Natera, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Natera develops and commercializes molecular diagnostic tests in women’s health, oncology and organ health, including Panorama, Horizon, Signatera and Prospera. Figures below are in U.S. dollars; financial statement amounts are unaudited.
Key financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $241.8 million | $194.1 million | Up 24.5% |
| Product revenue | $237.8 million | $190.0 million | Up 25.2% |
| Gross profit and margin | $93.6 million; 38.7% | $90.9 million; 46.8% | Margin down 8.1 percentage points |
| Operating loss | $138.3 million | $137.1 million | Loss widened $1.2 million |
| Net loss | $136.9 million | $138.6 million | Loss narrowed $1.7 million |
| Basic and diluted loss per share | $1.23 | $1.45 | Improved $0.22 |
| Cash used in operating activities | $80.9 million | $137.3 million | Use decreased $56.4 million |
Revenue growth was driven primarily by higher testing volume. Natera processed approximately 626,200 tests, versus 489,300 a year earlier; reported oncology units rose to approximately 71,000 from 35,100. Product cost rose 43.9%, faster than product revenue, contributing to the lower gross margin. Research and development expense was $82.3 million and selling, general and administrative expense was $149.6 million. Stock-based compensation was $40.7 million, compared with $35.1 million.
Liquidity, debt and cash flows
- At March 31, 2023, cash, cash equivalents and restricted cash were $403.2 million, and short-term investments were $408.9 million, for combined balances of about $812.0 million.
- Debt included $80.4 million outstanding on the UBS credit line, including accrued interest, and $287.5 million principal on 2.25% convertible notes due 2027. The credit line had $70.0 million remaining available, bore a variable 5.84% rate at quarter-end, and is callable by UBS at its discretion.
- Cash used in operating activities was $80.9 million; investing activities provided $15.7 million, primarily from investment maturities, while financing activities provided $2.3 million from stock-option exercises. Cash and restricted cash declined $62.9 million during the quarter.
- Current assets were $1.129 billion and current liabilities were $291.0 million. The company reported an accumulated deficit of $2.1 billion.
Changes, outlook and risks
- Compared with Q1 2022, revenue rose substantially and net loss narrowed modestly, but gross margin fell as product costs increased faster than sales. Interest expense increased to $3.1 million; higher interest and other income, at $4.6 million, partly offset that increase.
- Management expects continued losses and negative operating cash flows in the near future, and says revenue has not yet funded all operations. Based on its current business plan, Natera believes cash and marketable securities will cover anticipated cash requirements for at least 12 months after May 9, 2023. It may need additional financing; equity financing could dilute shareholders, and debt financing could impose restrictive terms.
- Revenue estimates are exposed to reimbursement, collection and refund uncertainty. Natera reduced revenue by a net $9.2 million for tests delivered in prior periods in Q1 2023; it also released $5.7 million of insurance-carrier refund reserves to revenue. The filing cites payer coverage and reimbursement, including microdeletions and expanded carrier screening, as important business risks.
- Legal matters include ongoing regulatory and governmental investigations and litigation. In a CareDx false-advertising case, a jury found $44.9 million in damages against Natera; Natera’s motion for judgment as a matter of law remained pending, and the company said it did not consider a loss probable and estimable. Other patent and class-action matters remain pending. The board-led investigation into allegations in a 2022 short-seller report concluded the allegations were unfounded.
- The filing reports no material effect from inflation to date, no off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2023.
Important facts for investors to verify
- Whether testing-volume growth can translate into improved gross margin as product costs and operating expenses evolve.
- Whether payer coverage, reimbursement rates, collections and refund estimates support reported revenue, particularly for Panorama and Horizon.
- Cash burn and financing needs relative to management’s stated 12-month liquidity outlook; also monitor the callable, variable-rate credit line and convertible-note terms.
- Developments in the CareDx verdict, regulatory inquiries and other litigation, including any potential financial exposure not yet estimable.
- How much of reported earnings and future expense reflects stock-based compensation and other non-cash items.