NovoCure Limited — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Business context
NovoCure develops and commercializes Tumor Treating Fields through its Optune system. Its commercial business was focused on glioblastoma (GBM) in the U.S., Austria, Germany, Israel, Japan, Sweden and Switzerland. The company was also developing Optune for other solid tumors. Revenue is primarily driven by the number of patients receiving treatment and the amount collected per patient.
Financial and operating metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $248.1 | $177.0 |
| Gross profit / gross margin | $168.0 / 68% | $121.4 / 69% |
| Operating expenses | $201.7 | $160.7 |
| Operating loss | $(33.7) | $(39.3) |
| Net loss | $(63.6) | $(61.7) |
| Net loss per share | $(0.69) | $(0.70) |
| Cash used in operating activities | $(1.9) | $(33.1) |
Fourth-quarter 2018 revenue was $69.7 million, gross profit was $46.6 million, operating loss was $8.7 million and net loss was $15.6 million. Fourth-quarter 2017 revenue was $53.7 million, gross profit was $38.0 million, operating loss was $4.5 million and net loss was $10.9 million.
- At year-end, cash and cash equivalents were $140.6 million and short-term investments were $105.3 million, totaling $245.9 million. Working capital was $256.8 million.
- Outstanding principal debt was $150.0 million under a 9% secured term loan due February 2023; the balance-sheet carrying amount, net of discount and issuance costs, was $149.3 million. Current liabilities were $64.6 million and long-term liabilities were $163.0 million.
- Active patients at year-end increased to 2,383 from 1,834; prescriptions received during 2018 were 5,060, compared with 4,119 in 2017.
Changes versus the prior comparable period
- Annual revenue increased 40%, primarily reflecting 549 additional active patients (30% growth) and higher revenue per active patient, including improved reimbursement approvals in Germany and growth in Japan.
- Gross profit rose by $46.6 million, while operating expenses increased 25%. R&D and clinical-trial costs rose 33%, sales and marketing rose 22%, and general and administrative expenses rose 24%.
- Gross margin declined to 68% from 69%. Cost of revenue increased 44%, including higher array-shipping costs and a one-time $2.7 million increase in non-recoverable indirect taxes related to a supply-chain change.
- Net loss widened despite a narrower operating loss, reflecting higher net financial expense and income tax expense. Income tax expense was $17.6 million despite a pre-tax loss, principally reflecting operations and tax rates in multiple jurisdictions.
- Cash used in operations narrowed substantially to $1.9 million. Management attributed the change partly to non-cash share-based compensation, the Zai upfront license fee deferred as revenue, and higher payables; receivables growth was an offset.
Outlook, commentary and risks
- Management said available cash, cash equivalents and short-term investments were expected to fund operations for at least 12 months under its existing plan. It also expects R&D, sales and marketing, and administrative expenses to rise and potentially outpace gross profit; additional capital may be needed.
- Near-term commercial priorities include increasing GBM penetration in existing markets. The company expected to pursue an MPM U.S. launch in 2019, subject to FDA action on its humanitarian device exemption (HDE) application. The FDA had provided comments, and NovoCure was preparing a response; approval and any associated profit-limit exemption were uncertain.
- Clinical milestones remain uncertain: the company anticipated liver-cancer pilot-trial data in 2020; interim analyses for NSCLC and pancreatic pivotal trials in 2020 and 2021, respectively; and final data for brain metastases and NSCLC in 2021 and pancreatic cancer in 2022. It expected to commence a phase 3 ovarian-cancer trial in 2019.
- Medicare fee-for-service had denied Optune claims to date. In 2018, 20%–25% of U.S. active patients were Medicare fee-for-service beneficiaries. The durable medical equipment contractors accepted reconsideration of coverage for newly diagnosed GBM but not recurrent GBM; timing and outcome of a final coverage policy remained uncertain.
- Other material risks include dependence on Optune and successful clinical and regulatory outcomes, payer coverage and reimbursement, patient adoption and adherence, competition, reliance on some single-source suppliers, cybersecurity and privacy exposure, foreign-exchange volatility, and debt-service and covenant obligations.
- NovoCure licensed commercialization rights in Greater China to Zai Lab in 2018. It received a $15 million non-refundable upfront fee, netting $12.7 million after withholding taxes; most of the fee was deferred and recognized over a six-year performance period. The agreement also provides for up to $78 million in development, regulatory and commercial milestones and tiered royalties.
- A former director and an affiliated entity filed a claim seeking 210,000 shares based on an alleged 2003 verbal agreement. NovoCure said it considered the claim without merit and would defend it; no amount was accrued because a liability was not considered probable or reasonably estimable.
Important facts for investors to verify
- Whether growth in active patients and revenue per patient continues, and whether gross margin stabilizes after the 2018 decline.
- Progress and final terms of Medicare coverage reconsideration for newly diagnosed GBM, and the continuing effect of Medicare denials on collections and patient assistance.
- FDA disposition of the MPM HDE application, including launch timing and any profit restrictions, and progress against clinical-trial milestones.
- Cash use, future funding needs, and the costs and covenants of the $150 million secured loan, including any required prepayment provisions.
- The effect of ASC 606 on comparability: adoption reduced 2018 revenue by $8.7 million and increased net loss by $8.7 million versus the prior revenue-recognition method, according to the filing.
- Potential dilution from equity awards: the filing reported 16.1 million securities issuable under shareholder-approved plans at year-end, subject to applicable vesting and exercise terms.
- Developments in the 210,000-share legal claim and execution of the Zai collaboration, including whether contingent milestones and royalties are achieved.