NATERA, INC. You should read the following discussion and analysis of our financial condition
and results of operations in conjunction with our unaudited condensed
consolidated financial statements and related notes included in Part I, Item 1
of this report. Our actual results could differ materially from those discussed
below. Factors that could cause or contribute to such differences include, but
are not limited to, those identified below and those discussed in "Risk Factors"
in our Annual Report on Form 10-K for the year ended
Overview
We are a diagnostics company with proprietary molecular and bioinformatics
technology that we deploy to change the management of disease worldwide. We
began in the women's health space, in which we develop and commercialize non- or
minimally- invasive tests to evaluate risk for, and thereby enable early
detection of, a wide range of genetic conditions, such as Down syndrome. Our
technology is now also being proven in the oncology market, in which we are
commercializing, among others, a personalized blood-based DNA test to detect
molecular residual disease and monitor disease recurrence, as well as in the
organ health market, with tests to assess organ transplant rejection. We seek to
enable even wider adoption of our technology through Constellation, our global
cloud-based distribution model. In addition to our direct sales force in
We currently provide a comprehensive suite of products in women's health, as well as our oncology and organ health products, and our Constellation cloud-based platform. We generate a majority of our revenues from the sale of Panorama, our non-invasive prenatal test ("NIPT"), as well as Horizon, our Carrier Screening ("HCS") test. In addition to Panorama and Horizon, our product offerings in women's health include Spectrum Preimplantation Genetics, our Anora miscarriage test, and Vistara single-gene NIPT, as well as our Empower hereditary cancer screening test, which we also plan to offer to oncologists through our oncology sales channel. We also offer our Signatera molecular residual disease test for oncology applications, which we commercialize as a test run in our CLIA laboratory and offer on a RUO basis to research laboratories and pharmaceutical companies; and our Prospera organ transplant assessment tests.
We process tests in our laboratories certified under the Clinical Laboratory
Improvement Amendments of 1988 ("CLIA") in
In addition to offering tests to be performed at our laboratories, either directly or through our laboratory distribution partners, we also establish licensing arrangements with laboratories under Constellation, our cloud-based distribution model, whereby our laboratory licensees run the molecular workflows themselves and then access our bioinformatics algorithms through our cloud-based software. This cloud-based distribution model results in lower revenues and gross profit per test than cases in which we process a test ourselves; however, because we do not incur the costs of processing the tests, our costs per test under this model are also lower. We began entering into these licensing arrangements starting in the fourth quarter of 2015.
The principal focus of our commercial operations is to offer our tests through both our direct sales force and laboratory distribution partners, and our Constellation licensees under our cloud-based distribution model. The number of tests that we accession is a key indicator that we use to assess our business. A test is accessioned when we receive the test at our laboratory, the relevant information about the test is entered into our computer system, and the test sample is routed into the appropriate workflow. This number is a subset of the number of tests that we process, which includes tests
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distributed through our Constellation licensees. The number of tests that we process is a key metric as it tracks overall volume growth, particularly as our laboratory partners may transition from sending samples to our laboratory to our cloud-based distribution model, as a result of which our tests accessioned would decrease but our tests processed would remain unchanged.
During the three months ended
The percent of our revenues attributable to our
For the three months ended
Our net loss for the three months ended
COVID-19 Impact
The COVID-19 pandemic has continued to present a global public health and
economic challenge that has affected our business operations and the
The extent to which the COVID-19 pandemic will continue to impact our business, results of operations and financial condition will depend on future developments, which continue to remain highly uncertain and cannot be predicted, including, but not limited to, the continued duration and spread of the pandemic, including the contagiousness of variants and their severity, the actions to contain the virus or address its impact, and whether, when and to what extent pre-pandemic economic and operating activities can resume. The COVID-19 pandemic could continue to limit the ability
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of our customers, suppliers and business partners to perform under their
contracts with us, including third-party payers' ability to make timely payments
to us during and following the pandemic. We may also experience a shortage of
laboratory supplies and reagents or a suspension of services from other
laboratories or third parties. We also increased our dependence on growing and
maintaining a network of mobile phlebotomy specialists
Specifically, difficult macroeconomic conditions as a result of COVID-19, such
as decreases in per capita income and level of disposable income, increased and
prolonged unemployment, a decline in consumer confidence, as well as limited or
significantly reduced points of access of our products, could have a material
adverse effect on the demand for some of our products, such as our products
targeted for the IVF market. Decreased demand for our tests, particularly in
In particular, while our test volumes and the average selling price of our tests
collected from insurance payors in the three months ended
In response to the COVID-19 pandemic, we have implemented measures to protect the health of our employees and to support the functionality of our laboratories. We will continue to support and incur expenditures towards COVID-19 prevention and employee safety.
Since the
Components of the Results of Operations
Revenues
We generate revenues from the sale of our tests, primarily from the sale of our Panorama and HCS tests. Our two primary distribution channels are our direct sales force and our laboratory partners. In cases where we promote our tests through our direct sales force, we generally bill directly to a patient, clinic or insurance carrier, or a combination of the insurance carrier and patient, for the fees.
Sales of our clinical tests are recorded as product revenues. Revenues recognized from tests processed through our Constellation model, from the Qiagen, BGI Genomics, and Foundation Medicine agreements (collectively the "Strategic Partnership Agreements") are reported in licensing and other revenues.
In cases where we sell our tests through our laboratory partners, the majority of our laboratory partners bill the patient, clinic or insurance carrier for the performance of our tests, and we are entitled to either a fixed price per test or a percentage of their collections.
Our ability to increase our revenues will depend on our ability to further penetrate the domestic and international markets and, in particular, generate sales through our direct sales force, develop and commercialize additional tests, obtain reimbursement from additional third-party payers and increase our reimbursement rate for tests performed. In particular,
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our financial performance depends on reimbursement for Panorama in the average
risk population and for microdeletions. There has been a significant increase in
the number of commercial third-party payers that cover the use of Panorama in
the average risk population, representing approximately 95% of commercial
covered lives in
Our financial performance has also been impacted by the increase in in-network coverage of our tests by third-party payers, which we believe is crucial to our growth and long-term success. However, because the negotiated fees under our contracts with third-party payers are typically lower than the list price of our tests, as we enter into additional in-network contracts with insurance providers, our average reimbursement per test may decrease as compared to out-of-network contracts. While we expect the reduction in average reimbursement per test from in-network pricing to reduce our revenues and gross margins in the near term, in-network pricing is more predictable than out-of-network pricing, and we intend to continue to mitigate the impact by driving more business from our most profitable accounts.
Cost of Product Revenues
The components of our cost of product revenues are material and service costs, impairment charges associated with testing equipment, personnel costs, including stock-based compensation expense, equipment and infrastructure expenses associated with testing samples, electronic medical records, order and delivery systems, shipping charges to transport samples, costs incurred from third party test processing fees, and allocated overhead such as rent, information technology costs, equipment depreciation and utilities. Costs associated with Whole Exome Sequencing ("WES") are also included, as well as labor costs, relating to our Signatera CLIA and Signatera research use only offerings. Costs associated with performing tests are recorded when the test is accessioned. We expect cost of product revenues in absolute dollars to increase as the number of tests we perform increases.
As we continue to achieve scale, we have increased our focus on more efficient use of labor, automation, and DNA sequencing. For example, we updated the molecular and bioinformatics process for Panorama to further reduce the sequencing reagents, test steps and associated labor costs required to obtain a test result, while increasing the accuracy of the test to allow it to run with lower fetal fraction input. These improvements also reduced the frequency of the need to require blood redraws from the patient.
Cost of Licensing and Other Revenues
The components of our cost of licensing and other revenues are material costs associated with test kits sold to Constellation clients, development and support services relating to our Strategic Partnership Agreements, and costs associated with specimens and WES.
We currently have 15 revenue generating licensing and service agreements with laboratories under our Constellation distribution model. We consider our cost of licensing and other revenues for the Constellation software platform to be relatively low, and therefore we expect its associated gross margin is higher. We expect our cost of licensing will increase in relation to volume growth.
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Critical Accounting Policies
Our management's discussion and analysis of our financial condition and results
of operations is based on our financial statements, which have been prepared in
accordance with generally accepted accounting principles in
Recent Accounting Pronouncements
There have been no material changes to our other critical accounting policies
and estimates as compared to the disclosures in our annual report on Form 10-K
for the year ended
Results of Operations
Comparison of the three months ended
Three Months Ended
March 31, Change
2022 2021 Amount Percent
(in thousands except percentage)
Revenues
Product revenues $ 190,002 $ 120,384 $ 69,618 57.8 %
Licensing and other revenues 4,131 31,932 (27,801) (87.1)
Total revenues 194,133 152,316 41,817 27.5
Cost and expenses
Cost of product revenues 102,670 65,832 36,838 56.0
Cost of licensing and other revenues 545 981 (436) (44.4)
Research and development 80,414 40,188 40,226 100.1
Selling, general and administrative 147,634 108,332 39,302 36.3 Total cost and expenses
331,263 215,333 115,930 53.8
Loss from operations (137,130) (63,017) (74,113) 117.6
Interest expense (2,087) (2,073) (14) 0.7
Interest and other income, net 801 1,371 (570) (41.6)
Loss before income taxes (138,416) (63,719) (74,697) 117.2
Income tax expense (179) (134) (45) 33.6
Net loss $ (138,595) $ (63,853) $ (74,742) 117.1 %
Revenues
Total revenues are comprised of product revenues, which are primarily driven by
sales of our Panorama and HCS tests, oncology testing, and licensing and other
revenues, which primarily includes development licensing revenue and licensing
of our Constellation software. Total revenues increased by
We derive our revenues from tests based on units reported to customers-tests delivered with a result. All reported units are either accessioned in our laboratory or processed outside of our laboratory. As noted in the section titled "Overview" above, the number of tests that we process is a key metric as it tracks overall volume growth. During the three
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months ended
Product Revenues
During the three months ended
Licensing and Other Revenues
Licensing and other revenues decreased by
Cost of Product Revenues
During the three months ended
Cost of Licensing and Other Revenues
Cost of licensing and other revenues for the three months ended
Research and Development
Research and development expenses during the three months ended
Selling, General and Administrative
Selling, general and administrative expenses increased by
Interest Expense
Interest expense remained flat in the three months ended
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Interest and Other Income
Interest and other income for the three months ended
Liquidity and Capital Resources
We have incurred net losses each year since our inception. For the three months
ended
While we have introduced multiple products that are generating revenues, these revenues have not been sufficient to fund all operations. Accordingly, we have funded the portion of operating costs that exceeds revenues through a combination of equity issuances and debt and other financings. We expect to develop and commercialize future products and continue to invest in the growth of our business and, consequently, we will need to generate additional revenues to achieve future profitability and may need to raise additional equity or incur additional debt. If we raise additional funds by issuing equity securities, our stockholders would experience dilution. Additional debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any additional debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders and requires significant debt service payments, which diverts resources from other activities. Additional financing may not be available at all, or in amounts or on terms acceptable to us. If we are unable to obtain additional financing, we may be required to delay the development and commercialization of our products and significantly scale back our business and operations.
In
Refer to additional disclosures associated with risks and our ability to generate and obtain adequate amounts of cash to meet capital requirements for both short-term and long-term obligations.
Based on our current business plan, we believe that our existing cash and
marketable securities will be sufficient to meet our anticipated cash
requirements for at least 12 months after
Credit Line Agreement
In
Convertible Notes
In
The Convertible Notes are senior, unsecured obligations of the Company and bear
interest at a rate of 2.25% per year, payable in cash semi-annually in arrears
in May and November of each year, beginning in
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Convertible Notes mature in
We received net proceeds from the Convertible Notes of
Cash Flows
The following table summarizes our condensed consolidated cash flows for the
periods indicated:
Three Months Ended
March 31,
2022 2021
(in thousands)
Cash used in operating activities $ (137,277) $ (74,876)
Cash provided by investing activities 207,033 86,740
Cash provided by financing activities 4,156 4,570
Net increase in cash, cash equivalents and
restricted cash 73,912 16,434
Cash, cash equivalents and restricted cash,
beginning of period 84,614 48,855
Cash, cash equivalents and restricted cash, end of period
$ 158,526 $ 65,289
Cash Used in Operating Activities
Cash used in operating activities during the three months ended
Cash used in operating activities during the three months ended
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Cash Used in Investing Activities
Cash provided by investing activities for the three months ended
Cash provided by investing activities for the three months ended
Cash Provided by Financing Activities
Cash provided by financing activities for the three months ended
Cash provided by financing activities for the three months ended
Contractual Obligations and Other Commitments
We have entered into arrangements that contractually obligate us to make payments that will affect our liquidity and cash flows in future periods. Such arrangements include those related to our lease commitments, Credit Line, Convertible Notes, commercial supply agreements and other agreements.
Operating leases
Our lease commitments consist of
Credit Line
The short-term debt obligations consist of the
Convertible Notes
The long-term debt obligations consist of the
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Inventory purchase and other contractual obligations
We enter into contracts in the normal course of business with various third
parties for clinical trials, preclinical research studies, testing,
manufacturing, and other services for operational purposes. The contractual
obligations also include a
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements during the periods presented.
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