Natera, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 9, 2019. Financial statements are unaudited. Natera is a diagnostics company whose largest revenue sources are prenatal tests Panorama and Horizon carrier screening.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $66.8 million | $62.3 million | Up 7.2% |
| Gross profit | $23.5 million | $21.7 million | Up approximately 8% |
| Operating loss | $31.7 million | $30.5 million | Loss widened $1.2 million |
| Net loss | $34.1 million | $32.9 million | Loss widened $1.2 million |
| Net loss per share, basic and diluted | $0.54 | $0.61 | Loss per share narrowed |
| Net cash used in operating activities | $31.8 million | $1.0 million provided | Cash use increased substantially |
Product revenue rose 16.8% to $63.4 million; licensing and other revenue fell 57.1% to $3.5 million. Panorama revenue was $37.2 million, up from $33.3 million, and Horizon revenue was $22.7 million, up from $18.3 million. Panorama represented 56% of total revenue and Horizon 34%.
Cost of product revenue was $41.6 million, or 65.7% of product revenue, compared with 72.0% in Q1 2018. Overall gross margin, calculated from reported revenue and cost of revenue, was approximately 35.2%, versus 34.9%. Research and development expense declined 20.3% to $11.4 million, while selling, general and administrative expense increased 15.6% to $43.8 million.
Balance sheet, liquidity and debt
- At March 31, cash and cash equivalents were $34.3 million and short-term investments were $93.8 million; together, these totaled $128.1 million. Cash, cash equivalents and restricted cash were $34.7 million.
- Current assets were $208.1 million and current liabilities were $112.7 million. Accounts receivable was $60.3 million; deferred revenue totaled $44.6 million.
- Debt included $50.2 million outstanding on the UBS credit line, including accrued interest, and a $73.4 million net carrying amount for the OrbiMed term loan. The term loan is secured by substantially all assets, including intellectual property. Natera reported compliance with its covenants at quarter-end.
- Accumulated deficit was $608.4 million. Stockholders’ equity was $5.0 million, down from $32.2 million at year-end 2018.
- After quarter-end, Natera raised $108.1 million, net of underwriting discount and before $0.6 million of offering expenses, from an April stock offering. Management said existing cash and marketable securities would cover anticipated needs for at least 12 months after May 9, 2019.
Changes, outlook and key risks
- Test volume grew: Natera reported approximately 200,194 tests processed in Q1 2019 versus 164,355 in Q1 2018. Panorama tests accessioned increased approximately 19% and Horizon tests approximately 31% year over year.
- Lower licensing revenue mainly reflected the prior-year recognition of $5.5 million associated with the Qiagen technology license. Q1 2019 licensing and other revenue also included only $0.2 million related to Qiagen support services.
- Operating cash flow declined sharply from the prior-year inflow, which had benefited from a $35.5 million increase in deferred revenue, primarily related to Qiagen prepaid royalties and undelivered obligations. In Q1 2019, operating cash outflow included working-capital uses, including lower accounts payable and accrued compensation.
- Management expected the updated Horizon automation workflow to gradually reduce product costs during the remainder of 2019. It expected R&D spending to rise as it invests in product development, and SG&A to increase in part due to public-company compliance work. The filing provides no quantified revenue or earnings guidance.
- In February 2019, Natera signed a BGI Genomics license agreement with stated consideration of $50 million, including upfront licensing fees and prepaid royalties and potential milestones. It recognized no revenue from the agreement in Q1; the agreement remained subject to customary closing conditions, including government approval. Natera also committed to prepay $10 million for sequencing services and supplier costs in connection with the partnership.
- Reimbursement remains a major uncertainty: prior authorization requirements and collection trends pressured revenue, and coverage for average-risk Panorama and microdeletions screening is limited. A new expanded-carrier-screening CPT code could affect Horizon reimbursement. Insurance and patient collections typically take nine to twelve months.
- Material legal matters include CareDx patent-infringement and false-advertising suits concerning Prospera, Illumina patent litigation concerning Panorama, a patient suit alleging a discordant test result, and a purported TCPA class action. Natera said outcomes and potential losses were not estimable for these matters. The company had completed payments under its approximately $11.4 million DOJ reimbursement-claims settlement in March 2019.
- Other significant risks include reliance on Illumina and other limited or sole-source suppliers, dependence on Natera’s San Carlos laboratory and cloud platform, regulatory uncertainty for laboratory-developed tests, and continuing losses and negative operating cash flow. Management cautioned that actual results may differ materially from forward-looking statements.
Important facts for investors to verify
- Whether test-volume growth converts into durable revenue and cash collections, particularly given payer authorization, reimbursement, refund and collection risks.
- Whether product-cost improvements persist as volumes rise, and whether increased SG&A and R&D spending can be supported by revenue growth.
- The proceeds and dilution from the April 2019 equity offering, and the extent to which the stated liquidity runway depends on the company’s business plan and cash burn.
- Debt terms, covenant compliance and the April extension of the option to draw up to $50 million of additional OrbiMed borrowing capacity.
- Progress and closing status of the BGI agreement, including the stated consideration, prepaid costs, milestones and timing of revenue recognition.
- Developments in the CareDx and Illumina disputes, payer audits and reimbursement policies, and any resulting financial exposure or business restrictions.