Progenity, Inc. (PROG) Q1 2021 Earnings Call Transcript

Progenity, Inc. (PROG 5.43%)
Q1 2021 Earnings Call
May 13, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon everyone. Welcome to the Progenity first-quarter 2021 earnings call. [Operator instructions] And later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator instructions] And I will now turn the call over to Robert Uhl, managing director with Westwicke ICR, Progenity's investor relations firm.

Robert Uhl -- Managing Director

Thank you, operator. Good afternoon and welcome to Progenity's first-quarter 2021 financial results conference call. Joining me on the call are Dr. Harry Stylli, chairman and chief executive officer; and Eric d'Esparbes, chief financial officer.

Before I turn the call over to Dr. Stylli, I would like to remind you that today's call will include forward-looking statements within the meaning of the federal securities laws, including but not limited to the types of statements identified as forward-looking in our quarterly report on Form 10-Q that we will file later today and our subsequent periodic reports filed with the SEC, which will all be available on our website in the investor section. These forward-looking statements represent our views only as of the date of this call and involve substantial risks and uncertainties, including many that are beyond our control. Please note that the actual results could differ materially from those projected in any forward-looking statement.

For a further description of the risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements, as well as risks related to our business, please see our periodic reports filed with the SEC. A slide deck with some supplemental first-quarter financial information is also now on the website, but it will not be directly referenced by the speakers on the call today. With that, I will now turn the call over to Dr. Harry Stylli, chairman and CEO of Progenity.

Harry Stylli -- Chairman and Chief Executive Officer

Thank you, Robert, and thank you all for joining us this afternoon. We made significant progress during Q1 with our revenue-generating business, especially with our innovation pipeline programs. And this is the area I want to focus on first during our call today as the company plans to enhance its focus on strategic biotech areas having, in our opinion, the highest possible value-generation potential as our GI Precision Medicine and preeclampsia programs. It has become clear to us that investors are currently placing more value on large unmet medical needs that can be alleviated by high margin therapeutics and molecular diagnostics.

We have made clear progress in our Preecludia test, with several recent studies showing a high probability of accuracy that could lead to significant commercial use. We have already initiated assets of our PRO-104 validation study, which upon satisfactory completion will trigger our commercialization phase by Q4 2021. As a reminder, preeclampsia is the second most common cause of maternal mortality in the U.S., with more than 700,000 women presenting each year with signs and symptoms of possible preeclampsia. Preeclampsia is a global scout and an effective operator-independent tests that aid in diagnosis is simply not currently available.

Preeclampsia is associated with a range of signs and symptoms, hypertension, proteinuria, but also, for example, headaches, edema, and GI pain. The only way to currently treat preeclampsia effectively is to deliver the baby before 37 weeks, resulting in premature delivery with an increased risk in health consequences and healthcare costs if that were to occur. A test ruling out preeclampsia in women with signs and symptoms such as Preecludia has the potential to transform patient management, especially in an intended use population, which is primarily represented by the OB-GYN. In order to rule out asymptomatic women, clinicians need a high degree of confidence in a negative score.

This is why Preecludia is optimized for negative predictive value, or NPV, which is driven statistically by sensitivity and the prevalence rate. Adherence to the ACOG guidelines, generate at best an NPV of 83%, and this performance represents the standard of care today in the U.S. Indeed, ACOG in their 2019 guidelines for preeclampsia discourages approaches based on positive predictive value, or PPV, which is statistically driven by specificity, which is not as important for a high NPV test. A false positive means our test cannot rule out the risk of the patient for developing preeclampsia, so these patients would be subject to the same existing standard of care.

We identified eight protein biomarkers through our research initiatives into the disorder and have developed a multivariate algorithm-based test as an LDT immunodiagnostic. Furthermore, over a number of years, we have developed a sophisticated and growing understanding of our actual clinical practice and insights into the clinical heterogeneity in relation to preeclampsia management in the U.S. Preecludia is designed to have a high NPV of at least 95. As a reminder, our NPV has consistently exceeded 97% at a 10% prevalence in the intended use population corresponding to a gestational age of 28 weeks to 37 weeks, the window where most preeclampsia occurs.

With our clinical verification study, which was presented last week at the ACOG annual meeting, we determined a rule out window of up to 14 days. This was corroborated in prevalidation and will be pressure tested in our PRO-104 validation study. In other words, our NPV test result rules out with high confidence preeclampsia for up to 14 days. The patient that is ruled out can be managed less conservatively.

And ideally, the pregnancy can be extended. With many patients, it is possible that more than one test or one of our tests will be used per patient. This will be determined by the physician based on signs and symptoms of patient's gestational age whether the patient is ruled out and whether testing is occurring on either a one or two-week cadence. We announced on Wednesday last week the results of our Preecludia prevalidation work, which demonstrated commercial laboratory readiness and also showed test performance in our intended use population to be consistent with our PRO-129 verification study with sensitivity greater than 87% and an NPV greater than 97% at a prevalence of 11% in a rule out window of 14 days.

The specificity was determined to be 66%. These data reflect the ongoing derisking in our Preecludia program and they position us strongly for our validation study. As a reminder, we also announced we completed assay testing and are now initiating data analysis of the PRO-104 clinical validation studies samples. We plan to share headline performance data from this study in the June-July timeframe.

I am pleased to report that we are on track to meet our previous disclosed validation milestone. Assuming our Preecludia rule-out test performs as expected in the PRO-104 validation study, we plan to begin a targeted launch by Q4 2021 and believe the performance level we've seen so far, coupled with market education, should facilitate initial commercial adoption and a clinical utility study. As a result, we are now just a few months away from launching a new product in our existing channel, addressing a clear unmet need in a multibillion-dollar U.S. market.

I could not be more excited about the potential for this test to positively change clinical practice in the management of preeclampsia and to generate economic benefits to the health system. It will be an important complement to our existing women's health test portfolio and provide a differentiated test menu for OB-GYNs and MFMs. Beginning 2022, Preecludia's expected high margins and anticipated adoption rates should positively contribute to our revenues and help drive our core business to profitability. We recently completed research on payors using a third party to better understand how they would characterize the value of Preecludia testing.

We were very encouraged by the findings, indicating payors have an understanding of the economic burden of preeclampsia and of the Preecludia test value proposition. This pricing study [Audio gap] reinforced our initial work, signaling compelling reimbursement and supports, a U.S. $2 billion to $3 billion opportunity. Our performance levels consistent with the reverification and prevalidation studies.

Future publication of our work today, including validation and clinical utility study and additional health economic studies, should drive our reimbursement goals. Preecludia has potential as an IBD immunodiagnostic and also has a global market opportunity. The other area of major progress this past quarter is our GI Precision Medicine pipeline. We continued during the first quarter to advance key preclinical and clinical studies, especially for our drug pipeline, now using fully autonomous devices.

Let's start with our drug programs. The first program update is around the significant progress we've made in our targeted therapeutics program. The goal of this program is to deliver high-dose pharmaceuticals to specific locations along the GI tract. This could become a multibillion-dollar platform if we are successful partnering it with major pharmaceutical companies and in advancing our pipeline.

I am pleased to share that, in the quarter, we met our previously reported key milestones for the drug delivery system, DDS. In this program, we are developing drug-device combination products that deliver proprietary solubilized formulations of drugs with our DDS to the site of disease in the GI tract, thereby maximizing the available dose in tissue and achieving pan-colonic distribution, important for disease impact. Furthermore, our platform results in reduced drug breaking through systemically, demonstrating potential for a greatly enhanced therapeutic safety index. We are first targeting the estimated $15 billion inflammatory bowel disease market with our two lard -- two lead drugs, PGN-001, adalimumab, a monoclonal antibody; and PGN-600, tofacitinib, a small molecule normally absorbed in the stomach and upper GI tract, with our initial focus being ulcerative colitis.

To bring this point home even further, earlier this week, we announced that we secured funding from the Crohn's and Colitis Foundation's IBD Ventures Program to further develop Progenity's first-in-class oral DDS for delivery of targeted therapeutics for IBD. As a reference, only 5% of submitted projects received funding last year from the fund selection committee. This endorses that our drug-device combinations have real potential to improve patient outcomes by delivering higher drug concentrations at the site of disease to improve efficacy while limiting systemic uptake to enhance safety. To illustrate this potential, we completed our first clinical study with the fully autonomous DDS, evaluating the capsule's safety and tolerability in the gastrointestinal tract of 12 normal healthy volunteers.

The study also collected the first clinical data on the ability of the DDS to both ultra-locate and accurately deliver a payload to the ileocecal junction or colon, a key delivery site for the treatment of ulcerative colitis and Crohn's disease. The single administration study used a well-established method of Scintigraphic characterization to validate the DDS GI localization, as well as the drug delivery mechanism, using a saline solution payload that includes radioisotopes. Preliminary analysis indicates the majority of DDS devices performed as intended, and autonomously and accurately identified entrance of the colon, releasing its liquid payload, resulting in pan-colonic distribution. No safety issues were reported.

This is the first time we have demonstrated fully functional targeting and delivery capability in humans and builds on our previous clinical work, demonstrating location in both healthy and disease-bearing patients. We will now continue advancing the DDS toward further clinical studies to deliver therapeutics -- our therapeutics. We also completed a preclinical study evaluating the safety, tolerability, and PK-PD effects of a seven-day administration of PGN-600 solubilized tofacitinib delivered by DDS at doses of 25 milligrams, or 10 milligrams per day, with direct comparison to a standard oral administered tofacitinib tablet at 10 milligrams per day in 12 dogs. This was the first study evaluating PGN-600 as a combination product of the company's proprietary solubilized formulation with tofacitinib delivered with the DDS.

Preliminary analysis subject to final audit and study report indicates PGN-600 has a favorable tolerability profile, that the DDS functioned as intended in the majority of doses, and resulted in significantly higher tofacitinib concentrations in colon tissue with lower systemic blood concentrations than the equivalent 10-milligram dose delivered by standard oral tablet. Tissue tofacitinib levels and tissue to plasma ratios of tofacitinib levels along the length of the colon were at least 25 to 50 times higher respectively with PGN-600 at 10mg daily compared to the standard oral tablet formulation at the same dose. These results demonstrate that PGN-600 proprietary liquid formulation can achieve a pan-colonic distribution, facilitating mucosal penetration. In addition, no evidence of tissue damage was observed by histology at either 25mg or 10 milligrams of PGN-600.

The results of this study will help inform the clinical dosing of PGN-600, with data suggesting that it does lower than currently commercially available tofacitinib formulations, may lead to significantly greater tissue drug concentrations, and materially reduce systemic exposure, potentially resulting in enhanced efficacy and low systemic side effects. We plan to update you in the next quarter or so with data from our ongoing clinical study in patients with UC using a monoclonal biotherapeutic Humira delivered by enema, which are both proxies for our PGN-001, adalimumab and our DDS platform. So far, preclinical experiments in mice and swine give us increasing confidence that DDS-PGN-001 could be effective in humans. The data we shared with you today in humans and canines demonstrates the potential of the DDS to transform the treatment of UC by maximizing the available dose at the site of disease while greatly reducing systemic exposure of these potent drugs.

We believe our DDS platform promises to materially advance the treatment of GI disease initially for IBD and UC. Our strategy begins by transforming established drugs with known efficacy and safety profiles but has the potential to materially enhance any compatible drug directed at treating GI-localized disease, and in this instance, enables new effective IBD treatment regimens such as rapid induction and drug combination therapies. While the DDS is designed to treat GI-localized disease with minimal systemic breakthrough, the oral biotherapeutics program is designed to achieve oral delivery and to maximize systemic distribution of biotherapeutics, especially monoclonal antibodies, but also other proteins, peptides, and nucleic acids. Our prior proof of concept studies using endoscopic placement of a nonautomated oral biotherapeutic delivery system, OBDS, achieved 27% bioavailability as a percentage of IV for Humira, a monoclonal, and Dulaglutide, SC fusion, to two GLP-1's in porcine models, representing unprecedented bioavailability for monoclonals and a fusion protein.

Recently, we initiated preclinical studies of our lead candidate, PGN-0B1, adalimumab, a monoclonal; and PGN-0B2, GLP-1 agonist, a peptide, utilizing a fully autonomous OBDS. The goal of these studies is to demonstrate bioavailability of our leads and utilized drug candidates with an automated OBDS and knows of our former partners in comparison to parenteral administration. We believe that the OBDS platform, which includes a mechanical device, has the potential to transform our biotherapeutics are delivered orally, potentially opening a vast market. This platform can be utilized with multiple different therapeutics that meet a broad envelope -- operating envelope in PK-PD characteristics.

Our first partnership with a major pharma is advancing as expected. Recently, we announced an exciting new partnership with Ionis, leveraging our mutual capabilities to explore the use of the OBDS platform for delivering antisense oligonucleotides. If successful, this work has the potential to lead to a broader partnership with Ionis, but may also enable further partnerships based on antisense RNAi, and potentially, vaccine delivery. As we indicated previously, now that we have a fully autonomous device and are generating preclinical data, we are witnessing an acceleration of pharma interests in partnering with us.

We are confident that given the advances today, and hopefully continued compelling preclinical data, we will have opportunities to enter into additional partnerships that provide validation, risk-sharing arrangements, and significant nondilutive capital component. We look forward to providing further updates. Moving to our GI diagnostic activities in our PIL Dx SIBO program. We'll continue to advance the technology with ongoing assay validation and on track to initiate a clinical pilot study with fully autonomous devices in the second half of the year.

The progress made so far with auto location performance in the DDS programs translated into additional derisking for both the RSS and the PIL Dx programs. As a reminder, the PIL Dx capsule can perform a range of in situ fluorescent-based assays for a variety of GI-related pathologies without the need for capsule recovery. In this regard, it is a digital technology that you can ingest at your convenience and transmits the assay data to a wearable receiver. Our first product is a small capsule bacterial detection system, SCBDS, for evaluating small intestinal bacteria overgrowth or SIBO.

There are over 100 million annual patient visits with patients showing signs and symptoms resembling those of SIBO, and current diagnostics are invasive and rely upon costly endoscopy and microbiological culture, or inaccurate -- and or inaccurate breath tests. Based on feedback and public statements from our KOLs, including the American College of Gastroenterologists, this presents the opportunity for the SCBDS to become the standard of care for evaluating suspected SIBO. Beyond SIBO, our PIL Dx program is beginning to generate potential interest in other infectious disease areas and also inflammatory bowel disease, colorectal cancer, pancreatic disease, and liver diseases. Moving to our sampling program based on the recoverable sample system, the RSS, a capsule designed for both discovery and diagnostics.

This continues to progress well. Initiation of the first clinical study with a fully autonomous device is on track to begin in the second quarter of this year. To conserve financial resources, we are currently focusing the majority of efforts to -- on our drug programs as we look to generate nondiluted capital to supplement our other potential sources of funding. Completing our innovation pipeline update is our single-molecule detection platform.

We continue to make progress over the past quarter while the development of the platform and its first assay, our next-generation NIPT test, Innatal 4. We continue to believe that Innatal 4 has the potential to reduce NIPT direct costs by up to 50% and achieve equipment performance to traditional sequencing. In addition to genomics solutions such as NIPT, our single-molecule detection platform has the potential to detect known RNA at genomics and protein biomarkers with high sensitivity and low costs. This platform has the greatest potential, however, for oncology testing.

Now, I will discuss our molecular testing business. Our core business achieved revenue growth of 72% quarter over quarter, with 46% growth over Q1 2020. The turnaround of our core lab business continues to gain momentum, especially with strongly improving ASPs that are already ahead of our internal year-end target. Revenue cycle improvements beginning last year are having an increasingly accretive impact, which we believe will accelerate momentum in the second half of 2021 and into '22 and beyond.

Average risk NIPT is also being reimbursed faster than our internal forecasts as are new carrot -- as are our new carrier testing panels. The margin contribution from this should accelerate with volume as we further improve liquidation. I'm also pleased to share that Aetna selected Progenity as one of their preferred NIPT providers. We have come a long way with Aetna.

The restructuring process to our sales channel because of our in-network transition and billing improvements initiated in Q4 of last year is advancing, and the account attrition resulting from it continued its path to stabilization in the first quarter of 2021. We continue to see provider acquisition and rising tests from new and existing providers. We are close to turning the corner with volume as we strengthen our sales force, our processes, and our productivity. Our affiliate, Avero molecular that provides COVID-19 testing, is diverting resources from COVID to focus in core revenue opportunities.

Avero is maintaining a COVID testing offering, but we stopped promoting the service, primarily because demand characteristics have changed and we are focusing our commercial efforts on our core business. I'm also pleased to share that during the first quarter, Progenity further increased its in-network covered lives with an additional 3.3 million lives from our new contracts with regional payors. Separately, we're advancing in our efforts to achieve in-network status with the remaining two large commercial payors and we're hopeful we can add a significant number of covered lives with access to our product portfolio in the second half of 2021 which should lead to a further expansion of our commercial presence. Going forward into the balance of '21 and into '22, we anticipate a number of catalysts that will continue to drive margin improvements and should increase test volumes.

These being benefiting from rising demand for average risk NIPT and carrier testing, improving reimbursement for NIPT, advancing our in-network transition from the anticipated launch of our Preecludia test by Q4, a highly differentiated product in our existence channel. Furthermore, in '22, we should be fully benefiting from broader average risk reimbursement. The expected margin improvements may also help provide a differentiated advantage and drive increased demand for our NIPT services, especially from other labs and health systems. Our molecular testing business is beginning to show signs of returning to be a positive contributor to our success, and that will synergize with the launch of our Preecludia test.

And we expect this to become more explicit as we progress into 2021 and beyond. With that, I'll now turn the call over to Eric d'Esparbes for a discussion of our financial results for the first quarter of 2021.

Eric d'Esparbes -- Chief Financial Officer

Thank you, Harry, and good afternoon, everyone. I'll provide a brief overview of our financial results and also invite you to review our first-quarter financial release and our 10-Q for a more detailed description. We reported $25 million in revenues in the first quarter of 2021, in line with our prior guidance. This represents a 72% growth quarter over quarter and a 46% growth from Q1 2020 as we now can report revenues without any accruals or reserves.

We continue to see ASP improvements in the quarter, which gives us confidence our revenue cycle management efforts will sustain increasing liquidation. We believe the vast majority of the operational improvements we've implemented last year, combined with the benefits of our growing in-network position and increasingly favorable average risk NIPT coverage by government and commercial payors, will all converge to deliver a progressively strong financial performance in 2021. So far, in the first quarter of '21, we generated an ASP upside of nearly $2 million compared to the first quarter of 2020, most of which is related to NIPT average risk upside. On a full-year run-rate basis, that represents almost $8 million upside before adding volume growth and further expected liquidation improvements, which is a very encouraging sign.

Based on current trends, we expect Q2 2021 overall revenues to return to growth compared to the first-quarter '21. As a result, we're maintaining our 2021 core revenue guidance range. We believe the transition to growth of our core molecular testing business will continue to progress through '21. And we expect to see the benefits of growing volume demand and rising ASPs.

As Harry previously mentioned, COVID was a transient opportunity for us. And since we are focused on our core business, we are choosing to no longer provide 2021 COVID volume and revenue guidance. While it was very much an opportunistic offering, we generated a positive and growing ROI on that original investment. Our first-quarter COGS and COGS per test increased slightly compared to the fourth quarter due to nonrecurring compensation expenses, but remained stable otherwise.

Following implementation of cost control measures in Q4 2020, we continued to maintain a disciplined approach to managing our operating expenses to ensure it is more in line with the progression of our top-line revenue performance. But in parallel, we're maintaining appropriate resourcing of our key R&D programs. We also are increasing our focus on opportunities to extract nondilutive capital and reduce cash burn as we continue to drive toward break even in profitability, ex R&D, for the core business by the end of '22, early '23 timeframe. SG&A expenses were $36.9 million during the first quarter of '21, a slight increase compared to the fourth quarter, largely the result of nonrecurring compensation expenses, but remain stable otherwise.

R&D expenses were stable at $11.7 million during the quarter -- first quarter. The result of stage-gated investment strategy where we allocate incremental R&D spend based on programs achieving various derisking milestones. Our key R&D projects are present -- are progressing very well as Harry explained earlier, and all remain well-funded. First-quarter '21 net loss was $32.3 million, which includes $14.8 million of income from change in fair value of the derivative liability associated with the 2025 convertible notes we issued in December.

First-quarter '21 operating cash flows were negative $48.6 million, compared to negative $72.3 million in the fourth quarter of '20. The main difference between the two quarters relate to $39.2 million in scheduled government and payor settlement payment made in December '20. As a reminder, we now have $24.3 million remaining in settlement payments, which are payable over the next three years. These payments will significantly diminish beginning in '22, significantly reducing our capital requirements in that respects.

During the first quarter, we raised $25 million in gross proceeds through a private placement and had a cash balance of $65 million at the end of the first quarter of 2021. With that, I will now turn the call back over to Harry.

Harry Stylli -- Chairman and Chief Executive Officer

Thank you, Eric. Progenity has several catalysts that are anticipated to create value in the coming quarters, and we are excited about the future. Key examples of strengthening performance of the core revenue business, including strong contribution from NIPT average risk reimbursement, Preecludia validation study results in June-July of '21, followed by a targeted launch by Q4 2021, our multiple GI program clinical milestones that I described earlier, coupled to partnerships -- likely par -- continued partnerships. The milestones we discussed today and as presented in our supporting materials in normal course should enhance value as we make progress with our core business and advance our innovation pipeline.

A number of our innovations address vast markets, and in certain instances, have the potential to be commercially transformational. Further certain -- further, certain of our innovations can readily support multiple significant partnerships, which we expect to realize as we continue to derisk our programs for execution by generating data. We are working toward achieving break-even profitability of our core business and intend to fully exploit various options that reduce our capital needs by generating, for example, nondiluted capital through various means available to us, while reducing our operating costs. We are excited by the near-term potential and the optionality we provide for value creation.

With that, operator, we are now ready for questions.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Steven Mah of Piper Sandler. Steven, your line is now open.

Steven Mah -- Piper Sandler -- Analyst

OK, great. Thank you. And thanks guys for taking the questions.

Eric d'Esparbes -- Chief Financial Officer

Hey, Steve.

Steven Mah -- Piper Sandler -- Analyst

Hey. So first one, I appreciate you guys are not giving COVID volumes going forward, but is there any way you guys could give us the core women's health volumes? And the reason I'm asking them, I'm doing some quick math here to try to back into the volumes and revenues. And just rough on top, it looks like the volumes in women's health were sequentially flat. And I was just hoping if you guys could just square away if they are sequentially flat, couple square away the disconnect as, you know, typically Q1 is typically a very strong quarter for NIPT testing.

And given some of the other women's health testing companies, we expected volumes to be a lot higher. So any color would be appreciated.

Eric d'Esparbes -- Chief Financial Officer

Yeah, Steven, thanks for the question. So yes, they're generally flat for both core and COVID. The difference is largely related to previous statements we made that the -- one of the conferences where February was a little bit challenging in Texas. It had some bad weather that affect, you know, affected demand dynamics a little bit.

And secondly, you know, Harry talked about it. We're still in the process of the -- some of the transitions on the sales channel. So that is both combining to the stable quarter-over-quarter volume. Hopefully, that helps.

Steven Mah -- Piper Sandler -- Analyst

Yeah, OK. Yeah. That helps. Sorry.

Thanks. And then next question. On the Crohn's and Colitis funding, is there any way you can give us some more detail or color, you know, potentially the amount of the funding, the timeframe of the funding, and any limitations of use on the funding?

Eric d'Esparbes -- Chief Financial Officer

Yeah. So this is Eric. I'll cover this. This is a cost-sharing arrangement, so it will not necessarily show us revenue.

It's more of a joint spending on the studies that are targeted by the program. So it's not overly critical in terms of the dollar. What matters is really the study that it supports.

Harry Stylli -- Chairman and Chief Executive Officer

And there's a contribution toward maturing the DDS further. That's the main focus. And that leads to studies.

Steven Mah -- Piper Sandler -- Analyst

OK. Got it. OK. So the funding is strictly for the DDS development?

Harry Stylli -- Chairman and Chief Executive Officer

Correct.

Steven Mah -- Piper Sandler -- Analyst

OK. All right. Great. That's helpful.

And maybe if I can sneak in one last one. You guys mentioned -- gave us a little bit of an update on Innatal 4. But could you remind us again on the timing and next catalyst for the Innatal 4 development?

Harry Stylli -- Chairman and Chief Executive Officer

I would say the next catalyst is probably going to be in Q3. And I'm hoping that it will be a demonstration that the technology has got to the point where now we can move it into what I call optimization. And then on to verification and validation. Based on current run rates, I would say progress -- I would say we should be ready to commercialize probably toward the end of the second quarter, beginning of the third quarter next year.

OK?

Steven Mah -- Piper Sandler -- Analyst

OK, great. Thank you so much.

Eric d'Esparbes -- Chief Financial Officer

Thanks, Steven.

Operator

Next question comes from the line of Andrew Cooper from Raymond James.

Andrew Cooper -- Raymond James -- Analyst

Thanks for the question guys. Maybe first, just kind of looking at the gross margin and sort of the cost of goods, understanding there's always some moving parts there. But with volume sort of flattish, it looks like the cost per test moved around a little bit. Is there anything that really point to there specifically? I know you talked about a couple of things in the script.

But can you just kind of size, you know, what maybe was the pro versus the con in 1Q cost per test to help us think about the margin trajectory from here as volumes continue to recover?

Eric d'Esparbes -- Chief Financial Officer

Yes, I would -- what I've tried to mention in the section on finance is that the temporary increase in Q1 is really more related to a combination of stock-based compensation, accruals, and other related expenses. The actual COGS per test, otherwise, remain stable. So if you want to forecast COGS profile, the -- if you back that out, the prior quarter level is more indicative of the run rate.

Andrew Cooper -- Raymond James -- Analyst

OK, so closer to what we saw kind of in the 4Q level? Is that kind of true --

Eric d'Esparbes -- Chief Financial Officer

That's correct.

Andrew Cooper -- Raymond James -- Analyst

OK. That's very helpful. And then maybe one on some of the data we've gotten in the GI Precision Medicine. I guess can you help me think about what majority means when we think about majority of payloads reaching their target? And then how that plays into sort of the clinical utility of a drug? And, you know, what a payload not reaching the target might mean, and how we think about that clinically, and sort of what the bogies are that you need to hit there would be helpful?

Harry Stylli -- Chairman and Chief Executive Officer

I'll be happy to do that. So generally, most drugs have situations where they don't meet their objectives, OK? So it's not uncommon in our world. So here right for the human study, which is the one that's most important for your question, is 11 out of 12 of the devices actually hit the target, OK? And the only one that didn't was an interesting phenomenon where the device left the stomach and then was sucked back in, OK? And that's really a small software tweak to overcome. That's sort of a rare event, but it occurs.

OK? So then beyond that, what we fan -- what we found is the majority of the devices, i.e. eight out of the device -- of those 12 devices actually released the drug. And the reasons where they didn't release was that this was the first batch of manufactured devices and there were some learning curve tweaks that we need to make. So ultimately, by the time we're ready to do human studies, I mean, I&D and two-way, which is way in the future, these devices should be way better than 90%, 95%, or even approaching beyond 95% in terms of their effectiveness.

Now, if they don't discharge, you will not receive a dose, which is not the end of the world in the correct place, OK? So that would be really the only sort of issue around that. And you can recover the device if you wanted to confirm that. But that would be really your primary downside here. Now, other than that, the devices based on the input that we received seem to be, I'll use the words safe and well-tolerated by the human subjects.

So it's really -- I've got to say to you, it's better than we expected, you know, at this point of the evolution of the device, and it's remarkable that we're able to hit the ileocecal junction, which is exactly where you want to be, i.e. the beginning of the colon or the very terminus of the ileum. So we're able to hit that 11 out of 12 times already and achieve a pan-colonic distribution when that occurred. OK? Again, what you need to see, because colitis begins in the rectum and usually makes its way up to the cecum.

Andrew Cooper -- Raymond James -- Analyst

OK, perfect. That's super helpful context. Maybe just one more, shifting a little bit but on preeclampsia. I know it sounds like everything's moving as expected and moving forward well.

So just maybe the latest and greatest thinking on building the sales force around that, tracking your existing force to really hit the ground, running there, and if anything's changed in sort of the last conversations we've had about any of those elements.

Harry Stylli -- Chairman and Chief Executive Officer

No, I don't think anything's changed. You know, in the beginning, you're not -- we're not going to go to pan-national with the test. It's going to be a targeted launch and there's more than enough capability. And that capability across its value chain is being trained and materials are being produced.

And, you know, once we have the validation data, we're going to publish and then we're going to expand our education programs. So, you know, everything is lining up just as expected. There's not going to be a need to really ramp the sales force for that per say because it's already a fairly substantial sales force. We may need to bring in additional skill sets into the sales force, and into marketing, and into the support functions.

But that's really just an incremental investment. Because one of the exciting things about this Preecludia is that it's -- the primary client if you like is the OB-GYN, which is where we're already focused on today. OK? So we expect to get operating leverage and other benefits as we go forward. And really, I'm quite excited, quite excited because this is a very difficult biology to navigate and a very difficult clinical environment to navigate.

And hopefully, with the success of the validation study, we get to see how it's received in due course and plays in the market and how the adoption rate advances. And of course, how reimbursement proceeds. And we're encouraged by what we're hearing by the way.

Andrew Cooper -- Raymond James -- Analyst

Great. That's it for me. I appreciate the questions again. Thanks, guys.

Eric d'Esparbes -- Chief Financial Officer

Thanks, Andrew.

Operator

Next question comes from the line of Catherine Schulte of Baird.

Catherine Schulte -- Baird -- Analyst

Hey, guys. Thanks for the questions. I guess first just on the core business. You guided the second quarter up sequentially.

Any further comment on what you expect in terms of the magnitude of that increase, then, you know, what you're expecting for sequential volume growth first as ASP benefits?

Eric d'Esparbes -- Chief Financial Officer

Yeah. So we'll probably going to stay with the statement that I made a little bit earlier because you have a lot of moving pieces. So I think we feel comfortable that we're going to be in a position to grow. But we'll have to provide further updates as we progress on the quarter.

Catherine Schulte -- Baird -- Analyst

OK. Got it. And then you mentioned seeing a lot more interest in some of your precision medicine application. Are there particular platforms, whether it's OBDS, DDS, PIL Dx, or the sampling device where you're seeing the most interest, and what are your expectations for additional partnerships this year?

Harry Stylli -- Chairman and Chief Executive Officer

Yeah, I'd say the most interest is in the OBDS. And, you know, you just have to take my word for it. The interest is growing, and, you know, we have mega-caps who are interested. And what we've noticed is as we generate more data, there will be more feasibility studies with pharma.

But the demand for these feasibility studies is softening as we generate more data. And I think if we continue to execute and generate data, you're going to see broader relationships. There's also interest in the DDS. There are discussions ongoing now.

They're not as advanced as the OBDS. There's also discussions for all the platforms with various parties that have expressed interest. For instance, for the SIBO capability. And also, there's a transaction in the works and it's for the RSS.

OK? So there's broad interest. But where we believe the greatest impact is going to result is with the drug programs. I mean, the data, you know, based on the feedback we've received that we've shared with you today is profound. And soon, you'll be seeing evidence of human performance.

And I think it's quite profound as we go along. And the devices, even at this relatively early stage in the evolution, they're super functional. And they actually are performing better than we thought than we anticipated at this stage. Now, also the SIBO opportunity, which we're getting a little slower with, we're going to take it to the point where we generate clinical data that we can then use to hopefully advance it in really -- in partnership with others.

So -- and that's a vast opportunity. And what excites me the most is the feedback we get from the G -- the gastroenterology community, including the college, where they are -- they have a thirst for technology that can do what we're proposing, the SCBDS can do. So this is beginning to go -- since everyone wants -- you know, the feedback I get is you need validation. Well, here's data that's validating.

OK? And it's both performance data in terms of the device tolerability data, coupled to what looks like efficaciousness, and gives us a sense of what the tolerability profile might be for these heavy drugs. OK? So this is quite powerful in its own right. It derisks things for us, and then the rest will, you know, will happen in due course. OK?

Catherine Schulte -- Baird -- Analyst

All right. Got it. And last one for me. You mentioned the OBDS partnership you signed last year is progressing as expected.

What are the next steps there and what kind of updates should we expect -- be expecting on that partnership? And then I think your Ionis partnership is divided into a few parts. So what's the timeline about hearing about the results of that partnership and the potential to it?

Harry Stylli -- Chairman and Chief Executive Officer

Yeah, absolutely. So the -- you know, that -- the first partnership is moving into the preclinical stage with the partner's drug. And we expect to have data on that in probably Q3, Q4. So in other words, it's clearing its initial milestones.

And we're getting down to, you know, in a way making the sausage right, which is, does the device work? The other thing I want to share with you which is interesting. There's an evolution in thinking away from canine as model into -- and into the porcine model for a number of reasons because it's actually much more representative of the human GI. So that's a learning that we, as a group, have. Now, the Ionis partnership is at the ground floor, but it's spinning up very rapidly.

And again, it's -- it really is a mutual partnership. We understand what we know and they understand antisense arguably better than anybody and their needs. And that's a whole area that requires over-delivery for it -- for those markets to really come to pass. So it's a meeting of two partners.

And hopefully, in the next two or so quarters, we'll have a preclinical update on the Ionis arrangement. Now, I will say there is some risk that some of these don't work because of the nature of the molecule for example. But, you know, at this point, based on the data we're seeing, we feel quite optimistic. And I'll leave it at that.

And you should expect to see, you know, other partnerships in this space. And I would say that you should -- I can't -- I'm not going to say the timing of them, but I would say there's interest from other parties and we're getting that. What I would add is this. We're getting to the phase where we're generating our internal preclinical data.

And because we're really talking about changing the bioavailability. You know, demonstrating bioavailability, that is the endpoint because a lot of these drugs are well-known and will characterize. And they're in their pipelines or on -- they're on the market today for a number of these partners. So the burden of proof is preclinical data, preferably in the porcine model.

That's it. Then I think if that goes well with our drugs -- and remember, the only other thing I would add is that we have already demonstrated that if you take the OBDS, but not in an automated form, and use an endoscope to position it, that we get, you know, we get compelling bioavailability for proteins and peptides. So we've already demonstrated that. We know that.

Now, we're trying to show that we can do it with a stand-alone fully automated device, which essentially looks like a pill that you ingest, and then it takes over from there, and then delivers the drug. That's what we're trying to show. That's where we're at. So replicating our initial data and observations but with an automate -- a fully automated device that effectively looks like a normal pill.

OK? So we're very close to generating this data and that will fuel additional partnerships. But also, I think our prospective partners will forego feasibility studies because, effectively, we're generating that data in advance. OK? And we'll share that as that story unfolds and evolves.

Catherine Schulte -- Baird -- Analyst

OK. Thank you.

Eric d'Esparbes -- Chief Financial Officer

Thank you, Catherine.

Operator

[Operator instructions] The next question comes from the line of Sung Ji Nam of BTIG.

Janet Zhang -- BTIG -- Analyst

Hi, this is Janet calling in for Sung Ji. Thanks so much for taking the question. So firstly, at this point --

Eric d'Esparbes -- Chief Financial Officer

Hi, Janet.

Janet Zhang -- BTIG -- Analyst

Hi. So firstly, at this point, what kind of impact are you seeing on prenatal revenues from the average-risk population? And what's baked into your assumptions for the average risk contribution in your guidance for 2021?

Eric d'Esparbes -- Chief Financial Officer

Right. So it is definitely increasing. And as I mentioned, just in Q1, we had about $2 million of upside associated with this. So you're already at the $8 million annual run rate.

And if you add additional payors who are gradually covering it, once you get through the normally ASC 606, you know, trailing revenue recognition requirements, you can see that it'll -- it can grow during the course of the year. We're not providing the breakdown of exactly how much from average risk NIPT is in the core revenue guidance because we have a lot of different moving pieces that contribute to this. But it's material, and that's why we wanted to highlight its contribution to this quarter. Hopefully, that helps.

Janet Zhang -- BTIG -- Analyst

That's helpful. Thank you. So maybe just one more on Preecludia. So given the recent data presented, including at ACOG, would love to get any additional feedback you might be getting from clinicians ahead of the launch if any?

Harry Stylli -- Chairman and Chief Executive Officer

Well, the next step is the validation study. And the feedback we're getting is that -- and especially from the MFMs, is that they're quite excited that this test could make a difference for helping the OB-GYN. That's not to say that the O -- MFM won't to find use, but they really believe it could really aid the OB-GYN because you get a very large number of cases where, you know, the patient may complain with -- and headaches, for example, and that could be a red alert. So they like the profile.

They like the performance to date, and it really hinges on validation, OK, ultimately, which is just weeks away. So let's wait and see around the corner. Now, what I will add is all the studies today have been consistent. We're getting a good reaction.

ACOG was definitely very supportive in account -- in invite -- in accepting our work. They are such shows their interest. So overall, things are in a great spot given for where we are. But a very shortly, we'll have a validation study with over 1,300 subjects, and that's going to lay the foundation for launch of the LDT, primarily targeted toward OB-GYNs, but also helpful to the MFMs in some cases.

Does that make sense?

Janet Zhang -- BTIG -- Analyst

Yeah, that's helpful. Thank you. Thanks again for taking a question.

Eric d'Esparbes -- Chief Financial Officer

Thank you.

Harry Stylli -- Chairman and Chief Executive Officer

You're welcome. Thank you.

Operator

Next question comes from the line of Dan Leonard of Wells Fargo. Dan, your line is now open.

Dan Leonard -- Wells Fargo Securities -- Analyst

Thank you. Just a quick housekeeping question as we're around the hour here. So you mentioned that Avero is no longer marketing COVID testing. But is the core Progenity labs -- are they still marketing COVID testing, or have you shut down the marketing to both brands?

Harry Stylli -- Chairman and Chief Executive Officer

Yeah. We've essentially stopped marketing COVID testing, and the business we're receiving are from existing clients. Maybe there's some incremental activity. But effectively, we're refocusing all our efforts onto our core business.

And even though it was accretive to us, you know, the volatility that we were seeing just made it less interesting. And really, it's all hands on deck for the core business. And that was -- that's exactly what we did. Even though it was in accretive business.

And will continue to be accretive because it's covered its costs.

Dan Leonard -- Wells Fargo Securities -- Analyst

OK. Thank you.

Eric d'Esparbes -- Chief Financial Officer

Thank you.

Operator

[Operator instructions] And there are no further questions at this time. I would turn it back to Dr. Stylli.

Harry Stylli -- Chairman and Chief Executive Officer

Thank you. Thank you all once again for participating on the call and thank you for your interest in Progenity. If you have any additional questions, please feel free to contact us. Have a good evening, everyone.

Operator

[Operator signoff]

Duration: 60 minutes

Call participants:

Robert Uhl -- Managing Director

Harry Stylli -- Chairman and Chief Executive Officer

Eric d'Esparbes -- Chief Financial Officer

Steven Mah -- Piper Sandler -- Analyst

Andrew Cooper -- Raymond James -- Analyst

Catherine Schulte -- Baird -- Analyst

Janet Zhang -- BTIG -- Analyst

Dan Leonard -- Wells Fargo Securities -- Analyst

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