Natera, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing was dated March 15, 2019. Figures are in U.S. dollars; comparisons for 2017 and 2016 reflect retrospective adoption of ASC 606 where noted.
Business context
Natera develops genetic diagnostic tests using molecular and bioinformatics technology. Its largest business is Panorama, a non-invasive prenatal test (NIPT); other offerings include Horizon carrier screening, additional reproductive-health tests, Constellation software, and Evercord cord-blood and tissue banking. Signatera oncology testing was offered for research use only, while clinical oncology and transplant-rejection tests were in development.
Financial and operating performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $257.7 million | $209.6 million |
| Gross profit and margin | $91.6 million; 35.5% | $70.0 million; 33.4% |
| Operating loss | $114.6 million | $135.3 million |
| Net loss | $128.2 million | $137.6 million |
| Operating cash flow | $(70.6) million | $(97.8) million |
| Cash, cash equivalents and restricted cash | $51.0 million | $13.0 million |
| Short-term investments | $107.5 million | $106.2 million |
| Debt carrying amount on balance sheet | $123.5 million | $123.2 million |
Revenue grew 22.9%; gross margin improved, and operating and net losses narrowed. The company remained loss-making and used cash in operations. Cash plus short-term investments totaled approximately $153.9 million at year-end. Debt included about $50.2 million under a UBS credit line and $73.4 million net carrying value on the OrbiMed term loan; the term loan’s $75 million principal was due in August 2024. The credit line was secured by investments and could be called by UBS.
Panorama generated $140.9 million, or 55% of revenue, down from 62% in 2017. Horizon contributed $87.2 million, or 34%, versus 30%. Panorama tests accessioned rose approximately 25% to 429,600; Horizon accessioned tests rose approximately 39% to 173,800. Total tests processed were approximately 668,600, up from 515,200.
Fourth-quarter 2018 revenue was $67.0 million versus $52.1 million in fourth-quarter 2017. Gross profit was $24.2 million versus $15.3 million, and net loss was $31.8 million versus $47.2 million.
Material changes and unusual items
- FY 2018 revenue increased by $48.0 million. Product revenue rose 18.0%, led by Horizon; licensing and other revenue increased to $17.3 million, including $5.8 million recognized under the Qiagen agreement and growth from Evercord and Constellation.
- Management recorded an additional $10.2 million of revenue in 2018 from revised estimates of collections for previously delivered tests, reducing operating loss by the same amount. The filing also identifies approximately $7.0 million of Panorama and $3.1 million of Horizon cumulative catch-up revenue tied to collections on prior-period claim appeals.
- ASC 606 was adopted retrospectively. It reduced reported revenue by $1.3 million in 2017 and $4.6 million in 2016; a $41.7 million cumulative adjustment was recorded to accumulated deficit at December 31, 2015.
- In July 2018, Natera raised approximately $96.8 million net from a public stock offering. Financing cash flow was $113.7 million, primarily reflecting the offering and employee stock issuances.
- The company reported $44.2 million of deferred revenue at year-end, including amounts related to Qiagen performance obligations and prepaid Evercord storage services.
- FY 2018 included a $1.5 million impairment charge for previously capitalized project-development costs. Interest expense rose to $10.5 million, principally reflecting the term loan and credit line.
Outlook, risks and contingencies
Management stated that existing cash and marketable securities were expected to meet anticipated cash requirements for at least 12 months after March 15, 2019. It also expected continuing losses and negative operating cash flows in the near term and said additional financing might be needed to fund operations and product development. No specific revenue or earnings guidance was provided.
- Reimbursement: Coverage for average-risk NIPT and microdeletion screening remained uncertain; management expected low microdeletion reimbursement in the near term. Prior-authorization requirements and payer collection practices had affected revenue and margins. A new expanded-carrier-screening CPT code effective January 2019 could also affect Horizon reimbursement.
- Business concentration and execution: Panorama accounted for 55% of revenue. The business depends on continued adoption, favorable reimbursement, successful product launches, and scaling laboratory and commercial operations.
- Suppliers and operations: Illumina was the sole supplier of sequencing equipment and reagents used for key tests; Streck was the sole supplier of Panorama blood-collection tubes. Natera had no backup commercial facility for Panorama at its San Carlos laboratory.
- Legal matters: Natera settled a DOJ qui tam reimbursement matter for approximately $11.4 million, without admitting liability; the final $1.4 million installment was paid in March 2019. Patent litigation with Illumina and other legal matters remained unresolved, including a patient suit filed in January 2019. The company said it could not estimate potential losses for the unresolved matters.
- Commercialization and regulation: Signatera was research-use-only, and the clinical oncology and transplant tests were still being developed. FDA oversight of laboratory-developed tests remained uncertain; international regulatory requirements and privacy obligations, including GDPR, added risk.
- Subsequent events: In February 2019, Natera entered a BGI license agreement providing for $50 million in fees, prepaid royalties and potential milestones, subject to customary conditions including government approval. It also amended a vendor agreement in January 2019, creating a $9.7 million minimum commitment for the next 12 months.
Important facts for investors to verify
- Whether the $10.2 million estimate change and prior-period claim collections recur, and how actual cash collections compare with revenue recognized.
- Whether revenue growth and gross-margin improvement continue as test volumes rise, especially given Panorama concentration and the impact of reimbursement terms.
- Cash burn, available liquidity, debt service and covenants, including the status and terms of any additional OrbiMed borrowing capacity.
- Progress on average-risk and microdeletion coverage, Horizon reimbursement under the new CPT code, and payer prior-authorization requirements.
- Outcomes of Illumina patent litigation, payer audits or recoupment requests, and other legal proceedings.
- Commercial launch, validation, regulatory and reimbursement progress for Signatera clinical testing and the transplant-rejection test; and execution of the Qiagen and BGI agreements.