Natera, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Financial statements are unaudited. Natera operates a genetic-testing business, with revenue primarily from Panorama non-invasive prenatal testing (NIPT); it also offers Horizon carrier screening and other tests, and licenses technology through its Constellation cloud platform.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $61.9 million | $47.4 million |
| Gross profit and gross margin | $29.6 million; 47.8% | $22.6 million; 47.6% |
| Operating loss and operating margin | $(9.6) million; (15.5)% | $(6.3) million; (13.2)% |
| Net loss and net margin | $(8.7) million; (14.0)% | $(10.0) million; (21.1)% |
| Net loss per share, diluted | $(0.17) | $(1.89) |
| Cash from operating activities | $0.5 million | $(2.5) million |
- Revenue grew 30.5%. Product revenue was $61.1 million and other revenue was $0.8 million. Panorama contributed $38.6 million, or 62% of revenue; Horizon revenue increased by $11.2 million year over year.
- Cost of product revenue was $32.3 million, or approximately 52% of revenue in both periods. R&D rose 55.6% to $8.8 million and selling, general and administrative expense rose 30.8% to $30.4 million.
- At quarter-end, cash and cash equivalents were $34.0 million and short-term investments were $196.6 million; restricted cash was $1.7 million. Total current assets were $248.6 million and current liabilities were $84.2 million.
- Debt was approximately $42.2 million, classified as short-term. It is drawn under a $50 million UBS revolving credit line, bears interest at one-month LIBOR plus 0.65%, is secured by cash and marketable securities held with UBS, and may be called by UBS at its discretion.
- Quarter-end accumulated deficit was $258.8 million. Operating cash flow was positive despite the net loss, helped by noncash expenses and increases in operating liabilities. Capital expenditures, net of asset-sale proceeds, were approximately $3.3 million.
Changes, outlook and significant items
- Test accessions exceeded 105,000, including more than 81,000 Panorama tests, versus more than 64,000 total and 55,000 Panorama tests in Q1 2015. Revenue is often recognized when cash is received; cash-basis recognition represented 88% of revenue, versus 82% a year earlier. Consequently, accessions and recognized revenue can differ materially in timing.
- Management expected operating losses to continue and R&D and SG&A to increase as it invests in sales, reimbursement, product development and cancer diagnostics. It stated that existing cash and marketable securities should cover anticipated cash requirements for at least the next 12 months, while noting that additional capital might be needed or chosen.
- The filing cautions that revenue growth could return to lower levels in upcoming quarters. Average-risk NIPT and microdeletion reimbursement remained uncertain; management also anticipated that in-network contracts could reduce average reimbursement per test.
- An increase in operating and net loss was partly offset by lower interest expense and the absence of the prior-year $1.8 million fair-value debt charge following repayment of the senior secured loan in October 2015. The longer estimated useful lives assigned to certain equipment reduced Q1 2016 operating and net loss by $0.4 million.
- Unrealized gains on available-for-sale investments increased other comprehensive income by $1.8 million. A $0.5 million decrease in the fair value of warrants was recorded as a gain.
- After quarter-end, Natera agreed to pay an insurer $3.2 million for partial exclusivity under an in-network provider agreement. Also in April, its subsidiary entered a $6.5 million Austin laboratory improvement construction agreement, within the landlord’s $7.8 million allowance.
- Commitments included $52.2 million of future minimum operating lease payments, $18.6 million of inventory purchase obligations and a separate $3.6 million remaining minimum commitment under a laboratory services agreement. The $3.2 million insurer payment was not included in the contractual-obligations table.
Risks, contingencies and controls
- Four purported class actions filed in 2016 allege IPO registration-statement or prospectus misstatements and seek unspecified damages and other relief. A separate patient lawsuit alleges failure to perform an ordered test. Natera said it intended to defend the cases; it had not accrued a loss contingency and could not determine outcomes.
- Sequenom petitioned the U.S. Supreme Court in March 2016 in the long-running dispute over the ‘540 patent. The Federal Circuit had affirmed invalidity of the relevant claims against Natera in 2015; the ultimate outcome remained uncertain.
- Key business risks include reliance on Panorama, payer coverage and collections, competition and pricing, regulatory uncertainty for laboratory-developed tests and Constellation, dependence on Illumina for sequencers and reagents, laboratory capacity, and the ability to scale operations. The filing also describes privacy, product-liability and litigation risks.
- Management reported effective disclosure controls as of March 31, 2016 and no material change in internal control over financial reporting during the quarter. The filing reports no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether test accessions translate into collected revenue, and how reimbursement denials, collection timing and refund requests affect results.
- Panorama’s revenue concentration and the progress of payer coverage, particularly for average-risk pregnancies and microdeletion screening.
- The UBS credit line’s demand repayment provision, collateral terms and the liquidity available if repayment is requested.
- Developments and potential financial exposure in the IPO class actions, patient claim and Sequenom patent proceedings.
- Execution and funding of the Austin laboratory build-out, future lease and supplier commitments, and continued access to critical testing supplies.
- Whether operating expenses, cash generation and revenue growth track management’s stated expectations; those expectations are not a guarantee of future results.