NTRA - Natera: Strong Growth Amidst Profitability Challenges

2023-08-15 09:25:20 ET

Summary

• Natera specializes in cfDNA technology, achieving 31.9% revenue growth in Q2 2023 and raising their annual outlook.
• Despite strong growth, Natera faces challenges with profitability, annual cash burn, and existing debts.
• Considering growth prospects and financial concerns, I recommend a "Hold" on Natera's stock while monitoring future developments.

Introduction

Natera ( NTRA ) is a leading diagnostics firm harnessing molecular and bioinformatics technology to reshape global disease management. Specializing in cell-free DNA (cfDNA) technology, the company offers advanced genetic tests in women’s health, oncology, and organ health. Since its inception, Natera has launched a suite of products, most notably Panorama and Horizon, contributing to a significant revenue growth. With over 135 published studies and a global distribution network, they're at the forefront of personalizing medical interventions for better health outcomes.

Recent developments: Natera Q2 EPS beats at -$0.97; revenue came in at $261.4M, up 31.9%; raised 2023 outlook.

The following article examines Natera's financial performance, emphasizing their advancements in genetic testing and challenges regarding profitability. I recommend observing the stock and appreciating their market position.

Q2 2023 Earnings

Looking at Natera's most recent earnings report , the company reported revenues from around 594,900 tests in the second quarter of 2023, marking a 29.0% increase compared to the same period in 2022. Gross profit rose to $118.3M in this quarter, up from $89.0M in Q2 2022, with a slight increase in gross margin from 44.9% to 45.2%. Operating expenses decreased by 0.6% from the previous year, amounting to $230.7M, primarily due to reduced payroll and R&D expenses. Natera's operational loss was $112.4M, a decline from the $143.1M loss of Q2 2022. The net loss stood at $110.8M or ($0.97) per share. The company's cash reserves amounted to $735.9M, down from $898.4M at the end of 2022. Additionally, Natera adjusted its 2023 revenue forecast to a range of $1.015B to $1.035B.

Liquidity And Cash Runway

Turning to Natera's balance sheet , the total of cash, cash equivalents, restricted cash, and short-term investments as of June 30, 2023 is $735.94M ($381.11M + $354.83M). Over the past six months, the company has an operating loss of $250.73M, translating to an annualized cash burn of approximately $501.46M when doubled. This results in a cash runway of roughly 1.47 years, derived by dividing $735.94M by $501.46M. Looking further into the balance sheet, the company has current and long-term debt financing totaling $362.71M ($80.42M + $282.29M). Despite the substantial cash and investments position, with a considerable annual cash burn rate and existing debts, Natera might need to consider additional financing options in the near future, especially if the losses continue or increase.

Valuation, Growth, And Momentum

According to Seeking Alpha data: Natera has a capital structure characterized by a significant cash position relative to its market capitalization, and a small portion in debt. The enterprise value stands at $6.12B. In terms of valuation, given the NM (Not Meaningful) for P/E ratios, it's evident that the company is not currently profitable. Natera exhibits a robust growth trajectory with YoY earnings estimates improving progressively from 2023 to 2025, indicating a steady climb towards profitability. Furthermore, sales forecasts reflect consistent YoY growth. The stock momentum for Natera outperforms the S&P 500 over the 3M, 6M, and 9M periods but slightly underperforms on a 1Y basis.

Natera Posts Strong Growth, Celebrates Litigation Wins

Natera recently highlighted several growth strategies in their earnings call . In the transplantation field, they presented data from the ProActive trial at the American Transplant Congress, showcasing the effectiveness of their Prospera test for predicting kidney transplant rejection. In women’s health, they received recognition for their Panorama test with the publication of their fourth paper from the SMART trial, which validates screening for sex chromosomal aneuploidies using NIPT. The oncology sector witnessed Natera's achievement in publishing over 50 peer-reviewed papers and their significant presence at ASCO, where they presented crucial Signatera data. The company is aiming for inclusion in future NCCN guidelines based on results from various trials.

Furthermore, Natera announced favorable litigation outcomes: a $19.35 million patent infringement lawsuit victory against ArcherDX and Invitae, and a reversed $45 million false advertising case verdict . Their business witnessed over 23% volume growth compared to the previous year, particularly in the Signatera segment. Efforts are ongoing to improve the margins in their women's health products. Signatera's performance remained notably robust, and they continue to optimize revenue streams and gross margins across all product lines.

My Analysis And Recommendation

In analyzing Natera's recent performance, it's evident that the company is capitalizing on its innovative genetic tests, driving growth across various medical fields, especially in women's health, oncology, and organ health. Their Q2 results, highlighted by revenue growth of nearly 32% YoY and a 29% increase in test volume, are a testament to their growing market presence. Their balance sheet does present a mix of strengths and concerns. On the upside, a substantial cash reserve and a promising 1.47-year cash runway offer cushioning against immediate financial concerns. Yet, the yearly cash burn and existing debt cannot be overlooked, potentially necessitating new financing routes soon.

The diagnostic sector is rapidly evolving, and while Natera's leading-edge cfDNA technology places them ahead, competitors are consistently emerging. Their litigious victories underscore their commitment to protecting intellectual property, which is vital in such a competitive environment. The 15% stock price surge post-earnings likely reflects investor confidence in Natera's growth strategy and recent successes.

Taking the broader picture into account, including the projected growth in the fields Natera operates and the increasing global emphasis on personalized medical interventions, the company seems poised for substantial future growth. Yet, their path to profitability, considering the annual cash burn and debts, remains a concern.

Given the strong growth trajectory, favorable earnings results, and Natera's dominant position in a burgeoning market, I'd recommend a "Hold" on the stock. Investors should keep a close watch on the company's next moves, especially in managing its financial health while capitalizing on market opportunities.

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