NovoCure Limited — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Financial amounts below are in U.S. dollars; rounded amounts are in millions unless noted.
Business context and reporting period
NovoCure develops, manufactures and commercializes Tumor Treating Fields (TTFields) devices, including Optune for glioblastoma (GBM) and Optune Lua for malignant pleural mesothelioma (MPM). Most revenue comes from Optune use in the U.S., Germany and Japan. The company reported one operating segment and 3,571 active patients at quarter-end, compared with 3,454 a year earlier.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $126.1m | $140.9m | $248.2m | $278.4m |
| Gross profit / margin | $92.0m / 73% | $112.4m / 80% | $184.6m / 74% | $222.2m / 80% |
| Operating loss | $62.7m | $21.1m | $122.9m | $21.9m |
| Net loss | $57.4m | $24.0m | $110.5m | $28.7m |
| Adjusted EBITDA | $(27.2)m | $7.3m | $(45.6)m | $34.2m |
| Operating cash flow | $(22.7)m | $15.8m | $(39.5)m | $12.1m |
At June 30, cash, cash equivalents and short-term investments totaled $940.8m, down from $969.4m at December 31, 2022. Cash and cash equivalents were $157.0m; short-term investments were $783.8m. Current assets were $1.065bn and current liabilities $150.1m.
Long-term debt was $567.2m net, representing $575.0m principal of 0% convertible notes due November 2025. The notes were not convertible as of quarter-end. NovoCure terminated its unused $150m revolving credit facility effective February 22, 2023, with no outstanding borrowings or termination fee.
Material changes versus prior comparable periods
- Revenue fell 11% in both the quarter and first half. Management attributed the decline primarily to lower collections from previously denied or appealed U.S. claims: $13.4m lower in Q2 and $18.8m lower in the first half. Q2 revenue was also affected by $5.5m from U.S. approval-pattern variation, partly offset by $5.4m from improved German approval rates.
- Management said the most accessible previously denied claims were largely exhausted in 2022; future revenue is expected to more closely reflect active patients, treatment duration and realized monthly price. Timing and size of remaining claim collections are difficult to predict.
- Cost of revenue increased 19% in Q2 and 13% in the first half, primarily due to added patient-support capacity. Gross margin declined to 73% in Q2 and 74% in the first half, from 80% in each prior-year period.
- Operating expenses rose 16% in Q2 and 26% in the first half. Sales and marketing increased 31% and 33%, respectively, and general and administrative increased 29% and 33%, reflecting geographic expansion, pre-launch activity, personnel and infrastructure investment. First-half R&D increased 16%, though Q2 R&D decreased 3%.
- Net financial income improved to $8.8m in Q2 and $17.9m in the first half, mainly due to higher interest income and lower foreign-exchange expense. Despite this, net losses widened materially. First-half operating cash flow shifted from positive $12.1m to negative $39.5m.
Outlook, management commentary and risks
- Management believes available cash, cash equivalents and short-term investments are sufficient to fund operations for at least 12 months under the current business plan. It expects operating expenses to increase over the next several years and potentially outpace gross profit, and says additional capital may be needed.
- In June, NovoCure reported positive Phase 3 LUNAR results in metastatic non-small cell lung cancer (NSCLC): median overall survival was 13.2 months with TTFields plus standard therapy versus 9.9 months with standard therapy alone (HR 0.74, p=0.035). Management expected these data to support an FDA PMA submission in the second half of 2023.
- The FDA accepted the investigational device exemption for the Phase 3 LUNAR-2 trial in July. Other ongoing Phase 3 programs include ovarian cancer, brain metastases from NSCLC, pancreatic cancer and newly diagnosed GBM. The company also planned to submit a U.S. PMA supplement for thinner, lighter arrays in the second half of 2023.
- An independent monitoring committee recommended that the PANOVA-3 pancreatic cancer trial continue to final analysis; data review was expected in 2024. Final METIS brain-metastases data were also anticipated in 2024.
- A putative securities class action filed in June alleges misstatements or omissions regarding LUNAR trial results. NovoCure considers the claim without merit, intends to defend it, and recorded no accrual because liability was not considered probable and estimable.
- The company reported no material change to the risk factors in its 2022 Form 10-K. It noted that lingering pandemic-related staffing constraints at clinical sites could affect studies. Forward-looking plans remain subject to regulatory, reimbursement, commercial adoption, clinical, supply and financing risks.
Important facts for investors to verify
- Whether U.S. payer approvals and collections recover, and how much of the remaining denied or appealed claims is ultimately collected.
- Whether active-patient growth and treatment duration support revenue growth as prior-claim collections diminish.
- Whether investment in patient support, geographic expansion and potential indication launches improves scale and margins, which fell year over year.
- Progress and timing of the LUNAR PMA submission, LUNAR-2 enrollment, and other clinical readouts and regulatory milestones.
- Cash use, potential financing needs and the terms or dilution risk of any future capital raise; the $575m principal notes mature in 2025.
- Developments in the LUNAR-related securities litigation and any resulting financial or disclosure impact.