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Edited Transcript of NTRA earnings conference call or presentation 12-Mar-19 8:30pm GMT

Q4 2018 Natera Inc Earnings Call

San Carlos Mar 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Natera Inc earnings conference call or presentation Tuesday, March 12, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Matthew Rabinowitz

Natera, Inc. - Co-Founder & Executive Chairman

* Michael Brophy

Natera, Inc. - CFO

* Solomon Moshkevich

Natera, Inc. - General Manager of Oncology & Transplant

* Steve Chapman

Natera, Inc. - CEO

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Conference Call Participants

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* Alexander David Nowak

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Catherine Walden Ramsey Schulte

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Eleni Maria Apostolatos

JP Morgan Chase & Co, Research Division - Research Analyst

* Mark Anthony Massaro

Canaccord Genuity Limited, Research Division - Senior Analyst

* William Robert Quirk

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

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Presentation

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Operator [1]

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Welcome to Natera's 2018 Fourth Quarter Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded today, March 12, 2019.

I would now like to turn the conference over to Michael Brophy, Chief Financial Officer. Please go ahead.

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Michael Brophy, Natera, Inc. - CFO [2]

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Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our fourth quarter and full year 2018. Also on the line is Steve Chapman, our CEO; Bob Schueren, Chief Operating Officer; Solomon Moshkevich, General Manager of Oncology and Transplant; and Matt Rabinowitz, Executive Chairman. 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 the 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 2019, 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 filed with today's press release. Those documents identify important risks and other factors that may cause our actual results to differ from those contained in the forward-looking statements. Forward-looking statements made during the call are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information.

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

And now I'd like to turn the call over to Steve.

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Steve Chapman, Natera, Inc. - CEO [3]

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Great. Thanks, Mike. Good afternoon, everyone, and thanks for joining us. I will cover our recent highlights and progress since we last spoke in November, and Mike will provide additional detail on our financial progress. As Mike mentioned, we will be referring to slides that were just posted at investor.natera.com.

Before we jump into recent highlights, I'll revisit the 3 goals that we spoke about at the JPMorgan conference in January. We think Natera can drive significant value for shareholders in the near term by executing on these 3 core objectives. First, we want to extend our leadership position in reproductive health and get to cash flow breakeven. Continued volume growth combined with a roughly $200 gross profit per unit would get us there, which we think is achievable.

Second, we need to deliver rapid revenue growth in our oncology business. We generated a lot of compelling data so far and this year, we expect that to translate into meaningful revenue from pharmaceutical companies. Finally, we need to pass key inflection points in our organ transplant business by commercializing our test and getting Medicare coverage, continuing our success from 2018 where we completed all of our stated milestones. We will spend more time on these goals throughout the call.

Let me now move on to a summary of our recent highlights on the next slide. On volumes and revenues, we processed roughly 669,000 tests in 2018, which represents a company record of 30% year-on-year growth versus 2017. We processed over 174,000 tests in the fourth quarter, including processing over 119,000 Panorama tests and accessioning more than 46,000 Horizon tests. We're very pleased with is a rapid volume growth. Revenue growth also roughly tracked our volumes. We generated total revenues of $67 million in the quarter, up 29% versus Q4 of 2017.

In oncology, we think 2019 can be an inflection point for the business. As we're seeing the market from minimal residual disease testing in solid cancers starting [to date] to take off. We just announced of $50 million partnership with Beijing Genomics Institute to bring Signatera to China, and we are outperforming our pharma contracting target. We said on our last call that we expect to end 2018 with pharma contracts valued at $8 million. We ended up beating that goal by closing the year 2018 with $9.1 million in total contracted value. We expect the cumulative contract value to hit $40 million to $50 million by the end of 2019, driven by an increasing interest in MRD and molecular monitoring where we believe that Natera is poised to emerge as a leader with our unique personalized approach.

We also presented our breast cancer data at the San Antonio Breast Cancer Symposium, demonstrating Signatera's ability to detect molecular recurrence up to 2 years in advanced imaging. Our performance in breast cancer was similar to the excellent results we published in lung, bladder and colon cancer last year. We've now analyzed roughly 3,000 plasma samples across 18 different cancer types. Consistent results like these helped us to secure the $50 million partnership with BGI to commercialize Signatera in China and to extend our rapid growth in pharma services. We're making great progress towards our goal of delivering meaningful revenue in oncology.

We're also rapidly achieving milestones in our transplant business. Earlier this year, we announced a comarketing partnership with One Lambda, a division of Thermo Fisher. In this deal, Natera and One Lambda will both market our test on a co-exclusive basis in the United States. We also published our analytical and clinical validity studies in top peer review journals. The results highlighted the power of our core technology showing superior analytical performance characteristics, underpinning exceptional clinical test performance in screening for active rejection.

Having achieved all of our stated milestones in 2018, we are on track to commercialize and obtain Medicare coverage in 2019. I will cover each of these topics in more detail in a few minutes.

With that summary, let me walk through the key topics in each of these areas. The first component of our reproductive health strategy is to continue to grow volume at a rapid pace. This slide shows the full year progression over the last few years in our business. We doubled our growth rate in 2018 to 30% of a much bigger unit base. I think this speaks to our core competitive advantages in women's health, our technology and our direct sales channel. While you hear about a lot of NIPT competition in the field, what hasn't really changed is that there are 2 primary technologies available for NIPT. Natera's SNP-based technology and the shotgun sequencing method used by most others. Most of our major competitors are using the same shotgun sequencing method approach that we've successfully competed against in the past and where we have clear technological and clinical performance advantages. In addition, our direct to OB/GYN sales channel continues to be a source of strength. We've got a very stable, long-tenured team relative to the industry, and we are focused solely on this premium segment genetic testing sale. Given the strength of our technology and our commercial footprint, we are well positioned to ride the wave of increased adoption that we expect to result from future average-risk NIPT expansion.

We think the average risk market, which is 3.3 million pregnancies is only about 15% to 20% penetrated today. As this market expands, we have an opportunity to grow volume from our existing customers that don't routinely order average-risk NIPT today. Our patient mix has remained at roughly 40% high-risk and 60% average-risk. We think this could shift dramatically as our existing clients adapt their practice patterns in the future, driving significant volume growth.

In addition, we expect to capture new accounts from positions converting from maternal serum screening to NIPT and through continued competitive wins. We plan to be on the front foot in capturing more market share, so we are expanding our commercial efforts further in 2019 to help maintain and grow our leadership position. The second deployment of our reproductive health strategy is to improve the average selling price. ASPs were stable in the quarter and Mike will touch on how we expect that the ASP to track going forward, later in the call.

We see average-risk coverage being a significant driver of our future ASP, and we have been encouraged by recent policy adoptions from Blue Cross Blue Shield of Tennessee, Minnesota, North Carolina and North Dakota, in addition to the recent approval from 5 state Medicaid programs.

Annualizing our Q4 volumes, we estimate the value of average-risk coverage will be worth roughly $60 million in revenue and cash flow from the tests we already won at [an illustrative] $450 ASP. Although we don't control the timing, we continue to believe there will be progress in average-risk this year and expect to see some of the upside coming during the second half of 2019.

The final component of our strategy in reproductive health is to lower the cost of goods sold. In Q4, our COGS per unit improved again to $263 per unit. We've continued to make steady progress. Based on specific funded projects already underway, we think we can make significant progress in 2019 to our longer term goal of getting COGS below $200 per unit. As you can see, from the right half of the slide, if we can get to the $200 per unit mark, the incremental savings from our current blended COGS would generate roughly $40 million in additional gross profit and free cash flow using Q4 annualized volumes. Together, the impact of average-risk coverage and our planned COGS improvements could be worth up to $100 million in gross profit and cash flow on an annualized basis. Our plan is to continue growing volume, driving average-risk coverage and reducing costs to get us to cash flow breakeven in the reproductive health business.

Switching gears now to oncology and our goal to deliver rapid revenue growth for this business. We were very pleased to announce a $50 million partnership with BGI to leverage our extensive region operations to bring his Signatera to the Chinese market. We believe China represents a very large clinical testing opportunity, and we also expect this partnership to support the adoption of Signatera into a pharma-sponsored clinical trial in China. This may give us an advantage with global pharma customers running trials in China since Chinese law prohibits the export of patient blood samples overseas.

BGI already enjoys a significant leadership position in genetic testing in China. For example, last year, they performed more than 1 million cell-free DNA test. This partnership with BGI strengthens our oncology franchise, expands our reach in reproductive health in select markets and may reduce COGS in our lab.

Many of you will recall that we entered into a partnership with QIAGEN early last year, and that we have a 10-year supply agreement with Illumina. This new partnership with BGI doesn't change the plans we have in place with our other partners. Offering our content on a range of sequencing platforms remains part of our long-term strategy, both expanding our commercial reach and providing the opportunity to lower our COGS.

The financial terms of the deal consist of $35 million in upfront licensing fees and prepaid royalties, plus $15 million in future milestone payments to Natera. In addition, Natera will receive ongoing royalties on the sale of test. Natera will prepay $6 million for sequencing services to BGI and prepay $4 million to another supplier. Overall, including near term milestones, we expect a net of $30 million cash inflow in 2019 related to this deal. This transaction is subject to customary closing conditions.

In addition to the BGI deal, our Signatera commercial effort continues to accelerate. We started 2018 with just a few hundred thousand dollars in signed Signatera pharma services contracts. You can see our evolution from initial pilot studies to now signing several prospective clinical trials with leading pharmaceutical companies. The bars on the page represent the total contracted value, which should be the amount of revenue we'd expect to recognize over time from signed deals based on the pricing and the test volume specified at each contract. We generally expect most signed deals to translate to recognized revenue over roughly 12 to 36 months depending on how long it takes for prospective clinical trials to enroll patients, among other factors.

I mentioned at the top of the call that we believe in 2019 can be an inflection year for Signatera. We believe we can secure signed pharma contracts with accumulative value of $40 million to $50 million by the end of 2019. This is a major step forward for our business and sets us up for significant revenue growth as we execute against these signed agreements.

On the clinical side of the oncology business, we have inbound demand for patients and physicians who want to test for recurrence. With a clear launch plan for Q2, we will begin to serve the U.S. and international markets. However, our commercial investment will remain largely focused on the pharma business until we secure reimbursement with Medicare and commercial carriers. We have previously estimated the market opportunity in MRD and molecular monitoring to be north of $12 billion, and we believe Natera is poised to take a significant share of this market given our unique personalized approach.

Shifting gears now to transplant. There are 2 critical milestones that will allow us to reach a tipping point for this business. Commercialization of our assay and securing Medicare coverage, both of which we think we can hit in 2019. On commercialization, we're off to a great start with the partnership we signed with One Lambda Thermo Fisher earlier this year. One Lambda is a global leader in HLA and antibody monitoring assays and therefore, has long standing relationships with most of the largest transplant centers in the United States. We will be able to leverage their commercial infrastructure to accelerate our entry into this new market. This deal will complement our planned direct sales effort that we will be pursuing in parallel. We kicked off the collaboration at last month's CI conference and are looking forward to having a joint presence at the American Transplant Congress, along with other efforts planned for this year.

Turning to our technology and performance. Natera enters the organ transplantation field as a leader and expert in cell-free DNA testing, having spent more than a decade optimizing our molecular biology and bioinformatic techniques and having performed over 1.5 million commercial cell-free DNA test. This expertise has resulted in measurable and significant advantages in assay performance. We just published on our analytical validation results in the journal, Transplantation, describing the performance of our assay.

The reported precision of our tests was particularly strong with repeatability up to 5x better than others. The fundamental point here is if you believe donor-derived cell-free DNA is a useful biomarker, Natera, has a more precise and reliable tool for measuring that biomarker. We expect this precision advantage to apply in renal as well as other organ types whenever donor-derived cell-free DNA is measured.

The superior analytical performance we published helps explain why our clinical performance data was so strong. Our published clinical validation was 2x larger than other studies and the data showed a better overall area under the curve, superior detection of key cell [mediary] rejection and the ability to detect subclinical rejection where there are no other clinical signs. Transplant physicians are responding very positively, thus far, to our analytical and clinical data, which together, put us in a good position to execute on our goal of commercialization and achieving Medicare coverage in 2019.

Now let me walk through the reimbursement time line more specifically. This slide is the same road map we showed you on our last 2 earnings calls. We've now accomplished all of our objectives for 2018, we've completed our analytical and clinical validations, completed our pre-submission meeting with Medicare, obtained the unique z-code for our test and formally submitted our dossier at the end of 2018. We are very pleased with our progress, and at this stage, we remain on track to obtain Medicare coverage and launch in 2019.

To frame the commercial opportunity here in more concrete terms, we estimate the market opportunity for donor-derived cell-free DNA testing and kidney transplant rejection to be roughly $2 billion. While using a cell-free test to screen for rejection is a relatively new concept, we are encouraged that physicians are adopting a protocol where patient receive testing up to 7x in the first year when the risk of rejection is highest, and then quarterly thereafter. The adoption of cell-free DNA testing has been very encouraging. And given the strong clinical performance of our test, we think we can compete very well.

Given that the market is estimated to be less than 5% penetrated. There's a lot of greenfield opportunity out there for us. To lay out a few scenarios for what this launch might mean for our business, if you assume 20,000 new patients per year and a protocol of 7 tests in the first year, and then quarterly thereafter for the next 2 years, you can see a range of annual revenues that would be achieved at a price point and market penetration rates that we believe are achievable based on market precedent. So even with relatively modest product adoption, we think the transplant business can be a very significant contributor of high-margin revenues through our overall business in the next 2 to 3 years. We are very encouraged by the opportunity ahead of us in reproductive health, oncology and transplant.

So with that, let me hand the call over to Mike to review our financial performance. Mike?

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Michael Brophy, Natera, Inc. - CFO [4]

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Thanks, Steve. Now to summarize our results from the quarter. The results for the quarter and the full year across the wire this afternoon. For brevity on the today, I'm going to focus on the key points of the Q4 results. As a reminder, the results from Q4 of 2017 have been restated under ASC 606 in which revenues are recognized on an accrued basis so the face of the financials are apples-to-apples in the filing across the wire today.

Our fourth quarter total revenues for were $67 million compared to $52 million for the fourth quarter of 2017. This growth was driven by volumes as Steve described. Gross margins were 36% in the quarter compared to 29% in the same period of the prior year.

Panorama revenues for the quarter were $36 million compared to $30.9 million in the fourth quarter of 2017, an increase of approximately $5.1 million. Horizon revenues for the quarter were $23.9 million compared to $16.1 million for the fourth quarter of '17, an increase of approximately $7.8 million, driven by both volume growth and shifts in product mix.

Total operating expenses for the fourth quarter were roughly $54 million compared to $62 million in Q4 of '17. At the close of the quarter, the company held approximately $158.5 million in cash equivalents compared to $170 million as of September 30, 2018. As of December 31, 2018, we held a net carrying amount of $73.4 million under our 7-year term $125 million debt facility with Orbimed Advisors, and have drawn down $50.2 million, including accrued interest under the $50 million line of credit in place with UBS.

Turning to our future outlook. We expect 2019 total revenues of $275 million to $302 million. Gross margins to be 35% to 41%. Selling, general and administrative cost to be $180 million to $190 million. Research and development cost to be approximately $60 million to $65 million, and our cash burn to be approximately $80 million to $100 million. This guidance assumes we will maintain our leadership position in women's health with continued volume growth.

Steve talked about some of the drivers to ASP in the medium- and long-term, which we think are positive. For the 2019 guide, though, we've made an effort to be conservative on pricing assumptions, particularly in the first half of the year. The guide presumes an uptick in the factors that affect the percentage of times in which we get reimbursed like prior authorization policy that we've described in the past. We don't think these factors are permanent and that there is skill for ultimately getting reimbursed on some of these tests on appeal, but we don't plan to accrue these claims as revenue immediately in 2019. You've seen some of the successes on getting reimbursed during 2018 on older claims, and we continue to optimize our efforts in that area.

On the positive side, Steve talked about our competence in getting broader reimbursement on average risk NIPT and the guide presumes steady improvement in average risk NIPT reimbursement in the second half of the year.

On the revenue from new businesses, we are presuming steady growth and steady stable pricing in our core blended business, and Steve talked about the goal for total value of contracted business for Signatera of $40 million to $50 million. For any given deal we sign with a pharmaceutical company, we expect that contracted value of the deal to translate to revenues over the course of roughly 12 to 36 months as we run the samples from the clinical trial, as Steve described. We don't have revenues from transplant in the guide, but we remain on track with our original targets to launch and get Medicare reimbursement by the end of the year. The guidance assumes a successful close of the BGI ideal, and it includes the $30 million in cash inflow that Steve described, but it excludes any upfront revenue recognition from the BGI deal. We are evaluating that and will provide another update on our Q1 call in May.

The gross margin guide takes into account the volumes and pricing comments above and also presumes we make steady progress in reductions to cost of goods sold per unit that Steve described earlier in the call.

The next slide breaks down an estimate of our operating expenses by business: reproductive health, oncology and transplant. We wanted to break this down to give you a clearer sense of the investments we are making in each area. The reproductive health efforts supports our sales channel and includes roughly $4 million this year for the smart trial, which we think is key for future microdeletions reimbursement, and that spend should be winding down after 2019. The majority of the additional spend assigned to the reproductive health business is focused on reducing cost of goods sold. Projects like planned improvements to our carrier screening workflows and additional automation and algorithm improvements that take advantage of recent advances in AI to improve performance and reduce the amount of sequencing required to generate a result and of course, supporting ultimate -- alternate sequencing platforms like the effort we announced with QIAGEN last year and BGI this year.

Our oncology effort is already paying dividends, so you can see it from the BGI deal announcement, and the rapid growth in the value of signed contracts, we've signed with pharmaceutical companies. In 2019, we plan to support BGI development effort and drive further adoption with pharmaceutical companies by launching the CLIA version of Signatera. We've gone to this point in the Signatera launch with just a few people selling to pharma companies, and we are expanding that team to roughly 10 people. We are going to be conservative about offering the test in a clinical setting before we have a clear path to reimbursement, so we are planning to launch targeted clinical trials in selected indications where we feel the health economics and unmet need are compelling, and we'll launch those in 2019 before growing clinical volumes immediately.

Finally, in transplant. We are doing the work to launch the test commercially with an efficient direct sales and marketing effort that will complement our work with One Lambda. So to summarize, we're on the front foot in reproductive health and think we can unlock up to $100 million in cash flow from expected average-risk expansion and COGS projects, as Steve described, and that's just from our existing volumes. Given that our trajectory in pharma and the near term milestones we expect in transplant, we intend to put our foot on the gas to capitalize on these opportunities.

Now I'd like to open the line for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from the line of Bill Quirk with Piper Jaffray.

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William Robert Quirk, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [2]

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So I guess, first question, and, Mike, you kind of alluded to a little bit in some of your comments regarding timing of taking those oncology orders and turning this into revenue, but can you give us a little extra color on your break down expectations for the big categories, things like Panorama, Horizon and I think, I heard you right on oncology, it's probably going to be something like a $3 million to $4 million '19 expectation?

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Michael Brophy, Natera, Inc. - CFO [3]

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Yes. So I want to just keep the guide for the total revenue, Bill, like we've always done. I feel like when we give more detail, it actually introduces more complexity and makes life harder for everyone. So I think it's simpler to kind of stick to that total revenue guide. It's fair to say that, like, if you look at past year, the vast majority of that revenue has come from Horizon and Panorama. So I don't think that, like, a percentage of revenue is going to be dramatically different than what you've seen in past years. We will have a material amount of revenue coming from oncology, and it's going to come kind of on that waterfall that -- when you start with contracted revenue at the beginning of that kind of revenue recognition waterfall. And then as we said on our call, kind of cascades 12 to 36 months from there to cash flow revenue recognition. And then finally, on transplant, there's nothing in the guide for transplant revenues just given our expected launch time.

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William Robert Quirk, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [4]

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Understood. And then just, like, as a clarifying question. With respect to the cash burn forecast, is that inclusive of the net $30 million that you expect to have from BGI?

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Michael Brophy, Natera, Inc. - CFO [5]

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No, does that include the cash. That contemplates the cash we're getting from BGI.

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William Robert Quirk, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [6]

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Understood. Okay. Got it. And then I guess, just on transplant, I presume, given that you've got your draft LCD in here before the end of the year, presumably we should have some sort of update I would think by the end of March, is that the right way to think about it, guys? And obviously, there's an open comment period and then it gets sort of final documentation from Palmetto, call it, late summer, early fall, is that the time line you're looking at as well?

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Steve Chapman, Natera, Inc. - CEO [7]

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Yes, roughly. I mean, I think we're engaged with Palmetto and in discussions. And when the local coverage decisions are released, there's an opportunity for us to participate there and then from there, it will follow the standard cycle as you outlined.

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Operator [8]

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And our next question will come from the line of Catherine Schulte with Baird.

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Catherine Walden Ramsey Schulte, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [9]

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With the One Lambda partnership, how are you willing to divide the commercialization responsibilities between your team and One Lambda? And how should we think about this in terms of incremental feed on the Street for you?

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Steve Chapman, Natera, Inc. - CEO [10]

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Yes. So obviously, we're really excited about that partnership. I mean, with One Lambda's presence in all the major transplant centers, they have a very strong reputation, they're plugged in with the top doctors and top labs. As we've said, we're going to be building out our direct sales force in parallel. I think similar to what we've done in the past, when we brought the NIPT to market, we had a direct strategy, and we also had partners that came to market with us. We saw that as a way to expand our distribution. I think there's natural accounts where they have stronger relationships, and there will be accounts where we have strong relationships and the field team just works together in a very positive way to collaborate. Again, we're excited about the opportunity with them, and it makes sense. And Matt, you want to add anything there?

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Matthew Rabinowitz, Natera, Inc. - Co-Founder & Executive Chairman [11]

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Yes. I think it's a great question. Just how one collaborates with big partners. There's a very technical sell that we can make in transplant because the doctor is so compelling. As you saw from that slide, we've got about a 1.85% standard deviation on repeatability of our test versus the competition of about 9.2% in the main publication. So we've seen that incredible analytical performance translate into much better clinical performance. And so it's going to be very important when you've got that kind of a technical advantage to have our sales team collaborating with sales team of Thermo Fisher and helping make that very differentiated technical sell. And we saw the same thing in NIPT. We had a very different technology, very differentiated, we took market share very quickly with the help of our partners, but we really did depend on having our own experts sort of co-traveling with them and educating those larger sales forces. So it's going to be a pretty similar approach in transplant.

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Catherine Walden Ramsey Schulte, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [12]

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Okay, that's helpful. And then what are your latest thoughts on ACOG? And can you just quantify what your assumptions are in the back half for that approved effort for screen reimbursement?

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Steve Chapman, Natera, Inc. - CEO [13]

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Yes. I'll take the general comment, and then I think, Mike, if you want to talk more broadly about what's in the forecast. So obviously, we're engaged with ACOG, we've established a good relationship with them. We also purchased the NIPT Consortium where many members, Illumina, Roche, et cetera, LabCorp, are engaged in various ways with ACOG. And I think, generally, everyone is sort of hearing positive noises, but nobody has the exact playbook for what ACOG is going to do. So we, obviously, expect some positive guidance as we've reflected in our forecast, but we don't know the exact timing, and we don't know exactly what the guideline is going to say. Mike?

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Michael Brophy, Natera, Inc. - CFO [14]

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Just in terms of quantifying it, I mean, we've talked about previously how within the commercial business and average risk NIPT, we're getting paid circa 35%, 40% of the time there. And the guidance just contemplates kind of a steady appreciation of that fraction of time when we get paid in a linear way through the course of the second half of '19.

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Catherine Walden Ramsey Schulte, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [15]

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Okay. And then last one for me. First thing, for Natera, when should we expect to get some data from your pharma relationships and get more clarity on the reimbursement pathway for indications other than the ones you're pursuing yourself?

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Steve Chapman, Natera, Inc. - CEO [16]

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Solomon, do you want to take that?

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Solomon Moshkevich, Natera, Inc. - General Manager of Oncology & Transplant [17]

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Yes. In terms of data publication, we are looking forward to presenting some new data at ASCO in the middle of the year, in Chicago. And in terms of additional collaborations with pharma, I think the road map looks very bright here. We don't always control release for publication of data that comes from a pharma collaboration, but where the data's compelling and there's an agreement that it should be out in the field, we work together with our partners to publish that. So I can't give you a specific time line around data like that right now. I would say that there continues to be a data pipeline coming from academic collaborations as well, and we look forward to presenting more data this year. In fact, I think there's going to be some publications that come out in some major journals in the coming months. In addition to that, from a reimbursement perspective, we would say that we don't expect to have Medicare reimbursement in the immediate term. We are working with Medicare in the same way that Steve described in the transplant side, to set up a road map there. And I think that's going to depend on bringing the test to market and also demonstrating the utility of the test in the key unmet need applications where we've described before. I think initial indications would be in the areas where our data is strongest and the unmet need is clearest including early stage and late stage diseases.

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Steve Chapman, Natera, Inc. - CEO [18]

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And so I'll just say a lot of the data that we presented throughout the year of 2018 is now going to be published in the very near future in very high impact journals. So we've been very pleased with publications that have been accepted that are going to be published in the very near future. In addition, we're feeling very good about our pharma pipeline, so companies that have looked at the data and thought about the different ways that they can use our test within their development programs or for future clinical trials and we said we expect to have $40 million to $50 million in total contracted value cumulatively by the end of 2019, and that is significant, significant progress from where we were at the beginning of '18, and even at the end of '18. So we're seeing a lot of momentum that's based on the strength of the data and the strength of the technology.

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Operator [19]

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Our next question will come from the line of Mark Massaro with Canaccord Genuity.

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Mark Anthony Massaro, Canaccord Genuity Limited, Research Division - Senior Analyst [20]

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I guess, just my first one for clarification. Does the $40 million to $50 million include the BGI payment or the $30 million net inflow in 2019?

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Michael Brophy, Natera, Inc. - CFO [21]

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No, those are totally separate streams. So the BGI, the $30 million that we referenced, that's what we expect as a net cash inflow from this BGI partnership that we just signed. The $40 million to $50 million in contracted revenues from pharmaceutical companies is the value of -- and the cumulative set of deals we've signed with pharma companies to use Signatera. Does it make sense, Mark?

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Mark Anthony Massaro, Canaccord Genuity Limited, Research Division - Senior Analyst [22]

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It does. And just for clarification, so that contracted value will convert to revenue over 12 to 36 months?

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Michael Brophy, Natera, Inc. - CFO [23]

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Yes. So we've already signed some deal, that we talked about on prior calls. And yes, I mean, 12 to 36 months is roughly the waterfall.

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Mark Anthony Massaro, Canaccord Genuity Limited, Research Division - Senior Analyst [24]

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Okay. Great. And then certainly, 2019 marks a year of greater investment. Certainly, I appreciate the increase, especially on the oncology side, you have to build up a little bit on the kidney side, but I think you also talked about increasing your leadership position in NIPT. So I guess, if you could, could you give us a sense on how many people you'll be adding in the OB/GYN sales call point? And just help us with some of the numbers across the areas?

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Steve Chapman, Natera, Inc. - CEO [25]

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Yes. So I think when you look at the investments that we're making in 2019, I mean, as you said, it makes a lot of sense for us to be making investments in OpEx at this point. When you look at our trajectory in pharma, $40 million to $50 million in total contracted value, and then as a leading indicator for revenue and that puts us on a trajectory at the top of oncology diagnostic companies in this space. On transplant, we're at a major inflection point now where we've done all the work, we've done all the R&D. We have to commercialize the test, and we have to get Medicare coverage, and we're going to be in position to go out and compete very, very fiercely for market shares. So we feel like it makes a lot of sense to continue to invest there. And then in women's health, we have an opportunity to continue to grow business because our technology is differentiated. And as we said, our COGS are coming down rapidly, we have a path to get down to $200. And -- with average-risk coming in, but we have an opportunity to unlock like $60 million, roughly, from our existing accounts. So we're really sitting in a very good position right now, and it makes a lot of sense to be making investments to put ourselves in a leadership position. Our commercial team has been fairly stable over the past and there are select areas where we're making investments going forward, because we think it makes sense.

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Mark Anthony Massaro, Canaccord Genuity Limited, Research Division - Senior Analyst [26]

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Great. And then if I can, maybe a question for Matt. You're building bespoke assays. I believe you're the only company doing this in oncology. And so I'd be curious to hear your take on how you think the fact that you're building customized panels for a particular cancer patient, is resonating with some of your -- in your earlier conversations both with pharma partners and potentially, with other institutions, relative to some of the other larger panel opportunities, relative to other companies?

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Matthew Rabinowitz, Natera, Inc. - Co-Founder & Executive Chairman [27]

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So I'm glad people have questions for me, that's good. I'll take a crack at that and I'll hand it over to Solomon. So to just go through the fundamentals. When you build these customized panels for patients, there are 2 big advantages. The one big advantage is you can go down to these very low levels of cell-free DNA, pretty much single molecule level of detection with a limited amount of sequencing. So we're going down to levels of below 0.01% in catching these tumors and we're able to do that with incredible sensitivity and specificity. When we shot clinical data that shows that we catch the occurrence of lung, bladder, breast, colon cancer and several other cancers coming down the pipe with positive vector values in certain cohorts that are 100%, I mean, it will never stay 100%, [achieved] performance is phenomenal, it's largely because we've got that spoke approach where we can go down to roughly single molecule detection levels with unmatched sensitivity and specificity to our knowledge. Okay, so that's the one component that, with a limited amount of sequencing, you can go very low. But the other component is that you can catch a large number of a variance for a patient. If you use a standardized panel, even if you're looking at several hundred genes, the number of variance that you see on that one-size-fits-all panel can be very low. Even for the 300, 500 gene panels, you can see 0 to 5 variance for a particular patient and that makes an enormous difference because the frequency at which these variance appear in the plasma can range over 2 orders of magnitude, the ideal fractions. So the fact that we can track many variance means that we can accommodate the very different DNA fractions against those variants up here, and we can make sure that we can monitor the particular tumor based on all of the targets that are relevant for that tumor, which gives us a better sensitivity and specificity. If you just look with one variance, you can have a false positive because of PCR errors or other things. If you're looking at a multiplicity of variance, you can play all these informatics games and be much more robust. So those are the 2 main things. Now behind those 2 sort of core arguments, there's a ton of technology and molecular capability and thematics capability that goes into making this work. You've seen some of the publications come out, we're very pleased with the acceptances that we've had a bunch of top clinical journals in oncology, and you're going to see those in the [upcoming months], and I think that the pharma partners have resonated with us. They've tested our technology against these board panel approaches, the hybrid capture approaches go down to about 0.1% versus our levels of an order of magnitude below that, and they see that we can see things earlier with better sensitivity and specificity and lower cost than the other approaches. So that's the reason why we've got more than 30 pharmaceutical trials going on right now and that pipeline going beautifully. Okay. Solomon?

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Solomon Moshkevich, Natera, Inc. - General Manager of Oncology & Transplant [28]

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Matt, that was an excellent answer. So to add to that, I think the data is demonstrating also strength of the method that Matt described. So we've now tested approximately 3,000 plasma samples from around 700 patients across 18 different cancer types, and we published some of the bigger studies in the cancer that you've seen before in lung, colon, bladder and breast cancer, but we have tested now in many different cancer types, and what we're seeing is pretty consistent performance and also validation of our method because we're seeing that the first MRD-positive time point that we detect is very frequently, majority of the time is below 0.1% [very little] frequency. So what Matt described that the technology is designed to be able to confidently detect below that 0.1%, where larger panels start to suffer because they're just not looking for enough variance to confidently detect at that level. So detecting below 0.1% also means they're going to have a longer lead time of molecular relapse versus clinical relapse and that lead time makes a clinical difference. Because in theory, if you're going to treat somebody, you have a better chance of cure if they have lower disease burden. So I think between the scientific rationale that Matt described and that being demonstrated now in the clinical data that we have shown across many cancer types, you're starting to see in the market embracing the opportunity and the differentiation of this method.

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Operator [29]

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And our next question come from the line of Tycho Peterson with JPMorgan.

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Eleni Maria Apostolatos, JP Morgan Chase & Co, Research Division - Research Analyst [30]

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This is Eleni on for Tycho. Maybe just to start off, was just wondering, on a go-forward basis, how are you thinking about revenue per test? It looks like it has leveled out in the $400 price range over the last 4 quarters? And then what are the dynamics you expect once the ACOG bulletin for average-risk comes out?

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Michael Brophy, Natera, Inc. - CFO [31]

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As we said it in the prepared remarks, so over the medium term and longer term, Steve covered a number of drivers that we think can be very constructive to the average selling price. As to the guide in '19, we're taking a conservative approach on the assumptions, including like the fraction of time that we get paid, particularly in the first half of the year. And then we do have an assumption, the second half of the year, that we do start to get some benefit from the average risk NIPT, getting paid a higher fraction of the time, kind of gradually improving for the course of the second half of the year.

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Eleni Maria Apostolatos, JP Morgan Chase & Co, Research Division - Research Analyst [32]

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Great. That's helpful. And then in terms of the pacing of pharma contracted value, you mentioned around $40 million to $50 million expected by year-end. Was wondering how the timing of the CLIA assay launch affects that? Are we looking at a sort of back half floated year in terms of the contracted business?

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Steve Chapman, Natera, Inc. - CEO [33]

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Yes. So I think the CLIA launch is one of many factors that will help us improve our ability to sell faster with pharmaceutical companies. As we mentioned, we have these more key publications that have now been accepted in very high impact journals. We think that data coming out, along with a clear launch -- along with our announcement of the partnership with BGI that gives us a special access in China that is going to be very hard to compete with because for pharma trials, you need to have Chinese patients enrolled if you want to launch the drug in China. So there's many different factors. This sort of flywheel effect that we're now on, that are going to start to increase the pace at which we're able to sign partnerships with pharmaceutical companies. As we said, this trajectory of $40 million to $50 million now that we're on toward the end of 2019, is really in line with the top diagnostic companies in the oncology space, and that is a leading indicator of future revenue.

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Eleni Maria Apostolatos, JP Morgan Chase & Co, Research Division - Research Analyst [34]

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Great. and then on the kidney transplant test, while your analytical and clinical data looks good and revenue sensitivity is definitely encouraging, was wondering what else you believe is necessary to increase that penetration rate above the 5% level and what steps you are taking? You do expect Medicare reimbursement by the end of the year, but how do you think -- what effect do think that will have in increasing adoption?

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Steve Chapman, Natera, Inc. - CEO [35]

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Yes. So I think the market, so far, appears to be doing very well. I mean, we've been very encouraged with other cell-free DNA tests around the market and their ability to grow rapidly up to roughly this sort of 3% to 5% market share. From our standpoint, it's the same playbook when other test launch. I mean, there's a lot of medical education, peer-reviewed publications, there's detailing with medical science liaisons in the field, et cetera, and physicians begin to use the test as Medicare coverage and data become available. So we plan on commercializing in 2019 with both the direct sales efforts and in our partnership with One Lambda who we really think is a premier partner because they have relationships in all of the top transplant centers. Now there's a lot of other things that go beyond just the technical and clinical performance of our assay that we think will help us scale very quickly. There's a lot of user experience capabilities that we've built in a lot of operational efficiencies that we've built in running a very high scale and high throughput cell-free DNA laboratory. So we've now performed over 1.5 million cell-free DNA tests in our lab, and what you learn through that process is really important, and we've made a lot of significant improvements that we can now leverage as we move into the transplant space. The same on the user experience side, we're doing hundreds of thousands of tests per year with physicians that have very high expectations for how we work with them and how we work with their patients, and we're able to piggyback on a lot of the stuff that we've built in the women's health space and bring that immediately and directly to transplant physicians and a lot of the things like interfaces and so forth, we've done before, and we know how to execute.

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Operator [36]

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And our next question will come from the line of Alex Nowak with Craig-Hallum Capital.

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Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [37]

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Steve and Matt, congrats on the deal with BGI. When do you expect to see your Signatera test launched into the Chinese market and generating royalties there? And then just -- you mentioned it in the prepared remarks but just any update on QIAGEN and when they're going to launch your test on GeneReader?

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Steve Chapman, Natera, Inc. - CEO [38]

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Yes. So we think BGI could launch the Signatera assay in China in 2020. They're -- they have the ability to move very quickly and efficiently as they've done in many other cell-free DNA test. We don't need Chinese FDA approval to launch the test. There's many hospital systems that are exempt from that provision. When you look at the Chinese market itself, there's about 4.3 million patients that are diagnosed with cancer on an annual basis, and that's like 3x the U.S. So if you just compare the trajectory of other cell-free DNA test in the U.S. that are sort of $50 million to $75 million range, and you would imagine in China, BGI can generate $50 million to $75 million, we think we're in a position to make tens of millions of dollars in the future from ongoing royalties in the BGI partnership and at some point, recognize revenue on the upfront payments and milestones that we've gotten in the partnership. Shifting gears to QIAGEN. They're a very strong partner, and we're feeling very positive about the relationship with them. Things are going in line with our expectations and the expectations that we outlined on the call, roughly, last year, when we announced our partnership with them. And Matt, you want to add anything additional?

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Matthew Rabinowitz, Natera, Inc. - Co-Founder & Executive Chairman [39]

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Yes. Well, thanks, Steve. I don't know if I'm going to speak again on this call. So I'll just take this opportunity to say that Steve has done an amazing job leading this company and the management team has progressed around Steve's leadership really beautifully so we're feeling great about that decision to go with an internal ace rather than to bring somebody from the outside. So congrats, and thanks, Steve. On the BGI and QIAGEN deals, we've spoken for a long time about this vision to piggyback on the emergence of sequencing all over the world and to offer our proprietary technology in a way that is really accessible to patients all over the world. And so the deal with BGI was just part of that vision. BGI, as Steve said, has a lot of resources in China, they can move very quickly, I think they're going to be a major competitor in the sequencing space. So it was crucial for our vision to be partnered with them and I think this deal has taken a long time to come together, but it's a great deal for both companies. On QIAGEN, QIAGEN's got a lot of inroad in the lab business worldwide. They've got their DNA extraction and their oncology pipeline and a whole series of technologies that synergize beautifully with women's health and they've got this packaging of sample to in flights approach where they're really streamlined for lab. So I think QIAGEN's going to have a very compelling value proposition as well. And the time lines for QIAGEN are really up to them. We're supporting them in every way that we can, and we are expected to, and we're hoping that they're going to come out with a very compelling proposition and they're driving the time lines. So you're going to have to ask them what their launch dates will be, but all of that is looking very good. And as we said in the prepared remarks, this doesn't -- the announcement with BGI doesn't change our plans with Illumina and QIAGEN, we want to be supporting all of these different sequencing providers. And in terms of what we do share in the United States, we think that the additional sequencing competition is going to be good for the market and certainly, going to be very good for patients and health care, in general, and we will offer those technologies that are most accurate and cost-effective in our lab and that have the best services associated with it. So all of that is looking very good.

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Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [40]

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Okay, understood. And then I believe there's a new CPT code for carrier screening here in 2019. So I know Panorama had some challenges years ago when switching over to a new code. So do you foresee any challenges first couple of months here of the year? And is that baked into the guidance regarding that?

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Steve Chapman, Natera, Inc. - CEO [41]

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Yes. So I think others have talked about this and generally, very favorably, particularly around the pricing upside, I think Medicare priced the cut in this sort of high-$2,000 range, if I recall directly. And we think that's very positive, I think, in the long term. I think the medium term question is really what happens with coverage, and we're monitoring that. It's certainly a portion of our business, although we do offer a very broad range of offerings in carrier screening, and we have a mix of how physicians tend to order with many choosing smaller panels. With respect to how this makes impact and so forth, I think we've been fairly conservative with the guidance for this and other factors that Mike outlined on the call.

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Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [42]

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Okay. Got it. And then just last question for me. For Mike, just to understand needing to invest in the business here, and you also talked about some of the potential upsides around COGS and average risk pricing. But just based on your current trajectory, what you currently see out there, when do you anticipate achieving cash flow breakeven for the business?

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Michael Brophy, Natera, Inc. - CFO [43]

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Yes. So we went into some detail on the prepared remarks around cash flow break even for the women's health business, and that's where we've oriented the goal. So Steve laid out an [illustrative] example of getting there with -- at unit base volume of 900,000 units, and if that base volume, you'd be covering your women's health operating expenses with about a $200 spread. Now obviously, there's a number of variables there. There's the gross margin spread, which is affected by pricing and is affected by COGS, and there's also the volume base. So it's possible, as we alluded to in the prepared remarks, that we could get to that breakeven point at a lower volume rate base if we get -- if the reimbursement comes more quickly. So -- but I think that's sort of a middle case for you to contemplate, Alex, is just kind of steady volume growth at that level. With that gross margin spread, would get you to cash flow breakeven in the women's health business.

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Operator [44]

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Thank you. Ladies and gentlemen, this concludes our question-and-answer session for today. We thank you for your participation in today's conference, and you may now disconnect. Everybody, have a wonderful day.