Natera, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Financial statements are unaudited. Natera develops and commercializes genetic testing services; Panorama prenatal screening and Horizon carrier screening generated most revenue. The company also expanded oncology and organ-health offerings, including Signatera and Prospera.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $86.5m | $74.4m | $180.5m | $141.2m |
| Gross profit and margin | $39.5m; 45.7% | $30.5m; 41.1% | $88.6m; 49.1% | $54.1m; 38.3% |
| Operating loss | $(51.7)m | $(28.6)m | $(86.5)m | $(60.4)m |
| Net loss | $(59.6)m | $(32.4)m | $(95.0)m | $(66.5)m |
| Basic and diluted loss per share | $(0.75) | $(0.48) | $(1.21) | $(1.01) |
Revenue growth was led by product testing: Q2 product revenue rose 23.5% to $80.4m, while licensing and other revenue fell 34.6% to $6.1m. For the first half, product revenue increased 30.4% to $167.5m; licensing and other revenue rose 2.4% to $13.0m. Q2 reported test units were approximately 220,100, versus 187,600 a year earlier.
First-half operating expenses rose 32.5% to $267.0m, including research and development of $41.2m (up 75.0%) and selling, general and administrative expense of $133.9m (up 47.3%). Stock-based compensation was $19.4m for the first half, compared with $9.9m. The $5.8m loss on debt extinguishment was an unusual first-half expense.
Cash, liquidity and debt
- At June 30, cash, cash equivalents and restricted cash totaled $77.4m; short-term investments were $493.9m. Together these totaled $571.2m in cash and marketable securities.
- First-half operating cash use was $76.1m, versus $35.8m in 2019. Investing cash use was $122.0m, largely reflecting purchases of investments; financing provided $213.4m. Ending cash and restricted cash was $77.4m.
- In April, Natera issued $287.5m principal of 2.25% convertible senior notes due 2027, receiving $278.3m net proceeds, and used about $79.2m to repay its $75.0m OrbiMed term loan, including penalties and interest. The notes’ initial conversion price is approximately $38.79 per share. Their liability carrying amount was $197.5m at quarter-end.
- The UBS credit line is secured by cash and investments and can be called by UBS at its discretion. The balance-sheet line for short-term debt financing was $50.1m; the debt note separately reports $49.0m of credit-line principal and accrued interest. These figures are not clearly reconciled in the filing text.
- Management expected existing cash and marketable securities to cover anticipated cash requirements for at least 12 months after August 6, 2020. The company continued to expect losses and negative operating cash flows and might need additional financing to reach profitability.
Changes, outlook and key risks
- Compared with Q2 2019, revenue increased 16.3%, but net loss widened by $27.2m. Higher R&D and SG&A spending substantially outpaced revenue growth. For the first half, revenue rose 27.8% while net loss widened by $28.5m.
- Management said Q2 test volumes were relatively flat versus Q1 2020 and average selling price decreased slightly. It warned COVID-19 could adversely affect results for at least the next quarter and potentially the full year; the duration and scale of the impact were uncertain. The filing provides no numerical financial guidance.
- Revenue and reimbursement remain exposed to payer coverage and pricing, particularly for average-risk Panorama screening, microdeletions, and expanded Horizon panels. Reimbursement denials, prior-authorization requirements, audits, refunds or collection delays could pressure revenue and cash flow.
- Qiagen discontinued development of its sequencing platform; Natera terminated the agreement in March 2020. The parties were discussing their resulting obligations, and any refund of prepaid royalties remained uncertain. No potentially refundable prepaid royalties were included in Q2 revenue.
- Material litigation includes CareDx patent and advertising disputes, a Ravgen patent action, patient-related claims and other proceedings. Natera reported no accrual for legal loss contingencies and said it could not estimate possible losses. The Illumina litigation was settled in May 2020, though related patent proceedings remained pending.
- Other significant risks include dependence on Illumina sequencing equipment and Streck blood collection tubes, laboratory capacity and third-party providers, regulatory requirements for laboratory-developed tests, product performance, and the commercialization and reimbursement of newer oncology and transplant products. Management assessed disclosure controls as effective at the reasonable assurance level.
Investor verification priorities
- Track test volumes, average selling prices, and payer reimbursement and collection trends; clarify the filing’s differing test-volume measures and definitions.
- Monitor operating cash use and cash-plus-investment runway against management’s stated 12-month expectation, including the impact of ongoing losses and COVID-19.
- Reconcile the $50.1m balance-sheet short-term debt figure with the credit-line disclosure of $49.0m, and review the UBS facility’s demand and collateral terms.
- Follow the Qiagen termination discussions and any potential repayment of prepaid royalties, as well as the status and potential exposure of material litigation.
- Assess convertible-note conversion, repurchase and dilution exposure, and progress toward reimbursement and commercial adoption for Signatera, Prospera and other newer products.