Natera, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited results; comparisons are with the same periods in 2022 unless stated otherwise. Natera is a molecular diagnostics company focused on women’s health, oncology and organ health, with key offerings including Panorama, Horizon, Signatera and Prospera.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $261.4m | $198.2m | $503.2m | $392.3m |
| Gross profit and margin | $118.3m; 45.2% | $89.0m; 44.9% | $211.9m; 42.1% | $179.9m; 45.9% |
| Operating loss | $(112.4)m | $(143.1)m | $(250.7)m | $(280.2)m |
| Net loss | $(110.8)m | $(145.2)m | $(247.7)m | $(283.7)m |
| Net loss per share, diluted | $(0.97) | $(1.50) | $(2.20) | $(2.95) |
- Q2 revenue increased 31.9%; product revenue rose 32.7% to $258.3m, while licensing and other revenue declined 13.0% to $3.1m. Six-month revenue increased 28.2%.
- Q2 reported units were approximately 594,900, up from 461,300; oncology units increased to approximately 83,500 from 44,200. For the first half, processed tests rose to approximately 1.24m from 989,200.
- Q2 cost of product revenue grew 31.3%, roughly in line with product revenue growth. For the first half it increased 37.4%, faster than revenue, contributing to lower gross margin. Q2 R&D declined 5.3%; SG&A rose 2.0%.
- Cash used in operating activities was $159.3m in the first half, versus $248.1m in 2022. Investing activities provided $62.7m, principally from investment maturities; financing activities provided $11.6m.
Liquidity, debt and balance sheet
- At June 30, 2023, cash, cash equivalents and restricted cash were $381.1m; short-term investments were $354.8m. Combined, these totaled approximately $735.9m, down from approximately $898.4m at year-end 2022.
- Debt included $80.4m outstanding on the secured, variable-rate UBS credit line, with $20.0m available, and $287.5m principal on 2.25% convertible notes due 2027. The credit line rate was 6.28% at quarter-end; UBS may demand repayment or terminate it at its discretion.
- Accounts receivable was $260.1m, versus $244.4m at year-end. Accumulated deficit was $2.19bn. The company reported $81.5m in operating lease liabilities.
- Shares issued and outstanding were 114.1m at June 30, up from 111.3m at December 31, 2022. The notes’ potential 7.4m conversion shares were excluded from diluted loss per share as antidilutive.
Changes, outlook and risks
- Losses narrowed year over year: six-month net loss improved by $36.0m. Higher revenue and interest income helped; operating costs also increased, and first-half gross margin fell from 45.9% to 42.1%.
- Management expects continued net losses and negative operating cash flows in the near future. It believes existing cash and marketable securities are sufficient for anticipated requirements for at least 12 months after August 3, 2023, but says additional revenue is needed for profitability and additional financing may be required. No numerical revenue or earnings guidance is provided in the filing text.
- Management cited growth in Panorama, Horizon and Signatera volumes. It also identified reimbursement uncertainty, including low microdeletion reimbursement and potential pressure on Horizon reimbursement, as risks; expanding in-network coverage may improve predictability but can lower reimbursement per test.
- Revenue estimates include collections and refunds for tests delivered in prior periods. In Q2, prior-period collections increased revenue by $3.4m; release of insurance refund reserves added $0.8m. For the first half, prior-period collection adjustments reduced revenue by $5.8m, while released refund reserves added $6.5m.
- Legal matters remain significant. A jury awarded Natera $19.35m in its patent case against ArcherDX and Invitae; post-trial matters, including an injunction request, remained pending. In the CareDx false-advertising case, the court ruled July 17, 2023 that CareDx was not entitled to damages, setting aside the adverse damages portion of the jury verdict. Other patent, securities, marketing and billing disputes and investigations continue; outcomes are uncertain.
- Other risks include dependence on payer coverage and reimbursement, continued cash burn and financing needs, possible dilution or restrictive debt terms, and variable-rate credit-line exposure. The company reported effective disclosure controls as of June 30, 2023 and no material effect from changes in internal control during the period.
Key investor verification points
- Track test volumes, revenue growth and product-level economics against the increase in cost of product revenue and the decline in first-half gross margin.
- Monitor operating cash burn, cash and investment balances, and whether management’s stated liquidity runway remains supported by actual results.
- Review credit-line terms and availability, potential repayment at UBS’s discretion, and obligations and potential dilution associated with the 2027 convertible notes.
- Assess payer coverage, reimbursement rates, collections and refund estimates, particularly for Panorama microdeletions and Horizon carrier screening.
- Follow the status and financial implications of material litigation, regulatory inquiries and payer recoupment requests.