And welcome to the Natera, Incorporated Second Quarter 2020 Earnings Conference Call. My name is Michelle and I will be the operator for today's conference. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] I would now turn the call over to Mike Brophy.

Mike, you may begin..

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our second quarter 2020. Also on the line is Steve Chapman, our CEO; Bob Schueren, Chief Operating Officer; Solomon Moshkevich, General Manager of Oncology; and Paul Billings, Chief Medical Officer.

Today’s conference call is being broadcast live via webcast. We will be referring to a slide presentation that has been posted to investor.natera.com. A replay of the call will also be available at investor.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 outlook, our assumptions for that outlook, the impact of the COVID-19 pandemic on our business and operations, market size, partnerships, clinical studies, opportunities and strategies and expectations for various current and future products, including product capabilities, expected release dates, reimbursement coverage 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-K or 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 materially from those contained in or suggested by 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 form. We will quote a number of numeric or growth pages 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 Steve.

Steve?.

Thanks, Mike. Good afternoon, everyone, and thank you for joining us. Let me get into the highlights. Q2 was another very strong quarter for Natera. We processed 234,000 tests in the quarter, which was essentially on par with our all-time record Q1 volumes, despite the obvious impacts from COVID-19.

We generated $86.5 million in revenues on a 46% gross margin and grew product revenues approximately 24% year-on-year We started enrolling patients in three separate large prospective trials, BESPOKE and IDEA-CIRCULATE for Signatera in colorectal cancer and the proactive trial for Prospera in kidney transplant rejection screening.

These are key trials that we believe will extend our leadership position in these areas. I'm sure many of you saw that we have now completed the process to get reimbursed for Prospera. And so far, we are being paid as expected by CMS.

We were very pleased to receive the Force of Change Illuminator Award from Leading Women Entrepreneurs, which is an organization that is recognized over 500 outstanding women leaders in innovative companies over the past day.

Sheetal Parmar, who leads the Clinical Services and Medical Education teams at Natera and is Cochair of Women of Natera, an employee resource group that supports workplace equality and diversity was also recognized for her individual contributions in Natera’s mission and values.

So we just wanted to say thank you and congratulate Sheetal and the women of Natera for their leadership. In our oncology effort, first in IO monitoring.

Just this week, we saw the publication of a groundbreaking validation study in Nature Cancer, demonstrating Signatera's ability to monitor tumor response to immunotherapy in 25 different types of solid cancer.

Second in colorectal cancer, we presented data at ASCO and ESMO GI that supports the use of Signatera for metastatic colorectal cancer, with a prospective publication to follow.

Based on the strong data, I'm very pleased today to announce two new clinic expansion opportunities where we're seeking reimbursement for Signatera, as you can see on this next slide.

We think together these new opportunities represent approximately 900,000 additional tests per year, nearly doubling our previous addressable market associated with stage two and three colorectal cancer.

So all combined, we think we have a clear path for reimbursement and commercialization in clinical settings that represent roughly 2 million tests per year.

In IO monitoring, we have already completed a positive pre-submission meeting and formally submitted our dossier for local coverage decision to Medicare and what would be our second major reimburse clinical indication for Signatera.

In metastatic colorectal cancer, we plan to submit this indication to expand the previous colorectal cancer indication soon. Solomon will describe these indications in more detail later in the call. The next slide shows our volume performance by quarter. Each of the last few years we've seen a very large step up in the Q1 volumes over prior years.

And then due to seasonal factors that we've described in the past, Q2 volumes are typically just below Q1. In 2019 Q2 volumes pulled back 3% from Q1 2019. This year in 2020, we saw a smaller pullback of about a half percentage point versus our record Q1 2020. This is remarkable, given the scale of the disruption to the economy in Q2.

During the onset of the COVID-19 outbreak, we immediately saw a drop in our weekly received volumes of about 15% in the last two weeks of March and first few weeks of April.

And then we saw weekly volume starts to recover toward Q1 levels, as our existing customers and the accounts we won early in Q1 figured out how to reopen their practices to maintain critical services, like non-invasive prenatal testing. Mike will talk more about the outlook later in the call.

But we're feeling good about our existing customers ability to weather COVID-19 surges in the second half of the year. In order to grow, we also need a new - to win new accounts. While I still think it's clearly easier to win new business when a rep has unfettered access to a clinic, we have made good use of our remote tools.

And we built and have a number of encouraging customer wins since our last earnings call. So we're monitoring the situation as you'd expect, but we're cautiously optimistic about the second half of the year. The next slide shows a revenue trajectory over time.

I’d note that partner revenue recognition in Q2 of 2019, included $5 million from BGI compared to only about $1.2 million for BGI and Foundation Medicine combined in Q2 of 2020. So the underlying product revenue trends in the business remain very strong, as I mentioned.

The next slide is our typical ASP and COGS view, which came in as we had expected, and I think shows our momentum is intact. On the ASP front, we had both headwinds and tailwind in the quarter. As expected, our IVF channel was much more severely impacted than our core channel, as it was initially considered elective, and many centers closed.

The products we sell in that IVF channel have a much higher average price per test than the core reproductive health channel. So we suffered a bit from a less favorable product mix. I think that's more of a timing issue.

It's likely that a lot of these IVF customers that were put on hold in the spring will find a way to push forward in the next three to four quarters, so the IVF volume I think can swing in our favour when that happens. The main tailwind we had was Aetna, extending their average risk NIPT coverage due to the pandemic.

And we just saw over the weekend that they've chosen to extend coverage now to the end of the year, which of course we were very glad to see. So I view this ASP result as more or less status quo, as expected given the factors outlined. One other long term potential benefit to both ASP and average risk adoption is the publication of the SMART study.

The study enrollment is now completed, and we expect data to be published and presented around the SMFM conference in roughly six months. As a reminder, SMART is a landmark 20,000 patient multi site prospective clinical trial we've been running for the past five years.

We expect multiple papers from the study, one focused on fetal aneuploidy in both average risk and high risk pregnancies, and one focus on microdeletions. The aneuploidy data has been analyzed and the microdeletion data has yet to be released.

Although we can't comment on the performance, because this is the largest perspective, average risk aneuploidy and microdeletion trial to be completed, we think SMART could have a positive impact on society guidelines and coverage policies for both indications.

We also expect to generate additional demand for Panorama given our leadership in clinical validation data that extends further with the SMART trial completed. I've got largely the same takeaway for COGS per unit in the quarter.

We added some redundancy to fortify our lab operations team to make sure we are robust to COVID-19, including the expansion at our Austin lab facility, and we anticipate needing to maintain that redundancy over the next few quarters.

Having said that, the new workflow improvements coming out R&D that have caused a step change improvement versus last year performed even better in Q2 than they did in Q1. So we're very confident our plan for COGS below $200 for the reproductive health business is achievable.

Now last point getting below $200 for the reproductive health business it's important to note,, as our product mix changes to include new products like Signatera, the average COGS will change as well. So we'll track these overall metrics, but I anticipate giving some separate color in the future on reproductive health COGS.

You will recall, the number one goal in the company is to get the reproductive health business to cash flow breakeven. This comes from strategic volume growth, stable ASPs and COGS getting lower.

Despite all the impacts from COVID-19, all of the variables that we've just walked through give us the confidence that we are on track to achieve that goal, while we rapidly scale the new business. Just one more check-in second slide on our operational response to COVID.

The mobile tools for patients and customers which have been available for years are scaling nicely. We've seen this mobile offering proved to be particularly critical and starting new accounts for Signatera and Prospera, given these patients tend to be you know compromised and also have a critical need to be consistently monitored.

I mentioned the Austin lab expansion as well. This was executed smoothly despite the pandemic. The Austin lab gives us critical redundancy to our California lab and offers capacity of more than 2 million tests annually and it should in the future offer additional cost of goods sold efficiencies once at scale.

We've also launched a wide array of safety and protective testing protocols for both labs and feel confident we have a good model for consistent operations in this new environment. Okay, now, let me shift the focus to the Transplant business. As I mentioned, we're very pleased to get final reimbursement for Prospera.

This slide is the same slide we first presented in 2018. And we're now happy to retire it. As you'll see later in the call, we of course following the same path now for a number of indications and oncology.

We've been able to submit claims to Medicare for Prospera and so far received reimbursement consistent with the final pricing of 2841 per test assigned to us by the MolDx program. So we have now executed our commercial launch.

We described on our last call the success we had during our pre launch phase for Prospera, in which we demonstrated that we could access a broad swath of the transplant centers. We're still in the early days of the launch. And despite the ongoing pandemic, we continue to feel confident that Prospera can be a significant contributor for the company.

As described on the next slide, we've continued to generate data and improve the performance of the test. Given that we have run more than 2 million cell-free DNA tests commercially at Natera, we built up a huge data set that we can query to further refine Prospera's algorithm.

This spring, we launched an improvement to the algorithm that identifies patients with elevated background levels of cell-free DNA in their blood. This can provide critical information. For example, we've seen patients affected by COVID-19 can have very elevated levels of background cell-free DNA.

Being able to identify elevated levels of background DNA allows us to identify patients who might be at risk of a false negative result, where the donor signal is simply diluted by an extremely elevated background signal. So we presented several case studies on this new technology at ATC this year.

And we also announced the launch of a prospective trial, the PEDAL study to externally validate this enhanced algorithm. And we plan to run that study in 500 patients across several major transplant centers. Dr. Brennan from Johns Hopkins and Dr. Bunnapradist from UCLA introduced the study at ATC to great perception.

These are two premier physician researchers from two of the largest and most prestigious centers in the world. We're excited to leverage our scientific expertise and our leadership and cell-free DNA to help transplant patients and we look forward to continuing our early success in the second half of the year.

Now, let me hand the reins over to Solomon to cover our progress in oncology.

Solomon?.

Thanks, Steve. The first slide here summarizes the commercial verticals we are pursuing within oncology.

As a reminder, we signed a deal with Foundation Medicine last year to co-develop a test similar to Signatera, which leverages the tumor genomic data identified in a FoundationOne CDx test to design a personalized assay for each patient for serial monitoring of their ctDNA.

We continue to think this is an elegant combination of industry-leading technologies from both companies. And we are excited to have the foundation oncology field force out marketing the product to both biopharma and clinical customers.

We expect the new test to fit especially well for the immunotherapy response monitoring indication, which I'll discuss in greater detail in a moment. The co-development effort is going well and we remain on track for Foundation Medicine to be engaging with pharma customers this year.

Another key partnership for us is with BGI, to bring Signatera technology to China. We remain on track there to get the initial launch in China by the end of this year, and we have already signed deals with leading biopharma that are just waiting for the service to launch.

Within our direct commercial effort, demand in our pharma channel has been exceeding our expectations. We are generating new data together with pharma clients at a rapid pace. And the data that we presented at ASCO in collaboration with Genentech was well received.

As our pharma clients plan to launch more MRD guided clinical trials, we are continuing to invest. Mike will touch on this further in his guide. We expect more news flow from the pharma channel in the second half of the year, but for today, we want to focus on new developments in our clinical channel.

In the direct clinical channel, we have been extremely pleased with the reception we've gotten from the pre-launch phase for Signatera in colorectal cancer. Steve mentioned we started enrolling in the BESPOKE trial and the idea of surgery at trial, and the IDEA-CIRCULATE trial.

And the initial uptake and feedback from NCCN centers and other leading institutions has been very positive. With this strong momentum, plus the new opportunity we are pursuing in immunotherapy response monitoring, we're moving forward with commercial expansion plans to ensure full access nationwide.

Checking in on our reimbursement path now for the indication in stage two and three colorectal cancer, where we received the draft coverage decision for Medicare. We initially set out a goal to have final reimbursement in the second half of this year, and nothing has changed from that expectation.

Now, I'm excited to discuss the two new clinical indications that Steve touched on in his intro, oligometastatic CRC and IO monitoring. I will describe the metastatic CRC opportunity first, which is really an extension of our existing application in colorectal cancer.

If you recall, our initial indication was focused on stage two and three CRC, based on validation data we published last year in JAMA Oncology. We have now generated data that shows the validity of Signatera in CRC patients with stage four oligometastatic disease, which represents about 20% to 30% of all stage four CRC patients.

In oligometastatic disease there are generally only a few metastatic lesions, usually isolated to the liver, which can be treated with curative intent surgery, plus or minus adjuvant chemotherapy.

Many of these patients can be cured with surgery alone, but doctors today do not have good diagnostic tools to determine which patients need adjuvant chemotherapy and the NCCN guidelines are vague on this front.

These patients may also benefit from early relapse detection, as the relapse may again be oligometastatic and eligible for local treatment if caught early enough. This is where Signatera can help clarify which patients still have residual disease in their blood after surgery. At the ESMO GI World Congress, back in July, Dr.

Stacy Cohen from the University of Washington presented data showing Signatera detected ctDNA prior to surgery in 100% of patients with confirmed oligometastatic disease, and half of patients from the first blood sample taken after surgery still had circulating DNA.

This is consistent with what many doctors had expected based on published relapse rates. But now Signatera allows them to get this information in closer to real time when they can make a better decision on chemotherapy after surgery.

We have recently had a separate data set from a prospective Phase 2 study accepted for presentation at ESMO in September, which will further bolster the evidence base for this patient population. As Steve described, we look forward to working with Medicare to include this application under the coverage policy.

Turning the page now, we have a totally new opportunity for Signatera in immunotherapy response monitoring, or what we like to call IO monitoring for short. Let's start first with the problem statement here, which is pretty different from what we are doing in CRC.

More than 200,000 patients are estimated to receive immune checkpoint inhibitor treatment every year across a range of cancer types. And that number is growing with every successful new pharma trial. While immunotherapy has revolutionized cancer care in many ways, and brought hope and cure to many.

It is expensive, and many experienced immune related adverse events. But still the majority of patients do not respond to this type of treatment, despite the introduction of predictive biomarkers.

One particular challenge is how to determine whether the treatment is working after it has been initiated, and when it may be appropriate to discontinue or switch treatment strategies, there are many points of clinical uncertainty during a patient's journey with immunotherapy.

But one that we want to highlight here is a phenomenon called pseudoprogression. If a patient is not responding to treatment, you would expect the tumor to get larger on a scan over time.

However, up to one in 10 immunotherapy treated patients see their tumors get bigger before it gets smaller, because it's being filled with lymphocytes and swelling up under attack from the immune system. With a CT scan, this swelling looks like a true disease progression, which it's not, hence the term pseudoprogression.

Though this phenomenon is not super common, it actually impacts care for most patients. Because everyone with increasing tumor volume on a CT scan hopes that they might be the one in 10.

As a result of this uncertainty, current guidelines suggest that physicians continue treating beyond progression, until they see confirmation of progression in a follow up scan, which can be approximately six to 12 weeks later.

This extra treatment can significantly delay sick patients from switching to other available lines of therapy that may be more effective or can result in premature withdrawal for a patient who may actually be sensitive to the treatment.

And of course during the COVID-19 outbreak getting routine CT scans for these compromised patients is even more challenging.

Based on the published evidence, we think a serial testing protocol with Signatera could significantly help improve this picture, setting a baseline ctDNA measurement before treatment and then following up regularly in conjunction with imaging to help identify true disease progression earlier.

In addition to ruling out pseudoprogression, serial follow up with Signatera can also identify patients with secondary resistance before it's noted on imaging, helping to decide whether to modify or potentially switch treatment strategies.

And it can also identify exceptional responders who clear their ctDNA completely and might be eligible for an early drug holiday. If you assume four Signatera tests per year for over 200,000 patients, we think the addressable market for Signatera in this indication could exceed 800,000 tests annually, as Steve described.

So there's a fast growing body of scientific literature that validates the use of ctDNA for this purpose. To highlight a few quotes here from earlier academic studies, and nature reviews article concluded that monitoring of ctDNA levels has now been shown to be a clinically valid method of assessing the early efficacy of immune checkpoint inhibitors.

A JAMA Oncology article found that ctDNA profiles can accurately differentiate pseudoprogression from true progression. And an article in Clinical Cancer Research reported these findings provide rationale for use of ctDNA in conjunction with standard imaging to provide an earlier and more comprehensive assessment of immunotherapy efficacy.

So the momentum within the clinical community for this indication strong. Now our paper is the first to validate these results using a commercial grade technology.

In this perspective, Phase 2 study called INSPIRE published in Nature Cancer on Monday, patients with 25 different types of solid cancer received the Merck drug pembrolizumab and were monitored regularly with both CT scans and personalized ctDNA assessments.

At just six weeks into treatment, 42% of those patients showed increasing tumor volume on CT scan and increasing ctDNA, of whom 100% were later confirmed to be non-responsive to the treatment. These patients received on average six extra weeks of treatment that potentially could have been avoided.

Signatera also identified 16% of patients who completely clear their ctDNA during treatment. And 100% of those patients survived through the end of the study period, with a median of 25.4 months of follow up beyond the first clearance of their tumor DNA.

Based on the strength of this data and early feedback from leading oncologists, we think IO monitoring will have a meaningful impact for patients, doctors and health systems. So we're moving fast now to commercialize. The next slide shows where we are in that process with Medicare.

Hopefully, the slide format will look familiar as this is now our third time down the path with the same group at MolDx. We've now had multiple positive pre-submission meetings with MolDx on this topic, and we have formally submitted our dossier for review.

If MolDx remains positive on the clinical validity and utility here, the next step could be a draft coverage decision, which we may receive in late 2020, or the first half of 2020. So in summary, the oncology business is progressing rapidly. With that, let me hand the call over to Mike to review the financials.

Mike?.

Thanks, Solomon. The next slide here is just a summary set of results for the quarter. Steve, covered volumes, revenues and COGS, but a couple other items to note on the expensive side. When we spoke in May, we described that we were going to take a wait and see approach as it relates to investments across our businesses.

Despite the uncertainty around the pandemic, the business has been resilient. So we've expanded our initial investment plans from the start of 2020.

In oncology, we've made some key additions in the quarter, as the pre launch phase has given us comfort that we should pursue a full commercial launch in the second half as we had originally planned at the start of the year. We expect to be ready in time for the final reimbursement in colorectal cancer here in the second half.

One other area that we think is going to require additional investment is in support of our pharma commercial and operations channel. The inbound demand for MRD guided clinical trials, including Phase 3 trials, and subsequent anticipated commercial volumes has pleasantly exceeded our expectations.

We're continuing to make investments to support these larger deals. Some of that is reflected in increased R&D investments in the quarter. But also we continue to make progress with the BGI and FMI development efforts. As a reminder, we were paid cash upfront last year to support these teams. And now much of the effort is running through the R&D line.

The balance of the increase in R&D is largely attributable to headcount to support several of the large clinical trials that we've launched and Solomon described. So in summary, we're glad to be ahead of schedule, in terms of making some of these client investments.

And really most of this work is in the service of large, high margin, near term revenue opportunities. On the balance sheet, we raised cash via the seven year convertible note in the spring, which after the shoee, the principal amount was roughly $288 million, and a cash interest expense of two and a quarter percent.

We paid off the OrbiMed loan in the second quarter. So total interest expense went up in the current quarter $3.8 million versus $2.2 million last year, but the cash portion of the convert interest is lower than the cash interest we used to pay to OrbiMed, and the cash interest for the convertible note was $1.4 million in the current quarter.

Okay, on to the guide. We're very happy to be reinstating guidance for the year. And we're getting significantly above where we planned to be at the beginning of the year when COVID-19 was not even on our radar.

This is really driven by the resilience we've seen in our existing customer base, stable ASPs, good cost trajectory and the strong response we've seen so far in the new businesses. By far the most impactful assumption on revenue and the model is that volume assumption implied by this guide.

Although the business has performed well as Steve described, but we haven't been significantly impacted in areas where COVID-19 has surged more recently, this guide implies a significant amount of caution given the dynamic situation and uncertain timing of when we can get back to normal with routine access to accounts.

Gross margin really just assumes continued progress in our plans to reduce COGS in the reproductive health business, which are on track and largely within our control. The top and bottom end is driven more by product mix, which again is driven by the volume assumption.

I touched earlier on the rationale for stepping up expensive slightly, we're responding quickly to the demand we are seeing and the new clinical indication Steven and Solomon described and we're pleased to be accelerating our planned investments, as I mentioned.

The net of the increase revenue and advancement for oncology means that the cash burn remains basically the same for the year, as compared to the original guide and the balance sheet remains strong. So with that, let me hand it back to the operator for question.

Operator?.

Thank you, sir. [Operator Instructions] The first question comes from Mr. Doug Schenkel [Cowen and Company]. Sir, your line is open, please proceed..

Hey, good afternoon guys and great job in a challenging period. Mike, maybe building off of where you closed, as you noted, your revenue guidance is actually higher than where you started the year. I'm just wondering if it's possible to provide a bridge.

It may not be, but I'm wondering, how much of a headwind COVID is expected to be in the context of full year guidance? And on the flip side, how much better are you now expecting, certain volume categories and ASPs to be versus original guidance, that that may be hard to do, but I figured out I’d ask just case it is possible?.

Yes, no. Thanks, Doug. I appreciate the question. I mean, I think the – we certainly would be doing better this year, if it weren't for this lockdown situation, I think we'd be doing even better as we have our strong convictions.

We were able to guide above where we started the year initially, really, because I think mainly because the volume performance, I think, exceeded our expectations. And then followed by, ASPs, I think have been stable, where I could if you recall, we had guided, some conservatism around the ASP that arose in the beginning of the year.

So that slightly exceeded expectations. And then third, I think the, the new businesses, you know, are performing well. So I think it's, in order of magnitude, those point 1 through 3, those are the drivers.

I do see - like we said on the call, in the prepared remarks, this does - the volume assumption for the second half a year does offer some caution as it relates to like sequential volume growth. Just because there's a lot of uncertainty and we're trying to monitor the situation. So we're still on the lookout for impacts from COVID.

And I wouldn't be surprised if it's still - still is a bit of a headwind for us in the second half.

Steve, would you add anything to that or?.

No, thanks, Mike. I mean, I guess I'll just reiterate that we - in the guide, even though we're raising the guide, you know, we have been conservative with the second half of the year just because of the surge in COVID. And that doesn't mean that we've seen any disruption in any of the new hotspots, because frankly, we haven't.

And we think that you know, a lot of the centers and our sales team will put the necessary steps in place to manage through Corona. So we're not really seeing that dip, like we saw in some of the other hotspots in March.

But with that said, just with the surge and seeing the sort of peak numbers at various places we wanted to be conservative with the guide, although we did raise..

Yes, and that that's really helpful, I guess, I guess that's kind of a good segue to just kind of what's contemplated in guidance.

Like, is it fair to say at the low end of the range you're assuming there's some resurgence in infection rates put pressure on the margin?.

Yes, that's right. I mean, I think that the lower end of the guide presumes kind of more disruption, you know, more kind of widespread lockdown kind of scenario akin to what we saw in the spring. And the upside, you know, the upper end of the guide presumes more gradual return to normal..

Okay. Last one, and I'll get back in the queue. Just a clean up question on gross margin guidance.

Does that contemplate any benefit this year associated from the recent Illumina agreement? And if so, how should we think about quarterly pacing?.

Yes, it's not - there's not a huge benefit from the Illumina settlement. So as you recall that deal will go into effect in October. So just from a timing perspective, there's not going to be a lot of time for that. But you know, the benefit from that deal do affect full year gross margins..

Okay, thank you again..

Thanks, Doug..

The next question in the queue comes from Tyco Peterson. Your line is open. Please proceed..

Hey, thanks. I'll start with NIPT, it looks like Aetna extended the average risk policy through the end of the year.

You know, is that factored in the guidance? And any thoughts on you know, that becoming permanent, any update from you know, United? And then, it seems like your growth on the volumes is obviously tremendous, how much of this is the market, you know, catching up versus share gains on your part for NIPT specifically? Thanks..

I'll take the guide piece and then Steve, you want to talk to the second part?.

Yes, sure..

Yes. So on the guide, yes. So the Aetna news, that is factored in, Tycho through the guide and then in terms of what we think about Aetna going forward, and the volumes, I hand it Steve..

Yes. I think there is a couple of factors that we think could really move the needle. You know, one is obviously an updated ACOG guideline, I think the other is the publication of the SMART study. And then I think the third is just continued pressure from physicians, patients in the community to have updated policies.

And I think across each of those fronts we're seeing, you know, very positive momentum. We've said for a while now that we've heard updated ACOG guidelines are drafted and they're coming. We really don't know when that's going to happen. But we haven't heard anything that would indicate that, you know, they're negative or that's not the case.

For the SMART trial, as we said in the prepared remarks. This is the largest prospective clinical trial in NIPT that's ever been done. And it's the largest average risk NIPT trial that's ever been done.

And although, we're really excited about microdeletions, I don't want to overlook the fact that there's 20,000 patients many of which were average risk where we have aneuploidy results. And we have clinical outcomes through newborn karyotypes that were done on the baby.

So we're in a very good position now to have this be a very significant tipping point, if we haven't seen ACPG guidance before then. And we've seen the aneuploidy data, and we still feel strongly that this trial has the opportunity to really move the needle significantly for Natera, and, you know, for the industry on the whole.

And of course, we can't comment on the data at this point. And then I think the third thing is continued momentum with physician usage from patients and from others in the industry.

And we're seeing now with Aetna extending their coverage, many of their physicians are getting comfortable with ordering and many of their patients have certain expectations for what's going to be covered. So I think it's a positive sign that they've continued to extend their coverage. And we don't know if that will become permanent at some point.

But certainly, the fact that they're extending their coverage is a positive sign..

And then it sounded like from your comments that, you know, IVF could also drive some upside in 2H in terms of picking up and helping with ASPs.

Can you just elaborate on how mature you think that could be?.

Yes, so what we saw on the IVF business was really, almost immediately of like a roughly a 80% drop in, you know, late March, early April, because the centers were basically shut down.

And around mid May, we started to see centers start to open back up, but they're still in this sort of, you know, social distancing, maybe low volume, less capacity than they would have been before just for safety reasons.

So we think that there's certainly a swing to the upside there, and the second half the year and we've already started to see some of that come through in recent weeks. And I guess that the trend is heading in the direction we would expect it to be..

Okay. And then two quick ones, before I hop off.

On guidance, I just want to make sure that you didn't factor anything in on the Signatera China launch, given that that's year end, or is that factored in as well? And then you practically brought up the mobile offering? You know, we heard from one of your peers last night about how that had been very important in the COVID environment.

Can you just talk to whether you're seeing increased uptake of the mobile offering in this environment as well?.

Yes, let me talk about that first, and then maybe Mike, you can comment on any of the channel revenue. So we had built an enormous infrastructure to deal with mobile patient, blood draws, mobile phlebotomy. We've been doing that for a long time.

And we have very significant tools that enhance the user experience, that allow physicians to place orders, that allow patients to interact with genetic counselors and get kits shipped directly to them or have a mobile phlebotomist come directly to their house.

So this is something that we had all the groundwork for, we really just had to flip the switch and expand it across all three businesses, women's health, the transplant organization, and in our pre launch oncology phase, we've seen a significant uptick from where we were previously.

And it's certainly been a driver of us getting into new customers and extending our relationships with existing customers. And we're actually seeing, you know, quite a nice uptick across all three of those businesses at this point..

Yes, the Signatera channel in terms BGI is not in the guide, and it's again, it's more of a timing thing. It just won't be live for long enough for the year to affect a full year guide..

Understood. Thank you..

Thanks, Tycho..

Thank you. The next question in the queue comes from Catherine Sheltie. Your line is open. Please proceed..

Hey, guys. Congrats on a great quarter. And thanks for the questions. I guess, first starting last quarter, you referenced that volumes declined about 15% in the last two weeks of March versus prior one 1Q levels.

Can you just walk us through what the rebound looked like throughout the second quarter? Or maybe how things were trending in July when we started to see a COVID resurgence in some geographies?.

Yes, I'll take that. So yes, we did see, like we said IVF was down significantly. We saw some of the new businesses drop, you know, more significantly, initially. And then we saw some areas like New York, New Jersey, drop more significantly initially. What's happened since then is the core business has basically recovered.

IVF has a very strong trajectory, heading throughout the month of July, as centers have started to open. The new businesses are actually above the levels where they were pre-COVID because of all of the tools that we put in place.

And, you know, I think with the recent resurgence, although we've been cautious in our guidance, we've actually looked into the details and we haven't seen any disruption in some of the hotspot areas that you would think of now.

So we're feeling good about the trajectory, but like we said, in the guidance, we just want to be cautious because of the uncertainty. I know most people actually aren’t even guiding. But, you know, we felt like we could, you know, conservatively put out what we put out now given what we're seeing in the business..

Okay, very helpful.

And any comments on how the initial Prospera launch has gone relative to your expectations and how much is baked into the 2020 guide for Prospero?.

Yes, I would say it's exceeding our expectations. I think, specially in this COVID environment, I mean, we look at the breadth of customers that we're reaching, I think the value being placed on the product by key centers and key physicians, and then our, you know, relatively quick enrollment and site sign up in the proactive clinical trial.

We're really pleased to see the engagement that we had at the ATC conference, we had very strong presence to see presentations where we had top principal investigators lined up. So we're feeling good about things and we're seeing the volume trajectory to meet our expectations.

You know, of course, certainly it would be easier for us to launch new products if we weren't in this sort of lockdown, COVID environment, but I'm really impressed with the way that our team has been nimble and been able to continue to move the ball down the court and use our mobile solutions to continue to grow the business.

From a guidance standpoint, Mike, do you want to make any comments on what's in the guide?.

Yes, I mean, so echo on Steve's comment. The reality is, I mean, just compared to the very large core business for a new product like Prospero, even for it to do well on a volume basis, doesn't really have to be much more than kind of smaller tailwind in terms of impact to the guide.

So if it is contemplated in the guide that we would get paid for Medicare like we're getting paid? Yes. But again, very small in terms of the overall business for the second half of the year..

Okay. And maybe last one for me just on Signatera for IO response monitoring. When do you think you could see a draft LCD for that indication? I think the turnaround time for colorectal is pretty swift, maybe a month or two, Prospera closer to five or six months.

I think I heard Solomon say potentially by the end of the year, but just curious what your specific timing expectations are there?.

Yes. Thanks, Catherine. I'll make a couple comments and then hand it over to Solomon. As I said, the beginning of the prepared and Solomon said, I mean, we're really excited about this opportunity because it basically is doubling what we had previously put out there for stage 2 and 3 colorectal cancer.

And with this Nature paper, it again puts us in a data leadership position to be on the front foot and go out and build this clinical market. And we've already completed a significant portion of the work, which is to get the paper published and then go get the dossier submitted to Medicare.

So, Solomon, you want to comment specifically on what that pathway looks like for Medicare?.

Sure, I think we've mentioned in the prepared remarks that we assuming MolDx remains positive on the validity and utility, which we expect based on multiple positive pre sub meetings. We would expect something either as soon as the end of you know, late second half of this year, or something in the early part of 2021.

You know, MolDx has its own timelines and priorities, and those are also affected in various ways by the current environment. So, I'm certainly not in a position to speak for Medicare or for the MolDx group. But we think there's very strong momentum here..

Great, thank you..

Thanks, Catherine..

The next question in the queue comes from Max Masucci [Canaccord Genuity] Your line is open. Please proceed..

Hi. Thanks for taking the questions and congrats on a great quarter.

So, I mean, do you feel like you've been a meaningful share gainer in NIPT due to some of your larger competitors, wider testing portfolios? Maybe de- prioritizing NIPT in favor of COVID testing? And do you think that can be sticky? And then are you likely to prioritize your mobile tools beyond the pandemic, you know, as just the delivery of health care continues to evolve?.

Yes, so we definitely feel like we've been taking share but also continuing to impact the Greenfield opportunity. So if you remember NIPT, overall, we still think is only about 15% to 20% penetrated in you know, particularly in that average risk setting where there's a lot of customers that are still ordering high risk only.

So we think there's a lot of room to grow. We just did a big market survey, where we, you know, in detail, you know, mapped out, high risk, low risk where the opportunity is. And it's really incredible how many physicians are still doing high risk only and how big that opportunity is.

But when you look at the uniqueness of our offering where we have - we can detect things that simply other companies can't. Nobody else is doing the snip method. Everyone's doing shotgun sequencing, there's just biological limitations, things that they can detect.

And you combine that with the extensive Rolodex of peer reviewed publications that we have at this point, we are by far, the leader now in published data. In fact, just recently, we had another publication in the Green Journal, with over a million patients study that confirmed are near 100% accuracy on fetal sex determination.

So we just continue to push out evidence that shows are unique aspects and physicians now recognize us, as both the clinical and market leader. Now we've combined that with a strong sales force. And an extreme focus on user experience.

A lot of the customer tools that are now being used in COVID are things that we've been investing in, you know, for the past four or five years. Mobile solutions, ways physicians can interact with patients, ways we can interact with physicians, and provide counseling for patients. So we certainly see that as a major part of the business going forward.

I think, you know, to the extent that mobile phlebotomy itself is important, I think that really depends on you know, what happens with COVID long term, and you know, how frequently patients are returning to their offices. But absolutely, digital tools are very important. And we've always said the user expense is extremely important..

Great.

And then can you just speak to how your automation initiatives are coming along? How far along are you with those projects? And when do you expect to really start gaining traction from some of those initiatives?.

Yes, I think you're referring to some of the COGS initiatives that we've described previously.

So is that correct?.

Yes..

Yes. Okay. So, yes, so we had really a book of big R&D initiatives that we're working on throughout the year, this year, and then into the beginning of next year. And as we said in the prepared remarks, we stay on track to our trajectory to bring our COGS down below, $200 in the reproductive health business.

And there's a couple of ways we're getting get there. One is extraction automation, where we've actually now rolled out the initial version of that in our Austin facility. And that's going to be rolled out more broadly.

As this year goes on, there's a couple other projects that we've talked about that rely on our deep neural networks project and the fact that we've run more than 2 million commercial samples, we can use that to reduce some of the sequencing costs.

And then there's other R&D projects that we're working on that, you know, I don't want to go into detail on right now, but would reduce costs. So we think together, you know, there's still a good chunk coming out of where we are today from - from the future R&D projects. So the stuff is all coming along. It's on track.

You know, as we said, we think it will make a meaningful impact. And then, of course, I think our updated supply agreement with Illumina has put us in a strong position to continue to focus on reducing our costs, as we grow our business and that can be another benefit for us in the future.

Just one last comment on that, as I said in the remarks, you know, reproductive health, it has been our goal to get down below $200.

As we start to see the mix change, and some of these other products come in, we'll try to provide more color on the reproductive health business, specifically, so you can track our progress on some of these key initiatives that are moving forward..

Great. And then if I can just squeeze one more, and could you just give us a directional idea of where your different direct sales forces stand for oncology and for transplant? Just any idea about where these may shake out in the near or medium term? Thanks..

Yes, so, you know, we've said previously on the oncology side that, you know, we had hired 25 sales reps, and that we were going to be expanding that somewhat as we go into the full commercial launch. We kind of have a sense of where some of the other teams are.

And we sort of have now, kind of a schedule based on how many accounts are out there, how many calls we want people to make, and so forth. And so we, we have a good sense of what the optimized number looks like. For competitive reasons, you know, we haven't really been giving the exact number of reps that are out there.

You know, on the transplant side, we've said before that, you know, we think that you can be - you can cover the market with a relatively small force, because there's only 200 transplant centers that are of meaningful size, and you just really don't need a big team.

And then I think, you know, in women's health, we've sort of said the OpEx has generally been flat there, maybe slightly up as things vary a little bit. But, you know, overall, I think we really haven't been giving any exact numbers..

Great. Well, congratulations on the continued progress. Thanks..

Thank you The next question the cute comes from Steven Ma. Your line is open. Please proceed..

Thank you. Congrats on the quarter, guys. Just a few follow up questions on the Signatera and wanted to follow up on Katherine's questions about the IO response monitoring application.

So is the draft or is your dossier? Is it going to call out specific cancers or is it going to be a pan cancer, because I noticed on the Nature paper, you know, there was 25 solid tumors in there.

So maybe just a little color on strategy there?.

Yes, Solomon, do you want to take that?.

Sure. At a high level, we believe that there is ample evidence for validity and utility of using Signatera in a pan cancer fashion.

So for any cancer type, any solid tumor type where the patient's indicated to either begin or continue treatment with immunotherapy, we see value being added by using Signatera in conjunction with imaging to aid decision making along the way.

And, and we've discussed that specifically with the team at Medicare and I look forward to seeing what the final decision and you know, draft policies will look like..

Okay, great. That's fantastic if you can do that. And then my last question is on the metastatic CRC application, it sounds like it's going to be an amendment to the existing draft LCD. So maybe a little color and how that works. Do you have to wait for the final LCD or can you amend it in parallel, while you're still getting the final LCD..

So I think that the simple answer here is we're not 100% sure, because we haven't seen the final LCD. And, you know, based on what that final policy will look like, will dictate what approach we take.

There are pathways for amendment and, you know, other paths that should be a little bit more streamlined than going out to get a brand new local coverage decision. So, you know, once we see that final will, we'll be able to share more details about the plan..

Okay, great. Thanks so much for the questions..

And Steve, I guess, I'll just add one other comment to that. I mean, if you remember I take the open comment period started in kind of roughly October of last year. So we're sort of coming up on that sort of mark where, you know, they're statutorily required to release that final LCD.

So we think actually the final LCD could be coming in the near future. And so it's not really a long wait to sort of see what's in there.

And then as Solomon also mentioned on CRC, we have this - although we presented great data ESMO GI, what we're actually really excited about is just prospective trial data from a Phase 2 study that's being presented at ESMO. And that will be submitted as a peer reviewed publication.

So I think there's a little bit more of a lift there, but the data looks fantastic. And that's, really the biggest hurdle is, is generating this data. You know, not necessarily at this point for us, you know, getting the submissions down because it's sort of become a well oiled machine for us..

We have time for one more question. The last question will come from Alex Noack. Your line is open. Please proceed..

Great. Good afternoon, everyone. Actually just following up on that last point right there. So I think statutorily, it's got to be issued by August 22 or so.

So just any update on the conversations you're having with Palmetto? And am I correct that has to be issued by that date, or has to be dropped and the anything on pricing?.

No, just one correction. So it's basically 12 months from the October date, 12 months from the start of the open comment period. So we think it should be coming in before - we think it should be coming in before October. So, you know, I think it's up to a couple of months left before that comes in. But it's, you know, it's near term, certainly.

And we look forward to that coming out. We've been in active engagement with them, you know, like we said, we completed multiple pre submission meetings on IO recently as recent as you know, early summer and sort of late spring, and then we submitted the dossier for IO, you know, as we said in June.

So there's a lot of engagement there, and we feel like that's actually - the CRC final is on track, and we're really excited. We're sort of gearing up for that to come out in the next couple of months..

Okay, got it. Thanks for the correction there as well. And then the IO monitoring application certainly seems pretty unique, pretty valuable to patients. Now Signatera CRC, that's designed for recurrence monitoring, this new indication is very much upstream for treatment monitoring. So the use cases are different.

Just how do you plan to leverage the oncology sales team itself both into a recurrence and a treatment monitoring application?.

So I'll make a couple high level comments and then Solomon, or Mike feel free to jump in. I think first, there's certainly quite a bit of overlap, particularly in the community, on the ordering physicians.

I think when you get into some of the academic centers, you see more specialization, but the very large community practice network that we're going to be targeting, there's going to be quite a bit of overlap in synergies within the sales force. So we're excited about that.

I think the second, one of the - one for us, one of the key rationales for doing the partnership with Foundation Medicines, was because they're brilliantly set up to just dominate in this particular space.

And, you know, having already run the therapy selection panel, having already, you know, performed as many tests as they perform and just have this dominant sales team, we certainly think that having them out in the field, with an indication like this is going to be very meaningful.

And combined with our force, you know, our separate product, I think it's going to put us in a place to really lock this down, very, very quickly..

Yes….

Go ahead, Solomon..

Yes, I was just going to add, I think we're excited about the opportunity to leverage the same oncology field for us to be able to educate customers about both use cases. And as Steve mentioned, you know, it's roughly 80, 20 community versus academia where patients are treated.

So there, you know, there's massive overlap in the customer relationships we've already built. In academia where we, today we really focused on GI oncologist, gastrointestinal oncologist for rollout of the CRC application.

I think the great news is that there's been so much excitement and engagement on the research front with other specialties, you know, from breast cancer, lung cancer, GU cancers, et cetera, that I think a lot of those relationships are already being developed and are going to set us up for success..

Okay, appreciate. Thank you. That's helpful. And then just last question. I know you were billing UnitedHealthcare and appealing any denials more aggressively based on the society for field medicine decision.

Can you just say if in a quarter or maybe July or, you know, first week in August, if any of those denials by UNH that you went ahead and appealed are starting to get paid?.

Mike, you want to take that?.

Yes. So I mean, I think the best way to track this is just by the coverage policies that the various payers have put out and it's basically status quo, with the exception of Aetna extending to the end of the year at this point..

Okay, understood. Thank you appreciate it..

Sir, I'll turn the call back over to Mr. Brophy for any closing remarks..

Well, thank you all for joining, fantastic questions, is a pleasure to be with you, and we're looking forward to the second half of the year..

Thank you, ladies and gentlemen, this concludes today's teleconference. Thank you for participating. You may now disconnect..