NovoCure Limited — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. NovoCure develops and commercializes Tumor Treating Fields (TTFields) devices, including Optune for glioblastoma and Optune Lua for malignant pleural mesothelioma. Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $140.9 | $133.5 | $278.4 | $268.2 |
| Gross profit | $112.4 | $104.9 | $222.2 | $213.2 |
| Gross margin | 80% | 79% | 80% | 79% |
| Operating expenses | $133.5 | $117.2 | $244.1 | $225.6 |
| Operating loss | $(21.1) | $(12.3) | $(21.9) | $(12.4) |
| Net loss | $(24.0) | $(14.6) | $(28.7) | $(18.8) |
| Adjusted EBITDA (non-GAAP) | $7.3 | $18.1 | $34.2 | $39.2 |
| Operating cash flow | $15.8 | $26.2 | $12.1 | $44.0 |
Q2 revenue increased 6% year over year; first-half revenue increased 4%. Growth was attributed mainly to more U.S. and Japanese patients and collections on previously denied and appealed U.S. claims, partly offset by fewer German active patients, lower approval rates following updated coverage criteria, and foreign-exchange effects. Q2 gross margin improved about one percentage point. Net loss widened as operating costs grew faster than revenue, particularly sales and marketing and clinical-development investment.
Q2 research, development and clinical-study expense rose 13% to $57.1 million; sales and marketing rose 31% to $44.8 million; general and administrative expense fell 3% to $31.7 million. First-half operating cash flow fell 73% to $12.1 million, reflecting lower earnings and working-capital use, including increased receivables and inventory and reduced payables and accrued expenses.
Balance sheet and liquidity
- Cash and cash equivalents were $367.0 million and short-term investments were $581.5 million at June 30, 2022; together, $948.5 million, versus $937.7 million at December 31, 2021.
- Long-term debt had a net carrying amount of $563.8 million, representing $575.0 million principal on 0% convertible notes due 2025, net of issuance costs. Holders could not convert as of June 30, 2022. The notes’ disclosed estimated fair value was $430.8 million.
- The $150 million secured revolving facility had no amount drawn; the company reported covenant compliance. Current liabilities were $135.4 million and total liabilities $721.0 million.
- Management stated available cash, cash equivalents and investments were sufficient for at least the next 12 months under its existing plan, while noting that expenses may continue rising and could outpace gross profit, potentially requiring additional capital.
Commercial, operating and development changes
- Active patients at period end totaled 3,454 versus 3,487 a year earlier. North America was 2,229 versus 2,206, Germany 458 versus 571, other EMEA 421 versus 419, and Japan 346 versus 291. North America includes Canada in 2022 but only the U.S. in 2021.
- Q2 prescriptions received were 1,383 versus 1,450 a year earlier. The filing reports eight active Optune Lua MPM patients at quarter-end and 11 MPM prescriptions during Q2.
- Sales of products to Zai Lab were $3.4 million in Q2 and $5.3 million in the first half; those products are sold at cost. Cost of revenue per active patient per month, excluding Zai sales, declined 5% year over year to $2,391 in Q2.
- Sales and marketing spending was directed in part toward commercial readiness for potential future indications and market-access capabilities. Clinical investment also increased, primarily due to direct study costs.
- The company moved the planned LUNAR Phase 3 top-line data announcement from late 2022 to early Q1 2023. INNOVATE-3’s interim review supported continuing the ovarian-cancer study as planned, with data review expected in 2023.
Outlook, risks and unusual items
- No specific revenue, earnings or cash-flow guidance was provided. Management expects research and development, sales and marketing, and general and administrative expenses to increase over the next several years.
- Management said COVID-19 had not materially affected financial results through Q2, but warned that healthcare-system disruption, patient-volume and care-pattern changes, and difficulty monitoring studies could affect future operations and trials.
- Foreign-exchange fluctuations increased financial expense; Q2 FX expense was $3.4 million versus FX income of $0.3 million a year earlier. The six-month increase in net financial expense was also attributed mainly to FX movements, partly offset by interest income.
- Short-term debt-security unrealized losses were primarily attributed to rising interest rates. The company reported no impairment based on its assessment of available evidence.
- A collaboration with MSD was established for a study of TTFields with pembrolizumab and maintenance temozolomide in newly diagnosed GBM. The company also reported initial Phase 2 gastric-cancer results and enrollment of the first patient in a Phase 2 NSCLC study with MSD. A planned recurrent-GBM study with GT Medical Technologies was suspended indefinitely by mutual agreement.
- The company became a Swiss tax resident effective January 1, 2022. It reported no material changes to previously disclosed risk factors, contractual obligations, market-risk disclosures, or internal controls; disclosure controls were deemed effective.
Important facts for investors to verify
- Whether revenue growth can persist, particularly amid German coverage criteria changes, foreign-exchange effects and unpredictable collections on appealed U.S. claims.
- Whether rising commercial and clinical spending can be supported by gross-profit growth, and how quickly operating cash flow and adjusted EBITDA may decline or recover.
- The timing and results of the LUNAR and INNOVATE-3 readouts, and the clinical and regulatory progress of other pipeline programs.
- The terms, conversion conditions and 2025 maturity implications of the $575 million convertible notes, alongside liquidity and any future financing needs.
- The full dilution impact of equity compensation; 104.7 million ordinary shares were outstanding at June 30, 2022, and 104,738,581 were outstanding as of July 22, 2022.