Michael Brophy - CFO Matthew Rabinowitz - Co-Founder, CEO, President & Chairman Steve Chapman - COO Paul Billings - Chief Medical Officer & SVP, Medical Affairs.

William Quirk - Piper Jaffray Companies Stephen Beuchaw - Morgan Stanley Catherine Schulte - Robert W. Baird & Co. Doug Schenkel - Cowen and Company Mark Massaro - Canaccord Genuity Limited Alexander Nowak - Craig-Hallum Capital Group.

Welcome to Natera's 2018 Second Quarter Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded today, August 8, 2018. I would now like to turn the conference 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 2018. Also on the line is Matthew Rabinowitz, our CEO; and Steve Chapman, our Chief Operating Officer. Paul Billings, our Chief Medical Officer; and Solomon Moshkevich, SVP of Product and Strategy are here today for questions.

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 2018, our assumptions for that guidance, market size, partnerships, clinical studies, opportunities and strategies, and expectations for various current and future products, including product capabilities, expected release dates and related effects on our financial and operating results.

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

These documents identify important risks and other factors that may cause our actual results to differ from those contained in the forward-looking statements. Forward-looking statements made during the call are being made as of today.

If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. Natera disclaims any obligation to update or revise any forward-looking statements.

We will provide guidance on today's call, but we'll 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 cover our recent highlights and progress in the business since we spoke in March, and Mike, will provide additional details on our financial progress. We made enormous progress since our Q1 call.

Since we've had 2 additional investor calls since then, we'll limit repetitive updates. As Mike mentioned, we will be referring to some slides that we just posted at investors.natera.com. A summary of our recent highlights on the next slide.

On volumes, we processed over 162,000 tests in the quarter, which represents 29% growth versus the same quarter last year and consistent with volumes in Q1 despite that Q1 was an all-time record for us by a wide margin and benefited from seasonality as we have discussed previously.

Our first half volume was up 32%, more than twice the growth rate we posted in the first half last year. And as Steve will describe in a few moments, we believe we are in a great position to drive volume growth for the rest of the year and strong year-on-year growth at roughly 13%.

For Panorama in particular, we processed 113,000 tests in Q2, which represents a growth of 27% compared to Q2 last year. We also saw continued momentum in our Horizon carrier screening volumes, which grew 36%, when compared to the same period of the prior year. We generated total revenues of $63.1 million in the quarter, up 21% versus Q2 last year.

We booked $62.3 million in Q1, which included $5.5 million in revenue recognition from the QIAGEN deal. Stripping that out of Q1, revenues grew 11% sequentially on stronger underlying pricing and growth in tests we reported out to patients.

We said in May, the drivers for revenue growth this year would be volume growth and stable pricing and so we are pleased to see both trends play out so far as we expected. I'm excited to have recently announce Natera's release of a new biomarker for pregnancy management.

This biomarker uses our patented technology for precise regiment of fetal DNA fraction in maternal plasma.

When the fetal fraction is lower than expected as a function of maternal weight and gestational age, this can indicate certain aneuploidies and other abnormalities leading to adverse outcomes with a positive predictive value of oral conditions of 21.8%.

These high-risk pregnancies cannot currently be detected by other screening tests, which lack credibility to precisely measure fetal fraction. This represents early fruits of Natera's program to leverage our leadership position and clinical database of over 1 million commercial samples to follow-up the patients and conduct biomarker research.

This biomarker will be further explored for it's ability to predict other outcomes such as preterm birth based on extensive clinical data we are collecting as part of the small trial. Steve will discuss this in more detail later in the call.

With continued volume growth, improving Medicaid reimbursement, recent guideline changes at ACOG, the SMART trial recruitment progressing as planned, ongoing cost reductions and ongoing innovation to define in the field of prenatal testing. We feel that we are delivering on the strategy that we laid out in the prenatal health market.

Steve and Mike will provide more detail later in the call. As we described in our investor call in June, we announced excellent data in kidney transplant rejection generated in collaboration with UCSF.

This data was presented at The Transplantation Society Annual Meeting in Madrid, and Steve, will spend a bit more time later in the call laying out path to reimbursement in this area. Of course, we were pleased to compete a follow-on equity offering in July in which we raised net proceeds of $97.3 million after the execution of the green shoot.

We will cover some of the information presented in the course of that deal in a summarized format today. Finally, the uptake of Signatera RUO amongst pharma companies has continued to be strong. We have now signed 20 trials with the leading pharmaceutical companies, including most of the top 10 pharma and the leading immuno-oncology company.

First, it was right as we further developed Signatera to enhance and accelerate trials for the pharmaceutical industry and for patients. As we also described in our investor call in June, we announced the completion of the breast cancer study with the University of Leicester and Imperial College London.

While we plan to disclose details of this data later in the year, the data was very exciting and showed performance roughly consistent with what we have seen in other cancers such as bladder, colon and lung cancer. Now I would like to hand the call to Steve to summarize our commercial progress in the quarter..

Thanks, Matt. The next slide shows our recent volume progression for Panorama and Horizon. You can see the last few quarters are a step function higher than last year's unit volumes and Q2 volumes matched unusually strong Q1 volumes as Matt described.

We're pleased with this result given the seasonality trend favoring Q1 and the unprecedented growth rate we achieved in Q1 setting a new high bar. We worked through our pipelines in Q1 in a faster pace than normal contributing to our record growth. During Q2, we put energy towards rebuilding these pipelines, which bodes well for the rest of the year.

In our Panorama business, the mix of volumes has remained stable at roughly 60% average risk units and 40% high-risk units and our attachment to carrier screen has continued to grow. The next slide shows volume growth in the first half of the year.

Despite the fact that the business has obviously grown substantially larger in terms of absolute volumes, you could see on the left chart our volume growth rate in the first half is more than twice what it was this time last year. And Q2 is one of the strongest year-on-year volume growth rates we have posted in recent years.

The year-on-year growth rate for a particular quarter is a good way to look at the growth trends because it more accurately captures seasonality trend between quarters.

Consistent with volume trends we've observed for the past several years, Q2 tends to be a wider volume quarter for our current accounts with volume recovering over the course of the year. In Q2, we offset the seasonality trend with new client volume remaining at our high watermark, while laying a solid groundwork for the rest of the year.

So with those data points in mind, the next slide shows volumes on an annual basis and our expectations for the rest of the year.

Based on the trends we were seeing so far in Q3, we feel we are very well positioned to deliver a record year this year in terms of total volumes at roughly 30% year-on-year growth for the full year, which is consistent with our goals set in January. Looking ahead to the future of our prenatal business.

We've seen some encouraging news from out of ACOG in academia recently that we think bodes well for broader adoption of NIPT in the average-risk setting. As we had described previously, ACOG recently withdrew their previous guideline covering the use of cell-free DNA screening for fetal aneuploidies.

This guideline included some ambivalent language regarding NIPT in the average risk setting and many of the coverage policies from the remaining payers that do not cover NIPT for all pregnancies cited this language in their coverage policies. That opinion is now no longer in use.

And separately, ACOG just reaffirmed their practice bulletin #163, which we believe is substantially more favorable toward average risk adoption. We think the withdrawal of the previous guideline and the reaffirmation of the practice bulletin clears the way for a new guideline to be issued.

And as we have described previously, the evidence supports a stronger guideline. Last week, a review article was published in The New England Journal of Medicine written by 2 key opinion leaders in prenatal care.

The article summarized the key data and clinical use of sequencing-based, cell-free DNA testing during pregnancy and they made a lot of the same points we often make on investor calls.

Specifically, the authors describe how across 3 large scale studies, the first positive rates associated with cell-free DNA screening were less than 1/10 as high as that with multiple marker screening in the general population and the positive predicted values were significantly higher.

The authors also described the clinical benefits of assessing the fetal fraction in a sample and noted that not all labs routinely report on fetal fraction. Of course, as we had described previously, our assessment of fetal fraction on a workflow is a key quality differentiator between Panorama and other NIPTs.

We think articles like these demonstrate the benefits of NIPT as an option for all pregnancies. Just as the importance of reporting fetal fractions was highlighted in The New England Journal of Medicine, we were pleased to publish the clinical validation study for a new biomarker based on fetal fractions that Matt described.

The clinical validation study publishing ultrasound in obstetrics and gynecology compares the outcomes from 1,148 pregnancies to results using the new algorithm.

Results showed that the algorithms successfully identified high-risk cases, out of which roughly 22% had a chromosome abnormality or adverse pregnancy outcome representing the vast majority of all abnormalities in cohort. This is not flagged by the fetal fraction based risk algorithm had no evidence of increased risk.

Many of the abnormities that we've identified in the study cannot be predicted by other NIPTs and we believe this gives us another competitive advantage. We plan to commercially launch this offering this quarter.

As Matt described, we designed a SMART trial so we can run this algorithm with the samples we have collected to identify additional correlations between fetal fraction and key adverse outcomes such as preterm birth and preeclampsia.

We think this new algorithm can help extend our leadership position in NIPT and we will continue to leverage the trove of data we have collected over time to create additional offerings.

This launch represents the first of many examples in Natera leveraging it's leadership position and extensive database to build a competitive nook around our products. Now I'd like to transition to the transplant data we announced in June. I'd like to spend some time describing our commercial plans in more detail. First, a reminder on the market.

In contrast with our women's health franchise, kidney transplant patients are very concentrated in a relatively small number of centers. In the United States, there're roughly 265 centers that offer kidney transplants and approximately 80% of patients are treated in just 100 centers.

We believe we could target this market ourselves with a very modest sales team with the experience in these centers and leverage our user experience infrastructure to bring the same level of high-touch customer care to these patients as we described in June.

We can leverage the same playbook we used to achieve market leadership in NIPT to enter the transplant market. We have a few precedents of not being first to market, but then rapidly taking market share based on superior clinical performance and commercial execution.

In this instance, we are at an advantage because we've already done the work on lowering COGS and operating a cell-free DNA laboratory at scale. A quick refresh of the data presented at the Transplantation Society Annual Meeting in Madrid in July.

We evaluated 292 plasma samples taken from 187 transplant recipients and the status of their rejection level is confirmed by analysis of biopsy tissue. The results of the study suggested our assay could substantially improve the standard of care.

As we expected, the level of donor-drag DNA found in the bloodstream was significantly higher in patients suffering an acute transplant rejection compared to a non-acute response. We successfully called acute rejection with 92% sensitivity, 73% specificity and an area under the curve of 0.90.

As we described in June, we believe physicians will prefer our assay over other available cell-free DNA tests based on our test performance. The next slide shows a summary road map to obtaining reimbursement in transplant.

In the near term, we plan to complete our CLIA validation, publish the analytical and clinical validation establish a Z code and formally submit our dossier for Medicare local coverage decision.

You can see we've got the first wave of activities already underway and our target is to complete our submission for an LCD so that we can get the coverage decision published in 2019. The next slide gives more detail on our reimbursement strategy. We believe we could use a miscellaneous code and obtain an accompanying Z code.

We're confident this can be done and there is a little risk to this strategy as the steps to achieve this are generally administrative. Under this path, pricing would be established directly by MolDX.

We think this is a very favorable outcome for us because it's unlikely we will be treated differently by MolDX than a similar test that's already priced at $2,800. Alternatively, we can obtain a PLA code through a separate quarterly application process as we successfully completed in the past with our NIPT zygosity code just granted in Q2.

In this case, pricing would either be established on the Medicare clinical lab fee schedule or depending on timing directly by MolDX. For example, if we miss a deadline for the CMS clinical lab fee schedule pricing meetings, where the code would be priced through crosswalking process, we would be priced directly by MolDX.

In summary, there are multiple paths to achieving stable pricing and coding within 2019. Now for a brief update on our progress in oncology with Signatera. We've shown these Kaplan-Meier curves demonstrating our capability across cancer types. And as we mentioned in June, we've generated similar data in breast cancer.

On the next slide is our current effort in breast cancer. ISPY-2 is measuring molecular response to neoadjuvant treatment being run at UCSF. This study with University of Leicester and Imperial College London is monitoring cancer relapse after completion of surgery in adjuvant chemotherapy.

The [indiscernible] study combines aspects of both other studies evaluating Signatera for response in neoadjuvant treatment as well as for detection of relapse.

You see on the right side of the slide, the study with Leicester and Imperial College of London includes patients with all 3 of the key breast cancer subtypes, including ER positive, HER2 positive, and triple negatives.

This is a study that is now complete and the data is currently under embargo because we plan to submit the results for presentation in a leading breast cancer conference later this year. As Matt mentioned at the top of the call, we've been very pleased with uptake of Signatera in the RUO setting for pharma companies.

We now have 20 studies signed, including trials in lung cancer, colorectal, breast, prostate, non-Hodgkin's lymphoma, GI tumors, multiple myeloma as well as pan-cancer pharma studies. These studies are starting to translate a larger collaborations as Matt described.

One area of growing interest for pharma is investing in more clinical trials using advanced therapies in the adjuvant setting.

Historically, pharma has focused its investment in a metastatic setting to prove out the utility of new therapeutics, but now they are starting to move upstream to the earlier stage disease, where there are many more patients.

We believe Signatera will be a useful tool to stratify patients with worse prognosis for inclusion in adjuvant studies to accelerate trials and decrease costs. In the future, Signatera may be used to identify, which patients would benefit from these adjuvant treatments. We are on track to launch our CLIA test early next year.

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

Mike?.

Thanks, Steve. As a reminder, in 2018, we have transitioned to reporting revenue on an accrual basis as required by the accounting standard 606. In the past, we booked cash received in a given quarter as revenue.

Now we book revenue on just the test results were reported out to customers in the period based on our estimated total collections we expect to get from each test. As we did in Q1, we will disclose tests reported in a given period as well as tests processed and test accessioned in our CLIA lab.

Test process is a good metric to measure volume growth since it includes both test accessioned in our lab and tests performed via the constellation platform. And test accession remains a good metric for assessing cost of goods sold per unit.

As we described on the Q1 call, our goal is to take a conservative approach in our collections estimates, particularly since we've just recently transitioned to this new accounting standard.

In the last few quarters, we have predicted stable pricing for the year because we now have established in-network pricing for most of our large payers and are billing our tests on disease-specific CPT codes.

As we have talked about in the past, in 2016 and 2017, we chose the trade pricing for long-term stability, and we are now benefiting from that stability in 2018.

You see on the chart on the left, total revenues divided by tests reported in the period less the test reported via the constellation platform, so just the test reported from our lab increased from Q1 to Q2. Note that the Q1 number excludes a onetime revenue recognition of $5.5 million from QIAGEN to normalize the comparison.

We benefited from a number of factors in the quarter, including broader reimbursement among Medicaid plans for our carrier screening tests.

We also have a number of current and future pricing tailwinds that we described previously these, including increased payer coverage of average-risk NIPT in microdeletions that we have discussed in the past as well as broader Medicaid coverage.

I will caution you that these pricing metrics can bounce around from quarter-to-quarter and leave you with a message that stable pricing combined with volume growth is the key to the revenue growth that we forecasted in our guidance this year.

One additional comment on second quarter revenue, while test processed and test accession metrics in Q2 are roughly flat to Q1, as Matt and Steve described, tests reported in the period increased from roughly 147,000 tests in Q1 to roughly 155,000 units in Q2.

As we described in the Q1 call, that is just a timing difference in which we reported our tests to patients at the beginning of Q2 that were accessioned at the very end of Q1. The next slide shows our COGS progression. We've said previously that we launched our new carrier screening workflow in April.

While we immediately realized benefits on the launch, we are phasing in the new workflow over the course of Q2 and Q3. We expect to realize substantial COG savings going forward as we're nearing full scale on the new workflow.

COGS per unit, which is simply cost of product revenues divided by test accessioned in our lab were slightly higher than expectations, which was partially driven by product mix, the phasing of the carrier screening launch and staffing. We described previously that volume growth earlier in the year temporarily outpaced our hiring plans for the lab.

We caught up on some of the hiring in the last few months. And while we are being conservative in terms of staffing as we optimize this new launch, we do expect to drive COGS lower in the second half of the year.

Using Panorama as an example, it's worth noting that our COGS for NIPT were for the first time below $200 in Q2 in line with our expectations for this time going. And that includes all shipping, labor, accessioning, collection costs, genetic counseling costs and regents and sequencing costs.

Beyond that, as described previously, we have generated constant data on the next substantial reduction in COGS based on technology developments in the NIPT that we think will allow us to drive blended COGS much lower, again, over the next 18 months. We've made some significant investments in R&D since the beginning of 2015.

But as you can see on the right-hand side of the page, the returns have been very strong even if you only count the COGS reductions we've achieved and leave aside key products improvements that have driven revenues. Now to summarize our results for the quarter. The results for the quarter and the full year across the wire this afternoon.

For brevity on the call today, I'm going to focus on the key points of the Q2 results. Since we adopted the full retrospective approach to ASC 606 that I described, results from the current quarter as well as Q2 2017 are reported under ASC 606 standards so it's an apples-to-apples comparison.

Our second quarter total revenues were $63.1 million compared to $52.3 million for the second quarter of 2017. Gross margins for the second quarter of 2018 was 35% compared to a 34% gross margin in the same period of the prior year.

Panorama revenues for the quarter were $35.7 million compared to $31.5 million in Q2 last year, an increase of 13%, primarily driven by volume growth in that business over the past year.

Horizon revenues for the quarter were $21.4 million compared to $16.5 million in the second quarter of 2017, an increase of 30%, again, driven primarily by volume growth. Total operating expenses for the second quarter increased by about $3.2 million compared to the second quarter of last year.

That was driven by higher stock-based compensation expenses and some investments we've made related to our insurance collection efforts and the accounting transition to ASC 606.

Pro forma for the $97 million in net proceeds from the equity raise in early July, at the close of the quarter, the company held $186 million in cash, cash equivalents, short-term investments and restricted cash.

As of June 30, 2018, we held a net carrying amount of $73.2 million under our 7-year term with $100 million debt facility with Orbimed Advisors and had drawn down $50.1 million, including accrued interest under the $50 million line of credit in place with UBS. Turning to our future outlook. No changes to our guide we started with in March.

We expect 2018 revenues of $250 million to $275 million, cost of product revenues to be between 60% and 65% of revenues; SG&A cost to be approximately $140 million to $150 million; and R&D cost to be approximately $50 million to $55 million; and our cash burns to be between $40 million and $60 million.

The key assumptions in the guidance remain the same. Revenues driven by volume growth with stable underlying pricing, contributions from new products, margins driven by COGS improvements, and roughly stable operating expenses, as I have described previously. Now I would like to open the line for questions.

Operator?.

[Operator Instructions]. And our first question comes from the line of Bill Quirk from Piper Jaffray..

So I guess, first question -- thank you for some additional details around the transplant business and how are you looking at commercializing that. I guess, 2 follow-up questions, Matt or Steve. First is with respect to the published data, is 4Q a good timetable to be thinking about that? And then, just a follow-up for Steve.

Steve looking at kind of multiple options here in terms of pursuing reimbursement, should we be thinking -- if you're successful with, I guess, either approach we're looking at maybe mid- to late-'19, I'm just trying to get a handle on when you might see CMS coverage for that?.

Great, Bill. So I'll take the publication question and then I'll hand over to Steve. Publication question is just a question of how long it takes the paper to be reviewed.

And so we are hopeful that you could get something out this year, but it's just a question of how long it takes to review the process and the publication process, that's not in our control. And I can say that the paper looks great. So from our perspective, it should be a pretty small process.

With that said, Steve?.

Yes. Thanks, Matt. So we outlined two different paths for establishing pricing. I think the first one that we outlined is very straightforward. So we'll submit an application for an accompanying z code that will go along with our local coverage decision, that's really an administrative process.

And then a miscellaneous code is something that is available to us immediately on launch. So I think that process is very streamlined. The pricing would be discussed with the MolDX program sometime in mid-2019 and then they would grant the pricing directly to us.

If we go through the other pathway, we can -- we could submit our PLA application within a similar time frame and either go through crosswalking or negotiate directly with MolDX. The first pathway is very straightforward and that's probably the one we'll be going down..

Okay. Got it. And then a follow-on question, I guess, 2 parts. First is the commercial strategy for the fetal fraction algorithm, will this be an add-on to the existing NIPT with the microdeletions or the CA separate task from an acquisition standpoint.

I'm just trying to figure out if you're going to be filing additional CPT codes for that to try to capture some additional revenue. Or if this is more of a market share-based strategy where it's essentially kind of a "free" add-on. And then, sorry, Steve, one more question for you.

But just thinking about transplant reimbursement, can you help us think if there is any single-center studies that have been used to garner Z code and coverage through the MolDX program?.

Okay. I'll take the first part of that and then I'll hand over to Steve and also Paul might have some comments on the transplant side. So in terms of the FFBR marker, this is not going to be separately billed. This is going to be something, which really just enhances the value of our care.

And this is -- it's a beautiful piece of science, where we've been able to gather this information from many patients. We have the unique ability to make this fetal fraction measurement very precisely and following up with these patients we were able to see already great signal there with 21.8% positive predictive value.

So it's not going to be separately billed, but it is going to substantially improve the value of our care. And this is something, which is addressed for many years. The importance of fetal fraction and one can learn about these cases that have an extremely low fetal fraction.

The recent New England Journal of Medicine article, which was very supportive on NIPT, again, flagged this as a very important issue as being able to measure fetal fraction. And we've got unique technology here. So we're going to offer it as a -- of enhanced components of our reporting, but it is not something that we can be billing for separately.

And certainly not out of the gate.

Okay, then Paul, Steve, who wants to take the advanced partnership?.

I'll add on to that. Yes, for the second part of your question, Bill, I mean, we've had our clinical validation study and data package reviewed by leading experts that routinely walk companies and marshal them through the LCD process. And the feedback that we've gotten is very strong.

So they feel that our study is a high quality and is superior to that of others that have gone through the process. So the feedback we've gotten is very positive, very strong. We're very aware of what others have had in hand as they've gone through the process and feedback for us is we're in a good position..

And I would just add, Bill, that our test has millions of fetal fractions terminations as it's predicate. And so the fact that we can with relatively show that it's also sensitive to donor cell-free DNA in transplant setting. It draws on our previous experience..

And your next question comes from the line of Steve Beuchaw from Morgan Stanley..

First question relates to the references in the prepared remarks. Matt, you introduced it and Steve, you circled back in some detail about ACOG. I think the way you guys laid it out makes sense, but there is always a human element and as much as we think that the guidelines in the data kind of speak for themselves.

But it would be really helpful to hear, the extent to which you've been able to get any anecdotal feedback from the folks you deal with and the payer community subsequent to some of these changes to the post two guidelines?.

Steve, this is Steve. I'll take that and then Matt, if you want to make comments. Well, look, the good news is, which we didn't include in the prepared remarks is we've just seen an update this month from Blue Cross Blue Shield in Tennessee that is now post ACOG change updated their guidance to include average-risk NIPT.

And that's one of the largest remaining Blue's plans that was available to us. They have about 2.5 million covered lives. So with that said, we are engaged directly with United, with Aetna. It's early in the process.

We have a lot of different strategic irons in the fire so we can't comment specifically on those discussions that are ongoing, but there is a lot of evidence now that is pointing in the right direction. We think The New England Journal of Medicine publication is strong.

We think the brand-new confirmation of Practice Bulletin 163, which -- excuse me, the reaffirmation, which just occurred is a very strong signal. And then of course, we're continuing to hear that updated guidelines will be coming later this year.

So the direct evidence of Blue Cross in Tennessee is a positive and the other anecdotal evidence is backing up..

That's exactly what we needed. Thanks, Steve. And then, just for -- I'm sorry, I'm not sure, who this question is best for. But I wonder, if you could give us a sense as we think about the billed for revenues in the back half of the year, about your updated thinking on some of the newer offerings.

Signatera remains a big point of focus here on the calls, but we also have cord blood out there. We also have potential for maybe a little bit of a tail here on QIAGEN and the payments coming from QIAGEN.

Can you give us a sense for what some of the new initiatives are contributing for the back half?.

Steve, this is Mike. So -- yes, I mean, I think the new initiatives are more or less progressing in line with our guide and hence keeping the guide kind of consistent with where we were previously. On QIAGEN, the revenue recognition on QIAGEN there is a primary piece of revenue recognition was right up front.

And then the bulk of the recognition will come as we work our prepaid royalties. And between now and the commercial launch, we're going to be recognizing like small amounts of revenue as we progress with them towards the launch, but that's not -- I don't expect that to be a hugely material in a quarter, at least not right now.

So that's kind of where is QIAGEN -- I would not expect that to be a huge revenue tailwind in the back half of the year. And as for the other products, it's kind of, steady as she goes. I mean, I think there is -- we're just going to -- we're continuing to progress and consistent with our comments at the beginning of the year..

And our next question comes from the line of Catherine Schulte from Baird..

First off on Signatera.

With the CLIA launch on track for early 2019, can you just walk us through what kind of commercial investment you think you will need to make to support that launch? And any additional details on initial indications?.

Do want to take that, Steve?.

Yes, sure, I'll take that. So as we described previously from a commercial strategy standpoint, there was a couple of different patterns we're looking at to bring the test to market. So we have an existing pharma team. We're starting to see a lot of momentum there. We just announced our 20th deal.

And as we start to make progress there, these things tend to build on each other as the same companies reup for additional or more extensive trials. So that same team will be speaking with major key opinion leaders and top academic centers. But we also plan on building a small sales footprint at the launch.

Now as we described previously, to reach the larger community oncology market, we plan on working with distributors, and there is a lot of different conversations going on with top companies in the space, but it will prepare to do a direct model and do that effectively if that's the topic that we decided to go down..

And then, I'll just add that, we haven't announced the breast cancer data, that the breast cancer data is very exciting.

And a large proportion of that market for recurrence monitoring for breast cancer is with the existing OB/GYNs and MFMs and that goes right through our existing co-points, which is why -- one of the reason why that is also so exciting to us. So we've got a lot of genetics expertise in the company.

A lot of the cancer opportunity to Signatera goes to the specialty diagnostics labs. And we've got both through the pharma sales force and our specialty lab sales force, we've got a lot of an expert teams. And so those people are already pretty much in the company. And we've bought in a lot of the pharma expertise recently.

And -- but we've also got this much broader footprint, when you look at the women's health-related cancers.

And one more thing that I'll just mention is, if you look at the other cancers -- the other cancer companies that are in the space, the ones that have been recently successful, a lot of the revenue in the early days comes from the pharmaceutical opportunity.

Now the way we see this market playing out is we think in the first couple of years there's going to be a lot of opportunity in pharma, but the clear opportunity, as we've described is about $15 billion market and so over time, we expect that to be dominant.

But we can address the pharma opportunity, which is the lion share of the opportunity in the early years very effectively with our existing team..

Right. Great. And then, now they are over a year into the launch of Evercore as a start.

I would be curious to get some qualitative comments on how those products have ramped relative to your expectations? And any surprises you've seen from a market demand perspective?.

Well, I will make a comment and then I will hand it over to Steve and Mike. So I think it's been roughly in line with expectations. The comment that we made before, which we are not changing right now is that all new products we expect about $15 million in revenue this year.

And I would say that the thesis that we made on Evercore just panned out nicely. That is the thesis that we don't need to do broad blanket marketing that we have existing interaction with the patients, the existing co-points and just leveraging that interaction effectively leads to a pretty good uptake. And we haven't released the numbers.

So I'm not going to release them now, but I can say that, that thesis has played out well.

As far as Vistara is concerned, again, we're not going to release the numbers now, but this is a new technology and the validation of this technology, which is pretty fundamental change in carriers sequencing gene to look at the ANOVA variance but are not inherited from the parents, that's something that requires time and education.

And what we've tried to do is be very thoughtful there in terms of validating that the technology really works. And, although, we haven't highlighted that on this call, I'll just say that the positive predictive value is very high. When you see problems, those problems are almost always validated when you do an invasive test on the fetus.

And so I can say that, that technology absolutely works and the incidence rates absolutely justify that kind of testing. That said, we are just educating the markets and not trying to push too hard and get ahead of the market there, but I do think that that's going to play a substantial role over the next several years as the market gets educated.

So I would say further down we're roughly going according to plan. Anything to add, Paul..

Yes, I'll just add on to that. I mean, I'll say one of the -- one of our reasons for launching the Vistara product was to improve our presence in maternal and fetal medicine centers, which we think are important key opinion leaders and drive some regional thought leadership. So we're now actually seeing that play out.

We are at our highest penetration of maternal and fetal medicine centers that we've seen in the history since the launch. And I think part of that's due to Vistara and our new twins capability as we talked about in the test. And then, also with our rapid growth, our percentage of high- and low-risk businesses remain relatively stable.

And I think some of that is attributed as well to our changing market share in the maternal and fetal medicine space. So we're pleased with that. On cord blood, we're coming off of some record volume months, and we're seeing a pretty stable growth there. So as Matt indicated, we're roughly in line with what our expectations were..

Mike's sitting and smiling..

And our next question comes from the line of Doug Schenkel from Cowen..

Just a couple on noninvasive prenatal testing and the developments with ACOG.

How quickly do you think new guidelines could be issued?.

Well, I will take that. I mean, as somebody referred to earlier, it was well put as a human element that's just not in our control. All the indications were positive. And I think the guidelines could come out relatively soon this year. And I do think the guidelines will come out this year. But again, we are not in the control of the process.

So all indications are positives and that's as much as we can say. We're not holding the -- holding the strings there..

No, understood. Just I'm wondering, if you had a view on timing, but that's an understandable and helpful answer.

If guidelines were to become more favorable and less ambiguous in supporting broader use of average-risk NIPT, how quickly do you think your volume and revenue growth would be effective?.

Well, I'll make a comment and then hand over to Steve. It seems like a -- the modus operandi for this call. And so -- look, I think that the guidelines seems very likely to be more positive, Doug. When I'm saying we don't hold the strings here, I don't want to overstate, but we've got very good feedback from people, who are reliable people.

And we're not the only one to receive this feedback. There are lots of companies, who receive this feedback. So the indications are very strong. And so -- yes, we do think it's going to be a new guideline. We do think it's going to be positive. And we do think it's going to come off reasonably soon. This is not just hopefulness.

This is based on some pretty good indications. And as far as the volumes, I mean, I think it's going to make a substantial difference.

Steve, do you want to talk to that?.

Yes. I'll talk to that. I mean, first on the bigger health plans. I mean, we see them make off-cycle coverage decisions as they react to new guidelines. So I suspect the same thing would happen in this case. I mean, this is a big enough task that's visible that it is highly likely there would be an off-cycle decision.

As we said before, there is a lot of pent-up demand from physicians that want to offer average-risk, but are really waiting for coverage because they have to establish a protocol for their practice, for their hospital system and it is difficult to do that on a payer by payer basis.

So some groups are either waiting for ACOG or they are waiting for more established pricing across the board from nearly 100% of payers. From the standpoint of volumes, we take a look at the past that the growth opportunity if we were to just see the normalized mix of average risk and high risk within our existing customer base.

So if tomorrow the switch flip -- the switch was split and accounts that aren't really ordering average-risk started ordering average-risk, what would that growth look like? And there is a pretty substantial uptick there that we can achieve from our existing customers without having to go out and close new business, just having them simply change their ordering patterns and that's favorable for us because we're already in the account.

They are already in service on how to use war chest. They're already familiar with all different rec forms and protocols and logistics capabilities and they're comfortable with us. So that's I think is significant positive as things evolve, where we don't have a lot of way work that has to happen to get to the next level..

Great. And If I could pivot back over to transplant, understandably, there's been a lot of focus on the reimbursement pathway and also the timelines to the next publication of data on this call. Some of our checks with transplant doctors they have kind of prompted us to focus also on how you're going to go about driving patient buy-in.

So with that in mind, I'm just wondering if you have any updated thoughts on the need over time to move forward with the registry study? Your competitor in this area has, I think, it's a 35-site registry program planned.

Our sense from talking to a lot of the centers, which we've done over the last few weeks is reimbursement in 1 study may not be enough to actually get broad buy-in from this community, especially if there is a first mover ahead of you that that's running registry studies.

I'm just wondering, if you share that view? And if so, what comes next from Natera on this front?.

Okay. I'll take a quick pass at that and then I'll hand over to Paul and Solomon. So the answer on the registry study is absolutely, yes. We will participate in the registry study process and it's paid. So that's something, which makes a lot of sense from many different perspectives. We expect the price point there to be around $2,800.

So that's a firm yes. In terms of the uptake, I think, we've got a very high performance test. We've shown better clinical data. The AUC is the fundamental metric by which you establish the power of a diagnostic test. And the AUC is 90%, which is substantially higher than what the competitors have generated.

So I think that we've got a very strong test from a clinical perspective.

But the other thing is Natera has got a lot of experience in terms of the usability in terms of how we interface with patients? How we schedule the blood draws? How we interface with the sportsmen counselling sessions? How we let patient walk with their report, schedule post test and pretest counseling.

So there is lot of infrastructure that we've built on the service side. And then on the billing side as well, which helps to really streamline the process, where patients were going through insurance/reimbursement. And we've learned how to do this really well in a highly competitive space.

So I think that we are in a position to offer a better clinical test and with much better service. And both of these things are relevant to uptake. So With that said, Paul, do you want to..

Well, I would only just emphasize that we are planning on doing a registry study as with others, who have gotten CMS reimbursement.

And in addition, the key metrics that appear to be important to -- in this system are the frequency of biopsies and how our data will impact the frequency of biopsies and the preservation of kidneys, right? The -- we want the results to lead to better outcomes and more successful kidney transplantation and longer lives for kidney.

And we intend to keep our eye on those 2 outcomes that help that part of the transplant world..

That's, great. And maybe if I can -- I don't want to leave Mr. Brophy out. One quick one for you. R&D spend came in a bit lighter than we expected in the quarter and I flip over to my XL model again, but I think it dropped sequentially and grew only 1% year-over-year. You reiterated R&D guidance -- R&D spending guidance for the year.

So is -- if R&D wasn't exactly what you expected in the quarter in terms of spend, was this just a pacing dynamic versus some change in plan?.

No change in plan, Doug. It's just a timing issue. So we think that overall spend is on track for our product..

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

Congratulations on the Signatera side. Maybe a question for Matt. You have 20 studies with pharma. Give me a sense for whether or not this is 20 pharma partners? And I guess, the reason I ask is, I get the sense that one pharma partner could do up to 10 studies.

So how should we think about your ability to do multiple studies per partner?.

I will answer and then I'll hand it over to other people, who can put color on. So these pharma studies are sort of progressing now to get more serious. As we said in our prepared remarks, we have a mixture of different kinds of studies in that 20. And some of them are pilot studies, some of them are upcoming studies, so there is a smorgasbord there.

But the simple answer to your question is, yes, I mean, the one partner you are anticipating doing many studies across many indications over a long period of time. And one study tends to grow into many more.

So what's amazing here is that, we've got these 20 studies so soon after the launch of Signatera because these are largely big companies and the sale cycle tends to be pretty slow in these big companies. The whole process of negotiating a contract can take a long time.

So this is just very clear indication of the incredible energy and interest that has been generated in Signatera. And you could almost say that there is pent-up demand for a technology that works as well and we're just ready to tap into that with a technology that really solves the problem.

So yes, these would -- most of the -- certainly, the top 10 pharma of which there's a strong representation in that fit. We are expecting these to continually turn into more and bigger studies across more indications.

Mike, do you want to comment?.

Yes. And Mark, just to your point, I mean, it's not like there's 20 studies that are with two pharma companies, it's much more broad based in that. I mean, we are working with a [indiscernible] of the leading pharma players here.

Great. And then, I also wanted to ask -- I know it's only been a little over a month or so.

By chance have you seen any increase in orders from physicians at-risk prenatal on the volume side? And also recognizing that you did get the win from Blue Cross Blue Shield with Tennessee, recognizing that's a pretty small plan?.

Steve?.

Yes. Sure, I'll comment on that. Our -- we outlined sort of our outlook for the remainder of the year, and, obviously, we've from a volume standpoint and we've obviously seen the July date at this point.

I could say that the July volume per adjusted receiving day, which is a metric that we look at to really judge our performance whether we're growing or not looked very strong. And that gave us really the confidence to put out this volume forecast for the remainder of the year, which is something that we normally don't do.

So we're feeling strong based on what we saw in July. Now I can't say whether that's a direct result of the ACOG guidance change or our team executing in the field. I think it's a little bit early to see the results of -- in the field from ACOG. And so it's probably execution, but we'll keep you updated as things progress..

I would just second that. I think it's too early to say that that's because of ACOGs. Our physician practice is to change their protocol and for something like this to really take a foothold it takes a while. So I would say that that's mostly just execution and kind of growth that we are expecting.

It's not something substantially different from what we would have expected and unlikely that those numbers are affected by the ACOG changes so far..

Great. And a clarifying question with the withdrawal of [indiscernible] 640 at ACOG and the reaffirmation of 163, I just want to clarify.

Are you expecting an additional bulletin? Or do you think that 163 alone can be strong enough to engage the Uniteds and the Aetnas of the world?.

Well, again, we do not hold the strings, but we are expecting an additional guidance to come out at some point. And we do think that, that would be very influential on the Aetnas and the Uniteds of the world, but we don't hold the strings over those kinds either.

All indications are positive, but we've got to be cautious because we are not completely controlling the process..

Great. Last one from me. It's for Mike.

The $2.7 million licensing and other revenue in the quarter, do you have a sense of the split between Signatera and maybe I don't know if you got anything from QIAGEN in the quarter?.

Well, we've got about $100,000 from QIAGEN, and very little of that is actually Signatera. That's just kind of the typical licensing of the revenue shipping, things like that, our DDC partnerships, things like that are in that number as well..

And our last question today will come from the line of Alex Nowak from Craig-Hallum..

I'm jumping between a few calls here. So apologies, if this was already discussed. But your competitor counts was recently kicked out of UnitedHealth.

So I'm just curious, do you have any idea why their in-network status was revoked? And I assume this created somewhat of a tailwind for Natera over the next couple of quarters?.

Steve?.

This is Steve. I'll comment on that. I mean, of course, we are not privy to their negotiations or the decisions that were made by United. We think, frankly, given our in-network status, there is some opportunity there for us. Being in-network broadly was a key strategic decision that we made several years ago and that has been an advantage for us.

So we closely interact with these health plans, particularly to help shutdown out-of-network leakage and things of that nature. So there is some advantages to having one of our competitors being out of network..

Okay. Understood. And then, the prenatal volume here over the last 2 quarters has been pretty strong.

So Mike, just for modeling purposes for 2019, should we assume this is a new normal for volume going forward?.

Well, as said in the prepared remarks that we expect volume growth for the year to be roughly in the 30% range. So I think that's [indiscernible]..

Okay. That's fair. And apologizes, if I missed this one as well. But you were erring on the side of caution regarding ASC 606 last quarter.

Now that you have 7 months under your belt, just what are your assumptions regarding accrual ASPs? Are those proven to be conservative? And just remind us again, how does it benefit to ASPs? How does that flow through the P&L in future periods?.

Yes. And so as it relates to the 606 accruals, I mean, I still view this as -- it's our second quarter under the new standard. And so we're still endeavoring to be conservative, no guarantee that will ultimately prove conservative. I think the collections on the Q1 units are consistent with our expectations. So no cause for alarm just yet.

And I couldn't quite follow the last piece of that question, Alex, if you would just repeat that, please?.

Yes. Just, if ASPs actually prove -- so you're accruing in the ASP this quarter.

If the actual ASP proves to be higher than what you're occurring, how does that flow through the P&L in the future periods?.

Yes. So in the future period, when we get to a period where, let's say, we've accrued the ASP at $430 and the collections come in and it's at $440 and you sum it all up a year later, the tentative conclusion would be that we would likely book a true-up of revenue in that period.

But it's just -- it does -- there was a number of variables there and it depends on the scale of the difference..

Thank you..

Thank you very much everyone..

And that concludes today's question-and-answer session and also today's presentation. Thank you, all, for your participation. You may now disconnect. Everyone, have a great rest of your day..