Natera, Inc. — 2017 Form 10-K Summary
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017; it is not a standalone fourth-quarter filing. Natera develops genetic tests and related software, with prenatal testing as its core business. Panorama accounted for 63% of 2017 revenue. The company also sells Horizon carrier screening and other reproductive-health services, and launched oncology research-use-only Signatera, Vistara, and Evercord in 2017.
Key financial results
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $210.9 million | $217.1 million | Down 2.8% |
| Gross profit / gross margin | $71.3 million / 33.8% | $81.5 million / 37.6% | Margin down 3.8 percentage points |
| Operating loss | $134.0 million | $96.5 million | Loss increased |
| Net loss | $136.3 million | $95.8 million | Loss increased 42.3% |
| Net loss per share, basic and diluted | $2.56 | $1.86 | Loss per share widened |
| Cash used in operating activities | $96.8 million | $73.9 million | Cash burn increased |
| Cash and cash equivalents | $12.6 million | $15.3 million | Down |
| Short-term investments | $106.2 million | $130.9 million | Down |
| Debt, balance-sheet carrying amount | $123.2 million | $49.6 million | Up substantially |
Cash, cash equivalents, and short-term investments totaled approximately $118.9 million at year-end. Current assets were $144.8 million against current liabilities of $105.5 million. Stockholders’ equity moved from $106.5 million to a $10.4 million deficit. The independent auditor issued an unqualified opinion on the financial statements; management reported effective disclosure controls and internal control over financial reporting.
Material changes and operating performance
- Panorama revenue fell to $132.0 million from $143.1 million, despite accessioned Panorama volume rising approximately 4% to 343,700 tests. Management cited lower average in-network reimbursement, reduced microdeletion reimbursement, prior-authorization delays, and the end of the Bio-Reference distribution agreement. Approximately $4.0 million of Panorama claims submissions were delayed in Q4.
- Horizon revenue rose to $61.7 million from $58.3 million; accessioned volume increased approximately 54% to 124,800 tests. Horizon represented 29% of 2017 revenue.
- Overall tests processed increased approximately 15% to 515,200, including 29,200 Constellation units. U.S. direct sales generated about 83% of revenue, up from 78% in 2016.
- Gross margin declined as cost of product revenue increased slightly while product revenue fell; management also cited higher costs from increased Horizon testing. Research and development expense rose 19.6% to $50.1 million, and selling, general and administrative expense rose 14.1% to $155.3 million.
- Q4 2017 revenue was $53.8 million and net loss was $45.5 million, compared with Q4 2016 revenue of $49.3 million and net loss of $37.9 million. The 2017 quarter included higher operating expenses, including the reimbursement-related settlement accrual.
Liquidity, debt, and outlook
Operating cash outflow increased to $96.8 million. In August 2017, Natera borrowed $75 million under an OrbiMed term loan, with up to $25 million more available through December 31, 2018. The term loan bears interest at 8.75% plus the higher of 1.00% or LIBOR, matures in August 2024, and is secured by substantially all company assets, including intellectual property. The $50 million UBS credit line is secured by cash and marketable securities and is callable by UBS at its discretion. Management said it was in compliance with term-loan covenants at year-end.
Management expects continued losses and negative operating cash flows in the near term, and says profitability depends on growth, reimbursement, and product commercialization. It stated that year-end resources, together with the subsequent Qiagen agreement, were expected to fund anticipated needs for at least 12 months after March 15, 2018. The March 2018 Qiagen agreement provides $40 million in upfront license fees and prepaid royalties, plus up to $10 million in milestone payments; the upfront amount was expected before March 31, 2018. The agreement includes conditions and potential repayment obligations for some unearned prepaid royalties.
Risks, contingencies, and unusual items
- Reimbursement and revenue concentration: Dependence on Panorama remains significant. The filing says Natera did not expect reimbursement for approximately 28,000 average-risk Panorama tests and 41,000 microdeletion tests performed in Q4 2017. Prior-authorization requirements and payer coverage decisions may reduce or delay collections.
- DOJ settlement: In March 2018, Natera agreed to pay approximately $11.4 million to resolve claims concerning past government-program reimbursement submissions, without admitting liability and without a corporate integrity agreement. The full amount was accrued in 2017; approximately $5.3 million plus interest was to be paid in installments.
- Revenue accounting change: Beginning January 1, 2018, ASC 606 replaces the company’s cash-basis recognition for much of payer revenue with estimates of variable consideration. Natera elected full retrospective adoption and was still finalizing its estimates; 2016 and 2017 results were to be restated.
- Other material risks: The filing highlights continuing losses and financing needs; competition and pricing pressure; possible FDA or foreign regulatory changes; reliance on Illumina sequencing supplies and Streck collection tubes; dependence on a single main clinical laboratory and third-party testing partners; cybersecurity and privacy exposure; and intellectual-property disputes.
- Legal proceedings: An IPO-related securities action and a patient claim concerning a carrier-screening test remained unresolved as described in the filing. A payer also sought recoupment of alleged overpayments, which Natera disputed.
- Tax and operating items: The 2017 loss included a $11.4 million settlement charge and a $0.6 million equipment impairment charge. The Tax Cuts and Jobs Act effects were recorded provisionally; the company maintained a full valuation allowance against net deferred tax assets.
Important facts for investors to verify
- Updated reimbursement, collection, and prior-authorization trends, particularly for average-risk Panorama and microdeletion screening.
- ASC 606 transition effects and the restated 2016–2017 revenue, margin, and loss figures.
- Actual receipt and use of the Qiagen upfront payment, milestone progress, and any repayment exposure under the agreement.
- Cash burn, remaining liquidity, additional borrowing availability, debt service, and compliance with OrbiMed covenants and UBS credit-line terms.
- Progress toward broader payer coverage, commercial adoption of products beyond Panorama, and conversion of Constellation licensees into revenue.
- Outcome and potential financial impact of the remaining legal proceedings and payer reimbursement audits.