Natera, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Natera is a genetic testing company whose largest businesses are prenatal screening tests Panorama and Horizon; it is also developing oncology and transplant applications.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $77.9 million | $65.3 million | $219.1 million | $190.7 million |
| Product revenue | $66.9 million | $62.7 million | $195.4 million | $177.3 million |
| Licensing and other revenue | $11.0 million | $2.6 million | $23.7 million | $13.4 million |
| Gross profit and margin* | $34.0 million; 43.7% | $23.6 million; 36.1% | $88.1 million; 40.2% | $67.4 million; 35.4% |
| Operating loss | $(21.1) million | $(27.2) million | $(81.5) million | $(84.9) million |
| Net loss | $(23.1) million | $(29.6) million | $(89.6) million | $(96.3) million |
| Basic and diluted loss per share | $(0.33) | $(0.49) | $(1.33) | $(1.71) |
*Gross profit and margin are calculated as revenue less cost of product revenue and cost of licensing and other revenue.
- Revenue increased 19.3% in Q3 and 14.9% for the nine-month period. Panorama and Horizon drove product growth; nine-month revenue from those tests rose $6.3 million and $9.9 million, respectively.
- Q3 licensing and other revenue rose mainly because of $6.9 million recognized under the BGI agreement. Nine-month licensing growth also reflected BGI, partly offset by lower Qiagen revenue versus the prior-year period, which included a one-time license transfer.
- Reported operating loss includes a $14.4 million gain on the Evercord sale. Excluding that gain, operating loss was approximately $35.5 million in Q3 and $95.9 million for the nine months. SG&A increased 47.8% in Q3 and 29.8% year to date, including higher compensation, stock-based compensation, outside services, billing and collection costs, and litigation expenses.
- Tests processed totaled approximately 200,229 in Q3, up from 167,172, and 594,884 for nine months, up from approximately 494,334. Nine-month Panorama and Horizon accessioned volumes increased approximately 18% and 27%, respectively.
Cash, debt and liquidity
- At September 30, 2019, cash and cash equivalents were $51.6 million and short-term investments were $186.7 million, for $238.3 million combined. Working capital was $185.8 million; stockholders’ equity was $84.7 million.
- Debt included $50.1 million outstanding on the UBS credit line, including accrued interest, and $73.6 million net carrying value on the OrbiMed term loan. The credit line is secured by investments and UBS may demand repayment; the term loan is secured by substantially all assets, including intellectual property, and matures in August 2024. The company reported compliance with term-loan covenants.
- For the nine months, operating cash use was $48.4 million, investing cash use was $71.1 million, and financing cash inflow was $120.2 million. Financing included $107.6 million net proceeds from the April equity offering. Operating cash use was partly offset by $42.9 million of increased deferred revenue, largely from partner payments received in advance.
- On October 17, after quarter-end, Natera raised $216.2 million net of underwriting discount through an equity offering, before $0.4 million of offering expenses. Management stated that cash and marketable securities would meet anticipated needs for at least 12 months after November 8, 2019, based on its current plan.
- Accumulated deficit was $664.0 million. The company said it expects continued net losses and negative operating cash flows in the near future and may need additional financing to reach profitability.
Material changes, outlook and risks
- Evercord was sold in September for estimated consideration of $15.4 million, including $9.7 million cash, $1.0 million in escrow and $4.7 million of additional consideration, primarily tied to transferred receivables. The sale generated a $14.4 million gain; Natera also recorded $1.7 million of impairment charges on retained assets related to the business.
- Natera entered a collaboration with Foundation Medicine in August. It received $13.3 million in upfront and prepaid amounts and recorded a further $1.0 million receivable; it recognized no revenue under the agreement in Q3. The BGI agreement contributed $6.9 million of Q3 revenue and $11.9 million for the nine months.
- Management cited payer reimbursement and collection uncertainty, including prior-authorization requirements, limited coverage for average-risk NIPT and microdeletions, and potential reimbursement pressure on Horizon from a new expanded-carrier-screening CPT code. Insurance carriers typically take nine to twelve months to pay; the filing also describes payer recoupment requests and refund reserves.
- Key operating risks include reliance on Panorama and a limited number of suppliers, particularly Illumina sequencing equipment and Streck collection tubes; scaling laboratory capacity; competition and adoption of newer oncology and transplant tests; and regulatory uncertainty for laboratory-developed tests and international offerings. Natera noted the FDA granted Signatera Breakthrough Device designation but said it does not ensure accelerated review or approval.
- Material litigation includes patent and advertising suits brought by CareDx, an Illumina patent dispute, patient claims concerning test results, a Telephone Consumer Protection Act class action, and an appeal in the IPO-related securities litigation. The filing says outcomes and potential losses are not reasonably estimable for these matters; no accrual was recorded for them. The prior DOJ reimbursement settlement was fully paid in March 2019.
- The company reported effective disclosure controls as of September 30, 2019. It expected to cease being an emerging growth company after December 31, 2019 and anticipated added compliance costs, including auditor attestation of internal controls.
Investor verification points
- Assess whether test-volume growth translates into durable revenue and cash collection, given payer authorization, reimbursement and refund risks.
- Separate recurring operating performance from the Evercord disposal gain and evaluate the drivers of rising SG&A and stock-based compensation.
- Track deferred revenue recognition and performance obligations under BGI, Qiagen and Foundation Medicine agreements, including any milestone or prepaid-royalty constraints.
- Review the terms, dilution and use of proceeds from the October equity offering, alongside the credit line’s demand feature and term-loan covenants.
- Monitor the CareDx, Illumina, patient and securities proceedings, as well as supplier continuity, regulatory developments and the stated cash runway.