Natera, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Comparisons are with Q1 2019 unless noted. Amounts are in U.S. dollars.
Business context and reporting period
Natera develops and commercializes genetic testing services, primarily prenatal tests Panorama and Horizon. It is also building oncology and transplant offerings, including Signatera and Prospera, and licenses its technology through its Constellation platform. The company reports one operating segment. Most revenue is generated in the United States and a significant majority comes from Panorama and Horizon.
Natera reported processing approximately 235,500 tests in Q1 2020, versus 200,200 in Q1 2019. The MD&A also gives a different measure of approximately 221,500 reported units for Q1 2020; the filing text does not clearly reconcile these figures.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior balance |
|---|---|---|
| Total revenue | $94.0 million | $66.8 million; up 40.7% |
| Product revenue | $87.0 million | $63.4 million; up 37.4% |
| Licensing and other revenue | $7.0 million | $3.5 million; up 101.3% |
| Gross profit and margin | $49.0 million; 52.2% | $23.5 million; 35.2% |
| Operating loss | $34.9 million | $31.7 million |
| Net loss | $35.4 million; $0.45 per share | $34.1 million; $0.54 per share |
| Operating cash flow | $(35.1) million | $(31.8) million |
Management attributed product-revenue growth to approximately $13.0 million of volume growth and $10.7 million of higher average selling price. Licensing growth primarily reflected strategic partnership revenue. Cost of product revenue was broadly flat, while research and development rose 59.4% to $18.2 million and selling, general and administrative expenses rose 49.8% to $65.7 million. The latter included higher staffing and stock-based compensation, outside services, billing and collection costs, and a $1.2 million credit-loss expense related to the sold Evercord business.
At March 31, 2020, cash and cash equivalents were $74.1 million and short-term investments were $331.7 million, for combined cash and investments of $405.8 million. Current assets were $497.2 million and current liabilities $176.6 million. Total liabilities were $299.7 million; debt financing was reported at $50.1 million short-term and $72.9 million long-term net carrying amount. Accumulated deficit was $734.9 million.
Investing activities provided $43.5 million, largely reflecting investment maturities and sales, offset by purchases; property and equipment purchases were $7.9 million. Financing activities provided $3.8 million, primarily from stock-option exercises. The company recorded $7.4 million of stock-based compensation.
Material changes and notable items
- Product revenue increased 37.4%; licensing and other revenue more than doubled. Revenue from outside the United States was $7.3 million, compared with $6.5 million.
- Revenue growth did not eliminate losses: total costs and expenses grew 30.8%, and operating loss increased to $34.9 million.
- Q1 test volumes began declining in the second half of March as COVID-19 disrupted healthcare activity. Natera expected the impact to continue, but could not predict when volumes would return to normal.
- In March 2020, Natera terminated its Qiagen agreement after Qiagen discontinued development of its sequencing platform. The parties were discussing resulting obligations; any refund of prepaid royalties remained uncertain, and no potentially refundable amount was included in Q1 revenue.
- In April 2020, after quarter-end, Natera issued $287.5 million of 2.25% convertible senior notes due 2027, receiving approximately $278.9 million net proceeds. It used $79.2 million to repay the OrbiMed term loan, including $4.2 million of early-payment penalties and accrued interest. The notes may convert into up to approximately 9.6 million shares, subject to adjustment.
- Natera adopted the expected-credit-loss accounting standard on January 1, 2020, recording a $0.4 million cumulative-effect adjustment. It recorded $1.4 million of credit losses during the quarter, largely associated with the Evercord buyer.
Outlook, risks, and contingencies
Natera expects continued net losses and negative operating cash flows in the near term and says it needs revenue growth to reach profitability. Based on its current business plan, management believed cash and marketable securities would cover anticipated requirements for at least 12 months after May 7, 2020. The filing does not provide numerical revenue or earnings guidance.
Management expected COVID-19 to materially adversely affect financial results for at least the next quarter and potentially the full year, depending on healthcare restrictions and economic recovery. Risks include reduced test demand and access to care, collection delays, supply shortages, operational constraints, and disruption to sales and clinical studies.
Other significant risks include dependence on Panorama and Horizon, payer coverage and reimbursement uncertainty, competition and pricing pressure, reliance on Illumina and other sole-source suppliers, regulatory uncertainty for laboratory-developed tests, and the company’s continuing losses and financing needs. Natera disclosed ongoing patent disputes involving Illumina, CareDx, and ArcherDX, as well as other litigation and payer recoupment requests. It had not recorded an accrual for the described legal proceedings or determined that an unfavorable outcome was probable and reasonably estimable. The Illumina trial was scheduled for August 2020. Natera stated its disclosure controls were effective as of March 31, 2020.
Important facts for investors to verify
- How COVID-19 affected test volumes, revenue, collections, and cash use after Q1, and whether volumes recovered as anticipated.
- The reported test-volume measures: approximately 235,500 tests processed in the overview versus approximately 221,500 reported units elsewhere in the MD&A.
- Whether reimbursement rates and coverage for Panorama, microdeletions, and Horizon support the reported growth and average selling prices.
- The final obligations and any refund arising from termination of the Qiagen agreement.
- The post-quarter effects of the convertible-note issuance and term-loan repayment, including dilution exposure and ongoing debt-service requirements.
- Developments in the Illumina, CareDx, ArcherDX, and payer matters, including potential financial or operational consequences.