NovoCure Limited — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Financial amounts are in U.S. dollars; unless stated otherwise, amounts below are in millions. NovoCure develops and commercializes Tumor Treating Fields systems, primarily Optune for glioblastoma (GBM) and NovoTTF-100L for malignant pleural mesothelioma (MPM).
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $92.1 | $64.8 | $252.1 | $178.4 |
| Gross profit / margin | $69.2 / 75% | $45.8 / 71% | $188.3 / 75% | $121.4 / 68% |
| Operating income (loss) | $3.9 | $(5.2) | $(1.1) | $(25.0) |
| Net income (loss) | $1.9 | $(11.7) | $(11.5) | $(47.9) |
| Operating cash flow | $14.9 | $5.6 | $19.7 | $(18.7) |
- Q3 revenue rose 42%; management attributed growth primarily to 499 additional active patients in current markets (22% growth) and higher revenue per patient, including improved reimbursement. Nine-month revenue increased 41%.
- Active patients totaled 2,751 at quarter-end, versus 2,252 a year earlier. Q3 prescriptions were 1,319 versus 1,243; 82% were for newly diagnosed GBM, compared with 75% in Q3 2018.
- Operating expenses increased 28% in Q3 and 29% for the first nine months. Nine-month R&D rose 55%, with higher clinical-trial, personnel, medical-affairs, regulatory and engineering costs. Sales and marketing and G&A also increased.
- Q3 net income included a $0.6 million income-tax benefit; the company also recorded approximately $1.5 million of U.S. R&D tax credits. Nine-month results remained loss-making.
- At September 30, cash and equivalents were $208.0 million, short-term investments $104.6 million, and restricted cash $2.1 million. Cash, equivalents and short-term investments totaled $312.6 million, up $66.7 million from December 31, 2018. Current assets were $406.9 million and current liabilities $80.4 million.
- Term-loan principal was $150.0 million ($149.4 million net carrying amount). Total liabilities were $253.5 million. The loan is secured by substantially all company and guarantor assets and includes customary covenants and prepayment premiums or make-whole provisions.
- Accumulated deficit was $655.1 million. Ordinary shares outstanding rose to 98.95 million from 93.25 million at year-end 2018, mainly reflecting option and warrant exercises and vested awards.
Material changes and business developments
- Q3 gross margin improved four percentage points year over year; nine-month margin improved seven points. Management cited lower cost of goods per active patient from efficiency initiatives and scale, partly offset by higher array-shipping costs.
- The company moved to positive operating cash flow for the first nine months, versus cash use in the prior-year period. Management attributed the improvement mainly to reduced net loss and higher non-cash share-based compensation; receivables also increased and used cash.
- Medicare fee-for-service coverage for Optune in newly diagnosed GBM became effective September 1, 2019; Q3 revenue included an initial $0.5 million benefit. The company said it was managing the administrative ramp-up and appealing coverage denials.
- NovoTTF-100L received U.S. FDA Humanitarian Device Exemption approval in May for MPM with standard chemotherapy. The first commercial MPM patient began treatment in September. By quarter-end, prescribers were certified at 10 U.S. centers and two had completed required IRB review.
- The company adopted lease-accounting standard ASC 842 in 2019, recognizing right-of-use assets and lease liabilities. At September 30, right-of-use assets were $14.6 million; lease liabilities totaled $15.6 million, including $4.2 million current.
Outlook, risks and contingencies
- Management said available cash, equivalents and short-term investments were sufficient for at least the next 12 months under its existing plan and ability to control the timing of significant commitments. It expects continued substantial commercialization costs and higher R&D investment; spending could outpace gross profit and additional capital may be needed.
- The company planned to begin a GBM post-marketing trial studying earlier Optune use alongside radiation in the following months, with another GBM trial planned for 2020. It expected HEPANOVA phase 2 data in 2021 and an event-driven interim analysis for the ovarian-cancer INNOVATE-3 phase 3 trial in 2022.
- Management expected a German national reimbursement decision for Optune by October 2020. It planned to expand commercial activity into France and pursue payer access for MPM; early MPM claims may face appeals. Zai Lab was pursuing a China clinical-trial waiver and intended to launch Optune before year-end 2019 if granted.
- Key uncertainties include adoption and reimbursement, regulatory outcomes and clinical-trial results, execution of new launches, manufacturing and supply, and the need for future financing. The filing states no material change to previously disclosed risk factors.
- A former director and an affiliated company claimed entitlement to 210,000 shares based on an alleged 2003 verbal agreement. The company said it considered the claim without merit and intended to defend it; it recorded no accrual because liability was not considered probable and could not be reasonably estimated. Motions to dismiss and amend were pending.
Important facts for investors to verify
- Whether patient growth and improved reimbursement continue to translate into revenue and cash generation, particularly as Medicare coverage ramps up.
- Whether MPM commercialization and international reimbursement progress as planned, and whether the China launch proceeds.
- Clinical-trial timelines, results and regulatory or reimbursement milestones, including the stated 2021 HEPANOVA and 2022 INNOVATE-3 interim-analysis expectations.
- Cash use, working-capital trends, the $150 million term loan’s covenants and prepayment terms, and the potential for additional capital needs.
- The magnitude and outcome of the pending Israeli share claim, and future dilution from equity awards and option exercises.