Natera, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited results; filed November 8, 2023. Natera is a molecular diagnostics company focused on women’s health, oncology and organ health, with Panorama, Horizon, Signatera and Prospera among its key tests.
Financial performance
- Revenue: Q3 revenue was $268.3 million, up 27.4% year over year; product revenue rose 32.7% to $265.2 million, while licensing and other revenue fell 71.4% to $3.1 million. Nine-month revenue was $771.5 million, up 27.9%.
- Volume and mix: Management attributed product growth to higher test volumes and average selling prices. Nine-month tests processed were approximately 1.87 million versus 1.51 million; oncology units processed were 243,200 versus 132,400. Insurance carriers accounted for $676.7 million, or about 88%, of nine-month revenue.
- Margins and operating results: Approximate gross margin, calculated as revenue less reported costs of revenue, was 45.1% in Q3 versus 44.7% a year earlier, and 43.2% for nine months versus 45.4%. Q3 operating loss was $111.0 million and net loss was $109.0 million, compared with $119.1 million and $121.5 million, respectively. Nine-month operating loss was $361.7 million and net loss was $356.8 million, versus $399.3 million and $405.2 million.
- Costs and per-share results: Nine-month cost of product revenue increased 33.9%, faster than product revenue growth. Research and development rose 4.0% and selling, general and administrative expense rose 2.7%. Stock-based compensation was $142.9 million for nine months, up from $116.4 million. Diluted loss per share was $0.95 for Q3 and $3.14 for nine months.
- Cash flow: Operating cash used was $188.8 million for nine months, versus $350.4 million a year earlier. Investing provided $143.8 million, primarily from investment maturities, while financing provided $247.6 million, including $235.4 million net proceeds from a September equity offering. Cash, cash equivalents and restricted cash increased by $202.6 million to $668.7 million.
- Liquidity and debt: Cash and restricted cash plus short-term investments totaled $936.6 million. Current assets were $1.27 billion and current liabilities $289.9 million. Debt included $80.4 million outstanding on the UBS credit line, including accrued interest, and $287.5 million principal on 2.25% convertible notes due 2027; the notes’ carrying value was $282.6 million. The credit line is secured by investments and may be called by UBS at its discretion.
Changes, outlook and key risks
- Revenue growth and reduced net loss were supported by increased test volumes and average selling prices, partly offset by lower collaboration-related licensing revenue and higher product costs. Interest income increased materially with larger cash and investment balances.
- The September 2023 public offering issued 4.55 million shares at $55 per share and generated approximately $235.4 million net proceeds. Shares outstanding at September 30 were 119.0 million, compared with 111.3 million at year-end 2022.
- Management expects continued losses and negative operating cash flows in the near future. It believes cash and marketable securities will meet anticipated cash needs for at least 12 months after November 8, 2023; no specific revenue or earnings guidance is provided. Management says additional revenue is needed for profitability and future financing may be required.
- Reimbursement remains a key uncertainty: management cites limited coverage and low reimbursement for microdeletion screening, potential pressure on Horizon reimbursement, and lower negotiated rates as in-network coverage expands. Revenue estimates also depend on collections and refund assumptions; tests billed to insurers and patients take an average of about 18 months to collect.
- Legal matters: The company reports ongoing regulatory and governmental inquiries and multiple patent, advertising, securities and other disputes; it says it cannot assure outcomes and does not believe currently identified matters require a material financial-statement accrual. An ArcherDX/Invitae jury awarded Natera $19.35 million, with post-trial motions pending. In a separate CareDx false-advertising case, the court set aside damages against Natera; appeals are pending. Other proceedings include scheduled trials and pending motions.
- Convertible-note holders met conditions allowing conversion as of September 30, 2023; no conversions occurred in the period. The notes represent potential dilution, and Natera disclosed that it does not intend to settle the obligation in cash if converted.
- Disclosure controls were assessed as effective at a reasonable-assurance level; no material change in internal control over financial reporting was reported.
Investor verification checklist
- Track test volumes, product-level growth and whether average selling prices and gross margins hold up as testing scales.
- Assess cash burn, the timing and collectability of receivables, and whether management’s stated liquidity runway remains adequate.
- Review payer coverage and reimbursement trends, particularly for Panorama microdeletions and Horizon, along with refund reserves and prior-period revenue adjustments.
- Monitor credit-line terms and callability, convertible-note conversion or dilution, and any need for further financing.
- Follow legal and regulatory proceedings, including appeals, pending injunctions, trial outcomes and potential financial exposure; the filing does not provide a clear estimate of ultimate losses.