Mike Brophy - CFO Matthew Rabinowitz - Co-Founder, Chairman, CEO and President Steve Chapman - Chief Commercial Officer.

Chris Lin - Cowen and Company Stephen Beuchaw - Morgan Stanley William Quirk - Piper Jaffray Companies Emily Stent - Robert W. Baird & Co..

Welcome to Natera's 2017 Second Quarter Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded today, August 8, 2017. I would now like to turn the conference call over to Michael Brophy, Chief Financial Officer. Please go ahead..

Thanks, Operator. Good afternoon. Thank you for joining our conference call to discuss the results of our second quarter 2017. Also on the line is Matthew Rabinowitz, our CEO; and Steve Chapman, Chief Operating Officer. Today's conference call is being broadcast live via webcast.

We will be referring to a slide presentation that has been posted to investors.natera.com. A replay of the call will also 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, 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 then 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 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..

Thanks, Mike. Good afternoon, everyone, and thank you for joining us. I will first review the highlights since we last spoke in May 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 investors.natera.com.

First, a summary of our recent highlights on Slide 3. We generated total revenues of $53.6 million in the quarter, which represents 3% growth over last year despite the fact that the majority of our revenues are now derived from in-network contracts and last year's second quarter benefited significantly from higher out-of-network pricing.

So we have successfully made up those revenues with volume growth and now we believe that we can reap the benefits of stable in-network pricing. Revenues grew more than 14% sequentially versus Q1 of this year, where the in-network volume mix was similar.

Crucially, in the second quarter, we actually showed improved average selling prices compared to Q1, which is the first time we have done that as a public company. I will spend more time on this later in the call.

As pricing has improved and the COGS benefit from the Version 3 of Panorama began to take effect in Q2, gross margins also expanded significantly. Gross margin in the quarter was approximately 36%, an increase of about 800 basis points from Q1. I will spend more time on this later in the call and Mike will dive deeper into this financials generally.

We processed approximately 125,700 tests in the quarter, which represents 17% growth versus Q2 of last year and roughly 3.6% growth sequentially versus Q1 of 2017.

Given our decision to exit our commercial relationship with BioReference Labs in the early January, we are particularly pleased to have now delivered sequential volume growth in both Q1 and Q2 of this year. As a reminder, BioReference accounted for approximately 11% of our total volume and 16% of Panorama volume in Q4 2016.

And we were not offering Horizon carrier screening to BioReference. So we've replaced that lower-margin Panorama volume with a mix of higher-margin Panorama and Horizon volume and continue to grow so far this year.

We processed approximately 89,400 Panorama tests in Q2, which represents approximately 8% growth over the same quarter of 2016 and approximately 1% growth versus Q1. Steve will talk more about volume growth, but we think we are in good position to grow Panorama, particularly with the emergence of low-risk NIPT.

We continue to see very strong expansion of our Horizon carrier screening business in Q2. We accessioned approximately 37,700 Horizon tests in the quarter, which represents a growth rate of 63% compared to Q2 of 2016 and 14% growth compared to the first quarter of this year, which was a challenging comparable because Q1 was also very strong.

Mike will talk more about this later in the call, but we believe increasing the proportion of carrier screening volumes in our product mix is valuable to us, given stable reimbursement and a significant carrier screening COGS reductions we are expecting to realize later this year and early next year.

I'm very pleased to announce that Steve Chapman, who has been our Chief Commercial Officer has now assumed the role of Chief Operating Officer of Natera. We are augmenting the leadership of the commercial team, which will remain under Steve.

Steve has been responsible for the tremendous growth of our business since joining in 2010 and we'll ask them to drive more efficiencies across our operations, product, business development and commercial teams going forward. One final recent highlight.

I am very pleased to announce that Natera had entered into a 7-year $100 million debt facility with Orbimed Advisors. We intent to make an initial draw of $75 million and have the remaining $25 million available to draw at our option through 2018. We believe this financing puts us in a very strong capital position.

We chose this financing option because we feel strongly about Natera's near-term prospect and that this transaction enables us to realize our key objectives. Mike will elaborate later in the call. Now, I'd like to hand the call over to Steve, to summarize our commercial progress in the quarter.

Steve?.

Thanks, Matt. As you can see on Slide 4, our unit volume productivity per rep continued to improve in the second quarter and we are in the early launch stages with 2 additional products that we believe will further increase unit volumes per sales rep.

As Matt mentioned, we grew Panorama volumes approximately 8% compared to the second quarter of 2016 and roughly 1% sequentially from the first quarter of 2017. The sequential growth was slower than we would normally like to see for a few reasons that we think are temporary.

One, we made a significant push to retain BioReference accounts and close our direct pipeline in Q1. We were very successful in doing so. We grew volumes in our direct channel in Q1 by about 16%, just compared to Q4 2016. Our outperformance in Q1 resulted in fewer pipeline accounts entering Q2 than usual.

Two, we made carrier screening attachment within our existing account a point of emphasis so far this year and our commercial team has responded to that challenge.

Our carrier screening attachment rate measured simply by dividing Horizon volumes by NIPT volumes, was over 36% in the second quarter compared to just 26% in Q4 of last year when we started this initiative. Horizon cross-selling requires spending time in our existing Panorama customer base resulting in less time hunting for new customers.

Finally, the most fertile ground for new product launches is existing accounts and our reps initially introduced Vistara and Evercord to these accounts rather than new customers. These three items together put pressure on Panorama volume in Q2 but we think the sales team now has the time needed to refocus on rebuilding new account pipelines.

As we move through the rest of 2017, we think we can adjust our focus back to growing new Panorama accounts while maintaining the momentum we have going with the new products and Horizon. One key near-term driver of Panorama growth is broader adoption of insurance coverage for average-risk NIPT.

As you can see from Slide 5, the market has evolved significantly in our favor since the middle of 2015 and we've seen continued steady improvement more recently. There have been a few analyst notes out on Aetna's recent coverage policy updates that did not include a change in their NIPT policy.

We were disappointed with that update, but we continue to see a lot of demand for average-risk NIPT from providers with Aetna patients and where allowed we will build a cash pay rate directly to the patient. A lot of Aetna and UnitedHealthcare's business comes from large self-insured employers.

We are working with these employers to push for broader NIPT coverage with their payers or to cover this test themselves directly. Having said that, the pace of average-risk NIPT adoption has remained consistent with our expectations at the beginning of the year.

We continue to see an ongoing trend of many smaller plans updating their medical coverage policies in favor of average-risk and we expect that trend to continue. Most recently Geisinger and Excellus BlueCross BlueShield updated their policies.

This steady adoption of small plans is important to our model and also keeps the pressure on the remaining holdouts. We believe the data in clinical utility are compelling and as you can see from the chart, payer policy has continue to evolve in favor of payers coverage.

While we don't control the specific timing of payer decisions, we continue to believe that broad coverage of average-risk NIPT will be realized. Medicaid represents another key driver of both volume and revenue growth for the rest of this year and beyond.

In order to secure steady reimbursement within a given state, there are 3 key factors that need to be in place, one, we need to have the product covered as medically necessary by the state; two, we ideally would like to have the product formerly priced on the state Medicaid fee schedule; and three, we need to be a credential provider with the state Medicaid program.

Over the past several quarters, more state Medicaid programs and manage Medicaid plans that operate within these states have started to cover and price NIPT. As of Q2, 2017, we're seeing about 34 state Medicaid programs that are covering high-risk NIPT. That's up from 23 in Q2 of last year.

Since CMS priced NIPT on its lab fee schedule this past January, we have seen a number of states increased their fee schedule rate leading to a number of programs whose reimbursement is now at/or above $700 for NIPT.

Lastly, we have become a credential provider with more state Medicaid programs as well as gain network status with a number of managed Medicaid plans operating in these states. As of Q2, 2017, we're credential provider in 44 states, making up the majority of the U.S.

This combination of increased Medicaid coverage for NIPT, increased reimbursement rates for NIPT and Natera's growth as credentialed service provider in more state Medicaid programs is why we have seen and anticipate in the future continuing to see increased revenue growth from this segment.

We expect to continue to make steady progress in expanding our reimbursement success within Medicaid. Given that we have maintained our Medicaid NIPT volume at roughly 30%, broad reimbursement can help improve our average selling price.

When we see stable reimbursement in a given state, we can open up new territories for us to grow volumes further as well. On carrier screening, we believe the underlying market changes represent a significant tailwind. Historically, the majority of physicians have offered single-gene carrier testing limited to just cystic fibrosis.

This market has predominantly been served by big clinical labs and regional hospital labs. Over the past few years, expanded multi-gene carrier screening has been taking market share but single-gene cystic fibrosis testing still represents roughly 60% of all orders in The United States.

Recently, ACOG issued updated guidelines recommending physicians to offer more than cystic fibrosis. Spinal muscular atrophy is now recommended as an offering for all pregnant women in The United States. This new guideline may disrupt the current status quo as many physicians will be prompted to reevaluate their practice patterns.

We see this as an inflection point for expanded carrier screening and expect to see a large shift in ordering patterns away from single-gene cystic fibrosis testing toward broader multi-gene panels.

This disruption is favorable for Natera as we believe we have the premier expanded carrier screening offering and we are leading the education to physicians about this change. Slide 8 summarizes the progress we're making with Horizon.

The left-hand side captures the explosive growth we've seen in Horizon in the past year and we are very pleased to see strong 14% sequential growth over Q1, despite the fact that Q1 was an unusually big quarter as we attached Horizon to retain BioReference accounts.

While we have been growing volumes, we have also been very pleased to see the mix of our carrier screening business evolve toward broader panels. We have seen a significant evolution in our business away from single-gene carrier screens to broader panels.

We think these changes confirm our hypothesis and we're at a very early stages of the sea change in carrier screening.

We have emphasized Horizon growth and attachment this year to capitalize on the shifting market trends, leveraging our superior panel design and our clients desire to order Horizon alongside Panorama in a very streamlined and simple way.

We are anticipating significant gross margin improvements in this business when we complete our COGS improvement and lab automation initiatives late this year and early next year. Now, an update on the launch of the startup, the newest addition to our NIPT franchise on Slide 9. The early results of our beta launch have been very encouraging.

We have made 8 positive calls, 2 of the 8 have had a basic testing and both have been confirmed as true positives. We are waiting the confirmation on the remaining 6. We've been messaging a turnaround time of about 3 weeks in the field. And so far, over 60% of our cases have report it out in under 14 days.

Up until now, we have been operating in a beta launch, offering Vistara in a limited fashion with maternal fetal medicine specialist and key opinion leaders to understand usage patterns, gather feedback and continue to improve performance parameters like we do with all of our tests.

The response thus far has been positive and we will continue to monitor and adjust our strategy going forward.

As a reminder, Vistara is a noninvasive prenatal test that screens for single-gene mutation by sequencing 30 genes based on fetal DNA in a plasma and identifies risk for severe skeletal, cardiac and neurological conditions that have a combined incidence of roughly 1 in 600.

This incidence is higher than that of Down Syndrome and higher than that of cystic fibrosis, which are ubiquitously screened by OB/GYNs and are both very well reimbursed.

These are conditions such as Retts Syndrome, where ultrasound findings are not a reliable indicator and current NIPTs and even standard invasive tests do not offer screening for the associated mutations.

Because these conditions are also commonly caused by de novo mutations in the fetus, patient or family history are also typically not a good indicator of risk, but there can be a slight increase in the frequency of these mutations as the age of the father increases.

Early screening with Vistara enables patients to be referred to an MFM and other specialists for target evaluations such as fetal echocardiograms, MRIs, targeted anatomic surveys, an invasive tests analyzing the particular gene affected.

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

We are now roughly a quarter into our commercial launch of the Evercord, our cord blood banking product. As a reminder, we launched Evercord in partnership with Bloodworks Northwest.

The Evercord lab is 1 of only 7 FDA licensed facilities, has released nearly 1,000 units for transplant, nearly 3x that of leading private banks and has been banking for over 20 years.

Our vision for this product is to unlock clinical utility by combining genetic screening and stem cell banking, which the vast majority of relevant medical professionals prefer. In the future, we may generate the full genome of the individual at the time of banking, providing clinically actionable information from birth through adulthood.

Currently, of the 80 diseases that can be treated with cord blood stem cells, our Horizon product screens for 35 of those. While we are still very early in this process and continuing to learn how to optimize our marketing and sales strategy, we are encouraged by the feedback so far.

Our initial results are in line with our expectations and we continue to believe we can monetize our patient channel. The core thesis for this product is working.

Instead of spending huge amounts on direct-to-consumer marketing, we are seeing demand generated through our inside sales team and our interaction with the existing customers through the Patient Portal.

We are starting the conversation with patients 9 weeks into their pregnancy, when patients log into our Patient Portal to engage with us for Panorama and Horizon. And at this time point in the pregnancy is generally much earlier than our competitors in this space.

As genetic testing evolves and becomes more consumer-driven, we are positioned to offer additional genetic services through our platform directly to patients. Now, I'd like to hand the call back over to Matt to discuss our progress in oncology and our path to cash flow breakeven.

Matt?.

Thanks, Steve. Now I would like to shift gears and provide an update on our upcoming commercial launch in oncology. Let me give you a sense of how that launch is going to happen.

First, we are launching the pan-cancer research use only offering for pharma and academic research studies and we will then leverage that data to support reimbursement for the clear launch slated for next year. We view the launch into the research market as a critical first step in our oncology strategy.

As we have seen with others in the space, revenues from academia and the pharmaceutical industry can initially be more meaningful contributors to the business than revenues generated from CLIA test for patients. These initial customers have access to patient samples that are crucial for clinical validation and utility studies.

These are often trials that would be prohibitively expensive and risky for us to run our ourselves. We are encouraged by the discussions we have had with partners prior to the launch and look forward to updating you on our progress in future calls.

The CLIA launch will be focused on recurrence monitoring for specific cancer types under the brand of Signatera. This name refers to our ability to uniquely customized the assay for a particular patient.

We are in active discussions with a number of partners that can provide access to over 3,000 samples in 6 different cancer indications, where we believe there is clear value in learning about a cancer relapse as early as possible, monitoring the progress of the cancer during therapy or checking for residual disease after an intervention.

In addition to the core areas like breast, ovarian and lung cancer we have discussed previously, these include examples in indication like bladder cancer, colorectal cancer and kidney cancer, where we believe many physicians would change practice based on early indication of cancer relapse or disease load monitoring.

Our recent publication in Nature has been critical to getting access to these sample banks. Slide 12 recaps the market for residual disease, recurrence monitoring and treatment response monitoring, which is different from the markets that many other prominent players are chasing.

We estimate that MRD and recurrence monitoring is approximately a $12 billion market in United States alone plus an additional $2 billion plus opportunity in United States with monitoring for treatment response and resistance.

These numbers are based on our estimates of the number of patients currently in remission from these cancers, 2 tests on average per year and a conservative assumption of $500 price point per blood test. We believe that the worldwide market in time can be roughly 4x that of The United States.

For those of you on the call who are new to Natera, let me provide a brief recap of how the test works. The advantages are shown on the left side of Slide 13. Based on the solid tissue sequencing of a patient's tumor, we build a personalized assay tailored to the specific mutation profile for each patient.

Our proprietary PCR technology that we first developed for Panorama allows us to quickly and cheaply build these assays tailored for each patient to quantify and characterize any tumor DNA in the blood.

This allows us to test for dozens of mutations simultaneously without splitting up the plasma sample, and our targeted approach means we can achieve very high sensitivity on the variants that matter for each patient without costly sequencing of many unnecessary genes.

As a result, we can offer a recurrence monitoring panel that is roughly an order of magnitude more sensitive and substantially cheaper cost of goods sold than commercially available liquid biopsy panels.

The most recent showcase for our performance was the results from the first 100 early-stage lung cancer patients analyzed with our liquid biopsy as part of the TRACERx study. The study was published in Nature and we were very pleased to be on the cover of the May 25 issue.

The key findings in the Nature paper were related to our performance in detecting relapse early and predicting patient response to adjuvant therapy.

We were given 0 blood samples from a subset of 24 of the patients and asked to identify on a blinded basis, which of these patients showed signs of molecular relapse, which is defined by presence of circulating tumor DNA in the blood. We accurately predicted the relapse with 93% sensitivity and 0 false positives.

As the green line in the graph shows, all patients who tested positive for circulating tumor DNA at some point after treatment went on to relapse all within a year of the positive blood test. The blue line shows the superb predictive power of the test.

Out of those patients who tested negative for tumor DNA after treatment, 90% of them remained relapse-free through the time of publications. Natera's test predicted outcomes with extraordinary accuracy. We believe such performance could substantially change how these patients are managed.

There are many applications to this technology beyond recurrence monitoring. We plan to expand our collaboration with TRACERx to demonstrate the value of our personalized assays in predicting patient response to adjuvant therapy.

Regarding patients with Phase Ib non-small cell lung cancer, after the initial surgery, physicians must decide whether to follow up with adjuvant chemotherapy. While the data suggest that less than 5% of these patients actually benefit from chemotherapy, physicians generally do not know which patients are likely to benefit.

As a result, many patients are receiving unnecessary chemotherapy, incurring unnecessary health care costs and being exposed to damaging side effects. We intent to measure circulating tumor DNA after surgery to help decide whether patients should receive adjuvant chemotherapy.

This is just 1 example of the cancer types and sample collection efforts we have underway. We believe there are at least 5 other indications in prevalent cancers, where using cell-free DNA can inform decision-making on adjuvant chemotherapy. We look forward to presenting additional details on the used cases of these other cancers in future calls.

Now, I would like to transition to our path to cash flow breakeven and the progress we have made in the quarter. We are on track to substantially reduce our quarterly cash burn through the course of 2017. We burned roughly $29 million in Q1 and our cash burn in Q2 was roughly $16 million.

There was some timing issues that held cash burn lower than expected that Mike will cover, and we expect cash burn to vary from quarter-to-quarter. But the combination of stable average selling prices, growing volumes and improving cost of goods with stable operating expenses is reducing our cash burn.

We presented Slide 15 last quarter and predicted pricing would stabilize as we have now shown here in Q2. As a reminder, we have undergone 3 discrete price reducing events in the past few years.

These are, transitioning from billing a procedural code for NIPT to a dedicated NIPT code in 2015; choosing to negotiate in-network agreements with essentially all of the largest payers in United States in 2016; and transitioning from a procedural code for microlesions test to a dedicated code in 2017.

In each of these cases, we chose to trade price in return for long-term stability for our business. So, while it appears that there has been a steady decline of ASP, that declining line is in fact the result of these discrete events, each of which play out over roughly a year as the insurance payments are collected over time after we perform a test.

We believe our results this quarter indicate we are just starting to reap the rewards of this strategy, as the blended ASPs implied by our financials improved from $408 to $452 in Q2. Now, going forward, we have steady multiyear contracts with payers representing roughly 200 million covered lives.

Since these contracts have generally been in place for roughly a year or more, the effect of going in-network should no longer be a headwind for the average selling prices we report each quarter. So now we can expect, as we have predicted in the past, revenue growth to track along with volume growth through the rest of 2017 and beyond.

As I will discuss on the next slide, increasing reimbursement for both average-risk NIPT and microdeletions represent 2 significant sources of upside for pricing going forward.

On Slide 16, as we have described in the past, there was a huge amount of earnings power embedded in the test volumes we run today, but which are not currently reimbursed by insurance. There are 2 hurdles to clear to receive consistent insurance reimbursement for a test.

Step 1 is having a negotiated rate for specific code, and the second is getting the test included in a payer's medical coverage policy. Steve described the rapid changes we have seen in NIPT reimbursement, where now insurers representing over 109 million covered lives have a medical coverage policy that reimburses for average-risk NIPT.

We expect broad coverage over time. But in the meantime, we estimate that in Q2 alone we processed roughly 26,000 NIPT tests that will not be reimbursed by insurance, as you can see on Slide 16.

If you assume that pricing for average-risk NIPT settled at around $450 over time and it could be above that, that would imply $12 million in quarterly revenues and cash flow from currently unreimbursed volumes. Microdeletions represent an even larger opportunity.

As we described in our last earnings call, the centers for Medicare and Medicaid services has priced the new microlesions code at $802. And we have seen many payers negotiate in-network rates with us in the same range.

Consistent with our guidelines and our experience earlier in the year, however, we are receiving positive coverage determinations on slightly more than 10% of our microdeletions volume today, which implies that roughly 40,000 microdeletions tests performed in Q2 will not be reimbursed by insurance.

If you assume, we can increase that allowed rate over time and achieve $450 ASP, that would drive $18 million in revenues and free cash flow per quarter from our current unreimbursed volumes. A reminder on pricing.

We do not need a sea change from our current reimbursed levels in these categories to reach a breakeven cash flow position, largely because of the COGS improvements we are making and the leverage we are getting out of our commercial channel.

We expect to drive broader reimbursement from microdeletions by delivering more data that shows the incidence rates of these in the population and our test performance. Moving to Slide 17, we were very pleased to announce the recent publication of the results of our clinical experience with our microdeletions panel.

The study of evaluated screening performance for 22q11.2, 1p36, Prader-Willi, Angelman and cri-du-chat microdeletions syndromes. For 22q, the data set included over 80,000 samples accessioned by our lab, and we demonstrated that our revised protocol resulted in a positive predictive value of 44% and a false positive rate up a 0.7%.

Both of these figures are better than the performance we reported in our previous 22q clinical experience paper. Based on our commercial data, the prevalence of 22q in patients who received testing was estimated to be roughly 1 in 1,255.

I would caution that our commercial cohort is likely to have a higher incidence of 22q than would be measured in the general population because some women choose to get tested after finding an ultrasound anomaly.

Still, our experience supports the broad testing of both 22qs and a host of other microdeletions particularly for younger women and our test performance in microdeletions is an important driver of our market share in the average-risk NIPT market.

The incidence of these microdeletions in our patients who have received test think is roughly the same as 22q. And given a strong PPVs with other microlesions, the data supports testing for the broader range of microlesions. In addition, our SMART trial remains on track to reach enrollment of 10,000 patients in the next month.

SMART is a more than 10,000 patient prospective clinical trial, focusing on microdeletions.

As we described previously, now that we have established this infrastructure with centers on-boarding and given the value of having born child genetic samples, coupled with prenatal examples, we may choose to extend that trial to thoroughly demonstrate the clinical utility of our broader genetic testing panels.

In parallel, we are working with a principal investigator of the trial to evaluate whether we can publish an interim analysis of the data from roughly the first half of patients enrolled in the study. We will provide further updates on future calls. Slide 18 is an update on our COGS progression so far.

In 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 test accessioned in the quarter. So this includes our IVF channel products that have smaller volume yet higher COGS than the rest of our business.

Our NIPT COGS are well below this blended number but this still gives you a directional sense of our progress. As you can see, we've continued to innovate with our technology to improve test performance, while substantially reducing our cost of goods.

We've said previously that we think we can get the blended COGS to the mid-200s by Q1 of next year based on projects we are currently working on in the lab. There are 2 key projects that drive most of those reductions, version 3 of our Panorama test and our carrier screening automation product.

We launched Version 3 in late January and we haven't yet seen the full benefits of this launch. We've been working with our suppliers during this launch phase to ensure we are realizing the expected material cost reductions and that has required rerun the samples in order to ensure conformance to our performance specifications.

As a result of this process, we expect to receive some credit from suppliers later in the year for initial supplies we extend in Q2 that did not meet quality standards.

This may have the effect of stretching up cost of goods sold benefit over few quarters, but the overall trajectory to our goal next year and our expected annual cash savings forecast remains unchanged.

We are on track to see the initial benefits of the carrier screening automation project by Q1 of 2018, and we think we can still reduce COGS significantly beyond that point. With that, let me hand over to Mike, to review our financial performance in the quarter.

Mike?.

Thanks, Matt. Our second quarter financial results are included in our press release that crossed the wire earlier this afternoon. Our second quarter total revenues were $53.6 million compared to $52 million for the second quarter of 2016, an increase of about 3%.

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 Q2, roughly 48% of the revenue recognized tests in the quarter were also accessioned in Q2. For Q1, this figure was 51%. This reflects ongoing improvement in winning appeals of older claims.

As we've discussed previously, we recognized most of our revenue on a cash basis and the timing of our cash collections has remained steady. Historically, about 80% of the insurance revenue we derived from a cohort of tests accessioned is collected within 2 quarters.

And almost all of the revenue we derived from a cohort of tests accessioned is collected within 3 quarters. Panorama revenues for the quarter were $32.9 million compared to $32.1 million in the second quarter of 2016, an increase of about 3%, which again is driven primarily by strong volume growth, balanced by the shift to in-network contracts.

We recognized revenue on approximately 54,600 Panorama tests in the quarter compared to approximately 40,000 Panorama tests in Q2 of last year. Horizon revenues for the quarter were $16.3 million compared to $15.9 million in the second quarter of 2016 but the fund is due to the change in in-network rates.

We recognized revenues on approximately 18,600 carriers tests in the quarter compared to approximately 8,600 tests in Q2 of last year.

As Matt mentioned, and as we expected, we saw ASP as not only stabilize but improve in Q2, dividing total revenue of $53.6 million by total accessioned units of approximately 118,700 units, implies a blended ASP of $452 in Q2 versus $408 in Q1 of 2017. Because we recognized revenues on a cash basis, this is an imperfect measure and can bounce around.

However, the underlying point is that we have seen stable pricing from our in-network payers, while we have steadily improved the fractional times that we get paid on our tests. We expect this ASP to be stable, and as Matt described, there is potential for the ASP to improve, as we get coverage for average-risk in microdeletions.

Gross profit for the 3 months ended June 30, 2017, was $19.1 million, representing a 36% gross margin and compared to $21.0 million or 40% gross margin in the same period of the prior year and compared to $13.2 million or 28% in Q1 of this year.

This strong sequential improvement in gross margin was driven by cost improvements from the switch to V3, the absence of noncash charges associated with that switch and the positive revenue impact of units from our direct channel.

Research and development expenses were $11.8 million in the quarter compared to $10.3 million for the same period in 2016, an increase of roughly $1.5 million.

The increase in research and development expenses was primarily attributable to increases in personnel costs associated with headcount growth and higher expenses related to clinical trials and studies.

Selling, general and administrative expenses were $34.3 million in the quarter compared to $33.2 million for the same period in 2016, an increase of $1.1 million.

The slight increase over the prior period primarily relates to additional personnel and facilities expenses across all of sales in G&A and reflects our commitment to leveraging our operating expenses as we grow unit volume and revenue.

As we've discussed, we're satisfied with our current direct sales footprint and will continue to optimize that channel as appropriate. Net loss for the 3 months ended June 30, 2017, was $27.7 million or a $0.52 diluted loss per share compared to net loss of $23.2 million or $0.46 diluted loss per share in Q2 of 2016.

Diluted weighted average shares outstanding were $53.1 million for the second quarter of 2017. At the close of the quarter, the company held $103.2 million in cash, cash equivalents, short-term and long-term restricted cash compared to $116.9 million, as of March 31, 2017.

As of June 30, 2017, we had drawn down $50 million, including accrued interest under the line of credit in place with UBS. This line of credit was previously priced at LIBOR plus 65 basis points.

As you may have noted in our previous disclosures, we agreed to an increase in the write-off LIBOR plus 110 basis points in exchange for greater flexibility in the terms of the loan. This line of credit was drawn down primarily to repay previous indebtedness at a significantly lower interest rate.

The line secured by our investment portfolio, which is designed to yield higher returns than the borrowing rate we incur in order to fund current operations. Turning to our future outlook. As you can see on the slide, we are holding our guidance the same compared to the updated guidance we provided on the Q1 call in May.

We expect 2017 total revenues of $210 million to $230 million, cost of revenues to be approximately 60% to 65% of revenues. Selling, general and administrative cost to be approximately $135 million to $145 million, research and development cost to be $45 million to $50 million and cash burn to be $65 million to $75 million.

We described the components of our guidance in detail on our Q1 and Q4 earnings calls, but let me just summarize them again now. First, reimbursement in the average we're setting. Matt commented on the pace of adoption thus far, as did Steve, where more than 109 million covered lives are now reimbursed for average risk.

We are assuming steady but not rapid changes in medical policies accommodating average-risk through the rest of 2017. As these changes take place over the course of the second half of the year, much of the benefit we will see in our financials will be reflected in our financial results in 2018. Second, reimbursement for microdeletions.

Matt reviewed with you the significant embedded earnings power we believe our microdeletions business represents.

The published the results of our clinical experience, coupled with data from our SMART trial and the recently issued CPT code for microdeletions are key milestones toward changing payer medical policies and achieving stable reimbursement for this test.

Our experience with reimbursements on the new microdeletions code has been steady, throughout the year, and since our last conversation in May. Third, we've been very pleased with our transition of business from BioReference to our direct channel as both Matt and Steve described.

This has been in line with our expectations and we continue to believe that this transition will be accretive to average selling prices and thus, gross margin dollars within 2017. Fourth, improvements in cost and goods sold. Matt already covered that our target is a blended COGS in the mid-200s based on R&D efforts currently underway.

We believe the largest benefit will come from our next wave of lab automation efforts that we expect to implement in modules from Q4 of '17 to Q1 of 2018. Finally, new product launches. Matt and Steve talked about Evercord and Vistara. We broadly launch Evercord and we've begun collecting samples.

As we described previously, 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 to start generating revenue late in the year when the babies are born and we collect the upfront fee.

As with Evercord, we expect Vistara revenue to be weighted toward the end of the year, as we have just recently followed our initial rollout with the broader launch. Matt described our plans in oncology regarding an RUO offering in the second half of this year followed by CLIA products for clinical use next year.

The current guidance does not include oncology revenue as we will firstly focus on building evidence and partnerships as Matt described. Just a reminder on the pacing of the quarters through the year.

Given progress on average-risk NIPT coverage through the year, new products generating revenue primarily in Q4 and significant COGS reductions from automations improvement beginning in Q4, we expect further revenue and gross margin improvements in the latter part of 2017.

Due to the near-term factors described above, we expect revenues and gross margins to increase in the second half. Q2 cash burn benefited from the timing of working capital payments that should actually reverse in Q3, but we expect cash burn in future quarters to remain well below our Q1 cash burn level.

Finally, I'm pleased to announce that Natera has entered into $100 million debt facility with our Orbimed Advisors. We intent to make an initial draw of $75 million and have the remaining $25 million available to draw at our option through 2018, subject to certain performance covenants which we believe are achievable even in a downside case.

This debt facility carries an interest rate of 8.75% over LIBOR. This senior secured loan is interest-only with a bullet payment due at the end of the 7-year term and allowed us to leave our UBS line of credit in place. In addition, we have significant flexibility to prepay the loan at any point in the 7-year term, if we decide to do so.

We chose this financing option because we feel strongly about Natera's near-term prospects and this transaction provides a bridge to more fully realizing the key objectives that we've outlined on the call today. I will now turn the call back over to Matt, for final comments..

Thank you, Mike. We are pleased with a very successful second quarter. We are looking forward to the growth of our recently launched products and the launch in Q3 of our first product in oncology. We are now open to questions..

[Operator Instructions]. And our first question comes from Doug Schenkel of Cowen..

This is actually Chris Lin on for Doug today. I just wanted to go back to the commentary on the sequential Panorama volume growth. I think you know that, that was a bit lighter than expected, but that you have implemented actions to rectify this issue going forward. So just a few questions related to this.

Could you elaborate a bit further on the actions you are taking? Two, when do you expect to return to a more normalized sequential growth rate? What are you seeing so far in Q3? And then just -- can you talk about the sales rep hiring plans?.

Yes. This is Steve Chapman, I'll talk about that. So as I outlined in the prepared remarks, there are really 3 reasons why we felt the quarter-over-quarter growth in Panorama was a little lighter than expected. And the first, just to reiterate, was that we had such an outstanding Q1 that we closed a lot of the accounts in our pipeline.

The second was that we were focused specifically on cross-selling our Horizon product. And generally, when we're cross-selling that, we're selling to our existing Panorama customers, so we're spending less time out prospecting for new business. And then number three, we launched 2 products Evercord and Vistara.

And the best place to sell new products is to your existing customers. And therefore, again, as less time out prospecting for new Panorama customers. So we feel like those things are sort of normalizing and it will be back to sort of status quo and business as usual going forward..

Thank you very much, Steve. I'll make another comment on that question. If you focus on the superb growth that we've seen on the Horizon product line, you can see that the sales team was incentivized to push on Horizon, especially given the changes in the ACOG guidelines. So we see very good reimbursement from Horizon.

It's a very profitable business for us. And so where the sales team is incentivized to grow Horizon, they might not have been pushing Panorama as hard. If you look at the overall volume growth, it's been really great..

And our next question comes from Steve Beuchaw of Morgan Stanley..

So many things to cover.

One, Matt, I think if you would look across the landscape in molecular testing and commentary and news from around the space over the last few months, it's becoming increasingly clear that, I guess, you could say there's an agreement with the Natera view that to make the business really work, you want as many products in the bag as you can get and you guys are clearly moving in that direction.

I wonder if you could give us a sense from here where your ambitions are on continuing to add products to the bag? And if you think there are any low hanging fruit, maybe high-margin low hanging fruit that would be helpful to consider.

Second, I don't know, if this is for Matt or for Steve, I wonder if you could just spend a minute in more qualitative terms, you're talking about the tone of your conversations at this point with United, number one, and with the private pay community on microdel reimbursement, given the publication of the data on the screen with a significantly improved PPVs?.

Thanks very much for those questions. So I'll take a stab at both of them and Steve if you want to come after with the comments that would be great. So in terms of additional products, we're not going to announce here things that are in the plan for competitive reasons. But I can say that we're going to be focused on Evercord and Vistara for a time.

Those have been really great products. We haven't announced the numbers for Evercord, but pieces there seems to be working very well. That we have a lot of touch points for the patient, we've got a very targeted sales and marketing strategy for that product. So we're very happy with that decision. And there's a lot of growth there.

As we both have said, that is going to be a foray into offering more extensive genetic testing.

We've said that we will over time be producing a whole exome and the whole genome for individuals, which will be used from birth to adulthood, and Evercord is going to be the first foray into that business but you can see over the next several years that that's where NIPT is probably going as well. And we expect to be on the forefront.

We're not going to be sacrificing our technology lead and our competitive edge in NIPT. As far as Vistara is concern, the data there looks great. We've seen a number of positives. We're managing that rollout quite carefully. And we are just making sure that people understand how to use it and that the product is performing as expected.

As we mentioned, we've seen a number of positives. Two of those positive have had invasive tests for confirmation and we've had 2 out of 2 true positives and I believe there are 6 other positive call so far that we're waiting to see the results of invasive testing.

So Vistara seems to be doing very well and we're going to be focused on growing that segment as well.

We are going to be adding additional products into the sales pipeline over time and you will be hearing more of that over the course of the next several months, but we're not going to be preannounced -- we're not going to preannounce what we're going to offer.

I can just say that we intent to continue to lead the space of prenatal genetic testing and augment the offering where we have a very high touch point with the customers. Okay, so that's in terms of new products in the prenatal space, then we've got the oncology offerings. And this RUO launch that's coming in Q3 is very exciting.

The performance of the recurrence monitoring and disease load monitoring, Signatera offering, appears to actually be even better than the performance was in the TRACERx trial.

We think that with this offering, we can address roughly half of the oncology market, namely for patients who are in remission from cancer, that's about 17 million in United States, from patients who are monitoring therapy having just been diagnosed and for patients who have just even intervention in the form of surgery or chemo to look for residual disease because the data showing the increased recurrence rate for patients who have residual cell-free DNA across multiple cancers is very strong.

So there's going to be substantial emphasis on that and we think we've got a great product there. It goes down to a much lower of cell-free DNA than a competitive technologies and it does that at a much lower cost. So that's going to be a substantial effort as well. Okay. So I think enough said there.

In terms of our interactions with United, I believe that it's going to take more work from ACOG in order to get United and Aetna to change their policies at this stage. Now we don't know what they're going to do. We have a very positive relationship with both of these companies.

We have a continual interaction with them as well as with the professional societies.

A lot of members who have written the key guidelines for the professional societies had sent to letters to insurance company, such as Aetna and United, saying that they believe that this should absolutely be covered and it does seem that there is a growing sentiment that the insurance companies are actually misinterpreting the ACOG guideline.

So we are currently working with various groups to see if we can clarify that. And I think that a coverage is going to come. Exactly when it comes, we can't be certain, but the pressure is continually growing, and I think that the data is incredibly strong for both low-risk and for microlesions.

The SMART data, I think, is also going to be T for microlesions testing. The SMART enrollment, as we said, is going to be according to plan.

We expect to finish enrollment in the next couple of months and we'll actually expand that to 20,000 patients because we want an ongoing cadence of publications and a lot of patients in the cohort, where we can actually expand these broader panels. So we are going to do whatever it takes and the coverage will come for microdeletions.

Steve, do you want to add to anything?.

I think you covered it. Thanks, Matt..

And our next question comes from Bill Quirk of Piper Jaffray..

Three questions.

First off, Steve, on Vistara, curious how we should think about coding for that? Are there existing CPT codes that you can use or maybe some other approach, would be curious about that? Mike, if we think about what cost of goods -- gross margin would have been without the additional kind of call it onetime or in-process charges that you had, would be curious about that.

And then Matt, on the Signatera in terms of the 3,000 samples, should we be thinking about this as a training set or a test set for the assay? And then just an update around kind of how long you think it will take to complete that, when we might see some data?.

Yes, Thanks, Bill. So I'll take that first one on Vistara. So the genes that we're testing for in Vistara are already established genes that have molecular pathology codes that map over to them specifically. So we are using the existing coding infrastructure that is out there today.

It's similar to because they are used largely for genetic carrier screening in Horizon assay. As we look forward into the future, at some points, we will likely apply for an individual code as we've done with other assays, but you have to have a certain amount of volume in order to do that..

Great. So thanks, Bill. I'll just tackle the question on the COGS. We estimate that there was about $1.7 million in onetime temporary qualification efforts in the cost that we incurred. So if you -- if we haven't incurred those that would imply the math would be as the gross margin went a bit closer at 39% in the quarter.

We've gotten -- assume we gotten all that. I'll just point out that that's not money that's spent and gone. We are actually working with our suppliers to try and get reimbursed for those expenses and we'll provide further updates there's a decent chance that we get that back later in the year..

Thanks for the question, Bill. In terms of the Signatera launch, those 3,000 samples are clinical validation set. So we know the performance of the assay very well. These are samples that come across multiple indications for different cancers.

And we're going to be running those samples in the second half of this year to show the performance of the assay for particular clinical indications in cancer.

So most of this is coming from bank samples, where either patients have been drawn longitudinally or there are particular time points that are critical in the management of the cancer patients and we know the outcomes for these patients.

So it's going to be a really valuable set of samples where we can then say that with a CLIA launch, it's being offered across a set of clinical indications where we have produced data to show how it works for those clinical indications..

Sorry, Matt, just to finish that up.

So would it be safe to assume that we would see potentially a clinical studies associated with that in, call it, first half of '18, is that reasonable?.

For some of them, I think, it would come out in the first half of '18. For some of the studies that are being processed in the second half of this year, it's going to take a while to write up and submit the papers and that would come out in second half of '18.

But there are going to be multiple studies that are included in this cohort of 3,000 samples. These are across many different cancers..

And our next question comes from Catherine Schulte of Robert W. Baird..

This is actually Emily Stent on for Catherine. So at this point and roughly 8 months test of BioReference agreement termination.

How many of those accounts have begun to use carrier screening?.

Yes, thanks. I'll take that. This is Steve. I think when we look at the account retention rate, I believe roughly 30% or so of the accounts were retained from an NIPT standpoint. Our carrier screening attachment rate, we announced in the call it's somewhere around 35% to 40%.

And that what we've seen within the BioReference retained business is this is a similar rate to what we see across the board. So the message of single blood draw, the ability to do Panorama and Horizon at the same time is resonating very well as we would expect with the former BioReference customers.

We think our Horizon assay is very competitive, both clinically and from the standpoint of user experience and ease-of-use, which is an important component for carrier screening..

Great. And then last one for me.

How would you characterize the competition you are seeing so far in the cord blood banking market and have there been any changes to your thoughts on pricing there?.

Yes, sure. This is Steve, again. So obviously, there's several very well-established competitors in the cord blood space, 2 Notable competitors and then there is a series of smaller groups.

We believe our message of quality and longevity builds around our bank and our partner, Bloodworks Northwest, is resonating very well with the physicians and with patients.

And we're going about things a little bit differently as we're leveraging our existing patient base that are coming in for our Panorama and Horizon products, and we are able to speak to them about the benefits of cord and tissue banking very early in pregnancy, rather than buying big list of patients and trying to approach someone that we don't have already have a relationship with.

So our thesis is working thus far. We've been pleased with the results. But we're not releasing our numbers at this point for competitive reasons, but we do feel like the message and the product that we built, and our thesis on how we're going to sell the product are all working well..

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Mr. Rabinowitz for any closing remarks..

Thanks very much, guys. We are very pleased with the progress in Q2. Thank you for the questions. And thank you for the Natera team..

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