Natera, Inc. — 2016 Form 10-K Summary
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2016; quarterly figures below identify the three months ended December 31, 2016. Natera is a genetic diagnostics company, with revenue primarily from prenatal testing, especially Panorama. It operates as one segment. The financial statements received an unqualified audit opinion from Ernst & Young LLP.
Key financial metrics
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $217.1 million | $190.4 million | +14% |
| Gross profit / gross margin | $81.5 million / 37.5% | $77.5 million / 40.7% | Margin down 3.2 percentage points |
| Operating loss | $96.5 million | $59.8 million | Loss widened |
| Net loss | $95.8 million | $70.3 million | Loss widened |
| Operating cash flow | $(73.9) million | $(37.8) million | Cash use increased |
| Cash, cash equivalents and restricted cash | $16.7 million | $30.5 million | Down $13.8 million |
| Short-term investments | $130.9 million | $201.6 million | Down $70.7 million |
| Debt | $49.6 million | $42.1 million | Up $7.5 million |
At year-end, cash, cash equivalents and short-term investments totaled approximately $146.1 million; the $49.6 million credit-line balance was secured by investment assets and was payable on demand at UBS’s discretion. Management said available cash and marketable securities were expected to cover anticipated needs for at least 12 months after March 16, 2017. The company reported an accumulated deficit of $345.9 million and expects further losses.
Revenue mix and volume: Panorama generated $143.1 million, or 66% of FY 2016 revenue, versus 73% in 2015. Panorama tests accessioned increased about 30% to more than 331,000; Horizon carrier-screening accessions rose 92% to more than 80,000. Total tests processed were over 447,000. Direct U.S. sales accounted for approximately 78% of revenue, compared with 77% in 2015. Research and development expense rose 51% to $41.9 million; selling, general and administrative expense rose 24% to $136.1 million.
Fourth quarter: Revenue was $49.3 million, down from $52.9 million in Q4 2015 and $53.9 million in Q3 2016. Gross profit was $11.3 million, approximately 22.9% of revenue, compared with $21.1 million and approximately 39.9% in Q4 2015. Net loss was $37.9 million, versus $23.0 million in Q4 2015.
Material changes versus prior periods
- FY 2016 revenue grew 14%, slower than the 19.5% growth reported for FY 2015. Increased Horizon volume supported growth, while lower average reimbursement as more payer business moved in-network offset revenue gains.
- Cost of revenue increased 20%, faster than revenue, and rose to 63% of revenue from 59%. The company cited test-volume growth, outsourced Horizon processing, and costs associated with operations and facilities.
- Operating cash outflow nearly doubled. Accounts receivable increased $8.5 million, contributing to cash use; 82% of FY 2016 revenue was recognized on a cash basis.
- Capital spending increased: purchases of property and equipment, net, were $23.1 million versus $7.9 million. The company invested in its Austin facility and San Carlos expansion.
- The company recorded $2.1 million in asset impairment charges and a separate $2.1 million inventory write-down related to sequencing and automation equipment being phased out.
Outlook, risks and contingencies
- Outlook: No formal numerical revenue or earnings guidance is provided. Management expects continued operating losses and higher R&D and selling, general and administrative expenses as it pursues product development, market adoption and reimbursement. Evercord cord-blood and tissue banking was planned for launch in Q2 2017; the company also described planned prenatal and oncology products.
- Reimbursement: The company identified payer coverage and pricing as significant uncertainties, particularly for average-risk NIPT and microdeletion screening. It expected microdeletion reimbursement to decline in the near term following a new CPT code and CMS pricing benchmark. In March 2017, a payer sought recoupment of alleged overpayments; Natera disputed the claim.
- Concentration and execution: Panorama accounted for two-thirds of revenue. The company depends on payer collections, its direct sales force and laboratory partners. It terminated its Bio-Reference agreement in January 2017 and began directly servicing affected accounts; Bio-Reference represented 8% of 2016 revenue and sells a competing test.
- Funding and debt: Continued losses and negative operating cash flow may require additional financing. The credit line had little remaining availability at year-end and could be called by the lender.
- Regulatory and supply risks: Tests were primarily laboratory-developed tests; future FDA or other regulatory requirements could increase costs or restrict sales. Illumina supplied key sequencing equipment and reagents, and Streck was the sole supplier of Panorama blood-collection tubes.
- Legal matters: The filing discloses IPO-related class actions, a patient lawsuit alleging failure to perform an ordered test, and a Department of Justice civil investigative demand connected to a former employee’s qui tam billing allegations. The company could not estimate potential losses and had not accrued litigation losses. The Bio-Reference dispute was resolved in February 2017.
- Other items: The company disclosed no material weakness in internal controls; management considered disclosure controls and internal control over financial reporting effective at year-end. The independent auditor did not provide an internal-control attestation because of the emerging-growth-company exemption.
Important facts for investors to verify
- Whether Panorama and Horizon volume growth can offset lower reimbursement rates and the deterioration in gross margin.
- Actual collections, payer denials or recoupments, including the outcome of the March 2017 payer demand and the DOJ inquiry.
- Cash burn, remaining liquidity, and the terms and demand features of the UBS credit line.
- Progress on average-risk and microdeletion coverage, and results and timing of the SMART study.
- Execution and economics of the Bio-Reference account transition, Constellation adoption, and planned Evercord and oncology offerings.
- Any developments in the disclosed litigation, supplier arrangements, or regulatory requirements that could materially affect operations.