What happened
Shares of Natera (NTRA 0.39%) jumped nearly 25% today after the company announced fourth-quarter and full-year 2018 operating results. The business delivered impressive growth last year -- as did its genetic testing peers -- and expects that momentum to carry into 2019. That's partly due to a potentially lucrative partnership with China's genomics powerhouse, BGI, which was announced the day before. The genetic testing player will receive a net up-front payment of $44 million plus royalties on products and services provided in China.
That said, today's pop doesn't really make much sense. Investors excited about the growth potential of Natera cannot dismiss the fact the business boasts what is by far the worst operating margin among major genetic testing companies. Meanwhile, biotech companies that link up with Chinese peers generally do so out of desperation. Do the potential and difficult-to-quantify economic rewards outweigh the risks of intellectual property theft?
As of 1:21 p.m. EDT, the stock had settled to a 21.8% gain.
Image source: Getty Images.
So what
Natera reported revenue of $257 million and an operating loss of $114 million in 2018. While revenue jumped 23% year over year, the business reported a greater operating loss than in 2016, when revenue was 18% lower. That suggests the platform is not realizing economic benefits as it scales.
By comparison, competing genetic testing platforms run by Genomic Health, NeoGenomics, and Myriad Genetics are all delivering operating profits and have improved their operating margins as they've grown. And even though Invitae is still unprofitable on the same basis, the business began shrinking year-over-year operating losses in the third quarter of 2018. It expects to generate at least $220 million in revenue in 2019. Given the trajectory of operations, that could enable the business to exit the year with nearly profitable quarterly operations. It could be generating positive quarterly operating cash flow by then.
That should put Natera's full-year 2019 guidance into perspective for investors. The business expects to generate revenue in the neighborhood of $289 million and burn about $90 million in cash in the year ahead. It actually guided for operating losses to increase in 2019. That doesn't suggest the business is heading in the right direction.
Now what
While top-line growth of 23% seems impressive, that's more than offset by a terrible operating margin. The weakness really stands out when compared to peers in the space. Simply put, investors looking to get into the genetic testing industry can do a lot better than Natera.
