Natera, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2019. Natera provides genetic testing and related services, with most revenue from prenatal tests Panorama and Horizon. It is developing oncology and transplant-rejection offerings and sells internationally through laboratory partners and its Constellation software platform.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue, 2019 | $74.4 million | $141.2 million |
| Revenue, 2018 | $63.1 million | $125.4 million |
| Net loss, 2019 | $32.4 million | $66.5 million |
| Net loss, 2018 | $33.8 million | $66.7 million |
| Basic and diluted loss per share, 2019 | $0.48 | $1.01 |
| Operating cash used, 2019 | Not provided separately | $35.8 million |
Q2 product revenue was $65.1 million and licensing and other revenue was $9.3 million. Panorama generated $36.5 million and Horizon $24.3 million in Q2. For the first half, product revenue was $128.5 million; Panorama contributed $73.7 million and Horizon $47.0 million.
Gross profit, calculated as revenue less product and licensing costs, was approximately $30.5 million (41.1% margin) in Q2 and $54.1 million (38.3%) in the first half. Operating losses were $28.6 million in Q2 and $60.4 million in the first half. Q2 selling, general and administrative expense was $47.0 million; first-half expense was $90.9 million.
At June 30, cash and cash equivalents were $29.9 million and short-term investments were $208.1 million. Current assets were $322.0 million versus current liabilities of $126.9 million. Debt included $50.1 million outstanding on the UBS credit line, including accrued interest, and a $73.5 million net carrying amount for the OrbiMed term loan. The term loan matures in August 2024; the credit line is callable at UBS’s discretion and secured by cash and investments.
Material changes versus prior comparable periods
- Revenue grew 17.9% in Q2 and 12.6% in the first half year over year. First-half processed test volume increased to approximately 394,700 from 327,200; Panorama accessions rose about 18% and Horizon accessions about 29%.
- Q2 licensing and other revenue rose 240.8%, largely reflecting $5.0 million recognized under the new BGI agreement and growth in Evercord. First-half licensing revenue grew 17.9%; the prior-year period included a larger one-time Qiagen license revenue recognition.
- Q2 net loss narrowed by $1.4 million, while operating loss widened by $1.4 million. Higher revenue was more than offset at the operating level by increased costs, particularly Q2 SG&A, up 25.6% year over year. First-half net loss was nearly unchanged.
- First-half operating cash use increased to $35.8 million from $34.5 million. Deferred revenue rose to $79.7 million from $44.2 million at year-end, substantially reflecting advance payments and uncompleted obligations under the BGI and Qiagen agreements.
- An April public offering raised $107.6 million net of underwriting discount and issuance costs, with 6.05 million shares issued. Outstanding shares increased to 70.0 million at quarter-end from 62.1 million at year-end.
Outlook, risks and unusual items
- Management expects continuing net losses and negative operating cash flows in the near future. It stated that existing cash and marketable securities were expected to cover anticipated cash requirements for at least 12 months after August 8, 2019; future profitability depends on revenue growth, and additional financing may be needed.
- No specific revenue or earnings guidance is provided in the filing. Management expects R&D spending to rise as it develops products and expects 2019 G&A expense to increase partly for public-company compliance; selling and marketing expense was expected to remain relatively flat.
- Reimbursement remains a key risk: prior-authorization requirements have affected collections, coverage for average-risk Panorama and microdeletion screening is limited, and a new expanded-carrier-screening CPT code may pressure Horizon reimbursement. Management also cited erosion in collection trends.
- Other significant risks include dependence on Panorama, competition and reimbursement uncertainty for newer products, reliance on Illumina and other limited or sole-source suppliers, operational scaling and laboratory continuity, and regulatory, privacy and cybersecurity risks. The filing disclosed a 2019 third-party vendor data incident affecting a limited number of patients; some credit-card information was compromised.
- Legal matters include patent and other claims brought by CareDx, patent litigation involving Illumina, a patient test-result case, and a Telephone Consumer Protection Act class action. Outcomes and potential losses were not estimable; the company said it intended to defend the cases. It reported no probable or reasonably estimable loss accrual for these proceedings. The final $1.4 million payment under the prior DOJ reimbursement-claims settlement was made in March 2019; the settlement involved no admission of wrongdoing.
- First-half financing and cash movements included $100.995 million of net investing cash use, primarily purchases of investments, and $115.725 million of financing cash inflow, principally the equity offering. The filing also records $10.0 million in advances to BGI for future sequencing equipment and services.
Important facts for investors to verify
- Whether test-volume growth translates into durable revenue and improved operating margins, given reimbursement and collections pressure.
- Progress on payer coverage and realized reimbursement for Panorama average-risk and microdeletion screening and for Horizon under the new code.
- Revenue recognition, remaining performance obligations and delivery requirements under the BGI and Qiagen agreements, including the $79.7 million deferred-revenue balance.
- Cash burn, financing needs, debt service and the terms and availability of the callable UBS line and undrawn OrbiMed capacity.
- Developments and financial exposure in CareDx, Illumina and other legal matters, and any changes in the company’s stated liquidity outlook.