NovoCure Limited — Form 10-Q Summary
Business context and reporting period
NovoCure develops and commercializes tumor treating fields (TTFields), marketed as Optune, for solid tumors. This unaudited filing covers the three and nine months ended September 30, 2015; comparisons are to the corresponding 2014 periods. Optune was marketed for glioblastoma (GBM), with commercial activity in the United States and Europe and a Japan launch beginning in the second half of 2015. The October 2015 developments below occurred after quarter-end.
Financial results and liquidity
Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $8.953 | $4.374 | $20.704 | $11.689 |
| Gross profit | $3.294 | $1.788 | $6.398 | $4.283 |
| Gross margin | 36.8% | 40.9% | 30.9% | 36.6% |
| Operating expenses | $27.532 | $19.693 | $79.788 | $61.430 |
| Operating loss | ($24.238) | ($17.905) | ($73.390) | ($57.147) |
| Net loss | ($26.023) | ($18.320) | ($78.653) | ($57.766) |
| Net loss per ordinary share | ($2.09) | ($1.45) | ($6.21) | ($4.67) |
- Cash flow: Operating activities used $73.763 million in the first nine months, versus $56.628 million in 2014. Investing activities provided $10.743 million, largely from net maturities of short-term investments; financing activities provided $115.731 million, principally from preferred-share proceeds and the term loan. Cash and cash equivalents increased $52.711 million to $110.324 million.
- Balance sheet at September 30: Short-term investments were $26.999 million, bringing cash and short-term investments to $137.323 million. Current assets were $158.802 million and current liabilities $25.915 million. Total liabilities were $52.557 million; shareholders’ equity was $121.224 million. Accumulated deficit was $355.153 million.
- Debt: The company had drawn $25 million under a five-year term loan, reported net of discount at $24.554 million. Interest is 10% annually, and the loan is secured by substantially all company assets. Up to a further $75 million was available for draw through June 30, 2016, subject to loan terms and covenants. The company reported covenant compliance at quarter-end.
Changes versus the prior comparable periods
- Q3 revenue rose 105% year over year; nine-month revenue rose 77%. Management attributed growth primarily to U.S. Optune sales, wider commercial reach, and increased sales and marketing activity. U.S. certified centers increased from 135 to 215.
- Cost of revenue grew faster than revenue in both comparisons, and gross margin declined. Management cited higher transducer-array shipments, staffing and infrastructure costs.
- Nine-month operating expenses increased 30%: research, development and clinical trials rose 13%, sales and marketing 47%, and general and administrative 44%. Higher commercialization, staffing, research and clinical activity and IPO preparation contributed.
- Financial expense increased to $2.277 million for the first nine months, mainly reflecting interest and loan-related amortization. Income tax expense was $2.986 million, primarily attributed to statutory tax provisions in Switzerland, the United States and Japan.
Outlook, commentary, risks and unusual items
- Management expected significant expenses and operating losses to continue for at least several years, with increased research, clinical, sales, marketing, manufacturing and distribution spending. It stated that quarter-end cash and cash equivalents, IPO proceeds and available term-loan capacity were expected to fund operations for at least 12 months under the existing business plan; additional capital may still be needed.
- Post-quarter developments: The October 7 IPO raised approximately $150.5 million net; a partial over-allotment sale on October 19 raised approximately $7.7 million net. The filing reported aggregate net proceeds of approximately $158.2 million. Preferred shares converted one-for-one into ordinary shares at IPO closing. Certain warrant exercises in October generated a further $2.003 million. In October, the FDA approved Optune with temozolomide for newly diagnosed adult GBM, and the company began its U.S. commercial launch for that indication. It also began rolling out a second-generation system in Germany.
- Revenue for the reported periods was recognized when cash was collected, because the company said it lacked sufficient payer-payment history to estimate price and collectability reliably. This can make reported revenue differ from product use in the period. One payer represented 18% of nine-month 2015 revenue, compared with 15% in 2014.
- Commercial indicators included 468 active patients at September 30, 2015, versus 179 a year earlier; the U.S. average prescription-to-active-patient fill rate was 72% for the first nine months. The company reported average U.S. cash payments of approximately $14,500 per month of use, net of indirect taxes.
- Key risks include reliance on Optune and GBM, adoption and patient adherence, payer coverage and reimbursement, competition, clinical and regulatory outcomes for additional indications, dependence on single-source suppliers, manufacturing and quality issues, and continuing cash needs. The company specifically noted that Medicare coverage for recurrent GBM was not established and that several U.S. private payers had policies denying coverage on certain grounds.
- Unusual items: In June, NovoCure issued Series J preferred shares for $94.6 million net. A February settlement concerning potential intellectual-property disputes involved a $1 million initial payment, a further $1 million paid in October, and a contingent $5.5 million payment tied to a cumulative-sales milestone or a merger or similar transaction. The settlement also involved shares and options, with an associated founder indemnification arrangement.
- The filing reported no material legal proceedings as of its filing date and no off-balance-sheet arrangements. Management concluded disclosure controls were effective as of September 30, 2015.
Important facts for investors to verify
- How payer collections, coverage decisions and the cash-basis revenue policy affect revenue quality, timing and concentration.
- Whether patient growth, prescription fill rates and commercialization in new markets translate into improved gross margins and sustainable revenue.
- Post-IPO cash deployment, operating cash burn, future financing needs, and the conditions and covenants governing additional term-loan draws.
- Progress and costs for the newly diagnosed GBM launch, second-generation Optune rollout, clinical programs and regulatory filings for other indications.
- Exposure to the Technion settlement’s contingent payment, supplier concentration and potential share dilution, including equity awards and warrant exercises.