Natera, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results; comparisons are with the corresponding 2019 periods. Natera develops and commercializes genetic testing services, with revenue primarily from women’s health tests Panorama and Horizon, alongside oncology, organ-health and cloud-based offerings.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $98.1 million | $77.9 million | $278.6 million | $219.1 million |
| Product revenue | $93.3 million | $66.9 million | $260.7 million | $195.4 million |
| Operating loss | $55.8 million | $21.1 million | $142.3 million | $81.5 million |
| Net loss | $58.3 million | $23.1 million | $153.3 million | $89.6 million |
| Net loss per share, diluted | $0.72 | $0.33 | $1.93 | $1.33 |
| Operating cash flow | Not separately provided for the quarter | $(109.2) million | $(48.4) million |
Margins: Based on reported revenue less cost of product and licensing revenue, gross margin was approximately 47% in Q3 2020 versus 44% in Q3 2019, and 48% for the first nine months versus 40% a year earlier. These are calculated from the filing’s figures.
Balance sheet and liquidity at September 30: Cash, cash equivalents and restricted cash were $209.5 million; short-term investments were $600.2 million. Current assets totaled $916.0 million and current liabilities $195.9 million. Total liabilities were $440.7 million and stockholders’ equity $536.0 million. Debt included $50.1 million outstanding under the UBS credit line, including accrued interest, and $287.5 million principal on 2.25% convertible notes due 2027; the notes’ balance-sheet carrying amount was $200.0 million after discounts and issuance costs.
Cash used in investing activities was $232.3 million for the nine months, primarily reflecting purchases of investments and $12.1 million of property and equipment. Financing provided $489.1 million, including $278.3 million net proceeds from the convertible notes and $270.7 million net proceeds from a September equity offering, partly offset by repayment of the OrbiMed term loan.
Material changes versus prior periods
- Q3 revenue grew 26%, while product revenue rose 39%; management attributed product growth primarily to higher test volumes. Q3 reported units were approximately 238,600 versus 189,600.
- Nine-month revenue grew 27%, but net loss widened to $153.3 million from $89.6 million. Research and development and SG&A expenses increased 86% and 42%, respectively, reflecting headcount growth, stock compensation, clinical studies and expanded product activity.
- Licensing and other revenue declined 56% in Q3 and 25% for the nine-month period. The filing cites lower collaboration-related revenue and the absence of Evercord revenue after its sale in 2019.
- Operating cash use increased to $109.2 million from $48.4 million, including higher losses and working-capital outflows, notably receivables and inventory.
- In April 2020, Natera issued $287.5 million of convertible notes and repaid the $75.0 million OrbiMed term-loan principal, incurring a $5.8 million extinguishment loss. In September, it raised approximately $271.0 million net from an equity offering.
Outlook, commentary and risks
- Management expected existing cash and marketable securities to cover anticipated cash requirements for at least 12 months after November 5, 2020. The company nevertheless expected continued net losses and negative operating cash flows in the near term and may need additional financing to reach profitability.
- COVID-19 effects remained uncertain. Q3 test volumes and average selling prices increased from Q2, but management warned that pandemic-related restrictions, workforce or supply disruption, payer delays and economic weakness could adversely affect demand and results.
- Panorama and Horizon remained the principal revenue drivers. Reimbursement for average-risk NIPT and microdeletion screening remained limited or uncertain; reimbursement pressure also affected expanded Horizon screening. Results from the SMART Study were expected to be disclosed or published in 2021.
- The first stated stock-price condition permitting holders to convert the notes had been met as of September 30. Conversion, if elected and settled partly or wholly in shares, could dilute shareholders; cash settlement could affect liquidity. Notes are senior unsecured obligations, bear 2.25% cash interest and mature in May 2027.
- Qiagen terminated its agreement in March 2020 after discontinuing development of its sequencing platform. The parties were discussing their obligations, and any refund of prepaid royalties remained uncertain; no related revenue was recognized in Q3.
- Legal matters include patent disputes involving CareDx, ArcherDX, Progenity and Ravgen, among others. The Illumina litigation was settled in May 2020, but an inter partes review of Natera’s patent and a European patent opposition remained. The company reported no recorded legal-contingency accrual and said it could not estimate a probable loss.
- Key business risks include reliance on Panorama and Horizon, payer coverage and collections, competition, clinical and regulatory uncertainty, reliance on Illumina and other limited or sole-source suppliers, laboratory capacity, data security, and ongoing litigation. Management reported disclosure controls were effective as of September 30, 2020.
Important facts for investors to verify
- Whether revenue growth and test-volume trends continue, and how realized reimbursement and average selling prices affect gross margin and cash burn.
- Cash and investment balances, operating cash use, and management’s stated liquidity runway, including any need for further equity or debt financing.
- The status and potential financial impact of the Qiagen termination and any prepaid-royalty refund.
- SMART Study findings and subsequent payer coverage decisions for average-risk Panorama and microdeletion screening; reimbursement developments for Horizon, Signatera and Prospera.
- Convertible-note conversion, settlement and dilution exposure, alongside the UBS credit line’s demand and termination provisions.
- Developments in material patent and other legal proceedings, payer recoupment requests, and any resulting liabilities or operating restrictions.