Natera, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also provides unaudited fourth-quarter results. Natera is a diagnostics company whose revenue is concentrated in Panorama, its non-invasive prenatal test (NIPT); the company reported one operating segment.
Financial performance
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Revenue | $190.4 million | $159.3 million |
| Cost of product revenue | $112.8 million | $78.4 million |
| Gross profit / margin | $77.5 million / 40.7% | $80.9 million / 50.8% |
| Operating income (loss) | $(59.8) million | $0.7 million |
| Net income (loss) | $(70.3) million | $(5.2) million |
| Operating cash flow | $(37.8) million | $10.5 million |
| Cash and cash equivalents | $28.9 million | $87.2 million |
| Short-term investments | $201.6 million | — |
| Debt | $42.1 million | $26.8 million |
Revenue grew 19.5% year over year, primarily on higher test volumes. Panorama generated $139.6 million, or 73% of revenue, unchanged as a share from 2014. The company accessioned more than 310,000 tests, including over 254,000 Panorama tests, up approximately 37% and 2014, respectively. Revenue recognized on a cash basis rose to 85% of total revenue from 67%, reflecting the growing direct-sales channel and uncertainty in collections.
Gross margin was approximately 40.7%, down from 50.8%. Management cited higher costs associated with the microdeletions panel and Horizon carrier screening, a greater mix of tests for average-risk pregnancies that were not broadly reimbursed, and an asset impairment. Research and development expense rose to $27.7 million from $17.3 million; selling, general and administrative expense rose to $109.6 million from $62.9 million, largely reflecting sales-force expansion and related operating costs.
Fourth-quarter comparison
Q4 2015 revenue was $52.9 million, versus $49.9 million in Q4 2014, an increase of about 6%. Gross profit was $21.1 million (about 39.9% margin), compared with $27.2 million (about 54.6%). Natera reported a Q4 2015 net loss of $23.0 million, versus net income of $1.3 million in Q4 2014.
Liquidity, debt and cash flow
At year-end, cash, cash equivalents and short-term investments totaled about $230.5 million, in addition to $1.6 million of restricted cash. The company reported $250.7 million of current assets and $80.5 million of current liabilities. Operating cash use was $37.8 million; investing cash use was $210.7 million, mainly reflecting $203.3 million of investment purchases and $7.9 million of property and equipment purchases. Financing provided $190.3 million, including IPO proceeds and $42.0 million drawn on a UBS credit line.
The July 2015 IPO, including the underwriters’ over-allotment, raised $178.5 million net. Natera repaid its ROS secured loan in October, paying $28.0 million, including principal, a prepayment penalty and a royalty payoff. Year-end debt was principally the $42.0 million UBS revolving line, secured by cash and marketable securities; UBS may demand repayment at its discretion. Management stated that existing cash and marketable securities were expected to fund anticipated requirements for at least 12 months, while also warning that further capital might be needed.
Changes, outlook and risks
- Net loss widened substantially, from $5.2 million in 2014 to $70.3 million in 2015. The 2015 results included a $7.3 million loss on debt extinguishment and a $1.0 million impairment charge; cash-flow reconciliation also reports $1.6 million of asset impairment adjustments.
- U.S. direct sales grew to 77% of revenue from 59% in 2014. Management said direct sales generally produce higher gross margins than partner-distributed testing, but payer contracting can reduce reimbursement rates.
- Management expected continuing operating losses and increased R&D and selling, general and administrative spending. The filing does not provide numerical revenue or earnings guidance.
- Panorama concentration, competitive pricing, payer coverage and reimbursement—especially for average-risk pregnancies and microdeletions—are material risks. Most payers had negative average-risk coverage determinations, and some did not reimburse microdeletions screening.
- Other significant risks include uncertain FDA oversight of laboratory-developed tests and Constellation software; reliance on Illumina as the sole supplier of Panorama sequencing instruments and reagents; dependence on the San Carlos laboratory; execution of the cloud-based distribution model; and development and commercialization risks for oncology tests, which remained early-stage.
- Legal matters include ongoing Sequenom patent litigation, with a petition for Supreme Court review filed after year-end; two purported IPO securities class actions and a patient lawsuit filed in 2016. The company said it could not estimate potential losses for these newer matters. Separately, it settled a payer audit for $1.2 million in 2015, recorded as a reduction of revenue.
Key facts for investors to verify
- Whether Panorama volume growth can translate into improved collections, reimbursement and margins, given that 85% of 2015 revenue was recognized on a cash basis.
- Drivers and sustainability of the sharp year-over-year increase in losses and the decline in gross margin.
- Availability and terms of liquidity: the UBS facility is callable, secured by investments, and $42.0 million was outstanding at year-end.
- Progress on payer coverage for average-risk NIPT and microdeletions, and the financial impact of payer audits, denials and refunds.
- Developments in FDA oversight, Illumina supply arrangements, the Sequenom case and the 2016 lawsuits.
- Whether Constellation licensees and oncology programs achieve commercial adoption; the filing reports limited Constellation commercialization at the reporting date.