NovoCure Limited — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filing dated February 27, 2020. Amounts are in U.S. dollars unless noted. The filing also reports fourth-quarter results.
Business context
NovoCure develops and commercializes Tumor Treating Fields (TTFields), a medical-device cancer therapy. Its marketed products were Optune for glioblastoma (GBM) and NovoTTF-100L for malignant pleural mesothelioma (MPM). Optune was sold in the U.S., Germany, Austria, Israel, Japan, Sweden and Switzerland; NovoTTF-100L was marketed in the U.S. The company’s strategy is to expand product adoption and advance clinical trials in additional solid tumors.
Financial and operating performance
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $351.3 million | $248.1 million |
| Gross profit / gross margin | $262.7 million / 75% | $168.0 million / 68% |
| Operating income (loss) | $(0.9) million | $(33.7) million |
| Net income (loss) | $(7.2) million | $(63.6) million |
| Operating cash flow | $26.6 million | $(1.9) million |
| Cash, equivalents and short-term investments at year-end | $326.1 million | $245.9 million |
- Revenue rose 42%, driven mainly by 526 additional active patients, a 22% increase, and improved reimbursement approval rates in the U.S. and EMEA. Active patients reached 2,909 at year-end, versus 2,383 in 2018; 2019 prescriptions received were 5,371, versus 5,060.
- Cost of revenue increased 11%, slower than revenue growth. Cost per active patient per month fell 12% to $2,755, contributing to gross-margin expansion.
- Operating expenses grew 31% to $263.6 million. Research and development/clinical trial expense increased 56% to $79.0 million, reflecting the four Phase 3 programs and other development spending.
- Adjusted EBITDA, a company-defined non-GAAP measure, increased to $60.0 million from $15.2 million. It includes an add-back of $52.4 million in share-based compensation in 2019; it is not GAAP net income.
- Fourth-quarter revenue was $99.2 million, versus $69.7 million a year earlier. Q4 operating income was $0.2 million and net income was $4.3 million, compared with operating and net losses of $8.7 million and $15.6 million, respectively, in Q4 2018. Q4 diluted EPS was $0.04.
- Year-end working capital was $353.6 million. The company reported $150 million principal outstanding under its 9% term loan, due February 2023; the loan is secured and includes covenants and prepayment provisions.
Material changes and outlook
- Revenue growth and improved gross margin substantially narrowed the annual operating and net losses; operating cash flow turned positive.
- Medicare’s new coverage policy for Optune newly diagnosed GBM took effect September 1, 2019. NovoCure recognized $5.5 million in 2019 revenue from Medicare beneficiaries billed under the policy, while noting administrative ramp-up and claim denials/appeals remain relevant.
- The FDA approved NovoTTF-100L for MPM through the HDE pathway in 2019. Initial commercial rollout was underway, with only three active MPM patients at year-end.
- Management said available cash, equivalents and short-term investments were sufficient for at least 12 months under its existing business plan, while warning that planned R&D, sales and administrative spending would continue to rise and could outpace gross profit. No specific revenue or earnings guidance was provided.
- Management expected trial and market developments to remain key drivers. Phase 3 trials addressed brain metastases, non-small-cell lung cancer, pancreatic cancer and ovarian cancer; enrollment in METIS was slower than anticipated, while PANOVA-3 enrollment had improved. The filing gave expected data timing, including 2021 for METIS, 2022 for LUNAR and PANOVA-3, and 2024 for INNOVATE-3; these are estimates, not assurances.
Risks, contingencies and unusual items
- Commercial performance depends heavily on Optune and reimbursement, including Medicare claim processing, payer coverage and continued patient/physician adoption. Treatment requires substantial daily device use, which may affect adherence and market acceptance.
- Clinical, regulatory and execution risks include trial enrollment and outcomes, competition, regulatory approval for new indications, and the transition to the EU Medical Device Regulation. Some components have single-source suppliers; manufacturing is outsourced.
- The company cited the emerging COVID-19 outbreak as a potential risk to clinical enrollment, commercial activity and supply, including components sourced from China. It reported no effect on 2019 results.
- A former director and affiliated company sought approximately 1.2 million ordinary shares in pending litigation in Israel. NovoCure disputed the claim, had not accrued a liability because loss was not considered probable and could not be reasonably estimated, and intended to defend the case.
- Revenue measurement involves estimated variable consideration and implicit price concessions. The auditor identified this as a critical audit matter. The company also reported a $1.6 million income tax benefit for 2019, versus $17.6 million tax expense in 2018.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting.
Key facts for investors to verify
- Whether revenue growth, active-patient additions and reimbursement rates—especially Medicare collections—continue to support revenue and cash generation.
- Whether the 75% gross margin and positive operating cash flow are sustainable as commercial and clinical spending rises.
- Cash and investment balances, the 9% secured loan’s covenants and maturity, and any future financing needs.
- Clinical-trial enrollment and data timelines, particularly slower METIS enrollment and planned interim or final analyses.
- Coverage and reimbursement progress for MPM and Germany, and the commercial contribution from the Zai Greater China collaboration.
- Resolution or developments in the share-claim litigation, along with supply-chain, regulatory and COVID-related impacts.