NovoCure Limited — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. NovoCure develops and commercializes Tumor Treating Fields (TTFields). Its commercial product, Optune, is approved in certain markets for adult glioblastoma (GBM). Financial figures below are in U.S. dollars; millions unless noted.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net revenue | $34.9 million | $13.1 million | +167% |
| Gross profit / gross margin | $23.2 million / 66.6% | $5.1 million / 38.9% | Margin expanded |
| Operating loss | $(13.4) million | $(31.9) million | Loss narrowed |
| Net loss / loss per share | $(18.0) million / $(0.21) | $(35.4) million / $(0.42) | Loss narrowed |
| Net cash used in operating activities | $(26.9) million | $(31.0) million | Cash use decreased |
- Revenue growth primarily reflected increased Optune sales: $17.1 million more in the U.S. and $4.7 million more in other active markets. Active patients rose to 1,266 from 797; prescriptions received were 894 versus 755.
- Cost of revenue was $11.7 million, up 46%, mainly due to greater transducer-array shipments. Operating expenses were $36.6 million, down 1%; research and clinical expenses fell 18% after completion of the EF-14 pivotal trial, while sales and marketing rose 11%.
- At March 31, cash and cash equivalents were $84.6 million and short-term investments were $104.7 million, totaling $189.3 million. Total current assets were $243.5 million versus current liabilities of $31.9 million.
- Term-loan principal outstanding was $100.0 million; its balance-sheet carrying amount, net of discount and issuance costs, was $96.5 million. Interest is 10% annually, payable quarterly. The facility includes a minimum-liquidity covenant, net-sales requirements, and collateral and prepayment provisions.
- Total assets were $264.6 million, total liabilities $135.7 million, and accumulated deficit $538.6 million. The company recorded $4.6 million of non-cash share-based compensation.
Material changes and business developments
- Beginning in Q4 2016, NovoCure recognized some revenue on an accrual basis; previously reported revenue was cash-based. In Q1 2017, $14.7 million was recognized on an accrual basis and $20.1 million on a cash basis. Gross billings of $73.2 million are not equivalent to recognized revenue; the company said it expects a continuing mix of cash- and accrual-based recognition.
- As of March 31, management reported coverage availability for more than 187 million Americans and in-network contracts covering more than 137 million lives. Medicare fee-for-service represented 20%–25% of the U.S. active patient population and had denied the company’s claims to date.
- In March, Japan’s health ministry approved the second-generation Optune system; NovoCure also filed in Japan for a defined reimbursement rate for newly diagnosed GBM. After quarter-end, the company reported final analyses of its 695-patient EF-14 trial: two-year survival was 43% with Optune plus temozolomide versus 30% with temozolomide alone, and five-year survival was 13% versus 5%.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance was provided. Management expects significant operating expenses and losses for at least the next several years, with R&D, clinical-trial, and commercialization costs expected to increase. It stated that available cash, cash equivalents, and short-term investments should fund operations for at least 12 months under its existing plan, while noting additional capital may be needed.
- Key risks include adoption and reimbursement of Optune, payer coverage, regulatory approvals for additional indications, clinical outcomes, manufacturing and third-party supply, intellectual property, and the need for future financing. Planned or ongoing studies include brain metastases, NSCLC, pancreatic, ovarian, and mesothelioma cancers.
- Two putative class actions filed in January 2017 allege misstatements or omissions in the 2015 IPO materials. The cases were consolidated. NovoCure disputes the claims; it recorded no accrual because a loss was not considered probable and the amount could not be reasonably estimated.
- Unrecognized tax benefits were $2.8 million at quarter-end; the company did not expect significant related tax payments within the next year. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and rising active-patient counts persist, and how revenue recognition, payer collections, and gross billings reconcile over time.
- Whether coverage translates into reimbursement and access, particularly given Medicare fee-for-service claim denials and the pending Japanese reimbursement rate.
- Cash burn, liquidity-covenant compliance, debt service and prepayment terms, and the timing or need for additional financing.
- Commercial execution and clinical-trial progress, including the applicability of the reported EF-14 survival results and outcomes in other tumor indications.
- Developments in the IPO-related litigation and any change in the company’s assessment of potential liability.