NovoCure Limited — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Financial amounts below are in U.S. dollars; “million” amounts are converted from the filing’s thousands unless otherwise noted.
Business context
NovoCure develops and commercializes Tumor Treating Fields systems, principally Optune for glioblastoma (GBM), and NovoTTF-100L for malignant pleural mesothelioma (MPM). In May 2019, the FDA approved NovoTTF-100L under the Humanitarian Device Exemption pathway for MPM in combination with standard chemotherapy. The company operates in one reportable segment.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $86.7m | $61.5m | $160.0m | $113.6m |
| Gross profit | $65.6m | $41.7m | $119.1m | $75.6m |
| Gross margin | 76% | 68% | 74% | 66% |
| Operating income (loss) | $1.2m | $(7.1)m | $(4.9)m | $(19.8)m |
| Net income (loss) | $(1.3)m | $(15.5)m | $(13.4)m | $(36.2)m |
| Net loss per share | $(0.01) | $(0.17) | $(0.14) | $(0.40) |
| Operating cash flow | $9.1m | $(7.5)m | $4.8m | $(24.3)m |
Q2 operating expenses were $64.4m, up 32% year over year: R&D and clinical trials $19.5m (+71%), sales and marketing $23.7m (+24%), and general and administrative $21.2m (+17%). Financial expenses, net, were $1.2m in Q2 and $3.6m for the first half.
At June 30, cash and cash equivalents were $180.1m and short-term investments were $104.5m; restricted cash was $2.1m. Cash, cash equivalents and short-term investments totaled $284.6m, compared with $245.9m at December 31, 2018. Total current assets were $370.0m and current liabilities $73.6m. Outstanding term-loan principal was $150.0m (carrying value $149.3m); total liabilities were $247.3m. Accumulated deficit was $657.1m.
Changes and operating trends
- Revenue rose 41% year over year in both Q2 and the first half, driven by more active patients and higher revenue per patient. Active patients at June 30 were 2,726, up from 2,169 a year earlier; Q2 prescriptions received were 1,362 versus 1,244.
- Q2 revenue benefited by approximately $5m from improved reimbursement rates. Management said this benefit was not expected to be as significant in future quarters; it described the underlying reimbursement improvement as sustainable.
- Gross margin improved as cost of goods per active patient declined through efficiency and scale, partly offset by higher array-shipping costs from greater patient volume.
- R&D spending increased with phase 3 trial activity and related personnel, medical-affairs, regulatory and engineering costs. Sales and marketing growth reflected the MPM launch and a larger global sales force.
- First-half operating cash flow turned positive, compared with cash use in the prior-year period. Management attributed the improvement primarily to lower net loss, increased payables and higher noncash share-based compensation, partly offset by higher inventory.
- Ordinary shares outstanding were 97.9m at June 30, compared with 93.3m at year-end 2018. Share-based compensation expense was $23.4m for the first half.
Outlook, risks and unusual items
- Management said existing cash, cash equivalents and short-term investments were sufficient for at least the next 12 months under its current business plan, while noting that further capital may be needed as commercialization and clinical-development spending continues. It provided no specific revenue or earnings guidance in the supplied filing text.
- The company had begun a phased U.S. MPM launch, certified its first prescribers in June, and expected the first MPM patient to start therapy in Q3 2019. It planned to focus on approximately 30 U.S. centers believed to treat most MPM patients.
- After quarter-end, in July 2019, Medicare contractors issued a final local coverage determination and fee schedule for Optune in newly diagnosed GBM, effective September 1, 2019. The filing says the final criteria removed or revised many restrictions in the proposed determination. Medicare fee-for-service had denied claims to date; appeals were ongoing.
- Management planned two additional randomized GBM trials: one potentially starting in 2019 to study earlier Optune initiation with radiation, and another planned for 2020 to evaluate combinations with other therapies. The filing also moved the LUNAR interim analysis expectation to the second half of 2020, with final data expected in 2022. The ovarian cancer phase 3 trial’s event-driven interim analysis was anticipated in 2022.
- Key risks include dependence on Optune and early MPM commercialization, reimbursement and pricing uncertainty, clinical-trial and regulatory outcomes, competition, third-party manufacturing and single-source suppliers, cybersecurity and privacy, and continued operating losses. The company reported $150m of secured term debt, with prepayment premiums and a potential make-whole payment under specified circumstances.
- A civil claim filed in Israel seeks 210,000 ordinary shares based on an alleged 2003 verbal agreement. The company moved to dismiss, considers the claim without merit and intends to defend it; it recorded no accrual because liability was not considered probable and the amount could not be reasonably estimated.
- The company adopted lease accounting standard ASC 842 on January 1, 2019, recognizing right-of-use assets and lease liabilities. At June 30, right-of-use assets were $14.7m and lease liabilities totaled $15.5m. Prior comparative periods were not adjusted.
Important facts for investors to verify
- Whether revenue growth and patient additions continue, and how much future revenue per patient reflects recurring reimbursement improvements rather than the approximately $5m Q2 benefit.
- The realized Medicare reimbursement and payment experience following the final LCD’s September 1, 2019 effective date, including the impact of its criteria and fee schedule.
- MPM launch progress, including first-patient timing, payer access and the constraints associated with the HDE pathway.
- Clinical-trial enrollment, milestone timing and outcomes, especially the revised LUNAR timetable and planned GBM trials.
- Cash generation, spending growth, potential financing needs, and the terms and prepayment provisions of the $150m term loan.
- Developments in the Israeli share claim and whether any change affects the company’s assessment or financial statements.