Natera, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited results. Natera is a molecular diagnostics company focused on women’s health, oncology and organ health; Panorama and Horizon account for most revenue.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $210.6 million | $158.1 million | $603.0 million | $452.5 million |
| Operating loss | $119.1 million | $150.2 million | $399.3 million | $328.5 million |
| Net loss | $121.5 million | $151.3 million | $405.2 million | $331.2 million |
| Net loss per share | $1.25 | $1.63 | $4.20 | $3.72 |
- Revenue growth: Q3 revenue rose 33.2%, led by product revenue, up 29.8%; nine-month revenue rose 33.3%, with product revenue up 41.2%. Licensing and other revenue fell 51.8% for nine months, principally because the prior-year period included $28.6 million recognized following the Qiagen settlement.
- Margins: Gross margin, calculated from reported revenue less product and licensing costs, was approximately 44.7% in Q3 versus 48.5% a year earlier, and 45.4% for nine months versus 50.4%. Cost of product revenue increased faster than revenue.
- Cash flow: Nine-month cash used in operations was $350.4 million, compared with $236.5 million in 2021. The increase included a $116.9 million increase in accounts receivable and a $13.4 million increase in inventory. Investing activities provided $308.4 million, mainly from investment sales and maturities; financing activities provided $14.5 million. Cash, cash equivalents and restricted cash ended the period at $57.1 million.
- Balance sheet: At September 30, cash and cash equivalents were $57.0 million and short-term investments were $464.1 million. Accounts receivable was $236.4 million, up from $122.1 million at year-end 2021. Total assets were $1.009 billion and stockholders’ equity was $361.6 million.
- Debt: The company had $50.1 million outstanding, including accrued interest, on its UBS credit line and $287.5 million principal on 2.25% convertible notes due 2027. The credit line is secured by investments, has a variable rate, and UBS may demand repayment or terminate it. The company drew another $30 million in November 2022 from the previously available $100 million.
Changes, outlook and risks
- Test volume increased: Natera reported approximately 1.507 million tests processed in the first nine months of 2022 versus 1.131 million in 2021. Separately, it reported approximately 1.400 million tests delivered with results for the period; the filing describes these as different measures.
- Q3 net loss narrowed year over year, while nine-month net loss widened. Q3 research and development expense fell 33.5%, mainly reflecting lower asset-development earnout expense; nine-month R&D expense rose 18.8%. Nine-month SG&A rose 22.1%, and stock-based compensation increased to $116.4 million from $84.8 million.
- Management expects losses and negative operating cash flows to continue in the near future and says additional revenue is needed for profitability. Based on its current plan, the company believes cash and marketable securities will cover anticipated requirements for at least 12 months after November 8, 2022; it also warns additional financing may be needed and may not be available on acceptable terms.
- Subsequent event: On November 4, 2022, Natera announced a workforce reduction of approximately 3.8%, with estimated costs of $4.7 million, substantially all cash expenditures and equity-award vesting, through Q1 2023.
- Legal and other exposures: A March 2022 CareDx false-advertising jury verdict found Natera liable for $44.9 million; Natera’s motion seeking judgment as a matter of law remained pending, and the company did not consider a loss probable and estimable. Other patent, payer-reimbursement, patient and securities-related matters remain ongoing; outcomes and potential costs are uncertain. The board’s independent committee concluded allegations in a March 2022 short-seller report were unfounded.
- Available-for-sale investments had $19.3 million of unrealized losses at September 30, reflected in accumulated other comprehensive loss; management said the portfolio was investment grade and no credit-loss allowance was necessary. The filing also identifies COVID-19, supply-chain and macroeconomic uncertainty, reimbursement rates, payer collections, and reliance on continued financing as risks.
- No specific revenue, earnings or cash-flow guidance was provided. Disclosure controls and procedures were assessed as effective at the reasonable-assurance level.
Investor verification priorities
- Track receivable growth, collection timing, payer reimbursement and credit-loss provisions against revenue growth.
- Monitor operating cash burn, cash and investment balances, the November credit-line draw, and the company’s stated 12-month liquidity assessment.
- Assess whether product-cost growth and gross-margin pressure moderate as test volumes scale.
- Follow the CareDx verdict and other litigation, investigations, payer audits and potential settlements or reimbursement recoupments.
- Confirm the actual costs and operating effects of the workforce reduction and whether further financing or cost actions are required.