Natera, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Natera is a genetic-testing company whose revenue is primarily from prenatal tests Panorama and Horizon Carrier Screening (HCS). Comparative 2017 figures are presented as revised following retrospective adoption of ASC 606.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $65.3 million | $55.9 million | $190.7 million | $157.6 million |
| Operating loss | $27.2 million | $25.8 million | $84.9 million | $88.7 million |
| Net loss | $29.6 million | $27.9 million | $96.3 million | $90.4 million |
| Net loss per share | $0.49 | $0.52 | $1.71 | $1.70 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(57.8) million | $(69.7) million |
- Revenue grew 16.8% in Q3 and 21.0% year to date. Product revenue rose 15.0% and 15.2%, respectively; licensing and other revenue increased notably, including Qiagen and Evercord contributions.
- Panorama generated $36.0 million in Q3 and $105.0 million year to date; HCS generated $23.6 million and $63.2 million. Year-to-date test processing volume was 494,334, versus approximately 377,500 a year earlier.
- Gross profit, calculated as revenue less product and licensing costs, was approximately $23.6 million (36.2% margin) in Q3 versus $21.3 million (38.1%) a year earlier; year-to-date it was $67.4 million (35.4%) versus $54.7 million (34.7%). Product-cost ratios increased year over year in both periods.
- Q3 operating loss widened despite revenue growth, while nine-month operating loss narrowed. Higher Q3 SG&A and interest expense contributed to the greater quarterly net loss. Year-to-date net loss increased, reflecting higher interest expense and other expense, including warrant remeasurement.
- Cash, cash equivalents and short-term investments totaled $165.4 million at September 30; restricted cash was an additional $4.6 million. Net carrying debt was approximately $123.4 million: $50.1 million on the UBS credit line and $73.3 million on the OrbiMed term loan. The filing reports $125.1 million of gross debt including accrued interest.
Liquidity, changes and notable items
- Operating cash use improved to $57.8 million from $69.7 million for the first nine months. Financing provided $110.7 million, chiefly from the July public offering, which raised $97.3 million before approximately $0.5 million in expenses. Investing activities used $26.8 million, largely reflecting net investment purchases.
- Management expects existing cash and marketable securities to cover anticipated cash requirements for at least 12 months after November 8, 2018, but expects continued losses and negative operating cash flows and says additional financing may be needed to reach profitability.
- ASC 606 was adopted retroactively. Adoption resulted in a $41.6 million cumulative adjustment to opening accumulated deficit as of January 1, 2016; 2017 comparative results were revised. Revenue estimates include variable consideration, refunds and payer collection uncertainty.
- The Qiagen agreement provides for $40 million in upfront license fee and prepaid royalties, some potentially refundable in limited circumstances, plus possible milestones and royalties. Natera recognized $5.7 million of related revenue year to date and reported $34.3 million net long-term deferred revenue associated with remaining performance obligations.
- Reported risks include payer coverage and reimbursement uncertainty, prior-authorization and collection pressures, low microdeletion reimbursement, and the new expanded-carrier-screening CPT code expected to take effect in January 2019. Management expected the updated HCS workflow to gradually reduce product costs, while noting longer-than-expected turnaround times following its implementation.
- Material legal matters include Illumina’s patent-infringement suit concerning Panorama and Natera’s counter-suit; outcomes and potential losses could not be estimated. A separate $11.4 million DOJ settlement concerning past reimbursement claims was recorded in 2017; Natera said it made settlement payments during 2018 and that the settlement involved no admission of wrongdoing.
- Other notable items: a $1.5 million R&D impairment charge for terminated project development costs; a $4.1 million year-to-date loss from warrant fair-value changes before full exercise in June; and operating-lease commitments of $52.7 million. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth converts into improved margins and lower operating cash burn, particularly as product costs rose faster than product revenue in the reported periods.
- How payer prior-authorization requirements, collection trends, refund reserves and reimbursement rates affect revenue quality and accounts receivable, which increased to $60.4 million.
- Whether the $165.4 million of cash and investments supports the stated 12-month liquidity outlook given ongoing losses, debt service and future financing needs.
- Qiagen agreement terms, the timing and conditions for recognizing its deferred revenue, and the extent to which prepaid royalties or milestones are ultimately earned or refundable.
- Developments in the Illumina litigation, payer-related claims and settlement payments, and any resulting costs or restrictions.