Natera(NTRA) - 2022 Q4 - Annual Report

PART I Business Natera is a diagnostics company specializing in cell-free DNA technology, primarily focusing on women's health, oncology, and organ health, generating revenue from its core diagnostic tests Financial and Operational Highlights (2020-2022) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total Revenues | $820.2 million | $625.5 million | $391.0 million | | Product Revenues | $797.3 million | $580.1 million | $377.9 million | | Net Losses | ($547.8 million) | ($471.7 million) | ($229.7 million) | | Tests Processed | ~2.1 million | ~1.6 million | ~1.0 million | - Natera's core cfDNA technology combines novel molecular assays with statistical algorithms to identify genetic variations with high accuracy from small samples, applicable across women's health, oncology, and organ health[25][29] - The company operates CLIA-certified laboratories in Austin, Texas, and San Carlos, California[28] Overview Natera is a diagnostics company leveraging cfDNA technology across women's health, oncology, and organ health, with 2022 revenues of $820.2 million and approximately 2.1 million tests processed Our Solution Natera's solution uses proprietary mmPCR and computational algorithms to detect genomic variations with high sensitivity and specificity across various diagnostic applications, distributed globally via Constellation - The company's technology combines mmPCR to measure thousands of SNPs with advanced algorithms to analyze the data, achieving high signal-to-noise ratio for detecting DNA fragments at very low frequencies[32] - Natera's technology has demonstrated high performance across its three main business areas: women's health (Panorama), oncology (Signatera), and organ health (Prospera)[33] Women's Health Natera's Women's Health division offers family planning, prenatal screening, and hereditary cancer risk tests, with Panorama NIPT and Horizon carrier screening as flagship products generating most revenue - The Panorama NIPT screens for fetal chromosomal abnormalities like Down syndrome as early as nine weeks into pregnancy, using a unique SNP-based method that provides high accuracy[36][38] - The SMART study demonstrated Panorama's high performance for 22q11.2 deletion syndrome, with 83% sensitivity and a 53% positive predictive value (PPV) using an updated AI algorithm[42] - The Horizon carrier screening test screens for over 200 inherited conditions, including Cystic Fibrosis and Spinal Muscular Atrophy, and can be performed from the same blood sample as Panorama[45][46] Oncology Natera's oncology division focuses on molecular residual disease (MRD) detection and recurrence monitoring in solid tumors, with Signatera as its personalized ctDNA test, targeting a U.S. market over $15 billion - Signatera is a personalized ctDNA test for MRD assessment that is custom-designed for each patient by tracking 16 tumor-specific clonal mutations, allowing for high accuracy at very low variant allele frequencies[54] - Clinical studies across multiple tumor types have shown that a positive Signatera test result predicted relapse with an overall positive predictive value (PPV) of over 98% without further treatment[58] - The total addressable market in the U.S. for recurrence and treatment monitoring for solid tumor cancers is estimated to be over $15 billion[53] Organ Health Natera's organ health division offers tests like Prospera for organ transplant rejection assessment, targeting an estimated U.S. market of approximately $3.0 billion, and Renasight for chronic kidney disease - The Prospera test assesses organ transplant rejection by measuring dd-cfDNA in the recipient's blood, offering a non-invasive alternative to biopsies for kidney, heart, and lung transplants[61][62] Prospera Clinical Validation Performance | Organ | Metric | Performance | Source Chunk | | :--- | :--- | :--- | :--- | | Kidney | Sensitivity | 89% | 63 | | Kidney | Specificity | 73% | 63 | | Heart | AUC | 0.86 | 63 | | Lung | AUC (Rejection vs. Stable) | 0.91 | 63 | Constellation Constellation is Natera's cloud-based platform enabling global partners to perform molecular workflows locally and access Natera's bioinformatics algorithms for analysis, expanding technology access - The Constellation platform enables international and U.S. laboratories to license Natera's technology, run molecular assays locally, and access Natera's bioinformatics algorithms through the cloud[67] Commercial Capabilities Natera's commercial strategy combines a direct U.S. sales force with a global partner network, focusing on physician education and test bundling to maximize sales and market penetration - In FY2022, approximately 75% of customers ordering the basic Panorama panel also ordered screening for 22q11.2 deletion syndrome, and about 33% also ordered Horizon carrier screening[72] Competition Natera operates in highly competitive molecular diagnostics markets, facing rivals like LabCorp, Illumina, Roche, Guardant Health, and CareDx across its women's health, oncology, and organ health segments - Key competitors in NIPT include LabCorp, Illumina, Myriad, and Quest[81] - Key competitors in MRD assessment include Roche, Guardant Health, and Adaptive Biotechnologies[82] - Key competitors in organ health include CareDx and Eurofins Viracor[83] Intellectual Property Natera protects its intellectual property through over 150 issued patents and 220 pending applications as of December 31, 2022, and is actively involved in IP litigation - As of December 31, 2022, Natera held over 150 issued U.S. and foreign patents and had over 220 pending patent applications[86] Reimbursement Natera receives reimbursement from commercial and government payers, with NIPT widely covered, but microdeletions testing reimbursement remains low, covering over 231 million lives in the U.S. as of December 31, 2022 - As of December 31, 2022, Natera and its laboratory partners had in-network contracts with health plans covering over 231 million lives in the United States[95] - Reimbursement for NIPT in average-risk pregnancies has improved, with most commercial insurers and an increasing number of state Medicaid programs providing positive coverage[94] - The company has experienced low average reimbursement rates for microdeletions testing and for its broader Horizon panel due to the implementation of specific CPT codes[92] Government Regulations Natera's business is subject to extensive federal, state, and international regulations, including FDA oversight of LDTs, CLIA certification, HIPAA, GDPR, and healthcare fraud and abuse laws - Natera's tests are currently offered as Laboratory Developed Tests (LDTs), which have historically been subject to FDA enforcement discretion, but the regulatory landscape remains uncertain[107][108] - The company's laboratories in Austin, TX, and San Carlos, CA, are CLIA certified and accredited by the College of American Pathologists (CAP). They also hold licenses in states with stringent requirements, such as California and New York[114][115][117][119] - The company is subject to healthcare fraud and abuse laws, including the federal Anti-Kickback Statute, the Stark Law, and the False Claims Act, which carry significant civil and criminal penalties for violations[134][145][148] Human Capital Management As of December 31, 2022, Natera had a global workforce of 3,018 employees, a 10.7% increase, emphasizing diversity with 62.7% women and over 40% minorities in the U.S. workforce - As of December 31, 2022, the global workforce comprised 3,018 employees, representing a 10.7% increase during 2022[157] - In 2022, women made up approximately 62.7% of the global workforce, and minorities comprised over 40% of the U.S. workforce[158] Risk Factors The company faces significant risks including revenue concentration, reimbursement uncertainty, a history of net losses, intense competition, potential FDA regulation, supply chain dependence, and intellectual property litigation - A majority of the company's revenues are derived from sales of its Panorama NIPT and Horizon carrier screening tests, and the business would be harmed if it cannot grow revenues for these products[199] - The company has incurred net losses since inception, with a net loss of $547.8 million in 2022 and an accumulated deficit of $1.9 billion as of December 31, 2022[205] - The company faces intense competition from established and emerging companies in women's health, oncology, and organ health, some of which have greater financial and technological resources[218][219] - Natera relies on Illumina as the sole supplier for its sequencing platform and related reagents for key tests like Panorama, Horizon, and Signatera, creating significant supply chain risk[232][233] Unresolved Staff Comments None Properties Natera leases its primary laboratory and office facilities, including approximately 136,000 square feet in San Carlos, CA, and 191,722 square feet in Austin, TX, with leases extending to 2027 and 2033 respectively Key Leased Facilities | Location | Size (sq. ft.) | Lease Expiration | | :--- | :--- | :--- | | San Carlos, CA | ~136,000 | October 2027 | | Austin, TX | ~191,722 | March 2033 | | South San Francisco, CA | 11,395 | November 2026 | Legal Proceedings The company is involved in various legal proceedings, including intellectual property, billing, marketing, and employment matters, with details referenced from the Consolidated Financial Statements - The company is involved in legal proceedings from time to time, the results of which are uncertain and could have an adverse impact due to defense costs and potential settlements[395] Mine Safety Disclosures Not applicable PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Natera's common stock (NTRA) trades on Nasdaq, with no cash dividends paid or anticipated, as the company intends to retain earnings for business growth - The company's common stock is listed on the Nasdaq Global Select Market under the symbol "NTRA"[400] - No cash dividends have ever been paid, and the company intends to retain all future earnings for business operations and expansion[402] Selected Financial Data Information required by this item is omitted as per SEC amendments to Regulation S-K effective February 10, 2021 Management's Discussion and Analysis of Financial Condition and Results of Operations Natera's 2022 revenues grew 31.1% to $820.2 million, driven by product revenue, though net loss widened to $547.8 million due to increased costs, with management affirming sufficient liquidity for at least 12 months Results of Operations (2021 vs. 2022) | Metric (in millions) | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $820.2 | $625.5 | 31.1% | | Product Revenues | $797.3 | $580.1 | 37.4% | | Licensing & Other Revenues | $22.9 | $45.4 | (49.5)% | | Total Cost & Expenses | $1,361.3 | $1,093.7 | 24.5% | | Cost of Product Revenues | $453.6 | $315.2 | 43.9% | | R&D | $316.4 | $264.2 | 19.8% | | SG&A | $588.6 | $511.0 | 15.2% | | Net Loss | ($547.8) | ($471.7) | 16.1% | - The increase in product revenues was driven by higher test volumes, which grew from approximately 1.57 million tests processed in 2021 to 2.07 million in 2022[419][461] - The decrease in licensing revenue was primarily due to the recognition of $28.6 million in deferred revenue from a settlement with Qiagen in 2021 that did not recur in 2022[462] - As of December 31, 2022, the company had $466.1 million in cash and cash equivalents and $432.3 million in marketable securities. Management believes this is sufficient to meet cash requirements for at least 12 months from March 1, 2023[470][473] Quantitative and Qualitative Disclosures About Market Risk Natera is primarily exposed to interest rate risk, where a 100 basis point increase could raise annual interest expense by $0.8 million and increase investment income by $4.3 million - The company's primary market risk is interest rate volatility affecting its variable-rate Credit Line and its investment portfolio[494] Financial Statements and Supplementary Data This section contains Natera's audited consolidated financial statements for the fiscal years ended December 31, 2022, 2021, and 2020, including balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes and an unqualified auditor's opinion from Ernst & Young LLP Consolidated Balance Sheet Summary (As of Dec 31, 2022) | Account (in thousands) | Amount | | :--- | :--- | | Total Assets | $1,394,474 | | Cash, Cash Equivalents & Short-term Investments | $898,306 | | Accounts Receivable, net | $244,385 | | Total Liabilities | $688,730 | | Debt Financing (Short & Long-term) | $362,003 | | Total Stockholders' Equity | $705,744 | Consolidated Statement of Operations Summary (Year Ended Dec 31, 2022) | Account (in thousands) | Amount | | :--- | :--- | | Total Revenues | $820,222 | | Total Cost and Expenses | $1,361,262 | | Loss from Operations | ($541,040) | | Net Loss | ($547,799) | | Net Loss Per Share (Basic & Diluted) | ($5.57) | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2022, a conclusion affirmed by Ernst & Young LLP, following ERP system modifications - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[738] - Management concluded that the company maintained effective internal control over financial reporting as of December 31, 2022, a conclusion audited and affirmed by Ernst & Young LLP[740][741] Other Information Chief Operating Officer Robert Schueren transitioned to a part-time role effective February 24, 2023, and is no longer considered a Section 16 officer of the company - Effective February 24, 2023, Chief Operating Officer Robert Schueren transitioned to a part-time role and is no longer a Section 16 officer[755][756] Disclosure Regarding Foreign Jurisdictions That Prevent Inspections None PART III Directors, Executive Officers and Corporate Governance The information required by this item is incorporated by reference from the company's definitive proxy statement for its 2023 annual meeting of stockholders Executive Compensation The information required by this item is incorporated by reference from the company's definitive proxy statement for its 2023 annual meeting of stockholders Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item is incorporated by reference from the company's definitive proxy statement for its 2023 annual meeting of stockholders Certain Relationships and Related Transactions, and Director Independence The information required by this item is incorporated by reference from the company's definitive proxy statement for its 2023 annual meeting of stockholders Principal Accounting Fees and Services The information required by this item is incorporated by reference from the company's definitive proxy statement for its 2023 annual meeting of stockholders PART IV Exhibits and Financial Statement Schedules This section lists the financial statements and exhibits filed as part of the Annual Report on Form 10-K, including corporate governance documents, material contracts, and Sarbanes-Oxley Act certifications Form 10-K Summary None