NovoCure Limited — Q3 2016 Form 10-Q
Business context and reporting period. NovoCure develops and commercializes Tumor Treating Fields (TTFields), including Optune for glioblastoma (GBM). This unaudited filing covers the three and nine months ended September 30, 2016; balance-sheet comparisons are to December 31, 2015. Amounts are U.S. dollars unless stated otherwise.
Financial and operating performance
- Revenue: Q3 revenue was $21.7 million, up 142% from $9.0 million. Nine-month revenue was $52.6 million, up 154% from $20.7 million. Growth was attributed to increased Optune adoption in the U.S. and other active markets.
- Commercial indicators: At quarter-end, 985 patients were active, versus 469 a year earlier. Q3 prescriptions totaled 690 versus 355. The 12-month prescription fill rate was 74%.
- Gross profit and margin: Q3 gross profit was $10.6 million, a 48.7% margin, compared with $3.3 million and 36.8% a year earlier. Nine-month reported gross profit was $17.3 million (32.9% margin), including a $6.4 million field-equipment impairment. Excluding that impairment, gross profit was $23.7 million (45.1% margin).
- Operating costs and profit: Q3 operating expenses were $38.8 million, up 41%; operating loss was $28.3 million versus $24.2 million. Net loss was $33.6 million versus $26.0 million, or $0.39 per share versus $2.09. Nine-month operating expenses were $114.8 million, up 44%, and net loss was $109.7 million versus $78.7 million, or $1.29 per share versus $6.21. Nine-month net loss included $16.7 million of non-cash share-based compensation.
- Cash flow: Nine-month operating cash use was $93.9 million, compared with $73.8 million in 2015. Investing activities provided $16.4 million, primarily reflecting net short-term investment maturities and purchases. Financing activities provided $73.8 million, mainly from the additional term-loan draw. Cash and cash equivalents were $115.8 million at quarter-end.
- Liquidity and debt: Cash, cash equivalents and short-term investments totaled $235.5 million, versus $269.4 million at year-end 2015. The company reported that this liquidity was sufficient for at least 12 months under its existing business plan. Term-loan principal was $100 million, bearing 10% annual interest and due in January 2020; it is secured by substantially all company assets. The company reported compliance with loan covenants.
- Other balance-sheet items: Current assets were $271.4 million and current liabilities were $29.7 million. Inventory increased to $24.0 million from $13.6 million. Accumulated deficit was $497.8 million. Ordinary shares outstanding were 85.8 million at September 30 and 86.8 million as of October 27.
Material changes versus the prior comparable period
- Revenue growth substantially outpaced 2015, while active patients more than doubled year over year.
- Sales and marketing expense rose 78% in Q3 and 81% for the nine-month period as commercial operations expanded. General and administrative expense rose 51% and 67%, respectively, including higher personnel, share-based compensation, professional-services and public-company costs.
- Research, development and clinical-trial expense was broadly flat year over year. Spending related to starting the METIS trial was offset by the conclusion of EF-14 trial activity and lower second-generation system development costs.
- The July 2016 U.S. launch of the second-generation Optune system was accompanied by termination of first-generation manufacturing and a $6.4 million impairment charge in Q2. Management did not expect an additional material charge from the transition.
- The remaining $75 million available under the term-loan facility was drawn in July, increasing outstanding principal from $25 million to $100 million and contributing to higher financial expense.
Outlook, management commentary and risks
- Management expects significant operating losses and expenses to continue for at least several years, with research, clinical, sales, marketing, manufacturing and distribution costs expected to rise. The company may need additional capital and may never achieve profitability.
- Management said payer plans covering 130 million lives had issued positive U.S. coverage policies, up 14 million from the prior quarter. Contracts expected to become effective in Q4 were intended to make Optune an in-network benefit for more than 120 million lives.
- Medicare fee-for-service beneficiaries represented 20%–25% of the U.S. active patient base. The company reported no material payments from that program; denied invoices remained open while appeals proceeded through a backlogged administrative process.
- The company hoped to obtain Japanese approval for Optune for newly diagnosed GBM in late 2016. It reported trial and development plans spanning brain metastases, lung, pancreatic, ovarian and other cancers; anticipated timing and outcomes remain uncertain.
- In September, the company said long-term analysis of the 695-patient EF-14 trial confirmed survival benefits for Optune plus temozolomide versus temozolomide alone. The filing describes planned presentation of the analysis; clinical findings do not establish future commercial adoption or regulatory outcomes in other indications.
- Other key risks include reimbursement and market acceptance, clinical-trial results, regulatory approvals, manufacturing and third-party supply, intellectual-property protection, cash needs and loan covenants. The company reported no material change in contractual commitments, no off-balance-sheet arrangements, and effective disclosure controls as of quarter-end.
Important facts for investors to verify
- Whether reported revenue growth translates into durable patient additions, collections and improving gross margins, given the company’s cash-collection-based revenue recognition and the mix of current- and prior-period collections.
- Whether positive coverage policies and anticipated in-network contracts become effective and generate payments; track unresolved Medicare denials and appeals.
- Whether cash burn, investment balances and the $100 million secured loan leave adequate runway as expenses expand, and whether loan covenants remain satisfied.
- Whether the second-generation Optune transition supports demand without further material impairment or supply disruption.
- Regulatory and clinical milestones, including Japanese approval and results from METIS, PANOVA and INNOVATE; the filing provides expectations, not assured outcomes.