Natera, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; year-over-year comparisons are to Q1 2020. Unaudited consolidated financial statements. Natera develops and commercializes molecular testing services, principally women’s health tests, with growing oncology and organ-health offerings.
Key financial results
Amounts below are in millions of dollars except per-share data, percentages, and test volumes.
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $152.3 | $94.0 | +62.0% |
| Product revenue | $118.4 | $87.0 | +36.0% |
| Licensing and other revenue | $33.9 | $7.0 | +387.1% |
| Gross profit | $85.5 | $49.0 | +74.4% |
| Gross margin | 56.1% | 52.2% | +3.9 percentage points |
| Operating loss | $(63.0) | $(34.9) | Loss widened |
| Net loss | $(63.9) | $(35.4) | Loss widened |
| Basic and diluted loss per share | $(0.74) | $(0.45) | — |
| Cash used in operating activities | $(74.9) | $(35.1) | Cash use increased |
- Revenue and volume: Natera processed approximately 348,200 tests, versus 235,500 a year earlier; approximately 333,400 were accessioned in its laboratories. Reported test units were approximately 313,800 versus 221,500. The company said test volumes grew while average selling prices declined.
- Margins and expenses: Gross margin improved on a consolidated basis, but product revenue cost grew faster than product revenue. R&D rose 120.5% to $40.2 million and SG&A rose 64.9% to $108.3 million. Stock-based compensation was $23.2 million, versus $7.4 million.
- Cash and liquidity: At March 31, cash, cash equivalents and restricted cash were $65.3 million, and short-term investments were $588.4 million, totaling $653.6 million. This compares with $737.3 million at December 31, 2020. Cash flow from investing activities was positive $86.7 million, largely reflecting investment maturities, not operating cash generation.
- Debt: The company reported $287.5 million principal of 2.25% convertible senior notes due 2027 and approximately $50 million outstanding under its UBS credit line. The credit line is secured by cash and marketable securities; UBS may demand repayment or terminate it at its discretion. The notes’ initial conversion price is approximately $38.79 per share.
- Balance sheet: Total assets were $893.5 million, total liabilities $521.1 million, and stockholders’ equity $372.4 million. Accumulated deficit was $987.0 million.
Material changes and unusual items
- Licensing and other revenue included $28.6 million recognized from deferred Qiagen revenue after the parties’ termination and settlement agreement. Natera also agreed to refund Qiagen a net $10 million; the filing reports this refund against deferred revenue.
- Revenue recognized from opening deferred revenue totaled $30.3 million; total deferred revenue declined from $72.9 million at year-end to $32.9 million at March 31.
- Effective January 1, 2021, Natera adopted ASU 2020-06 for convertible debt accounting. The adoption increased the reported debt carrying amount and reduced additional paid-in capital, with a cumulative opening-equity adjustment. Management said Q1 interest expense was $2.3 million lower than it would have been without adoption, and loss per share was $0.03 lower.
- Operating cash outflow increased substantially, including a $40.0 million decline in deferred revenue and increases in accounts receivable and inventory. Capital expenditures were $10.3 million.
- The company extended its San Carlos lease; operating lease right-of-use assets and lease liabilities increased. Q1 lease expense was $2.7 million.
Outlook, risks, and contingencies
- Management expects continued net losses and negative operating cash flows in the near future. Based on its current business plan, it believes cash and marketable securities will meet anticipated cash requirements for at least 12 months after May 6, 2021. It may require additional financing to reach profitability; financing may be unavailable or involve dilution, restrictive terms, or significant debt service.
- Management cited opportunities to expand Panorama adoption in average-risk pregnancies and to develop and commercialize oncology and organ-health products. Growth depends on test demand, reimbursement and payer coverage, commercial execution, and scaling laboratory operations.
- COVID-19 impacts remain uncertain. The filing identifies possible effects on demand, test volumes and selling prices, staffing, supply availability, payer collections, and access to testing. It also notes continued employee-safety measures and related expenditures.
- Reimbursement remains a risk: the company cites low reimbursement for microdeletion screening and potential pressure on Horizon reimbursement under expanded carrier screening coding. Increased in-network business may also lower average reimbursement per test.
- Natera is involved in multiple patent and other legal disputes, including litigation with CareDx and other companies. It recorded no loss-contingency accrual and did not determine that an unfavorable outcome was probable or reasonably possible, or that a loss range was reasonably estimable. Outcomes remain uncertain and could adversely affect results.
- Management reported disclosure controls and procedures were effective at a reasonable-assurance level as of March 31, 2021, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether test-volume growth translates into sustainable revenue and improved product-level margins despite declining average selling prices.
- How much reported licensing growth reflects recurring activity versus the one-time $28.6 million Qiagen revenue recognition, and the future revenue contribution from strategic partnerships.
- Operating cash burn, deferred-revenue movements, and the pace of use of cash and marketable securities against management’s stated 12-month liquidity outlook.
- Credit-line terms and reported outstanding balances, including the lender’s right to demand repayment, as well as potential dilution or settlement effects from convertible notes and equity compensation.
- Progress on payer coverage and reimbursement, COVID-19 and supply-chain exposure, and outcomes or developments in significant litigation.