarter 2016. Also on the line is Matthew Rabinowitz, our CEO and Steve Chapman, Chief Commercial Officer. Today's conference call is being broadcast live via webcast.

In addition, a replay of the call will be available at investors.natera.com.

During the course of this conference call, we will make forward-looking statements regarding future events and our anticipated future performance such as our operational and financial guidance for the full year 2017, our assumptions for that guidance, our market opportunities and strategies, and expectations for various current and future products including product capabilities and expected release dates.

We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. Please refer to the documents we file from time to time with the SEC including our most recent 10-Q and the Form 8-K filed with today's press release.

Those documents 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 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 we 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. Steve Chapman and I will begin with a review of our business and recent highlights for the fourth quarter. After that, Mike will review our financial assets, our results and discuss our current outlook for 2017, and then we will be opened for questions during the call.

Since our last earnings call, we continue to make significant progress and reach several important milestones. Specifically, we processed greater than 117,000 tests in the fourth quarter of 2016 compared to approximately 96,000 tests processed in the fourth quarter of 2015, an increase of approximately 22%.

These volumes include tests processed via our Constellation software platform. We processed 5100 Constellation units in Q4 of 2016 and roughly 3,000 in Q4 of last year. Greater than 447,000 tests were processed in the full year 2016 compared to 317,000 tests processed in 2015, an increase of approximately 41%.

This includes 17,000 Constellation units in 2016 and 7,000 Constellation units in 2015. For Panorama we accessioned greater than 84,000 tests compared to roughly 73,000 Panorama tests accessioned in Q4 2015 and roughly, a 15% increase.

Roughly 332,000 Panorama tests were accessioned in the full year of 2016 compared to roughly 255,000 Panorama tests accessioned in 2015, an increase of approximately 30%.

For our Horizon and carrier screening panel we accessioned greater than 22,000 tests compared to roughly 16,000 in Q4 of 2015, an increase of approximately 38%, greater than 80,000 Horizon tests were accessioned in the full year of 2016 compared to roughly 42,000 Horizon tests accessioned in 2015, an increase of approximately 90%.

We recently announced the launch of our Evercord, cord blood and tissue banking service, a new cash paid product that enabled expectant parents to collect, store and retrieve their newborn's cord blood and tissue for potential therapeutic use in roughly 75 established diseases and a host of potential regenerative medicine applications.

This service also places Natera in a position to generate the full genome of an individual very soon after birth. We are also excited to preview in this call our plans for a major new addition to our fleets of noninvasive prenatal tests.

This new edition will identify risk for a broad range of severe conditions in fetus that have a combined incidence roughly 1 in 600. We were selected to participate in the I-SPY 2 TRIAL in collaboration with Laura Esserman at the University of California San Francisco, one of the preeminent breast cancer trials ongoing in the United States.

The DNAFirst Study was published in Genetics in Medicine demonstrating the strong clinical utility of Panorama as a first line fetal aneuploidy screen in a general population and addressing questions on the efficacy of genetic counseling for the general population.

We launched a microdeletions testing application for new and existing Constellation licensees worldwide. We terminated our distribution agreement with BioReference Laboratories and we are now promoting Panorama directly to clinicians who previously ordered this test through BioReference.

We are also offering our Horizon carrier screen to these clinicians which we had not done previously. Steve will elaborate on this later in the call.

We were very pleased to see that CNS finalized their pricing for NIPT and for the separate microdeletions code at $802 each and number of plans have set pricing at a premium to the CMS rates and so we think the CMS rates is becoming a meaningful benchmark as we had expected.

Turning to the quarter and the full-year results, we generated Q4 total revenues of $49.3 million. Although this represents a roughly 7% decline over Q4 2015, we have now largely made up for the substantial price reductions we accepted in the process of going in network by growing volume and market share.

Gross margin came in at 22.9% in the fourth quarter down from 39.9% in the fourth quarter of 2015.

Revenues and gross margins were reduced by roughly 1.8 million due to delayed payments from BioReference labs as we negotiated the conclusion of our partnership and an estimated 1.5 million in delayed insurance payments caused by moving our billing operations to Austin which created a temporary delay in claims submissions.

We also recorded approximately 3.4 million in one-time non-cash asset impairment charges to the cost of goods sold as we switched to new equipment in our lab for the launch of Panorama V3. Adjusting for these items, we estimate that our revenues for the fourth quarter of 2016 would have been $3.3 million greater or $52.6 million.

Gross margin in the quarter would have been roughly 9.4% greater or roughly 34%. For the full year, revenues were $217.1 million compared to $190.4 million for the full year of 2015, an increase of approximately 14%. And gross margins were 37.5% in 2016 compared to 40.7% in 2015.

Adjusting for the one-time items mentioned above, 2016 would have been $3.3 million greater or $220.4 million. Gross margins would have been 2.1% greater or 40%. We continue to see strong momentum in volume growth in the quarter and we think these new product launches will further differentiate our offering in the field.

The first of these product launches is Evercord. Evercord is a new commercial offering from Natera that enables expectant parents to collect, store and potentially retrieve their newborn's cord blood and tissue for therapeutic use in transplantation and regenerative medicine applications.

We think quarter is a natural addition to our current suite of products that can both enhance the services we provide with our existing base to physicians and help us win new accounts.

Evercord also leverages our digital services to engage with the patient from the beginning of pregnancy through to the birth of the child and creates an opportunity to offer more products and services to the patient in the future. Natera's mission is to transform the detection and management of genetic disease.

The cord blood sample that we will collect can be sequenced to generate the first complete genome of an individual immediately after they are born. This genome could be analyzed as part of newborn screening and could then be used to protect disease susceptibilities and guide health decisions from birth through adulthood.

In the immediate term, Evercord allows us to leverage our leadership position in prenatal screening and existing investments in our direct sales channel to offer an attractive cash paid product that can generate a long-tail of our current revenues with high margins. I will ask Steve to elaborate more on the market and our plans later in this call.

We have discussed on our prior calls, progress on Version 3 of Panorama. And I'm pleased to say we successfully launched V3 in our lab in January.

V3 include our testing protocol for fetal 22q microdeletion which has improvements that we believe will reduce the false positive rate by more than a factor of 3 to 0.12% and increase the positive predictive value from 18% to about 40% while continuing to offer industry-leading sensitivity of greater than 95%.

A key benefit of V3 is the savings to cost of goods sold. In addition to more efficient sequencing and reagent usage, V3 will include the read-out for the 22q11.2 microdeletion the most prevalent condition covered by microdeletion tests on the base NIPT panel. Roughly 80% of our microdeletion test orders are for 22q only.

Previously when we received an order for 22q only, we would run our full microdeletions paneling the lab and only report the 22q result. V3 allows us to remove flow from our process. We will continue to innovate on our Panorama technology.

Later in 2017 we plan to launch a capability for screening twin pregnancies and introduce refinements that further reduced our retails rates and cost of goods sold. We previously discussed a blended cost of goods sold targets across all our test volumes in the mid to low $200 range based on initiatives that we're working on today.

The V3 launch is an important component of that roadmap and we remain on track for our target.

Given the performance of our microdeletion test, growing recognition from bodies such as the American College of Medical Genetics and the American Medical Association has expected data reporting out from our perspective smart trial next year - sorry, and the expected data reporting out from our smart trial next year.

We believe that we are very well-positioned for stable reimbursement of microdeletions over the long-term. We were very pleased to see that CMS finalized the price at $802 that's establishing a benchmark for negotiations with private payers as they set their rate plans for 2017. Our reimbursement experience with this new code is still early.

Some plans have not yet price to code but a number of plans have set pricing at a premium to the CMS rate and so we think that the CMS rate is becoming a meaningful benchmark as we expected. Our early experience in 2017 is that so far we are only getting paid on a small proportion of claims.

We don't get here data points for a large number of payer's at LIBOR and our experience with new CPT code in the past has been notifications of denied claims tend to arrive faster than allowed claims.

Finally, we have only just begun the appeal cycle on the first wave of claims that received an initial denial and we feel we have strong claims to make for coverage through the appeals process including our published test performance and support for microdeletions from the professional societies that I mentioned.

And our experience of appealing average risk NIPT claims, we found that we ultimately won coverage for about a third of those claims that were initially denied. I would caution you that the results in NIPT may not turn out to be predictive of our experience with microdeletions and this is reflected in our guidance for the year.

We do have well-established protocols within our insurance billing team to generate appeals that are most likely to have an impact. We continue to make progress on coverage for average risk NIPT. We referenced the completion of DNAFirst Study last quarter and we were pleased to see that the study published recently in Genetics in Medicine.

Out of 2,681 women included in the study, Panorama demonstrated a sensitivity of 100%, 12 out of 12 with no false negative and a 75% positive predictive value.

We believe this paper addressees key concerns raised by remaining payers that are not covering NIPT broadly specifically related to access to genetic counseling, and propensity of general population patients to follow-up for confirmation of the positive screening test.

In a survey conducted following the study, nearly all patients reported sufficient time to talk to their provider and all 12 patients that received a positive screen followed up for confirmatory testing. Genetic counseling was shown to the accessible and efficient, the conversation with the genetic counselor lasted roughly five minutes per patient.

Over 40 health plans encompassing more than 100 million lives now cover NIPT for all women including CIGNA, Anthem and most Blue's plans. We believe this coverage levels show that we have absolutely made the right bet in driving low risk NIPT market share and that the plan still holding out will follow this trend.

I referenced the CMS rate for 81422 code above but recall that 81420 was also priced by CMS at $802. As a result, we have seen more state Medicaid programs price NIPT and the rates are in line with CMS. It's too early to see the results here but long-term this is a very positive given the number of burps on the Medicaid.

As we've discussed in the past, we have a significant amount of earnings pie embedded in our existing volumes that we expect to realize as the reimbursement comes online for average risk NIPT and microdeletions testing.

Based on current reimbursement we are seeing in Q1 on the new code, we estimate that at least 38,000 microdeletion tests per quarter may not be reimbursed. For NIPT we estimate at least 25,000 average risk NIPT's per quarter may not be reimbursed.

Given that we're starting to see payers negotiate rates for the microdeletion code in the range set by CMS, we believe that the future cash flows from microdeletion can be significant with improvements and coverage over time.

Just getting paid on those average risk volumes in line with our contracted rates would be a substantial benefits but we also have a much larger opportunity to grow volumes as broad coverage enables much more significant penetration of the 3.3 million annual average risk pregnancies in the United States.

It's important to note but our part to cash flow breakeven does not require the full realization of our earnings potential that I've just described.

Given the substantial cost reductions we are executing on and that we can support both existing test volumes and the new product launches I described with an operating expense profile that will remain roughly stable in dollar terms versus 2016.

We believe that we can be cash flow breakeven with only one of the two large remaining payers covering average risk and microdeletion average selling price of roughly $125, roughly one-sixth of the CMS rates. We believe these reimbursement thresholds are very achievable. We continue to have strong momentum in our Constellation platform business.

We currently have signed deals with 22 licensees and I'm pleased to say that 7 labs around the world are now launched commercially with a license from Natera. We are working with some labs to launch commercially in the near term and some labs are waiting for later versions of our technology before launching.

As I mentioned at the top of the call, we were pleased to launch microdeletions application in Constellation which has now been launched by LifeLabs in Canada amongst others.

Our work on oncology continued as expected in the quarter and we think being selected to participate as a liquid biopsy arm and the I-SPY 2 TRIAL demonstrates the strength of our technology in cancer. I-SPY 2 widely regarded as one of the preeminent breast cancer trials in the United States.

It is a multicenter study evaluating the safety and efficacy of investigational therapies combined with neoadjuvant treatment in women with newly diagnosed locally advanced breast cancer.

In this trial, Natera will be analyzing blood samples at various points throughout patient treatment to evaluate the effectiveness of liquid biopsy in monitoring tumor burden, treatment response, and residual disease, as compared to traditional imaging methods.

In the trial we are first sequencing the tissue to establish the genomic profile of the patients tumor and then with a sample blood draw as defined time point in the study, we are monitoring the patient with a unique set of probes that is specifically tailored to each patient's tumor.

We believe this approach is particularly well suited for co-massively multiplex PCR technology that developed for our Panorama test. mmPCR always us to multiplex many probes in a single reaction without splitting up the patient's sample.

More probes in one reaction gives us many opportunities to catch even one mutated fragment in a patient's sample which could allow for excellent sensitivity. In addition, the simplicity of this approach could allow us to offer personalized assays at very low cost of goods sold compared to most other available methods.

We've been using this protocol in our lung cancer work with Cancer Research UK and Principal Investigator Dr. Charlie Swanton in the TRACERx study and the result in the current monitoring so far has been compelling. As we have described previously, Dr.

Swanton presented initial results for cell free DNA analysis from the first 50 treatment naïve patients with non-small cell lung cancer earlier last year at AACR.

In these first 50 patients, Natera was able to detect subclonal mutations meaning that they occurred in some patient in some parts of a tumor but not in others with detected levels as low as 0.01% fraction of the cell-free DNA.

To our knowledge, this is one of the largest and most comprehensive studies showing that cell-free DNA can be used to map clonal evolution and tumor heterogeneity.

We have now received preliminary results from the analysis of the next 50 patients in the study or 100 in total with the new addition of multiple longitudinal blood samples from patients who later went on to relapse.

We were able to identify which patients would relapse four to six months before the relapse was detected by traditional methods with high degree of accuracy. The results have been submitted for publication and we look forward to sharing more details in the future.

Our vision is that physicians will monitor the cancer patients for relapse using our DNA test in combination with regular scans and more importantly they will start treating patients immediately upon molecular relapse instead of waiting for the tumor to appear months later on the scan.

We would expect improved patient outcomes in terms of progression fee and overall survival translating to real and measurable clinical utility. In pursuit of this vision, we expect to expand our study cohort in lung cancer and continue to explore other test indications and modalities.

Later this year we plan to launch a commercial service across several cancers for research use only for pharmaceutical companies and academic centers focused on disease load and residual disease monitoring and cancer recurrence monitoring.

In this phase, we will not be issuing test result to patients or physicians, our plan is to compete clinical validity studies in multiple cancer types late this year and early next year after which we intend to commercially launch a clear test to patients and physicians for monitoring disease load joint therapy, residual disease post-treatment and recurrence.

We believe we can collect insurance reimbursement at launch on the strength of clinical validity data in certain cancers where the clinical utility is clear.

For example, in disease load monitoring cancer, where traditional monitoring technologies do not work well or recurrence monitoring for cancers in which early intervention has been shown to improve survival. As we launch, we will work to incorporate clinical utility trials designed to measure how our test changes clinical practice.

Finally, I am very excited to give a preview of our next product launch, a noninvasive prenatal test that identifies risk for severe cardiac neurological and other conditions that have a combined incidence of roughly 1 in 600 higher than that of down syndrome.

We expect reimbursement on this test to be strong upon commercial launch and we expect this test to be a substantial contributor to revenues in the coming years. These are conditions with all design findings are not reliable indicator and current NIPTs do not offer screening.

These conditions are often associated with cognitive disabilities or class surgical intervention and may have otherwise gone undetected until after birth or into childhood.

Early screening with our test enables patients to be referred to MFM and other specialists for targeted valuations such as fetal echocardiograms, MRIs, and targeted anatomic surveys.

Prenatal diagnosis of birth defects allows providers and patients to plan delivery incentive equipped to provide prompt evaluation and treatment and learning about these complex genetic disorders before birth enables families to mobilize resources, ask questions and anticipate future needs.

Initially we plan to launch this test in a limited fashion with maternal-fetal medicine specialists and key opinion leaders to understand the usage patterns, gather feedback and continue to improve performance parameters like we do with all of our tests followed by an anticipated broader rollout in the United States later this year.

For competitive reasons, I'm going to reserve further comments on the signs and test performance until we begin our initial launch of the test a little later this year. I will now turn the call over to Steve Chapman for an update on our commercial operations.

Steve?.

Thanks Matt. We were pleased to deliver sequential growth in volumes again in the fourth quarter despite the headwind from the BioReference termination discussions which began in December. I would like to provide a bit more context for our decision to shift that business to our direct channel.

As many of you know, our initial commercial strategy in 2013 and 2014 was to rely on large reference laboratories for the bulk of our sales efforts in the United States and complement lab partners with a small direct sales force. We quickly saw that our direct sales channel was substantially outperforming our lab partner channel.

We found that we could communicate the benefits of our tests, incentivize unit growth and collect insurance reimbursement much more effectively and efficiently ourselves. As a result we embarked on a significant expansion of our direct sales presence and we deemphasized our reliance on national lab partners.

That strategy has proven to be very successful as evidenced by our market share in volume growth since that time.

We still enjoy productive partnerships with several labs in United States, and we find those work especially well when the partner lab enjoyed a strong presence in a particular market niche such as hospital systems or partner labs that plan to launch an internal test using our Constellation platform.

We feel we can affectively cover the accounts that were previously ordering Panorama through BioReference. In addition, we now have the opportunity to market our full suite of products including Horizon and Evercord to these customers which was not part of our previous distribution agreement.

As a result, we believe the right long-term strategy is to pursue this business through our direct channel. This approach will of course take time and we will not be able to replace the full bulk of volumes and revenues overnight. We expect this shift to be accretive to gross margin dollars by mid to late 2017.

However, I am very pleased with the progress that we have made growing the business so far in 2017. Based on our test session to-date, Q1 2017 is on track to be our largest process volume quarter in history. This performance adds to our record of accomplishment when responding to changes in the market.

I would like to elaborate a bit more on the Evercord launch. As Matt described, we think cord blood banking represents a natural extension of the premium segment genetic testing conversation our sales reps are already having with OB/GYNs around the country.

We believe our ability to test for nearly 50% of the disorders treatable by cord blood is differentiated and in the first step in creating more value for patients and physicians through the combination of genetic testing at cord blood banking.

There are roughly 75 conditions that cord blood stem cells are currently used to treat and the probability of an individual acquiring one of these conditions by age 70 is roughly one in 217. Others roughly 75 diseases, 35 are currently screened for by our Horizon carrier test.

By offering both Horizon carrier screen and cord blood banking we can identify many families upfront who may benefit from banking their trials or a siblings cord blood. This increases the clinical utility of the Horizon carrier screening product and can extend the margin for cord blood to families who may not have otherwise banked.

In addition, we are just beginning to understand the potential utility of cord blood and tissue stem cells for regenerative medicine and a host of other diseases affecting roughly one in three people.

Finally as Matt described, the vision for this product is to ultimately offer whole genome analysis of the newborn child from the cord blood sample alongside the stem cell banking. Our approach to the business model is also different than competitors.

While most of the competition in the space relies on substantial investments and direct to consumer marketing, we feel our trusted position in the market allows us to take a more organic approach to growing this product.

Accordingly, we do not intend to make substantial upfront investments in infrastructure or marketing spend to kick sort of volume growth but we will instead leverage our existing OB/GYN call point, digital services platform and inside sales team to reach the customers.

When a patient logs on to a patient portal as part of their prenatal testing process early in pregnancy, we will offer opportunities to learn more about Evercord or sign-up via the portal.

In parallel we expect that only clinics will discuss Evercord as an option through the course of the pregnancy and we will offer printed materials in the physician's office. Once a customer has expressed interest in learning more, our inside sales team will follow up with a phone call to describe the process and the available options.

Our pricing is intended to be in line with competitors which tends to be roughly $1700 for cord blood processing and roughly $2700 for cord blood and cord blood tissue processing. Thereafter we build the customer in annual fee of roughly $150 for cord blood storage and roughly $300 for storage of cord blood and tissue.

We are offering Evercord as part of a partnership with Bloodworks Northwest one of the oldest and most reputable public cord blood banks in the country. Bloodworks was founded in 1944 and has 20 years of experience processing and banking cord blood.

Bloodworks is one of seven FDA licensed public banking facilities and has a strong track record of successfully releasing nearly 1,000 cord blood samples for transplant nearly three times that of the leading private cord blood banks. The longevity and proven quality of Bloodworks gives Evercord a strong foundation.

Bloodworks will perform processing and testing services on cord blood samples submitted by Evercord customers and will cryo-preserve the banks cord blood and tissue at its Seattle, Washington-based storage facility.

Today, we believe there are roughly 100,000 new cord blood storage transactions in the United States every year and roughly 70% of that market is controlled by two large players Cord Blood Registry and Viacord. Beyond that we believe the market is more fragmented among smaller players with much smaller sales and marketing efforts.

A substantial portion of our NIPT business comes from California, New Jersey, New York, Texas and Florida in areas that also tend to drive demand for cord blood services. So we think our existing sales coverage maps very well to this new market.

While we intent to exercise patients in the initial launch phase and grow organically, we believe our experience winning share in a competitive NIPT market bodes well for our ability to generate substantial revenue and cash flow with Evercord over time.

Finally, I want to flag you recent announcement by the American Congress of Obstetricians and Gynecologists or ACOG around updated guidelines for carrier screen. The new guidelines broaden the recommend usage of carrier screening to add spinal muscular atrophy and hemoglobinopathies for all patients.

We think that this recommendation could result in coverage changes and increased payment for conditions like SMA and further underscores the clinical value of the conditions included in the Horizon carrier screen.

As one of the leaders in broad panel carrier screen, we expect this guideline change to drive increased Horizon attachment rates as physicians shift away from ordering cystic fibrosis only toward broader panels than include SMA and hemoglobinopathies.

A large proportion of carrier screen today remain cystic fibrosis only and we believe we still have a significant opportunity to penetrate that market with our selection of broader panels. I will now hand the call over to Mike Brophy to review our financial results. Mike..

Thanks Steve. Our fourth quarter financial results are included in our press release that crossed the wire earlier this afternoon. Our fourth quarter total revenues were $49.3 million compared to $52.9 million for the fourth quarter of 2015, a decrease of about 7%. As Matt described, there were two different unusual impacts to revenue in the quarter.

One was the delay in receiving payment from BioReference as we negotiated the conclusion of our partnership. We received a payment of roughly $9 million in January and about $1.8 million of that total will be recognized on a cash received basis in Q1.

The second issue which we estimate is roughly $1.5 million related to a delay in submission of claims to insurance companies in the quarter. During Q3 and Q4 we transitioned most of our insurance billing operation to our facility in Austin, Texas.

While we anticipate this move will yield roughly $1 million in cost savings during 2017, we experienced a delay in claims submissions as the new team came up to speed. It's important to note that this is a timing issue only and we expect to have worked off a backlog and recognize most of this revenue by the second quarter of 2017.

Because we have already incurred all the cost associated with these volumes, these revenues would also flow directly to gross margin. Panorama revenues for the quarter were $34.3 million compared to $35.2 million in the fourth quarter of 2015, a decline of about 2%.

As Matt mentioned at the top of the call, Q4 of 2016 includes the impact of most of the pricing decreases we took to broadly go in network with payers earlier in the year and for Panorama we have largely replaced that revenue with volume growth.

Horizon revenues for the quarter were $11.4 million compared to $13.2 million in the fourth quarter of 2015, a decrease of about 14%.

The scale of the in network price discount was larger in our carrier screening business than in Panorama but we have seen robust volume growth from Horizon over the past year and we expect to be more than making up that discount with volumes in 2017. As a reminder, we recognize revenue primarily on a cash received basis.

Roughly 58% of our fourth quarter - roughly 58% of the test accessioned - sorry roughly 58% was derived from volumes accessioned in the quarter. The balances of our revenues were derived from test accessioned in prior quarters.

For Panorama roughly 63% of our - roughly 63% of the Panorama test - Panoramas on which we recognized revenue were derived from volumes accessioned in the quarter and the balance out of which were derived from test accessioned in prior periods.

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

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

Turning to revenue breakdown by channel, the percentage of our total revenue attributable to our U.S. direct sales force for the three-month ended December 31, 2016 was roughly 78%, up from 76% for the three months ended December 31, 2015. The percent of our total revenue attributable to U.S.

laboratory partners for the three months ended December 31, 2016 was roughly 15% up a 10% for the three months ended December 31, 2015. International comprised 12% of revenues in the quarter compared to 13% for the three months ended December 31, 2015.

Gross profit for the three months ended December 31, 2016 was $11.3 million representing a 23% gross margin compared to $21.1 million a 39.9% gross margin in the same period of the prior year.

Gross margins were unusually low due to revenue issues I described and Matt described and also because of several one-time non-cash charges with our switch to V3 as Matt also talked about. These include accelerating the depreciation schedules in high speed machines used for Panorama V2 and Panorama V2 reagents.

Research and development expenses were $11.5 million in the quarter compared to $7.8 million for the same period in 2015, an increase of $3.7 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 $37.6 million in the quarter compared to $29.7 million for the same period in 2015, an increase of $7.9 million. The increase over the prior period primarily reflects the additional personnel and facilities expenses across all of sales and G&A.

We are satisfied with our current direct sales footprint and we'll continue to optimize that channel as appropriate. Net loss for the three months ended December 31, 2016 was $37.9 million or a $0.72 loss per share compared to a net loss of $23 million or a $0.47 loss per share in Q3 of 2015.

Weighted average shares outstanding were $52.4 million for the fourth quarter of 2016. At the close of the quarter, the Company held $147.2 million in cash, cash equivalents, short-term investments and restricted cash compared to $184.2 million as of September 30, 2016.

We received approximately $9 million in cash from BioReference labs in January as payment for test accession in 2016 which increased our cash position by that amount to $156.2 million.

As of December 31, 2016 we had drawn down $49.5 million under the 50 million line of credit in place with UBS at a variable interest rate of 30 day LIBOR plus 65 basis points. This line of credit was drawn down primarily to repay previous indebtedness at a significantly lower interest rate.

The line was secured by our investment portfolio which is designed to have yield higher returns than the borrowing rate we incur in order to fund operations. Turning to our future outlook. I would like to provide financial guidance for fiscal year 2017. We expect 2017 total revenues of $210 million to $230 million.

Cost of product revenues to be approximately 60% 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 our cash burn to be $75 million to $85 million. We are taking into account several factors with this guidance.

First, reimbursement in the average risk NIPT setting. Matt commented on the pace of adoption thus far where more than 100 million covered lives may now be reimbursed for average risk. Based on our conversations with payers, we believe we will see significant additional payer coverage, policies change in 2017.

However, because a significant portion of the covered lives that still did not enjoy average risk NIPT coverage reside in just two remaining large national plans, we feel we must air on the side of caution as it relates to the specific timing of these coverage decisions.

So we are not including rapid changes in medical policies accommodating average risk in the immediate term. Second, reimbursement for microdeletions.

Matt reviewed the view the significant embedded earnings power we believe our microdeletions business represents and the rationale for why we feel that payers will catch up with a view that the vast majority of our physician clients that microdeletions testing is essential and medically necessary.

We have outlined in the past that we believe our published clinical experience coupled with data from our smart trial and the recently issued CPT code for microdeletions are the key milestones toward achieving stable reimbursement for this test.

The first of these milestones, the new CPT code established in January is in place and as Matt mentioned, the early trends and pricing negotiations have been positive. However, we only have a few months experience building on this new code so we have limited data points so far on the percentage of cases that will be paid.

As Matt described, our early experience in 2017 is that so far we are only getting paid on a small proportion of claims.

One point is that as with any new code, we expect the initial payments to be delayed as payers update their fee schedule and systems to accommodate the code crucially even for the first wave of January cases, we have no data points on what our success rate will be on appeal when the claim is denied.

Consistent with our established practice of forecasting the business based on data points in hand, our guidance assumes no substantial changes in the reimbursement that we've seen so far this year which implies a substantial reduction in microdeletions reimbursement compared to 2016.

Third, Steve and Matt described our decision to end our relationship with BioReference labs which represented roughly 12% of total volumes and roughly 8% of our total revenues in 2016.

We think this was clearly the right long-term decision for the business and as Steve mentioned, we are very encouraged by the volume growth we've seen so far in our direct channel. However, we cannot replace the full amount of that volume and revenue overnight.

Assuming we retain a conservative portion of accounts BioReference was serving, and a conservative Horizon attachment rate, we would expect that within 2017 this decision will be accretive to gross margin dollars. Fourth, improvements and cost of goods sold.

Matt already covered that our target is blended COGS in the mid to low $200 range based on R&D efforts currently underway. The V3 launch is an important piece of that plan but the largest benefit will come from our next wave of lab automation efforts that we expect to implement in modules from early Q4 through Q1 2018. Finally, new product launches.

Matt and Steve talked about Evercord and previewed the new addition to our NIPT franchise. Our sales reps are training on Evercord at our national sales meeting this month and we expect a broad launch in Q2.

Because our strategy with this product is to leverage our existing touch point with the physician and patient at the beginning of pregnancy, we expect early account conversions start generating revenue late in the year when the babies are born and we collect the upfront fees that Steve described.

We would expect any revenues from the launch of the new addition to our NIPT offering to be similarly weighted toward the end of the year as we learn from our initial rollout with key opinion leaders and then follow up with a broader launch. Matt described our plans on oncology regarding an RUL offering followed by clear products in oncology.

The guidance does not include oncology revenue as we will first be focused on building the evidence as Matt described. One more comment on the pacing of the quarters through the year.

Given expected delays in microdeletions payments, progress on average risk NIPT coverage later in the year new products generating revenue primarily in Q4 and significant COGS reductions from automation improvements later in the year. We expect revenues and gross margin improvements will be waiting for the latter part of 2017.

Based on all the initiatives we have underway, we expect to substantially improve our gross margins and reduce our quarterly cash burn exiting 2017. I will now turn the call back over to Matt for final comments..

Thank you, Mike. I’m encouraged by the progress we made in this quarter.

In particular, we believe the launches of Evercord, Version 3 of Panorama, and a key new component of our noninvasive prenatal test with substantially broader coverage coupled with the selection for the I-SPY TRIAL and further pay policy changes in average risk NIPT represents important milestones for the Company.

With that, we are now open up to questions.

Operator?.

[Operator Instructions] And our first question comes from Steve Beuchaw from Morgan Stanley. Your line is open..

Hi, good afternoon and thanks for taking the questions. I just wanted to clarify first of all on a couple of the assumptions, first is on the carrier screening guidelines that we've seen come out recently that Steve Chapman referred to, my sense is that you're not incorporating that as a positive for the guidance for 2017.

Am I hearing you correctly there and that I hear you correctly that on carrier screening, it sound like volumes will be slightly more significantly positive than pricing will be significantly negative, is that correct?.

Hi Steve, thanks for the question. I think all of that's correct, so as Steve mentioned we just very recently received that news from ACOG and we're trying to better understand exactly what the impact is to our business although we think it's certainly positive. So that is the incremental benefit from ACOG there is not factored into the guidance.

On your question on the mix between ASP declines versus volume improvements, I think you're right. And I think carrier screening volumes, we've got a real opportunity to grow those volumes down particularly as it relates to offering Horizon to those accounts that were previously served by BioReference. So I think that's also a correct assumption..

So then if I take a step back and I include that information and I consider there's probably order of magnitude $10 million to $15 million of pressure from BRL anticipated in the 2017 guidance.

I get to a view that the underlying panel growth in revenue terms is relatively modest and so that makes me wonder - well maybe I was a little too whether is a little too optimistic on Pano pricing in 2017.

So can you just talk a little bit about how you expect pricing to evolve over the course of the year now that we're - seen a number of quarters through the transition to in network. Thanks..

So I think Mike you can take that first..

Just to comment on Pano revenues, I think that's rightly so, if you think about that downdraft from BioReference, I think you have that roughly right although I think it's - if you do 8% of our 2016 revenues, you get to number slightly above 15 million and then if you anticipate a growth I think the target that we need to fill is slightly larger than that.

So that's the – that's just the background on the financials. I’ll let Matt comment more on just kind of Pano uptake and other parts of your question there..

Well you can do the math so I think you got a reasonable sense of what we're assuming in the model. To a large extent the model is driven by our conservatism related to payers coming in to cover low risk.

We are seeing steady growth in volumes in Panorama for both high risk and low risk and as Steve mentioned we've seen really great numbers in Q1 and it looks like Q1 is actually going to be a record volume quarter despite the BioReference reduction in volume.

However, we are just being prudent in modeling volumes through the rest of the year because we can't say what the big payers like Aetna and United are going to do. We are seeing payers transition to be covering low risk sort of on a steady flow every few months.

We see payers come online and you know now that we've got more than 50% of payers covering low risk. The train is very clearly left the station.

This is definitely the right bet that we made and the other payers are going to come in line in time - well I should can say are I mean we believe pretty strongly that they will come in line I mean if it seems very hard for them to hold out with more than 50% of payers covering and the trend just continuing every few months.

However, in our guidance we got to be a little bit conservative in modeling the uptake that we would expect to happen in low risk when all of the payers come online and when the doctors can expect that a low risk test order is going to be covered by insurance..

I think Steve maybe one more comment for - and I know you know that’s for just for others listening, our microdeletions revenue is recognized through our Panorama revenue line.

And so if you think about modeling Panorama revenues, our comments on the reimbursement we’ve seen so far microdeletions would certainly affect that Panorama revenue line for 2017..

Thanks so much. Really appreciate the help there..

Thank you. Our next question comes from Bill Quirk from Piper Jaffray. Your line is open..

Great, thanks. Good afternoon.

I guess first question is just trying to bridge consensus which was at 250 with the mid part of guidance is about 30 million, Mike if I’m hearing correctly BioReference is about 20 of that and so I guess first question is microdeletions essentially assume to be down about $10 million or is there something else here that I guess history is missing as I’m trying to bridge from guidance to where consensus was?.

Yes, I think the main bridge points here are BioRef in order of magnitude are the early experience we’re seeing on the 2017 the new code for microdeletions in 2017. That is by far the biggest delta and then second is BioReference which I think you're roughly in the zone on Bill.

So in the background we also have carrier screening improving as we've alluded to on the call. But really the main delta is the reduction in ASP that we’re seeing on microdeletions so far this year on the new code..

Got it, okay.

And not to acute on this but if microdeletions was greater than BioReference, I guess we normalized for that we actually would have implied fairly decent revenue growth and guidance that is and so is that a function of some of the Medicaid states coming on and pricing tests that are perhaps in your slight upside surprise, so trying to bridge this a bit?.

Yes, I understand. So what’s on the positive side of that would be carrier screening revenues two components there, one is just the volume growth opportunities Steve alluded to it in his section. We still think we have a lot of Greenfield there with the cystic fibrosis only population to convert those.

We got a real opportunity in carrier screening as a result of the - our ability to offer that to BioReference accounts and that’s one and I think you’re right, you do have incremental improvements and reimbursement assumed in our guidance for both average risk and then Medicaid coming on and NIPT.

And then finally we talk about Evercord and the new NIPT extension on this call and we do model revenues from both of those products in 2017 although it’s late in the year..

Got it. And then just last question from me here I guess getting to the comment about that one Q volumes they hold could be kind of a record for you which is obviously good to hear.

That said it looks us like NIPT was pretty flat sequentially I think you accessioned little over 84,000 tests in each quarter, maybe just add a little bit of color here on such performance. I suspect BioReference may have been a factor here but again any additional color will be great? Thanks.

Yes, absolutely. So I’ll just give a couple comments and then Steve will provide some color.

So I think we started breaking on Constellation units on this call to kind of help you get more color on this topic as we see labs transition from testing our business which would counter tests accessioned and when they started launching Constellation, those are Constellation units.

So if you kind of normalize for those things, we grew Panorama units by little over 1,000 units in the quarter. So that's just kind of just level setting on the map with the Constellation units going in there as well. So Steve what other comments would you add to that..

Yes, so I think it’s really three or four things there that we're contributing. The first is BioReference, we did see downward draft in the volume from the channel business overall in Q4 that mashed some of the direct growth in Panorama.

As Mike indicated, there was a transition to Constellation for a certain portion of the units that is further masking growth. Additionally, we put a larger emphasis on growth of our carrier screening product as we started to gain more traction there.

We are also putting a larger emphasis on generating more units from our committed customers and from customers that have tried us in previous quarters as opposed to just continuing to bring on new customers. And so we starting to see the results of that activity in Q1 but that was a strategy that we initiated right around the beginning of Q4..

Okay, got it. Thanks for the color guys..

Thank you. Our next question comes from [indiscernible] from Robert W. Baird. Your line is open..

Hi, guys thanks for the question. You guys talked about on last quarter's call expecting 2017 revenue growth to track volume growth.

Does that still hold true as we think about the volume versus ASP puts and takes in your guidance?.

Yes, so I think the first driver Katherine is just the reimbursement on microdels will affect that as we've commented the microdeletions revenue is flowing through the Panorama line. So we would expect that to affect the Panorama revenue ASP as you calculate in our financials. So with that level set, Matt if you had other comments..

Sure, I don't want to be cute but we were looking at the timing and the comment that we made was by the end of 2017, we would expect the reimbursement to be in a roughly steady state at which point we would expect revenues to be tracking volumes more closely.

So we are seeing reduction due to microdeletions reimbursement, we are seeing what we expect to be ongoing improvement in NIPT reimbursement and when this is sort of flashed out, we do expect that the numbers that we provided for the steady state revenues in the ASPs will be tracking the growth and volume.

In fact I think we are actually in a much better shape in the long-term than where we were when we made this comment because at the time that we made this comment we expected that the order in reimbursement for NIPT would be about $400 and we would add about $200 on to that for microdeletions.

What we are seeing now is that for the CMS pricing, we expect in the long-term to do a whole lot better than that. You know with the microdeletions code at $802, we think that the long-term additive affect on the microdeletions could be much more than $200.

So we are going to take some time for these new code issues to stabilize and for the payers to start to reimburse microdeletions but that long-term trajectory where we expect the revenues to track the volumes is absolutely still what we believe to be the case..

Okay, that's helpful. And it seems like you guys made some pretty meaningful improvements on recognizing revenue on test that have been processed in the period 63% for Panorama and earlier in the year it was more on the low 50.

So just curious as if there were unique dynamics going on in the fourth quarter if that's a new trend that will continue going forward?.

Yes I think the trend there is when we went in network with the payers early in the year and we got some experience with those payers we were able to negotiate terms on kind of bolus of claims of older claims that we had held up and not be paid on that were holding in the appeal queue. And so we really get those in Q2 and Q3.

So that inflated the number of volumes on which we recognize revenue that were actually accessioned in prior periods. The same hold true for BioReference.

As we switch to an accrual basis for BioReference in starting in Q3 and then into Q4, we were also receiving payments for the cash recognized units from prior in the year and that again depressed that number. So I think going forward I think that is a steady state number..

Great. Thank you..

Thank you. Our next question comes from Mark Massaro from Canaccord Genuity. Your line is open..

Hi, guys. Thank you for taking the questions. Your OpEx in Q4 I think was $49 million if I got that number correctly.

Can you speak to your comfort level around that level hovering roughly in that ballpark throughout the course of 2017 and maybe the cadence of how that might change throughout the year?.

Yes, I mean - Mark thanks for the question, I think the guidance incorporates what we think in terms of the total SG&A through the year. I think that cadence will be something that remains relatively steady through the course of the year. There are not massive initiatives that wouldn’t cause meaningful changes in different quarters there.

So roughly stable through the course of the year and again roughly stable on dollar terms versus 2016. Why is that is because we're comfortable with our sales footprint and the investment we’ve made in our Austin facilities for example. So we are feel like we’re ready to go with this expense base..

Great. And going back to the guidance I understand that you guys are the speaking to air on the side of caution and in your prepared remarks said that you're not including rapid changes in the immediate term.

Can you just clarify if those comments are specific to microdels are you also including average risk NIPT in that bucket?.

No those comments are actually specific to average risk NIPT, so we do expect to see continued improvement in the reimbursement for average risk NIPT through the course of the year but we just don't expect a sea change in the reimbursement and that’s great for average risk NIPT in the immediate term.

And as we discussed on prior calls, once you see changes in positive coverage decisions, it takes a bit of time to - for those decisions to flow through the system and actually show up in our revenues. So that’s an impact for NIPT.

For microdeletions we don’t anticipate - our guidance does not contemplate improvements in the reimbursements we've seen so far even though we may see that as we have an opportunity to execute on appeals and we are able to get more data points back in..

Okay, great. And then on the new product launch on the cardiac and neurological condition, given the fact that it is higher incident than down and in most other genetic abnormalities.

Can you just speak maybe to the size of the market opportunity you're seeking to address and maybe given the higher prevalence should we be thinking of a premium price relative to your other tests?.

I love that question Steve do you want to take and then I’ll make some comment..

Yes sure, I’ll take that. So I think initially as we described we plan on launching to maternal fetal medicine specialist in key opinion leaders. While there are some disorders on the panel that are relevant for ultrasound findings, a large portion of the panel has no prior indications.

So we think ultimately this is a test that once we go through the phase launch it have support from the appropriate key opinion leaders could be a routine test that is offered alongside Panorama. As we look back at the launch of microdeletions for example, we do have a very high attachment rate there to our base aneuploidy test.

So I think in the long-term this is a test that can generate substantial revenue. We think on commercial launch there will be a good revenue opportunity with the premium priced product.

Thanks Steve. So I’ll just add to that we’re being relatively conservative in the guidance there as well because we’re assuming that the majority of the revenue will come later this year.

We do expect that this should be well reimbursed right out of the gate upon the commercial launch and what you say is exactly right, this is very high incidence, serious conditions that when does occur in the screen fold so from our perspective this should be a really big deal.

We have just learnt that the right approach to these things is to offer them to the key opinion leaders before you try to rapidly change the field, you want to get the key opinion leaders comfortable with this new technology.

You want to get the doctors understanding your capabilities and also you want to be flushing out some of the technical issues that are involved in launching a new product especially in new product that's pretty cutting edge like this. Once we flush those out, we expect that the volume upticks will be substantial.

And I think you've seen some sort of points of reference here. You've seen the uptick of the microdeletions offering, you've seen the uptick of the broader Horizon carrier panel and given the importance of this test, we expect the uptick should be really substantial in the coming year. So this is we think going to be a big deal..

Great, thank you. And my last question is by chance have you seen any change in competitive dynamics.

Obviously we have LabCorp by Sequenom, just curious if you're seeing any changes relative to maybe even a year ago as it relates to market share or competitive activity?.

Yes, I'll take that. We haven’t seen significant changes, I mean obviously there was the Sequenom of acquisition you referenced. We've been competing against Sequenom and LabCorp for a long time and we haven’t really seen changes there even though there was a change in ownership.

There is a couple other I think changes in product offerings for example Roche is now offering the sort of good start carrier test.

We haven't seen that broadly within our customer accounts, but we know it's out there but overall it continues to be a pretty competitive space and we continue to compete on a daily basis very aggressively for new business..

Yes, so I would say that Natera has competed extremely affectively if you look at the volumes for Q1 we've grown through that loss of volume from BioReference very quickly. So I was very happy to see that.

It’s difficult to say exactly what competitive dynamics are in place but it’s possible that part of Natera's growth is because we have removed the shackles from some of the salespeople who were dealing with the channel conflicts with BioReference.

So people are selling much more easily and it’s much more streamline process without dealing with those channel conflict issues.

And the other thing is it possible that because Sequenom is no longer in the market and has kind of been taken under LabCorp, we are seeing much more powerful position for our salespeople being very clearly by far the leader in NIPT testing and being sort of the strongest player out there that’s offering broad carrier testing together with a very strong differentiated NIPT test.

So some of those factors might be giving rise to the great numbers that we seen in Q1, it's just difficult to say exactly what the factors are..

Okay. Thank you..

Thank you. And I am showing no further questions from our phone lines. Ladies and gentlemen thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day..

Thank you all..