NovoCure Limited — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. NovoCure develops, manufactures and commercializes Tumor Treating Fields, principally through Optune for glioblastoma (GBM). Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $52.1 million | $34.9 million | +49% |
| Gross profit / gross margin | $33.9 million / 65.0% | $23.2 million / 66.6% | Margin down 1.6 pts |
| Operating loss | $(12.7) million | $(13.4) million | Loss narrowed $0.7 million |
| Net loss | $(20.7) million | $(18.0) million | Loss increased $2.7 million |
| Basic and diluted loss per share | $(0.23) | $(0.21) | |
| Operating cash flow | $(16.8) million | $(26.9) million | Cash use decreased $10.1 million |
Operating expenses rose 27% to $46.6 million: R&D and clinical trials $11.1 million (+18%), sales and marketing $18.1 million (+23%), and general and administrative $17.3 million (+39%). Net financial expense nearly doubled to $4.9 million, primarily reflecting the new loan’s interest and accelerated amortization costs on the repaid prior loan. Income tax expense was $3.2 million.
Liquidity, debt and cash flow
- At March 31, cash and cash equivalents were $111.6 million, short-term investments $104.7 million, and restricted cash $2.2 million. Current assets were $282.8 million versus current liabilities of $44.8 million.
- Cash, cash equivalents and restricted cash totaled $113.8 million. The company reported $216.3 million of cash, cash equivalents and short-term investments combined.
- In February, NovoCure drew a $150 million, 9% term loan due February 2023, and repaid its prior loan with $100 million of the proceeds. The new facility is secured by substantially all company assets and includes customary covenants and certain mandatory prepayment provisions. Carrying value of the loan, net of discount and issuance costs, was $149.2 million.
- Financing activities provided $51.7 million, including $149.2 million net loan proceeds and a $100 million loan repayment. Investing activities used $1.9 million.
- Management stated current cash and short-term investments should fund operations for at least the next 12 months under its business plan, while noting possible need for additional capital. It expects significant expenses and operating losses for at least the next several years and may never achieve profitability.
Business developments and material comparisons
- Active commercial patients reached 2,009 at quarter-end, up from 1,266 a year earlier; prescriptions received increased to 1,258 from 894. Gross billings were $126.3 million versus $73.2 million.
- Revenue growth was attributed to greater Optune adoption in the United States and Germany and initial launch activity in Japan. U.S. revenue was $37.8 million and EMEA revenue $13.9 million, including Germany revenue of $13.4 million.
- Cost of revenue increased 56%, faster than revenue, mainly due to shipping arrays for more patients and higher field-equipment depreciation. Gross margin consequently declined.
- Q1 2018 results reflect adoption of ASC 606; Q1 2017 was prepared under ASC 605. NovoCure said ASC 606 reduced Q1 2018 revenue by $3.5 million and increased net loss by $3.3 million compared with the amounts that would otherwise have been reported. The adoption also resulted in a $2.2 million cumulative adjustment to opening accumulated deficit.
- In March, NCCN guidelines added alternating electric field therapy as a Category 1 treatment for newly diagnosed GBM in conjunction with temozolomide. The company estimated more than 217 million Americans had coverage for newly diagnosed and/or recurrent GBM and had in-network benefit contracts covering more than 187 million lives; Medicare fee-for-service had denied claims to date and represented 20–25% of the U.S. active patient population.
- In April 2018, NovoCure reported positive top-line results from its STELLAR mesothelioma trial and said it planned to submit an FDA Humanitarian Device Exemption application in coming months. This was a post-quarter-end development; results were compared with historical controls.
Risks, contingencies and other items
- Key risks include payer coverage and reimbursement, adoption by patients and clinicians, regulatory approval and trial outcomes for new indications, manufacturing and third-party supply, intellectual property, financing needs, and legal and tax matters. The filing reported no material changes to the risk factors or legal proceedings described in the 2017 Form 10-K.
- A $5.5 million milestone payment to Technion was made in Q1 after the company achieved the specified cumulative-sales threshold in Q4 2017. NovoCure stated it had no further financial obligations under that settlement agreement.
- Settled uncertain tax positions were $0.1 million at March 31, down from $2.8 million at year-end; the company said it paid the settled amounts in Q2. No off-balance-sheet arrangements were reported. Disclosure controls were judged effective.
- Share-based compensation was $8.5 million, up from $4.6 million a year earlier, and was a substantial non-cash expense. The company reported no specific revenue or earnings guidance.
Important facts for investors to verify
- How ASC 606 affects revenue trends and comparability with prior periods, including estimates of implicit payer discounts and collections.
- Whether patient growth converts to sustainable revenue and improved gross margins, given rising cost of revenue and payer denials.
- Cash burn, spending growth, and the adequacy of liquidity against management’s stated 12-month runway and longer-term funding needs.
- The new loan’s interest burden, collateral, covenants, and potential prepayment costs or triggers.
- Final STELLAR results and the timing and regulatory outcome of any FDA application, as well as progress and costs in other clinical programs.