Natera, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; unaudited. Natera provides prenatal and reproductive genetic testing, with Panorama non-invasive prenatal testing (NIPT) its primary product.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $53.9 million | $44.9 million | $167.8 million | $137.4 million |
| Gross profit / margin | $19.6 million / 36.4% | $14.5 million / 32.2% | $70.2 million / 41.8% | $56.4 million / 41.0% |
| Operating loss | $(26.7) million | $(20.7) million | $(58.8) million | $(42.5) million |
| Net loss | $(26.0) million | $(17.6) million | $(57.9) million | $(47.3) million |
| Basic and diluted loss per share | $(0.50) | $(0.39) | $(1.13) | $(2.53) |
Revenue increased 20.0% in Q3 and 22.1% for the first nine months. Growth reflected higher Panorama and Horizon carrier-screening volumes. For nine months, Horizon revenue rose $27.7 million year over year; Panorama revenue rose $4.2 million, with volume gains partly offset by lower payer reimbursement. Cost of product revenue declined as a share of revenue, reflecting laboratory workflow and operating efficiencies. Gross margins above are calculated from reported revenue and product cost.
For the first nine months, Natera accessioned more than 318,000 tests, including more than 247,000 Panorama tests, versus more than 217,000 and 181,000, respectively, in 2015. Panorama accounted for $108.7 million, or 65%, of nine-month revenue. Research and development expense rose 54% and selling, general and administrative expense rose 24.5%, contributing to wider operating and net losses. The accumulated deficit was $307.9 million.
Cash, liquidity and debt
- At September 30, 2016, cash and cash equivalents were $25.3 million, short-term investments $157.7 million, and restricted cash $1.5 million. Cash plus short-term investments totaled approximately $183.0 million.
- Operating cash use was $44.4 million for the first nine months, compared with $33.1 million in 2015. Cash declined $3.6 million from year-end 2015 to $25.3 million.
- Net investing cash provided was $30.1 million, including investment sales and maturities, offset by $14.6 million in property and equipment purchases. Financing cash provided was $10.7 million, including net credit-line borrowings.
- Short-term debt was $49.5 million, up from $42.1 million at December 31, 2015. The $50 million UBS revolving line bears interest at one-month LIBOR plus 0.65%; approximately $0.7 million remained available, net of accrued interest. UBS may demand repayment and terminate the facility at its discretion; the facility is secured by the company’s investment assets.
- Management stated that existing cash and marketable securities were expected to fund anticipated requirements for at least the next 12 months, based on its current business plan.
Outlook, risks and notable items
- The company expected continued operating losses and higher R&D and selling, general and administrative spending. It gave no numerical revenue or earnings guidance.
- Management identified payer coverage and reimbursement as important uncertainties. Most payers did not cover average-risk NIPT, and some did not reimburse microdeletions screening. A new microdeletions CPT code was scheduled to take effect January 1, 2017, and management warned reimbursement could decline.
- Most revenue was recognized on a cash basis: 85% for the first nine months of 2016, versus 80% in the comparable period. This creates a lag between testing and revenue and exposes results to collection and reimbursement uncertainty.
- Expansion commitments included $50.6 million of future minimum operating lease payments and $7.9 million of inventory purchase obligations at quarter-end. An October 2016 lease amendment added approximately 48,000 square feet of California office space.
- A useful-life estimate change for certain sequencing and automation equipment increased Q3 and nine-month operating and net losses by $0.4 million. The company also recorded $0.1 million of foreign income tax expense.
- One customer represented 13% of Q3 revenue and approximately 28% of net receivables at September 30. The filing describes four IPO-related purported class actions and a separate carrier-screening lawsuit; Natera said it intended to defend them and recorded no loss-contingency accrual. The prior Sequenom patent litigation ended after the U.S. Supreme Court denied review in June 2016.
- Principal risks include reliance on Panorama, reimbursement changes, competition, regulatory uncertainty, dependence on key suppliers (including Illumina and Streck), laboratory capacity and execution of the cloud-based distribution model. Management reported disclosure controls were effective as of September 30, 2016.
Important facts for investors to verify
- Whether growth in test volume converts into timely, collectible revenue, and how receivables and customer concentration evolve.
- Changes in payer coverage, reimbursement rates and collections, particularly for average-risk Panorama and microdeletions under the new CPT code.
- Operating cash burn and runway relative to management’s 12-month liquidity assessment, including the callable, investment-secured UBS debt.
- Progress in controlling operating expenses, sustaining gross-margin improvement and executing expansion and lease commitments.
- Developments in the pending lawsuits and any resulting financial exposure; the filing says outcomes were uncertain and no loss accrual was recorded.