Natera, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited results; comparisons are with the corresponding 2021 periods. Amounts are in millions except per-share data.
Business context
Natera develops and commercializes molecular diagnostic tests in women’s health, oncology and organ health, as well as its Constellation laboratory software platform. Panorama prenatal screening and Horizon carrier screening are major revenue drivers. The company reported 989,200 tests processed in the first half of 2022, up from 723,900 a year earlier.
Financial performance
| Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 |
|---|---|---|---|---|
| Total revenue | $198.2 | $142.0 | $392.3 | $294.3 |
| Product revenue | $194.6 | $139.6 | $384.6 | $260.0 |
| Operating loss | $(143.1) | $(115.3) | $(280.2) | $(178.3) |
| Net loss | $(145.2) | $(116.0) | $(283.7) | $(179.9) |
| Basic and diluted loss per share | $(1.50) | $(1.32) | $(2.95) | $(2.06) |
- Q2 revenue grew 39.6%; first-half revenue grew 33.3%. Product revenue rose 39.3% and 47.9%, respectively, primarily reflecting higher test volumes.
- Calculated gross margin, including licensing and other revenue, was approximately 44.9% in Q2 and 45.9% in H1, versus 46.4% and 51.4% in the comparable 2021 periods. Cost of product revenue grew faster than product revenue.
- Operating expenses increased: H1 research and development rose 73.5% to $163.0 million and selling, general and administrative expense rose 26.0% to $297.1 million. Higher compensation, headcount, clinical-study spending and operating costs contributed.
- H1 operating cash use was $248.1 million, compared with $145.4 million. Investing activities provided $241.8 million, largely from investment sales and maturities; financing activities provided $13.1 million.
- At June 30, cash, cash equivalents and restricted cash totaled $91.4 million, with $547.4 million of short-term investments. Accounts receivable was $208.3 million, up from $122.1 million at year-end 2021.
- Debt included approximately $50.1 million outstanding on the UBS credit line, which is callable at UBS’s discretion, and $287.5 million principal on 2.25% convertible notes due 2027. Total debt carrying value was approximately $331.1 million.
Changes versus the prior comparable periods
- Revenue growth was driven by test volume: Q2 reported units increased to approximately 461,300 from 355,700; H1 reported units rose to approximately 917,400 from 669,500.
- Despite revenue growth, net loss widened by 25.1% in Q2 and 57.7% in H1, as expenses increased substantially.
- H1 licensing and other revenue fell 77.4% to $7.7 million, principally because 2021 included $28.6 million of Qiagen-related deferred revenue recognized following a settlement.
- Unrealized losses on available-for-sale securities were $14.1 million in H1, recorded in comprehensive loss rather than net loss; the company said its portfolio was investment grade and no credit-loss allowance was needed.
Outlook, risks and unusual items
- Management expects continued losses and negative operating cash flows in the near future. It said existing cash and marketable securities were expected to cover anticipated cash requirements for at least 12 months after August 4, 2022; additional revenue and potentially financing will be needed to reach profitability. Financing may be unavailable or dilutive, and debt may impose restrictive terms.
- Reimbursement and collections remain important risks. Insurance and patient payments typically take nine to twelve months to collect; coverage and reimbursement rates, including for microdeletions and expanded carrier screening, may constrain revenue. H1 accounts-receivable growth contributed to operating cash use.
- COVID-19, inflation, interest-rate changes, supply availability, laboratory staffing and geopolitical uncertainty may affect demand, costs, operations or access to capital.
- In March 2022, a jury found Natera liable to CareDx in a false-advertising case and awarded $44.9 million. Natera’s motion for judgment as a matter of law remained pending; the company did not consider a loss probable and estimable. Other patent, advertising, securities, patient-billing and product-marketing litigation is described in the filing; outcomes are uncertain.
- The company’s disclosure controls were assessed as effective at the reasonable-assurance level. Implementation of a new ERP system was substantially completed during the quarter, with related control-process modifications.
Important facts for investors to verify
- Whether test-volume growth translates into improved gross margins and a narrower operating cash burn.
- Receivables aging, collections, reimbursement rates and the adequacy of reserves for payer refunds and credit losses.
- Cash runway assumptions and any need, timing or terms of additional financing.
- Credit-line callability and the potential dilution or cash settlement implications of the convertible notes.
- Developments in the CareDx verdict and other litigation, and any resulting financial exposure.
- Progress in commercializing oncology and organ-health tests, clinical studies, and broader payer coverage for existing tests.