Natera, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. Natera is a molecular diagnostics company whose revenue is primarily driven by reproductive-health tests Panorama and Horizon, with newer oncology and transplant offerings including Signatera and Prospera.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Total revenue | $302.3 million | $257.7 million |
| Product revenue | $269.9 million | $240.4 million |
| Licensing and other revenue | $32.4 million | $17.3 million |
| Gross profit | $126.9 million; approximately 42.0% gross margin | $91.6 million; approximately 35.5% gross margin |
| Operating loss | $116.3 million; approximately 38.5% negative operating margin | $114.6 million; approximately 44.5% negative operating margin |
| Net loss | $124.8 million; $1.79 per diluted share | $128.2 million; $2.22 per diluted share |
| Cash used in operating activities | $63.4 million | $70.6 million |
Revenue increased 17.3%. Total tests processed rose to approximately 804,300 from 668,600. Product revenue grew 12.3%; management attributed growth to Panorama and Horizon volume, partly offset by weaker collections and payer prior-authorization requirements. Licensing and other revenue increased 87.7%, mainly reflecting strategic-partnership development and license revenue.
FY2019 included a $14.4 million gain on the sale of Evercord. Selling, general and administrative expense increased 33.1% to $206.2 million, including higher personnel and stock-based compensation costs and increased legal and other outside services. Research and development expense was essentially unchanged at $51.4 million. Natera has reported annual losses since inception; accumulated deficit was $699.2 million at year-end.
At December 31, 2019, cash, cash equivalents and restricted cash were $62.0 million, and short-term investments were $379.1 million. Total current assets were $523.2 million and current liabilities were $179.9 million. Debt, including accrued interest, was approximately $123.8 million: $50.1 million under the UBS credit line and $73.7 million net carrying value under the 2017 term loan. The term loan is secured by substantially all assets, including intellectual property, and matures in August 2024. The company reported compliance with its loan covenants. Management said existing cash and marketable securities were expected to cover anticipated requirements for at least 12 months after February 28, 2020.
Operating cash outflow improved year over year. Investing cash outflow of $266.4 million chiefly reflected purchases of investments; financing provided $340.8 million, including $323.4 million net from two 2019 equity offerings. The offerings increased shares outstanding and diluted existing holders.
Prior-period changes and fourth quarter
- Net loss narrowed by 2.6% year over year, while reported operating loss increased modestly despite the Evercord sale gain.
- Gross profit and gross margin improved; product revenue growth was slower than test-volume growth, which management linked partly to collection trends and payer authorization requirements.
- Fourth-quarter 2019 revenue was $83.2 million, compared with $67.0 million in fourth-quarter 2018. Fourth-quarter net loss was $35.2 million versus $31.8 million. Fourth-quarter gross profit was $38.8 million versus $24.2 million.
- Evercord was sold in September 2019 for estimated consideration of $15.4 million, producing the $14.4 million gain. The sale also generated a $1.7 million impairment charge on retained assets.
Outlook, commentary and key risks
The filing provides no quantified revenue or earnings guidance. Management planned a full-scale Prospera commercial launch in 2020 and continued development and commercialization of Signatera. Prospera received a final Medicare local coverage determination in December 2019 for kidney transplant recipients. Signatera received a positive draft Medicare coverage determination for certain colorectal cancer uses in August 2019; it was not yet final.
- Reimbursement and collections: Coverage for average-risk prenatal screening and microdeletion testing remained uneven; management expected microdeletion reimbursement to remain low in the near term. A new expanded-carrier-screening billing code could pressure Horizon reimbursement. Payer audits, prior authorization, denials and recoupments could affect revenue and cash collection.
- Concentration and execution: Panorama and Horizon generated the significant majority of revenue. Adoption, reimbursement and commercial success of newer products and the Constellation licensing model were uncertain.
- Competition and supply: Natera depends on Illumina as a key sequencing supplier and on Streck for Panorama blood-collection tubes. Alternative platforms had not been validated for commercially viable testing.
- Litigation and contingencies: The company disclosed disputes involving Illumina, CareDx and ArcherDX, as well as other claims. It reported no accrual for these proceedings and said it had not determined an unfavorable outcome to be probable or reasonably estimable. Outcomes and potential costs remained uncertain.
- Regulation and operations: FDA oversight of laboratory-developed tests remained uncertain. The filing also highlights privacy and cybersecurity exposure, reliance on its principal California laboratory and cloud-service providers, and the risks of scaling operations.
Investor verification priorities
- Check subsequent results for revenue growth, gross-margin progress, operating expense trends and cash used in operations, including the effects of prior-authorization and collection delays.
- Verify payer coverage, realized reimbursement and collection rates for average-risk Panorama, microdeletions, Horizon, Signatera and Prospera.
- Track cash and investment balances against operating cash burn, debt service and management’s stated liquidity horizon; consider the dilution from equity issuance.
- Assess whether strategic-partnership revenue and deferred revenue convert into delivered services and recurring revenue, particularly given the disclosed uncertainty around Qiagen’s discontinued sequencing platform.
- Review developments in the Illumina, CareDx and ArcherDX disputes, payer recoupment matters and regulatory requirements.