Natera, Inc.

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

Natera, Inc. is a diagnostics company focused on non-invasive genetic testing for reproductive health, oncology, and organ health, aiming to enable better patient care by providing actionable genetic information.

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The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Natera, Inc. (NTRA) is a genetic testing company focused on reproductive health, oncology, and organ health using advanced molecular techniques and proprietary software.

Business Overview

Natera’s business revolves around providing genetic testing services through various assays. Their main sources of revenue can be broadly categorized into:

  1. Reproductive Health: This segment includes tests like Panorama, a non-invasive prenatal test (NIPT) that screens for chromosomal abnormalities in a fetus using a maternal blood sample. This is Natera’s main revenue driver.
  2. Oncology: Natera offers Signatera, a minimal residual disease test for cancer patients, which detects microscopic cancer cells in the blood and predicts the likelihood of cancer recurrence.
  3. Organ Health: Natera provides Prospera, a test for organ transplant patients that monitors the health of a transplanted organ to assess the risk of rejection.

These tests, using proprietary technology and software, are typically ordered by physicians and are primarily targeted toward prenatal care, cancer treatment, and transplant aftercare.

  1. Increasing Awareness of Genetic Testing: The field of genetic testing is witnessing a surge in awareness and acceptance as people become more conscious of preventative healthcare. In the reproductive health sector, the demand for NIPT is growing as more pregnant women seek early screening for genetic abnormalities. In oncology, the use of liquid biopsy to track minimal residual disease is expanding due to its minimally invasive nature and potential for early detection of recurrence. Transplant medicine is also relying more on sophisticated diagnostics to manage the risks of rejection and optimize patient outcomes.
  2. Technological Innovation and Automation: Advances in genomic sequencing technologies and automation capabilities have helped reduce the time it takes to run tests and lower their cost.
  3. Shift towards Precision Medicine: The healthcare industry is moving towards precision medicine, tailoring treatments based on each patient’s unique genetic makeup. This is where Natera’s technology has a huge role to play.
  4. Increased competition: As demand for molecular diagnostics grows, more companies are working on similar tests. This has led to more competition in the space, which might hurt smaller players like Natera with higher operating costs and smaller margins compared to larger players.

Competitive Landscape

Natera operates in a competitive market, facing both direct and indirect competition:

  • Direct Competitors: Competitors like Myriad Genetics, Invitae, and Exact Sciences provide overlapping or directly competing services with similar tests. They are able to offer cheaper tests at higher volumes due to their larger scale and therefore threaten smaller players.
  • Indirect Competitors: Natera also faces competition from large pharmaceutical and diagnostic companies that offer similar technology, often as a part of a broader product portfolio (eg. Roche, Thermo Fisher etc.)

Natera faces heavy competition from other companies in its field, including both direct and indirect rivals.

What Makes Natera Different

  1. Proprietary Technology: Natera’s core technology revolves around its proprietary bioinformatics algorithms and microarrays, especially for the detection of cell-free DNA (cfDNA). They boast their ability to do this faster and more accurately than competitors and claim to have the best technology and software for the tests they provide.
  2. Full-Stack Solution: Unlike most other players, Natera provides the full-stack solution including sample collection, lab testing, and data interpretation rather than relying on third parties for certain aspects of the process. This approach potentially reduces the turnaround time for the patients. This may also, however, lead to higher costs for them.
  3. Diverse Pipeline: The breadth of their testing products in reproductive health, oncology, and organ health offers a diversified revenue stream, making the company somewhat more resistant to shocks in any single market.
  4. Expanding into new markets: Natera is entering new markets like international regions, and new applications of their products (eg. cancer screening). This can lead to huge upside if the tests are successful and adopted in these new markets.

Financials Overview

Here’s a detailed look at Natera’s financials. Note that quarterly data is used in many of the following sections because there is a time lag on when annual reports are published.

Revenue Trends:

  • Natera’s revenue has been steadily increasing but is still not profitable, and is losing quite large amounts of money every quarter.
  • Total revenue for 2022 was approximately $942 million, with a quarterly average revenue of about $235 million.
  • In Q3 2023, their revenue was $283.9 million, showing an increase in revenue since last year. However, they had a total loss of $181 million during the same quarter.

Natera has demonstrated strong revenue growth, but it still operates at a loss.

Profitability and Margins:

  • Gross margins have fluctuated but currently are in the range of 45-55%, which is relatively high for the industry, indicating strong pricing power and a good product for which customers are willing to pay a premium.
  • Profitability remains elusive, as the operating expenses continue to be significant. Specifically, a significant portion of their expenses can be attributed to research and development (R&D) and Sales & Marketing.
  • As an early mover in the space, R&D expenses can be expected to be high, and they are also expanding aggressively in new markets.

A large part of Natera’s expenses is towards R&D and Sales & Marketing.

Balance Sheet and Cash Flow:

  • The company holds a significant amount of cash and cash equivalents. As of September 30, 2023, cash, cash equivalents, and marketable securities totaled $785.9 million.
  • The cash burn remains a concern as the company is not profitable, and relies on external funding for operations. For Q3 2023, cash used in operating activities totaled $129.3 million.
  • In September 2023, the company issued 287.5 million dollars of convertible notes which should lead to some cash flow that will help the company continue its operations.

Natera is heavily reliant on external funding as they are not profitable. They have good cash holdings and a new bond issuance which may help them sustain in the medium term.

Moat Assessment: 2/5

Natera’s economic moat is narrow due to a combination of factors:

  1. Proprietary Technology: The company does have a competitive advantage because it has proprietary technology for sequencing and interpreting DNA. However, such technology is likely to be imitated with time, as the space becomes more crowded. They are also constantly trying to evolve their technology to stay competitive but are facing rising competition from bigger companies that can have higher R&D and therefore put more effort and resources behind development of cutting edge technologies. The company does not have a strong patent protection that would prevent competition, which weakens its technology moat.

  2. Switching costs: There is some customer stickiness associated with test results and the need to keep consistency by sticking with one provider. However, the switching costs aren’t very high, and customers are willing to switch if better products and service are available.
  3. Barriers to Entry As discussed above, companies with proprietary technology and large research budgets are entering the space, which is making it harder for Natera to maintain a significant competitive advantage and barrier to entry.

Given the increasing competition and the company’s reliance on constantly improving technology to stay competitive, it makes sense to give the company a ‘Narrow’ moat rating.

Risks to the Moat and Business Resilience

  1. Increased Competition: The biggest risk to Natera is its increasingly competitive landscape. Competitors with larger budgets may find ways to imitate or even improve upon their technologies, making it difficult to maintain their advantage.
  2. Regulatory Changes and Reimbursement Risks: Natera is heavily reliant on reimbursement policies by government and private payers. Any negative changes in reimbursement rates for the current or upcoming tests could be a major blow. New regulations on the medical front can make some of their existing products obsolete too.
  3. Technological Obsolescence: While Natera has advanced technology, any major new breakthrough by competing companies may undermine their technologies and may make their tests obsolete. As such, Natera needs to constantly invest in R&D and continue to stay ahead.
  4. Operational Risks: As a company that is doing a lot of testing and requires huge amount of processing, their operational capabilities and efficiency can make or break the business. If they encounter any problems in their processes, they are likely to be hit badly, because their business is centered around running a seamless testing system.
  5. Financial Risks: Since Natera is a very high cash burn company, it is reliant on external funding. If they fail to get funding at a competitive price, then that will likely hurt their share prices and may put into question their future operations.

Despite these risks, the company shows some resilience because of its expanding suite of products, and established positions in its markets. Moreover, they are growing aggressively and have decent access to credit markets currently, allowing the company to pursue growth without an immediate risk of failure. However, the business resilience is only average at best given these risks.

Understandability: 4/5

Natera’s business is fairly easy to understand at the core, and the basic business of providing genetic tests is relatively straightforward to understand. The company’s business areas—reproductive health, oncology, and organ health—are well defined. However, some complexities may arise when you go through some of the specifics about each test, and what makes their testing procedure better than others. Also, understanding how they make their money and how they compete with competitors is a little complex, and not straightforward to understand. The different accounting rules and processes may be confusing to some, which is why a 4/5 is appropriate.

Balance Sheet Health: 3/5

While Natera currently maintains a good cash reserve, their overall balance sheet health is concerning, primarily because of their huge net losses. The key points of concern are:

  1. High Debt Burden: With issuance of convertible notes in September 2023, their debt is likely to have gone up, and if this debt is not managed wisely, it can put their financials into further trouble, especially if sales aren’t improving quickly enough.
  2. Continuous Losses: As Natera is not profitable yet, its reliance on debt and external funding makes it difficult to sustain for longer. This will continue to be a significant risk until they show good profit margins.
  3. Lack of tangible assets: A significant portion of Natera’s assets are towards R&D and other intangibles, which may not have sufficient value on a liquidation scenario, where the balance sheet health of traditional businesses is easier to analyze and compare with companies in different sectors.

Given these aspects, we find Natera to have a moderate level of financial health.