NovoCure Limited — Q2 2018 Form 10-Q
Business and period: NovoCure develops and commercializes Tumor Treating Fields, with Optune approved in certain markets for adult glioblastoma (GBM). This unaudited report covers the quarter and six months ended June 30, 2018; dollar amounts below are U.S. dollars.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $61.5 million | $38.4 million | $113.6 million | $73.3 million |
| Gross profit | $41.7 million | $25.2 million | $75.6 million | $48.4 million |
| Gross margin | 67.8% | 65.7% | 66.5% | 66.1% |
| Operating loss | $(7.1) million | $(15.5) million | $(19.8) million | $(28.9) million |
| Net loss | $(15.5) million | $(21.2) million | $(36.2) million | $(39.2) million |
| Operating cash used | — | — | $24.3 million | $32.8 million |
Q2 revenue rose 60% year over year, attributed to Optune adoption in the U.S. and Germany, Japan launch activity, and an improved gross-to-net revenue spread. At quarter-end, active patients totaled 2,169, versus 1,460 a year earlier. Revenue growth outpaced cost of revenue growth, lifting gross margin. Operating expenses increased 20% in Q2, including higher clinical, commercial, and administrative spending. Q2 net loss included $10.2 million of non-cash share-based compensation.
Liquidity, debt, and balance sheet
- At June 30, 2018, cash and cash equivalents were $114.5 million, short-term investments $104.5 million, and restricted cash $2.2 million; cash plus short-term investments totaled $219.0 million.
- Current assets were $289.9 million and current liabilities $45.2 million. Total liabilities were $197.8 million; shareholders’ equity was $112.1 million.
- The company reported $150 million principal outstanding under a new term loan bearing 9% annual interest, due February 2023. The facility is secured by substantially all company assets and includes prepayment provisions, including upon certain licensing transactions or a change of control.
- Six-month financing cash flow was $62.9 million, reflecting the new loan proceeds, repayment of the prior $100 million loan, and proceeds from option and warrant exercises. Operating cash use improved year over year to $24.3 million.
Material changes, outlook, and risks
- ASC 606 was adopted January 1, 2018. Compared with the prior revenue standard, adoption reduced Q2 revenue by $2.0 million and increased Q2 net loss by $2.0 million; six-month revenue fell by $5.5 million and net loss increased by $5.4 million. The 2017 comparison was prepared under the prior standard.
- Management said current cash and short-term investments were expected to fund operations for at least 12 months, but anticipated ongoing operating losses and rising research, development, clinical, and commercial expenses. Additional capital may be needed; profitability is not assured.
- More than 227 million Americans were estimated to have coverage for Optune, and contracts covered more than 220 million U.S. lives. Medicare fee-for-service had denied Optune claims to date; NovoCure requested reconsideration of the relevant local coverage determination in June 2018. Management estimated that coverage and payment could take about six months after a decision to revise the policy, but timing was not fixed.
- Management reported positive top-line STELLAR phase 2 results in mesothelioma versus historical controls and planned to submit an FDA Humanitarian Device Exemption application, with a potential 2019 U.S. launch subject to approval. A phase 2 liver cancer trial opened in June, with first enrollment anticipated in the second half of 2018. These are forward-looking plans, not guaranteed outcomes.
- A $5.5 million Technion milestone payment was made in Q1 following achievement of a cumulative sales milestone; the company stated it had no further financial obligations under that settlement. An Israeli tax audit concluded in Q1, with a $2.5 million payment made in Q2.
- The filing reported no material changes to previously disclosed legal proceedings or risk factors and no off-balance-sheet arrangements. Forward-looking outcomes remain subject to commercialization, reimbursement, clinical, regulatory, supply, financing, and other risks.
Important facts for investors to verify
- Whether Medicare coverage is revised and whether reimbursement is commercially viable; monitor payer access and the 20–25% share of U.S. active patients on Medicare fee-for-service.
- Whether patient growth and revenue translate into sustainable margins and lower operating cash burn as commercial and R&D expenses rise.
- Loan interest, collateral, covenants, repayment terms, and any prepayment premiums or make-whole obligations.
- How ASC 606 estimates for implicit discounts and revenue recognition affect reported revenue, receivables, and comparisons with 2017.
- Regulatory and clinical progress for the mesothelioma and liver cancer programs, including the stated HDE and launch expectations.