Natera, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited consolidated results; amounts below are in U.S. dollars unless noted.
Business context and financial performance
Natera is a molecular diagnostics company focused on women’s health, oncology and organ health. Panorama prenatal screening and Horizon carrier screening are key revenue drivers; the company is also commercializing Signatera for oncology and Prospera for transplant assessment.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $142.0 million | $86.5 million | $294.3 million | $180.5 million |
| Gross profit / margin | $65.9 million / 46.4% | $39.5 million / 45.7% | $151.4 million / 51.4% | $88.6 million / 49.1% |
| Operating loss | $115.3 million | $51.7 million | $178.3 million | $86.5 million |
| Net loss | $116.0 million | $59.6 million | $179.9 million | $95.0 million |
| Basic and diluted loss per share | $1.32 | $0.75 | $2.06 | $1.21 |
Revenue growth was principally driven by higher testing volumes. Product revenue rose 70.7% in Q2 and 52.6% for the first half. Q2 tests reported to customers were approximately 355,700, versus 220,100 a year earlier; first-half reported units were approximately 669,500, versus 441,500. Six-month licensing and other revenue included $28.6 million recognized from the terminated Qiagen agreement.
Operating expenses increased substantially: Q2 research and development rose 133.7% and selling, general and administrative expense rose 86.9% year over year. For the first half, those increases were 127.8% and 76.1%, respectively. Six-month stock-based compensation was $58.3 million, up from $19.4 million.
Cash, liquidity and debt
- At June 30, cash, cash equivalents and restricted cash totaled $63.0 million; short-term investments were $517.4 million, for combined cash and investments of approximately $580.2 million.
- Operating activities used $145.4 million of cash in the first half, versus $76.1 million in the prior-year period. Investing activities provided $146.7 million, mainly from investment maturities and sales, while financing activities provided $12.9 million.
- Debt included $287.5 million principal amount of 2.25% convertible senior notes due 2027 and approximately $50 million outstanding on the UBS credit line, which is secured by investment assets and may be called by UBS. The notes’ reported carrying amount was $279.8 million.
- Accounts receivable was $100.1 million, compared with $78.6 million at year-end 2020; deferred revenue declined to $34.2 million from $72.9 million.
Material changes, outlook and risks
- Management expects continued net losses and negative operating cash flows in the near term. It stated that cash and marketable securities were expected to cover anticipated cash requirements for at least 12 months after August 5, 2021.
- In July 2021, after quarter-end, Natera sold 5.175 million shares in an equity offering and received $551.2 million net of underwriting discount, before $0.4 million of offering expenses. The offering increased share count and liquidity.
- A May 2021 development and option agreement required a $10 million payment; exercising the exclusive option to acquire specified assets would require a further $290 million. Success, exercise and anticipated benefits are uncertain.
- Management cited reimbursement and pricing uncertainty, including limited coverage and low reimbursement for microdeletion screening and potential reimbursement pressure on expanded carrier screening. Growth also depends on test adoption, payer coverage, scaling laboratory capacity and continued access to supplies and third parties.
- COVID-19 effects remain uncertain, including possible effects on demand, collections, staffing and laboratory supplies. The company noted that volumes and average selling prices had increased in the first half, but may fluctuate.
- Litigation includes patent and advertising disputes, among others. The company reported no accrual for legal loss contingencies and had not determined an unfavorable outcome probable or a loss reasonably estimable. The Progenity patent litigation was settled on August 3, 2021, after quarter-end; other significant matters remained pending.
- Adoption of the convertible-debt accounting standard changed the notes’ presentation and reduced reported interest expense; the filing says Q2 and first-half 2021 net loss per share were lower by $0.02 and $0.05, respectively, than without adoption.
Most important facts for investors to verify
- Whether revenue growth and test-volume trends persist, and how product mix and payer reimbursement affect average selling prices and gross margins.
- Operating cash burn and the use of the July offering proceeds, including funding needs if losses continue.
- The status and potential dilution or cash obligations associated with the $287.5 million convertible notes, the credit line and conversion terms.
- Whether the $290 million acquisition option is exercised and whether the development work supports the expected value.
- Developments in payer audits, reimbursement reserves and pending litigation, including any material changes to estimated exposure.