NovoCure Limited — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. NovoCure is a commercial-stage oncology company developing Tumor Treating Fields (TTFields); its commercial product, Optune, was approved for certain glioblastoma indications and marketed in the U.S., Germany, Switzerland, and Japan. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $17.9 | $6.5 | $31.0 | $11.8 |
| Gross profit | $1.7 | $1.8 | $6.8 | $3.1 |
| Operating loss | $(37.2) | $(27.2) | $(69.2) | $(49.2) |
| Net loss | $(40.6) | $(29.4) | $(76.0) | $(52.6) |
| Net cash used in operations | Not separately highlighted | Not separately highlighted | $(60.4) | $(51.7) |
- Q2 revenue grew 174% year over year; six-month revenue grew 164%. Growth was driven mainly by U.S. Optune adoption. Q2 U.S. revenue was $16.1 million, versus $6.2 million a year earlier.
- Reported gross margin was approximately 9.5% in Q2 and 21.9% for the first half, including a $6.4 million field-equipment impairment. Excluding that impairment, approximate gross margins were 45.3% and 42.6%, respectively.
- Q2 operating expenses were $38.9 million, up from $29.0 million. Sales and marketing and general and administrative spending increased with commercial expansion and public-company/ERP costs; R&D spending declined in Q2 as the EF-14 trial concluded.
- Cash and cash equivalents were $80.9 million and short-term investments were $120.0 million at June 30. Current assets were $234.7 million and current liabilities $34.6 million. The company reported $25 million principal outstanding under its term loan at quarter-end.
- Operating cash use increased to $60.4 million for the first half. Cash, cash equivalents, and short-term investments together declined $68.6 million from year-end to $200.9 million at June 30.
Material changes and unusual items
- In July 2016, after quarter-end, NovoCure drew the remaining $75 million available under its term loan, receiving $72.9 million net of discount and issuance costs. This brought principal debt to $100 million. The loan bears 10% annual interest, is due in January 2020, and is secured by substantially all company assets.
- The company recorded a $6.4 million impairment charge for first-generation Optune field equipment after discontinuing its manufacture as it transitioned U.S. patients to the second-generation system. FDA approval of the second-generation system came in July 2016; management did not expect further material impairment from the conversion.
- Revenue is recognized when cash is collected and other criteria are met. Accordingly, reported revenue may include collections for prior-period patient use, and revenue timing reflects payer collection patterns.
- Share-based compensation was $11.1 million for the first half, compared with $4.4 million in the prior-year period. The accumulated deficit was $464.1 million at June 30.
Outlook, management commentary, and risks
- Management expected cash and short-term investments at June 30, together with the subsequent $75 million loan draw, to fund operations for at least 12 months under its business plan. It also expected R&D, commercial, and administrative expenses to rise over the next several years and said additional capital may be needed.
- The company expected continued operating losses for at least several years and noted that it may never achieve profitability. The loan has quarterly covenants, including minimum liquidity and pro forma net-sales requirements; NovoCure reported covenant compliance at June 30.
- Commercial indicators increased: Q2 prescriptions received were 657 versus 428 a year earlier, and active patients at quarter-end were 891 versus 425. The 12-month prescription fill rate was 75%.
- Clinical developments included FDA authorization to begin the phase 3 METIS brain-metastases trial; enrollment was completed in the PANOVA pancreatic-cancer and INNOVATE ovarian-cancer phase 2 studies, with pilot data anticipated in December 2016. Management hoped for Japanese approval for newly diagnosed GBM in late 2016.
- Key disclosed risks include adoption and reimbursement, obtaining regulatory approvals for new indications, clinical-trial outcomes, supply and manufacturing capacity, intellectual-property protection, and funding needs. The filing reported $2.2 million of unrecognized tax benefits and no expected significant related payment within the next year.
Important facts for investors to verify
- Whether prescription growth converts into filled prescriptions, sustained active-patient growth, and timely cash collections.
- The effect of the second-generation Optune transition on manufacturing costs, equipment impairment, and gross margins.
- Cash runway and covenant headroom after the July loan draw, including the burden of 10% interest and the 2020 maturity.
- Progress, timing, and results for METIS, PANOVA, INNOVATE, and the Japanese regulatory application.
- Whether rising commercial and administrative spending can be supported by revenue growth and reimbursement coverage.