Natera, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Natera provides genetic testing and related software; Panorama non-invasive prenatal testing (NIPT) is its principal product. The company completed its IPO in July 2015, raising approximately $178.5 million net, including the underwriters’ over-allotment.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $44.9 million | $46.3 million | $137.4 million | $109.4 million |
| Gross profit and margin | $14.5 million; 32.2% | $25.5 million; 55.0% | $56.4 million; 41.1% | $53.7 million; 49.1% |
| Operating income (loss) | $(20.7) million | $4.8 million | $(42.5) million | $(3.7) million |
| Net income (loss) | $(17.6) million | $3.7 million | $(47.3) million | $(6.4) million |
| Basic loss per share | $(0.39) | $0.04 income | $(2.53) | $(1.35) |
At September 30, cash and cash equivalents were $196.2 million, short-term investments $26.4 million, and restricted cash $1.6 million. Current assets were $246.3 million and current liabilities $35.0 million. Total assets were $262.4 million; total liabilities were $56.3 million. The accumulated deficit was $227.1 million.
For the first nine months, operating cash flow was $(33.1) million, investing cash flow $(32.8) million, and financing cash flow $175.0 million; cash increased $109.0 million. Financing chiefly reflected net IPO proceeds of $180.6 million, partly offset by $5.9 million of equipment-financing repayments. Management said existing cash and expected operating cash were sufficient for anticipated requirements for at least 12 months, while anticipating further losses.
At quarter-end, the ROS senior secured term loan was carried at $21.3 million fair value; equipment financing had been repaid in September. In October, Natera drew $32.0 million on its $50.0 million UBS revolving line and paid ROS $28.0 million, including $20.0 million principal, a $2.0 million prepayment penalty, and $6.0 million toward the royalty obligation. The ROS loan, royalty obligation, and related liens were terminated.
Changes versus the prior comparable period
- Q3 revenue fell 2.9% year over year, while nine-month revenue grew 25.6%. Panorama revenue was $34.2 million in Q3 versus $33.8 million; lower revenue from other products drove the quarterly decline. Nine-month Panorama revenue rose $23.2 million.
- Test accessions increased to more than 83,000 in Q3 from more than 57,000, including more than 67,000 Panorama tests. Nine-month accessions exceeded 217,000 versus 156,000, including more than 181,000 Panorama tests.
- Gross margin contracted substantially. Q3 product-revenue costs rose 46.3% to $30.5 million, outpacing revenue; nine-month costs rose 45.4% to $81.0 million.
- Q3 R&D increased 67.8% to $7.3 million and SG&A increased 71.0% to $27.9 million. Nine-month R&D rose 54.1% to $19.7 million and SG&A rose 77.6% to $79.2 million. The company cited expanded staffing, sales and marketing, and public-company costs.
- For the nine months, the share of revenue from the U.S. direct sales force increased to 76% from 52%; the U.S. laboratory-partner share decreased to 10% from 33%.
Outlook, commentary, and risks
- No numerical revenue, earnings, or margin guidance was provided. Management expects continued losses and increased R&D and SG&A spending, including investment in sales, reimbursement, Panorama, and future products such as cancer diagnostics.
- Management attributed pressure on average Panorama reimbursement to new CPT codes effective January 2015, growth in average-risk testing that is not broadly reimbursed, and a lag between test accession and cash-based revenue recognition. Cash-basis revenue recognition represented 77% of Q3 revenue and 80% of nine-month revenue in 2015.
- Key business risks include reliance on Panorama, uncertain payer coverage—particularly for average-risk pregnancies and microdeletions—competitive pricing, partner dependence, and sole-source laboratory supplies. The company also cited execution and regulatory uncertainty around its cloud-based distribution model and potential FDA oversight of laboratory-developed tests.
- A third-party payer audit alleging $1.88 million of overpayments was settled in August for $1.18 million; the charge was recorded in Q2 2015. The company reported no accrued loss contingency for other legal proceedings. Sequenom sought rehearing of the appellate ruling affirming invalidity of the patent claims at issue; Natera filed a response in October and said it would continue to defend its position.
- Unusual items included a $0.6 million impairment charge on equipment planned for sale and a change in estimated useful lives of certain machinery. The latter reduced operating and net loss by $0.6 million in Q3 and $1.2 million for the nine months. Fair-value changes in debt and warrants also affected non-operating results.
- Lease commitments included a 132-month Austin laboratory and office lease and, after quarter-end, an extension of headquarters leases through October 2023. The filing lists $25.6 million in future minimum operating-lease payments as of September 30, before the subsequent headquarters extension.
Investor verification priorities
- Track reimbursement rates, collections, and the gap between test accessions and recognized revenue, especially for average-risk Panorama testing.
- Verify whether gross margin stabilizes as test volumes grow, given rising product costs, Horizon mix, and reimbursement pressure.
- Monitor cash burn and spending growth against available liquidity, the UBS credit-line terms, and new lease and supplier commitments.
- Assess progress in payer coverage, cloud-model commercialization, and any required regulatory clearances, including FDA developments.
- Follow the Sequenom rehearing and any further payer audits, refund demands, or other litigation developments.