Welcome to Atira's 2018 Second Quarter Financial Results Conference Call. At this time, all participants are in a listen only mode. Following the management's prepared remarks, we will hold a question and answer session. As a reminder, this conference call is being recorded today, August 8, 2018. I would now like to turn the conference over to Michael Grossi, Chief Financial Officer.
Please go ahead.
Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our Q2 2018. Also on the line is Matthew Rabinowitz, our CEO and Steve Chapman, our Chief Operating Officer. Paul Billings, our Chief Medical Officer and Sohlen Moskovich, SVP of Product and Strategy are here today for questions.
Today's conference call is being broadcast live via webcast. We will be referring to a slide presentation that has been posted to investors. Natera.com. A replay of the call will also be available at investors. Natera.com.
During the course of this conference call, we will make forward looking statements regarding future events and our anticipated future performance, such as our operational and financial guidance for the full year 2018, our assumptions for that guidance, market size, partnerships, clinical studies, opportunities and strategies and expectations for various current and future products, including product capabilities, expected release dates and related effects on our financial and operating results. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. Please refer to the documents we file from time to time with the SEC, including our most recent Form 10 Q and the Form 8 ks with today's press release. Those documents identify important risks and other factors that may cause our actual results to differ from those contained in the forward looking statements. Forward looking statements made during the call are being made as of today.
If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. Natera disclaims any obligation to update or revise any forward looking statements. We will provide guidance on today's call, but will not provide any further guidance or updates on our performance during the quarter unless we do so in a public forum. We will quote a number of numeric or growth changes as we discuss our financial performance. And unless otherwise noted, each such reference represents a year on year comparison.
And now I'd like to turn the call over to Matt.
Thanks, Mike. Good afternoon, everyone, and thank you for joining us. I will cover our recent highlights and progress in the business since we spoke in March, and Mike will provide additional detail on our financial progress. We've made enormous progress since our Q1 call. Since we've had 2 additional investor calls since then, we'll limit repetitive updates.
As Mike mentioned, we will be referring to slides that were just posted at investors. Natera.com. As some of our recent highlights on the next slide. On volumes, we processed over 162,000 tests in the quarter, which represents 29% growth versus the same quarter last year and consistent with volumes in Q1, despite that Q1 was an all time record for us by a wide margin and benefited from seasonality as we have discussed previously. Our first half volume was up 32%, more than twice the growth rate we posted in the first half last year.
And as Steve will describe in a few moments, we believe we are in a great position to drive volume growth for the rest of the year and strong year on year growth at roughly 30%. For Panorama, in particular, we processed 113,000 tests in Q2, which represents growth of 27% compared to Q2 last year. We also saw continued momentum in our Horizon carrier screening volumes, which grew 36% when compared to the same period of the prior year. We generated total revenues of $63,100,000 in the quarter, up 21% versus Q2 last year. We booked $62,300,000 in Q1, which included $5,500,000 in revenue recognition from the QIAGEN deal.
Stripping that out of Q1, revenues grew 11% sequentially on stronger underlying pricing and growth in tests reported out to patients. We said in May, the drivers for revenue growth this year would be volume growth and stable pricing, and so we are pleased to see both trends play out so far as we expected. I am excited to have recently announced Natera's release of a new biomarker for pregnancy management. This biomarker uses our patented technology for precise measurement of fetal DNA fraction in maternal plasma. When the fetal fraction is lower than expected as a function of maternal weight and distemal age, this can indicate certain aneuploidies and other abnormalities leading to adverse outcomes with a positive predictive value over all the conditions of 21.8%.
These high risk pregnancies cannot currently be detected by other screening tests, which lack our ability to precisely measure fetal fraction. This represents early fruits of Natera's program to leverage our leadership position and clinical database of over 1,000,000 commercial samples to follow-up with patients and conduct biomarker research. This biomarker will be further explored for its ability to predict other outcomes such as preterm birth based on extensive clinical data we are collecting as part of the SMART trial. Steve will discuss this in more detail later in the call. With continued volume growth, improving Medicaid reimbursement, recent guideline changes at ACOG, the SMART trial recruitment progressing as planned, ongoing COGS reductions and ongoing innovation to define the field of prenatal testing.
We feel that we are delivering on the strategy that we laid out in the prenatal health market. Steve and Mike will provide more detail later in the call. As we described in our investor call in June, we announced excellent data in kidney transplant rejection generated in collaboration with UCSF. This data was presented at the Transplantation Society Annual Meeting in Madrid, and Steve will spend a bit more time later in the call laying out the path to reimbursement in this area. Of course, we were pleased to complete a follow on equity offering in July, in which we raised net proceeds of $97,300,000 after the execution of the Green Shoe.
We will cover some of the information presented in the course of that deal in a summarized format today. Finally, the uptake of Signatera RUO amongst pharma companies has continued to be strong. We have now signed 20 studies with leading pharmaceutical companies, including most of the top 10 pharma and the leading immuno oncology companies. I should mention that one of the studies already signed and another study currently being tapered by the legal teams are prospective studies that measure clinical outcomes. 1 of these studies involves therapy response monitoring, the other involves the use of Signatera in the adjuvant setting to enhance care and improve outcomes with more informed drug application.
We will be able to provide a few details later in the call and more information over time as these partnerships progress. To deepen our expertise in this field, we recently appointed Roy Baines to our Board of Directors. Roy is the Chief Medical Officer at Merck and SVP and Head of Global Clinical Development at Merck Research Laboratories. Prior to Merck, he's had a distinguished career leading the oncology programs at top pharmaceutical companies such as Gilead and Amgen. We look forward to working closely with Roy as we further develop Signatera to enhance and accelerate trials for the pharmaceutical industry and for patients.
As we also described in our investor call in June, we announced the completion of the breast cancer study with the University of Leicester and Imperial College London. While we plan to disclose details of this data later in the year, the data was very exciting and showed performance roughly consistent with what we have seen in other cancers such as bladder, colon and lung cancer. Now I'd like to hand the call to Steve to summarize our commercial progress in the quarter.
Thanks, Matt. The next slide shows our recent volume progression for Panorama and Horizon. You can see the last two quarters are a step function higher than last year's unit volumes, and Q2 volumes matched unusually strong Q1 volumes, as Matt described. We're pleased with this result given the seasonality trend favoring Q1 and the unprecedented growth rate we achieved in Q1 setting a new high bar. We worked through our pipelines in Q1 at a faster pace than normal contributing to our record growth.
During Q2, we put energy toward rebuilding these pipelines, which bodes well for the rest of the year. In our Panorama business, the mix of volumes has remained stable at roughly 60% average risk units and 40% high risk units, and our attachment to carrier screening has continued to grow. The next slide shows volume growth in the first half of the year. Despite the fact that the business has obviously grown substantially larger in terms of absolute volumes, you can see on the left chart our volume growth rate in the first half is more than twice what it was this time last year. And Q2 is one of the strongest year on year volume growth rates we posted in recent years.
The year on year growth rate for a particular quarter is a good way to look at the growth trend because it more accurately captures seasonality trends between quarters. Consistent with volume trends we've observed for the past several years, Q2 tends to be a lighter volume quarter for our current accounts with volume recovering over the course of the year. In Q2, we offset the seasonality trend with new client volume remaining at our high watermark while laying a solid groundwork for the rest of the year. So with those data points in mind, the next slide shows volumes on an annual basis and our expectations for the rest of the year. Based on the trends we are seeing so far in Q3, we feel we are very well positioned to deliver a record year this year in terms of total volumes at roughly 30% year on year growth for the full year, which is consistent with our goals set in January.
Looking ahead to the future of our prenatal business, we've seen some encouraging news come out of ACOG and academia recently that we think bodes well for broader adoption of NIPT in the average risk setting. As we have described previously, ACOG recently withdrew their previous guideline covering the use of cell free DNA screening for fetal antibodies. This guideline included some ambivalent language regarding NIPT in the average risk setting and many of the coverage policies from the remaining payers that do not cover NIPT for all pregnancies cited this language in their coverage policies. That opinion is now no longer in use. And separately, ACOG just reaffirmed their practice bulletin number 163, which we believe is substantially more favorable toward average risk adoption.
We think the withdrawal of the previous guideline and the reaffirmation of the practice bulletin clears the way for a new guideline to be issued, and as we have described previously, the evidence supports a stronger guideline. Last week, a review article was published in the New England Journal of Medicine written by 2 key opinion leaders in prenatal care. The article summarized the key data and clinical use of sequencing based cell free DNA testing during pregnancy, and they made a lot of the same points we often make on investor calls. Specifically, the authors describe how across 3 large scale studies, the false positive rates associated with cell free DNA screening were less than 1 tenth as high as that with multiple marker screening in the general population and the positive predictive values were significantly higher. The authors also described the clinical benefits of assessing the fetal fraction in the sample and noted that not all labs routinely report on fetal fraction.
Of course, as we have described previously, our assessment of fetal fraction in our workflow is a key quality differentiator between Panorama and other NIPTs. We think articles like these demonstrate the benefits of NIPT as an option for all pregnancies. Just as the importance of reporting fetal fractions was highlighted in the New England Journal of Medicine, we were pleased to publish the clinical validation study for a new biomarker based on fetal fractions that Matt described. The clinical validation study published in Ultrasound and Obstetrics and Gynecology compares outcomes from 11.48 pregnancies to results using the new algorithm. Results showed that the algorithm successfully identified high risk cases, out of which roughly 22% had a chromosome abnormality or adverse pregnancy outcome, representing the vast majority of all abnormalities in the cohort.
Cases not flagged by the fetal fraction based risk algorithm had no evidence of increased risk. Many of the abnormalities that we identified in the study cannot be predicted by other NIPTs, and we believe this gives us another competitive advantage. We plan to commercially launch this offering this quarter. As Matt described, we designed a SMART trial so we can run this algorithm with the samples we have collected to identify additional correlations between fetal fraction and key adverse outcomes such as preterm birth and preeclampsia. We think this new algorithm can help extend our leadership position in NIPT team, and we will continue to leverage the trove of data we have collected over time to create additional offerings.
This launch represents the first of many examples in Natera leveraging its leadership position and extensive database to build a competitive moat around our product. Now I'd like to transition to the transplant data we announced in June. I'd like to spend some time describing our commercial plans in more detail. 1st, a reminder on the market. In contrast with our women's health franchise, kidney transplant patients are very concentrated in a relatively small number of centers.
In the United States, there are roughly 2 65 centers that offer kidney transplants and approximately 80% of patients are treated in just 100 centers. We believe we could target this market ourselves with a very modest sales team with the experience in these centers and leverage our user We can leverage the same playbook we use to achieve market leadership in NIPT to enter the transplant market. We have a few precedents of not being first to market, but then rapidly taking market share based on superior clinical performance and commercial execution. In this instance, we are at an advantage because we've already done the work on lowering COGS and operating a cell free DNA laboratory at scale. A quick refresh of the data presented at the Transplantation Society Annual Meeting in Madrid in July.
We evaluated 292 plasma samples taken from 187 transplant recipients and the status of their rejection level was confirmed by analysis of biopsy tissue. The results of the study suggest that our assay could substantially improve the standard of care. As we expected, the level of donor derived DNA found in the bloodstream was significantly higher in patients suffering an acute transplant rejection compared to a non acute response. We successfully called acute rejection with 92 percent sensitivity, 73 percent specificity and an area under the curve of 0.90. As we described in June, we believe physicians will prefer our assay over other available cell free DNA tests based on our test performance.
The next slide shows a summary road map to obtaining reimbursement in transplant. In the near term, we plan to complete our CLIA validation, publish the analytical and clinical validation, establish a Z code and formally submit our dossier for Medicare local coverage decision. You can see we've got the 1st wave of activities already underway and our target is to complete our submission for an LCD so that we can get the coverage decision published in 2019. The next slide gives more detail on our reimbursement strategy. We believe we could use a miscellaneous code and obtain an accompanying Z code.
We're confident this can be done and there is little risk to this strategy as the steps to achieve this are generally administrative. Under this path, pricing would be established directly by MolDX. We think this is a very favorable outcome for us because it's unlikely we'd be treated differently by MolDX than a similar test that's already priced at $2,800 Alternatively, we can obtain a PLA code through a separate quarterly application process as we successfully completed in the past with our NIPT Zygosity code just granted in Q2. In this case, pricing would either be established on the Medicare clinical lab fee schedule or depending on timing directly by MolDX. For example, if we missed a deadline for the CMS clinical lab fee schedule pricing meeting where the code would be priced through a cross walking process, we would be priced directly by MolDX.
In summary, there are multiple paths to achieving stable pricing and coding within 2019. Now for a brief update on our progress in oncology with Signatera. We've shown these Kaplan Meier curves demonstrating our capability across cancer types. And as we mentioned in June, we've generated similar data in breast cancer. On the next slide is our current effort in breast cancer.
ISPY-two is measuring molecular response to neoadjuvant treatment being run at UCSF. The study with University of Leicester and Imperial College London is monitoring cancer relapse after completion of surgery and adjuvant chemotherapy. The JUULS 4a study combines aspects of both other studies evaluating Signatera for response to neoadjuvant treatment as well as for detection of relapse. You see on the right side of the slide, the study with Leister and Imperial College of London includes patients with all three of the key breast cancer subtypes, including ER positive, HER2 positive and triple negative. This is a study that is now complete and the data is currently under embargo because we plan to submit the results for presentation at a leading breast cancer conference later this year.
As Matt mentioned at the top of the call, we've been very pleased with uptake of Signatera in the RUO setting for pharma companies. We now have 20 studies signed, including trials in lung cancer, colorectal, breast, prostate, non Hodgkin's lymphoma, GI tumors, multiple myeloma as well as pan cancer pharma studies. These studies are starting to translate into larger collaborations as Matt described. One area of growing interest for pharma is investing in more clinical trials using advanced therapies in the adjuvant setting. Historically, pharma has focused its investment in the metastatic setting to prove out the utility of new therapeutics, but now they are starting to move upstream into the earlier stage disease where there are many more patients.
We believe Signatera will be a useful tool to stratify patients with worse prognosis for inclusion in adjuvant studies to accelerate trials and decrease costs. In the future, Signatera may be used to identify which patients would benefit from these adjuvant treatments. We are on track to launch our CLIA test early next year. With that, let me hand it over to Mike to review our financial performance. Mike?
Thanks, Steve. As a reminder, in 2018, we have transitioned to reporting revenue on an accrual basis as required by the accounting standard 606. In the past, we booked cash received in a given quarter as revenue. Now we book revenue on just the tests whose results were reported out to customers in the period based on our estimated total collections we expect to get from each test. As we did in Q1, we will disclose tests reported in a given period as well as tests processed and tests sessioned in our CLIA lab.
Test processed is a good metric to measure volume growth since it includes both test session in our lab and test performed via the Constellation platform. And test session remains a good metric for assessing cost of goods sold per unit. As we described on the Q1 call, our goal is to take a conservative approach in our collections estimates, particularly since we've just recently transitioned to this new accounting standard. In the last few quarters, we have predicted stable pricing for the year because we now have established in network pricing for most of our large payers and are billing our tests on disease specific CPT codes. As we have talked about in the past, in 2016 2017, we chose to trade pricing for long term stability and we are now benefiting from that stability in 2018.
You see on the chart on the left, total revenues divided by tests reported in the period less the tests reported via the Constellation platform. So just the tests reported from our lab increased from Q1 to Q2. Note that the Q1 number excludes a onetime revenue recognition of $5,500,000 from QIAGEN to normalize the comparison. We benefited from a number of factors in the quarter, including broader reimbursement among Medicaid plans for our carrier screening tests. We also have a number of current and future pricing tailwinds that we've described previously.
These include increased payer coverage of average risk in IPT and microdeletions that we have discussed in the past as well as broader Medicaid coverage. I will caution you that these pricing metrics can bounce around from quarter to quarter and leave you with the message that stable pricing combined with volume growth is the key to the revenue growth that we forecasted in our guidance this year. One additional comment on 2nd quarter revenue. While test processed and test accession metrics in Q2 are roughly flat to Q1, as Matt and Steve described, tests reported in the period increased from roughly 147,000 tests in Q1 to roughly 155,000 units in Q2. As we described in the Q1 call, that is just a timing difference in which we reported out tests to patients at the beginning of Q2 that were assessing at the very end of Q1.
The next slide shows our COGS progression. We've said previously that we launched our new carrier screening workflow in April. While we immediately realized benefits on the launch, we are phasing in the new workflow over the course of Q2 and Q3. We expect to realize substantial COGS savings going forward as we're nearing full scale on the new workflow. COGS per unit, which is simply cost of product revenues divided by tests accessioned in our lab, were slightly higher than expectations, which was partially driven by product mix, the phasing of the carrier screening launch and staffing.
We described previously that volume growth earlier in the year temporarily outpaced our hiring plans for the lab. We caught up on some of that hiring in the last few months. And while we are being conservative in terms of staffing as we optimize this new launch, we do expect to drive COGS lower in the second half of the year. Using Panorama as an example, it's worth noting that our COGS for NIPT were for the first time below $200 in Q2, in line with our expectations for this time when. And that includes off shipping, labor, accessioning, collection costs, genetic counseling costs and reagents and sequencing costs.
Beyond that, as described previously, we have generated concept data on the next substantial reduction in COGS based on technology developments in NIPT that we think will allow us to drive blended COGS much lower again over the next 18 months. We've made some significant investments in R and D since the beginning of 2015. But as you can see on the right hand side of the page, the returns have been very strong even if you only count the COGS reductions we've achieved and leave aside key product improvements that have driven revenues. Now to summarize our results in the quarter. The results for the quarter and the full year crossed the wire this afternoon.
For brevity on the call today, I'm going to focus on the key points of the Q2 results. Since we adopted the full retrospective approach to ASC 606 that I described. Results from the current quarter as well as Q2 2017 are reported under ASC 606 standards, so it's an apples to apples comparison. Our 2nd quarter total revenues were $63,100,000 compared to $52,300,000 for the Q2 of 2017. Gross margins for the Q2 of 2018 was 35% compared to a 34% gross margin in the same period of prior year.
Panorama revenues for the quarter were $35,700,000 compared to $31,500,000 in Q2 last year, an increase of 13%, primarily driven by volume growth in that business over the past year. Horizon revenues for the quarter were $21,400,000 compared to $16,500,000 in the Q2 of 2017, an increase of 30%, again driven primarily by volume growth. Total operating expenses for the Q2 increased by about $3,200,000 compared to the Q2 of last year. That was driven by higher stock based compensation expenses and some investments we've made related to our insurance collection efforts and the accounting transition to ASC 606. Pro form a for the $97,000,000,000 in net proceeds from the equity raise in early July, at the close of the quarter, the company held $186,000,000 in cash, cash equivalents, short term investments and restricted cash.
As of June 30, 2018, we held a net carrying amount of $73,200,000 under our 7 year term $100,000,000 debt facility with OrbiMed Advisors and had drawn down $50,100,000 including accrued interest under the $50,000,000 line of credit in place with UBS. Turning to our future outlook. No changes to our guide we started with in March. We expect 2018 revenues of $250,000,000 to $275,000,000 cost of product revenues to be between 60% 65% of revenues SG and A costs to be approximately $140,000,000 to $150,000,000 and R and D costs to be approximately $50,000,000 to $55,000,000 and our cash burn to be between $40,000,000 $60,000,000 The key assumptions in the guidance remain the same: revenues driven by volume growth with stable underlying pricing, contributions from new products, margins driven by COGS improvements and roughly stable operating expenses as I've described previously. Now I would like to open the line for questions.
Operator?
You. And our first question comes from the line of Bill Quirk from Piper Jaffray. Your line is now open.
Great. Thanks and good afternoon everybody.
Hi Bill.
So I guess first question is thank you for some of the additional details around the transplant business and how you're looking at commercializing that. I guess two follow-up questions, Matt or Steve. First is, with respect to the published data, is 4Q a good timetable to be thinking about that? And then, just a follow-up for Steve. Steve, looking at kind of multiple options here in terms of pursuing reimbursement, should we be thinking, if you're successful with, I guess, either approach we're looking at maybe mid to late 2019?
I'm just trying to get a handle on when you might see CMS coverage for that. Thanks.
Great, Paul. So I'll take the publication question and then I'll hand over to Steve. The publication question is just a question of how long it takes the paper to be reviewed. So we are hopeful that you could get something out this year, but it's just a question of how long it takes the review process and the publication process that's not in our control. I can say that the paper looks great.
So from our perspective, it should be a
pretty fast process. With that said, Steve? Yes. Thanks, Matt. So we outlined 2 different paths for establishing pricing.
I think the first one that we outlined is very straightforward. So we'll submit an application for an accompanying Z code that will go along with our local coverage decision. That's really an administrative process. And then a miscellaneous code is something that is available to us immediately on launch. So I think that process is very streamlined.
The pricing would be discussed with the MolDX program sometime in mid-twenty 19. And then they would grant the pricing directly to us. If we go through the other pathway, we we could submit our PLA application within a similar timeframe and either go through cross walking or negotiate directly with MolDX. The first pathway is very straightforward and that's probably the one we'll be going down.
Okay, got it. And then a follow on question, I guess 2 part. First is the commercial strategy for the fetal fraction algorithm, will this be an add on to the existing NIPT with the microdeletions or will this be a separate test from a requisition standpoint? I'm just trying to figure out if you're going to be filing additional CPT codes for that to try to capture some additional revenue or if this is more of a market share based strategy where it's essentially kind of a free add on? And then sorry, Steve, one more question for you, but just thinking about transplant reimbursement, can you help us think if there's any single center studies that have been used to garner a Z code and coverage through the MolDX program?
Thank you.
Okay. So I'll take the first part of that and then I'll hand over to Steve. And also Paul might have some comments on the transplant side. So in terms of the FFBR marker, this is not going to be separately billed. This is going to be something which really just enhances the value of our care.
And this is it's a beautiful piece of science where we've been able to gather this information from many patients. We have the unique ability to make the fetal fraction measurement very precisely. And following up with these patients, we were able to see a really great signal there with 21.8 percent positive predictive value. So it's not going to be separately built, but it is going to substantially improve the value of our care. And this is something which is addressed for many years, the importance of fetal fraction and what one can learn about these cases that have an extremely low fetal fraction.
The recent New England Journal of Medicine article, which was very supportive on NIPT, again, flagged this as a very important issue, being able to measure fetal fraction. And we've got unique technology here. So we are going to offer it as a sort of enhanced component of our reporting, but it is not something that we're going to be bidding for separately, certainly not out of the gate. Okay. Then Paul, Steve, who wants to take the Yes.
I'll add add on to that. So for the second part of your question, Bill, I mean, we've had our clinical validation study and data package reviewed by leading experts that routinely walk companies and marshal them through the LCD process. And the feedback that we've gotten is very strong. So they feel that our study is high quality and is superior to that of others that have gone through the process. So the feedback we've gotten is very positive, very strong.
We're very aware of what others have had in hand as they've gone through the process and feedback for us is we're in a good position. And I would just
add, Bill, that our test has millions of fetal fraction determinations as its predicate. And so the fact that we can with relative ease show that it's also sensitive to donor cell free DNA in transplant setting draws on our previous experience.
Got it. Thanks, everybody.
Thanks, Bill.
Thank you. And your next question comes from the line of Steve Bouchak from Morgan Stanley. Your line is now open.
Hi, good afternoon and thanks for the time here.
Okay, Steve.
First question relates to the references in the prepared remarks. Matt, you introduced it and Steve, you circle back in some detail about ACOG. I think the way you guys laid it out makes sense. But there's always a human element and as much as we think that the guidelines and the data kind of speak for themselves. So it would be really helpful to hear the extent to which you've been able to get any anecdotal feedback from the folks you deal with in the payer community subsequent to some of these changes to the posted guidelines?
Yes. Steve, this is Steve. I'll take that. And then Matt, if you want to make comments. Well, look, the good news is, which we didn't include in the prepared remarks, is we've just seen an update this month from Blue Cross Blue Shield of Tennessee that is now post the ACOG change updated their guidance to include average risk in And that's one of the largest remaining Blues plans that was available to us.
They have about 2,500,000 covered lives. So with that said, we are engaged directly with United, with Aetna. It's early in the process. We have a lot of different strategic irons in the fire. So we can't comment specifically on those discussions that are ongoing.
But there's a lot of evidence now that is pointing in the right direction. We think the new New England Journal of Medicine publication is strong. We think the brand new confirmation practice bulletin 163, which excuse me, the reaffirmation, which just occurred is a very strong signal. And then, of course, we're continuing to hear that updated guidelines will be coming later this year. So the direct evidence of Blue Cross of Tennessee is a positive and the other anecdotal evidence is stacking up.
That's exactly what we needed. Thanks, Steve. And then just for I'm sorry, I'm not sure who this question is best for. But I wonder if you could give us a sense as we think about the build for revenues in the back half of the year about your updated thinking on some of the newer offerings. Signatera remains a big point of focus here on the calls.
But we also have cord blood out there. We also have potential for maybe a little bit of a tail here on QIAGEN and the payments coming from QIAGEN. Can you give us a sense for what some of the new initiatives are contributing for the back half?
Thanks, Steve. It's Mike. So yes, I mean, I think the new initiatives are more or less progressing in line with our guide and hence keeping the guide consistent with where we were previously. On QIAGEN, the revenue recognition on QIAGEN, the primary piece of revenue recognition was right upfront. And then the bulk of the recognition will come as we work off prepaid royalties.
And between now and the commercial launch, we're going to be recognizing like small amounts of revenue as we progress with them towards the launch. But that's not I don't expect that to be hugely material in a quarter, at least not right now. So that's kind of where it stands like QIAGEN. I would not expect that to be a huge revenue tailwind in the back half of the year. And as for the other products, it's kind of steady as she goes.
I mean, I think there is we're just going to we're continuing to progress and consistent with our comments at the beginning of the
year. Thanks
for all the help there. Yes.
Thank you. And our next question comes from the line of Catherine Schulte from Baird. Your line is now open.
Hey guys, thanks for the question. First off on Signatera, with the CLIA launch on track for early 2019, can you just walk us through what kind of commercial investments you think you'll need to make to support that launch? And any additional details on initial indications?
You want to take that, Steve?
Yes, sure.
I'll take that. So as we described previously, from a commercial strategy standpoint, there's a couple of different patterns we're looking at to bring the test market. So we have an existing pharma team. We're starting to see a lot of momentum there. We just announced our 20th deal.
And as we start to make progress there, these things tend to build on each other as the same companies re up for additional or more extensive trials. So that same team will be speaking with major key opinion leaders in top academic centers, but we also plan on building a small sales footprint at the launch. Now as we've described previously, to reach the larger community oncology market, we plan on working with distributors and there's a lot of different conversations going on with top companies in the space. But in the we're prepared to do a direct model and do that effectively if that's the path that we decide to go down.
Then I'll just add that we haven't announced the breast cancer data, but the breast cancer data is very exciting. And a large proportion of that market for recurrence monitoring for breast cancer is with the existing OBGYNs and MFMs. And that goes right through our existing core points, which is why one of the reasons why Entarsa was so exciting to us. We've got a lot of genetic expertise in the company. A lot of the cancer opportunity for Signatera goes to the specialty diagnostics labs.
And we've got both through the pharma sales force and our specialty lab sales force, we've got a lot of that expertise. And so those people are already pretty much in the company and we've brought in a lot of the pharma expertise recently. But we've also got this much broader footprint when you look at these women's health related cancers. And one more thing that I'll just mention is, if you look at the other cancers the other cancer companies that are in the space, the ones that have been reasonably successful, a lot of the revenue in the early days comes from the pharmaceutical opportunity. Now the way we see this market playing out is we think in the 1st couple of years, there's going to be a lot of opportunity in pharma, but the clear opportunity, as we've described, is about $15,000,000,000 market.
And so over time, we expect that to be dominant. But we can address the pharma opportunity, which is the lion's share of the opportunity in the early years, very effectively with our existing team.
All right. Great. And then now that we're over a year into the launch of Evercore and Vistar, I would be curious to get some qualitative comments on how those products have ramped relative to your expectations and any surprises you've seen from a market demand perspective?
Well, I'll make a comment and then I'll hand it over to Steve and Mike. So I think it's been roughly in line with expectations. The comment that we made before, which we're not changing right now, is that from new products, we expect about $15,000,000 in revenue this year. I would say that the thesis that we made on Evercore has panned out nicely. That is the thesis that we don't need to do broad blanket marketing that we have existing interaction with the patients and existing core points and just leveraging that interaction effectively leads to a pretty good uptake.
And we haven't released the numbers. I'm not going to release them now, but I can say that, that thesis has played out well. As far as the start is concerned, again, we're not going to release the numbers now, but this is a new technology and the validation of this technology, which is a pretty fundamental change in carriers sequencing gene to look at de novo variants that are not inherited from the parents, that's something that requires time and education. And what we've tried to do is be very thoughtful there in terms of validating that the technology really works. And although we haven't highlighted that on this call, I'll just say that the positive predictive value is very high.
When we see problems, those problems are almost always validated when you do an invasive test on the fetus. And so I can say that, that technology absolutely works and the incidence rates absolutely justify that kind of testing. That said, we are just educating the markets and not trying to push too hard and get ahead of the market there. But I do think that that's going to play a substantial role over the next several years as the market gets educated. So I would say both of them are roughly going according to plan.
Anything to add, John?
Yes. I'll just add on to that. I mean, I'll say one of the one of our reasons for launching the Vistar product was to improve our presence in maternal fetal medicine centers, which we think are important key opinion leaders and drive some regional thought leadership. So we're now actually seeing that play out. We're at our highest penetration of the terminal fetal medicine centers that we've seen in the history since the launch.
And I think part of that is due to Vistara and our new Twins capability, as we talked about in the past. And then also with our rapid growth, our percentage of high and low risk businesses remain relatively stable. And I think some of that is attributed as well to our taking market share in the maternal fetal medicine space. So we're pleased with that. On cord blood, we're coming off of some record volume months, and we're seeing pretty stable growth there.
So as Matt indicated, we're roughly in line with what our expectations were.
Mike's sitting smiling, so I think he's good.
And our next question comes from the line of Doug Schenkel from Cowen. Your line is now open.
Hey, good afternoon, guys. Just a couple on non invasive prenatal testing and the developments with ACOG. How quickly do you think new guidelines could be issued?
Well, I'll take that. I mean, as somebody referred to earlier, it was well put, there's a human element that's just not in our control. All the indications are positive. I think that the guidelines could come out relatively soon this year. I do think the guidelines will come out this year.
But again, we're not in control of the process. So all indications are positive, and that's as much as we can say. We're not holding the strings there.
Yes. No, understood. Just wondering if you had a view on timing, but that's an understandable and helpful answer. If guidelines were to become more favorable and less ambiguous in supporting broader use of average risk NIPT, How quickly do you think your volume and revenue growth would be affected?
Well, I'll make a comment and then hand over to Steve. It seems like this is the modus operandi for this call. So look, I think that the guidelines seem very likely to be more positive, Doug. When I'm saying we don't hold the strings here, I don't want to overstate, but we have got very good feedback from people who are reliable people and we're not the only ones who receive this feedback. There are lots of companies who receive this feedback.
So indications are very strong. So yes, we do think it's going to be a new guideline. We do think it's going to be positive, and we do
think it's going to come
out reasonably soon. This is not just hopefulness. This is based on some pretty good indications. As far as the volumes, yes, I mean, I think it's going to make a substantial difference. Steve, do you want to talk to that?
Yes, I'll talk to that. I mean, yes, first on the bigger health plans, I mean, we've seen them make off cycle coverage decisions as they react to new guidelines. So I suspect the same thing would happen in this case. I mean, this is a big enough test that's visible that it's highly likely there would be an off cycle decision. As we said before, there's a lot of pent up demand from physicians that want to offer average risk, but are really waiting for coverage because they have to establish a protocol for their practice or for their hospital system.
And it's difficult to do that on a payer by payer basis. So some groups are either waiting for ACOG or they're waiting for more established pricing across the board from nearly 100% of payers. From the standpoint of volumes, we take a look in the past at the growth opportunity if we were to just see the normalized mix of average risk and high risk within our existing customer base. So if tomorrow the switch was flipped and accounts that aren't really ordering average risk started ordering average risk, what would that growth look like? And there's a pretty substantial uptick there that we can achieve from our existing customers without having to go out and close new business, just having them simply change their ordering patterns.
And that's favorable for us because we're already in the account. They're already in service on how to use our tests. They're already familiar with all of our different rec forms and protocols and logistics capabilities and they're comfortable with us. So that's I think a significant positive as things evolve where we don't have a lot of legwork that has to happen to get to the next level.
Great. Thank you for that. And if I could pivot back over to transplant, understandably, there's been a lot of focus on the reimbursement pathway and also the timelines to the next publication of data on this call. Some of our checks with transplant doctors, they have kind of prompted us to focus also on how you're going to go about driving patient buy in. So
with that
in mind, I'm just wondering if you have any updated thoughts on the need over time to move forward with the registry study. Your competitor in this area has I think it's a 35 site registry program planned. Our sense from talking to a lot of the centers, which we've done over the last few weeks is reimbursement in one study may not be enough to actually get broad buy in from this community, especially if there's a first mover ahead of you that's running registry studies. I'm just wondering if you share that view. And if so, what comes next from Natera on this front?
Okay. I'll take a quick pass at that and then I'll hand over to Paul and Sullivan. So the answer on the registry study is absolutely yes. We will participate in that registry study process and it's paid. So that's something which makes a lot of sense from any different perspectives.
We expect the price point there to be around $2,800 So that's a firm yes. In terms of the uptake, I think we've got a very high performance test. We've shown better clinical data. The AUC is the fundamental metric by which you establish the power of a diagnostic test. And the AUC is 90%, which is substantially higher than what the competitors have generated.
So I think that we've got a very strong test from a clinical perspective. But the other thing is Natera has got a lot of experience in terms of the usability, in terms of how we interface with patients, how we schedule the blood draws, how we interface with the support and counseling sessions, how we let patients follow-up with their reports, schedule post test and pretest counseling. So there's a lot of infrastructure that we built on the service side and then on the billing side as well, which helps it really streamline the process for patients who are going through insurance reimbursement. And we've learned how to do this really well in a highly competitive space. So I think that we are in a position to offer a better clinical test and with much better service, and both of these things are relevant to uptake.
So with that said, Paul, do you want to
Well, I would only just emphasize that we are planning on doing a registry study as are others who have gotten CMS reimbursement. And in addition, the key metrics that appear to be important in the system are the frequency of biopsies and how our data will impact the frequency of biopsies and the preservation of kidneys, right? We want the results to lead to better outcomes and more successful kidney transplantation that longer lives for kidney. And we intend to keep our eye on those two outcomes and help that part of the transplant world.
Okay. Great. And maybe if I can I don't want to leave Mr? Brophy out. One quick one for you.
R and D spend came in a bit lighter than we expected in the quarter. I didn't flip over to my Excel model again, but I think it dropped sequentially and grew only 1% year over year. You reiterated R and D guidance, R and D spending guidance for the year. If R and D wasn't exactly what you expected in the quarter in terms of spend, was this just a pacing dynamic versus some change in plan?
Yes. No change in plan, Doug. It's just a timing issue. So we think that overall spend is on track for our guide.
Okay, great. Thanks for all the color, guys.
Thank you. And our next question comes from the line of Mark Massaro from Canaccord Genuity. Your line is now open.
Hey, guys. Thank you for the questions. Congratulations on the Signatera side. Maybe a question for Matt. You have 20 studies with pharma.
Can you give me a sense for whether or not this is 20 pharma partners? And I guess the reason I ask is, I get the sense that 1 pharma partner could do up to 10 studies. So how should we think about your ability to do multiple studies per partner?
I will answer and then I'll hand it over to other people who can put color on. So these pharma studies are sort of progressing now to get more serious as we said in our prepared remarks. We have a mixture of different kinds of studies in that 20. And some of them are pilot studies, some of them are outcome studies. So there's a smorgasbord there.
But the simple answer to your question is, yes. I mean, for one pharma partner, you are anticipating doing many studies across many indications over a long period of time, and one study tends to grow into many more. So what's amazing here is that we've got these 20 studies so soon after the launch of Signatera, because these are largely big companies and the sales cycle tends to be pretty slow with these big companies. The whole process of negotiating a contract can take a long time. So this is just a very clear indication of the incredible energy and interest that has been generated in Signatera.
You could all say that there's pent up demand for technology that works as well, and we've just really tapped into that with a technology that really solves the problem. So yes, these would for most of the certainly the top 10 pharma of which there's strong representation in that set, we are expecting these to continually turn into more and bigger studies across more indications. Mike, do you want to comment?
Yes. And just Mark, just to your point, I mean, it's not like there's 20 studies that are with 2 pharma companies. It's much more broad based than that. I mean, we're working with a broad swath of the leading pharma players here.
Great. And then I also wanted to ask, I know it's only been a little over a month or so. By chance, have you seen any increase in orders from physicians for average risk prenatal on the volume side? Also recognizing that you did get the win from Blue Cross Blue Shield with Tennessee recognizing that's a pretty small plan?
Steve? Yes. Sure. I'll comment on that. Our we outlined sort of our outlook for the remainder of the year.
And obviously, we've from a volume standpoint, and we've obviously seen the July data at this point. I can say that the July volume per adjusted receiving day, which is a metric that we look at to really judge our performance and whether we're growing or not, looked very strong. And that gave us really the confidence to put out this volume forecast for the remainder of the year, which is something that we normally don't do. So we're feeling strong based on what we saw in July. Now I can't say whether that's a direct result of the ACOG guidance change or our team executing in the field.
I think it's a little bit early to see the results of in the field for MACOG. So it's probably execution, but we'll keep you updated as things progress. Yes. I would just second that.
I think it's too early to say that that's because of ACOG. Physician practices to change their protocol and for something like this to really take a foothold, it takes a while. So I would say that that's mostly just execution, the kind of growth that we are expecting. It's not something substantially different from what we would have expected and unlikely that those numbers are affected by the ACOG changes so far.
Great. And a clarifying question with the withdrawal of Bulletin 6 40 at ACOG and the reaffirmation of 163, I just want to clarify, are you expecting an additional bulletin or do you think that 163 alone can be strong enough to engage the Uniteds and the Aetna's of the world?
Well, again, we do not hold the strength, but we are expecting an additional guidance to come out at some point. And we do think that that would be very influential on the Aetna's and Unitas of the world, but we don't hold the strings over those kinds either. All indications are positive, but we've got to be cautious because we are not completely controlling the process.
Great. Last one for me is for Mike. The 2,700,000 dollars licensing and other revenue in the quarter, do you have a sense of the split between Signatera and maybe I don't know if you got anything from QIAGEN in the quarter?
We only got about $100,000 from QIAGEN and very little of that is actually Signatera. That's just kind of the typical licensing of the revenue shipping, things like that, our DDC partnership, things like that are in that number as well.
Great. That's it for me. Thanks guys.
Thank you. And our last question today will come from the line of Alex Nowak from Craig Hallum. Your line is now open.
Great. Good afternoon, everyone. I'm jumping in between a few calls here, so apologies if this was already discussed. But your competitor counsel was recently kicked out of UnitedHealth. So I'm just curious, do you have any idea why their in network status was revoked?
And I assume this creates somewhat of a tailwind for Natera over the next couple of quarters.
Steve? Yes. This is Steve. I'll comment on that. I mean, course, we're not privy to their negotiations or the decisions that were made by United.
We think, frankly, given our in network status, there's some opportunity there for us. Being in network broadly was a key strategic decision that we made several years ago and that has been an advantage for us. So we closely interact with these health plans, particularly to help shut down out of network leakage and things of that nature. So there's some advantages to having one of our competitors being out of network.
Okay, understood. And then the prenatal volume here over the last two quarters, it's been pretty strong. So Mike, just for modeling purposes for 2019, should we assume this is the new normal for volume going forward?
Well, we said on the prepared remarks that we expect volume growth for the year to be roughly in the 30% range. So I think that's where I point you.
Okay. That's fair. And apologies if I missed this one as well. But you were erring on the side of caution regarding ASC 606 last quarter. Now that you have 7 months under your belt, just what are your assumptions regarding accrual ASPs?
Are those proven to be conservative? And just remind us again, how does the benefit to ASPs, how does that flow through the P and L in future periods?
Yes. So as it relates to the 606 accruals, I mean, I still view this as it's our 2nd quarter under the new standard. And so we're still endeavoring to be conservative. No guarantee that we'll ultimately prove conservative. I think the collections on the Q1 units are consistent with our expectations.
So no cost for alarm just yet. And I couldn't quite follow the last piece of that question, Alex, if you would just repeat that, please.
Yes. Just if ASPs actually prove so you're accruing an ASP this quarter. If the actual ASP proves to be higher than what you're accruing, how does that flow through the P and L in the future periods?
Yes. So in the future period, when we get to a period where the let's say, we've accrued the ASP at $4.30 and the collections come in and it's at $4.40 when you sum it all up a year later. The tentative conclusion would be that we would likely book a true up of revenue in that period. But it just there's a number of variables there and it depends on the scale of the difference.
Okay, understood. Thank you very much. Nice quarter.
Thank you.
Thank you very much, everyone.
And that concludes today's question and answer session and also today's presentation. Thank you all for your participation. You may now disconnect. Everyone have a