NovoCure Limited (10-K) — Fiscal year ended December 31, 2017
Reporting period: This is an annual report for the year ended December 31, 2017, not a standalone quarterly filing. Fourth-quarter results are also summarized below. Amounts are U.S. dollars unless otherwise noted.
Business context and operating performance
NovoCure develops Tumor Treating Fields, a device-delivered cancer therapy, and commercializes Optune for glioblastoma (GBM). Its principal near-term priorities are expanding Optune adoption and advancing clinical trials for other solid tumors. Substantially all revenue came from Optune in the United States, Europe, the Middle East and Africa (EMEA), and Japan.
- Active Optune patients reached 1,834 at year-end, up 68% from 1,091 a year earlier. The company received 4,119 prescriptions in 2017, up 47%; its reported prescription fill rate was 70–75% per quarter.
- Management attributed commercial growth to increased awareness and physician confidence, improved U.S. coverage and German claim approvals, and longer treatment exposure. The company estimated 20% penetration across its currently active markets.
Financial results and liquidity
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Net revenue | $177.0 million | $82.9 million | Up 114% |
| Gross profit | $121.4 million | $36.6 million | Up $84.8 million |
| Gross margin | 69% | 44% | Up 25 percentage points |
| Operating loss | $(39.3) million | $(115.3) million | Loss narrowed |
| Net loss | $(61.7) million | $(131.8) million | Loss narrowed |
| Basic and diluted loss per share | $(0.70) | $(1.54) | |
| Net cash used in operating activities | $(33.1) million | $(107.6) million | Cash use declined |
Fourth-quarter 2017 revenue was $53.7 million, gross profit $38.0 million, operating loss $4.5 million, and net loss $10.9 million; loss per share was $0.12. Fourth-quarter 2016 revenue was $30.2 million, gross profit $19.3 million, operating loss $17.9 million, and net loss $22.2 million.
- Year-end cash and cash equivalents were $78.6 million, short-term investments $104.7 million, and working capital $194.9 million. Management said available cash and investments were sufficient for at least 12 months under its existing plan, while noting expenses may continue to rise and outpace gross profit.
- At year-end, principal debt was $100 million under a 10% term loan due in 2020; the balance-sheet carrying amount, net of discount and issuance costs, was $97.3 million. On February 7, 2018, the company repaid that facility using a new $150 million loan bearing 9% interest and maturing in 2023. The new debt is secured by substantially all company assets and includes restrictive covenants.
- Operating cash use fell year over year, but receivables increased $23.2 million, partly reflecting revenue recognized on an accrual basis. The company reported a $582.3 million accumulated deficit and a $13.2 million income-tax expense in 2017 despite a pretax loss.
Material changes, outlook, risks and unusual items
- Revenue growth reflected 68% growth in active patients and higher revenue per patient. The latter included improved payer coverage and a one-time benefit from transitioning certain payers to accrual-based revenue recognition. Accrual-basis revenue was $109.0 million in 2017; cash-basis revenue was $68.0 million.
- Operating expenses increased 6% to $160.7 million. Research and clinical expense decreased 8% to $38.1 million, while sales and marketing rose 7% to $63.5 million and general and administrative expense rose 16% to $59.1 million. Share-based compensation was $27.1 million.
- Management expects continued significant spending on commercialization, research, development and clinical trials, and expects research and development and general and administrative expenses to increase. The filing provides no specific financial revenue or earnings guidance.
- Pipeline plans included METIS (brain metastases) and LUNAR (second-line non-small-cell lung cancer), each targeting last-patient enrollment in 2019; PANOVA 3 (locally advanced pancreatic cancer), targeting 2020; expected commencement of a recurrent ovarian cancer phase 3 trial in 2018; and anticipated final STELLAR mesothelioma data in the first half of 2018. These are forward-looking timelines, not assured outcomes.
- Medicare fee-for-service had denied Optune claims to date, and the company had received no material Medicare payments. Management reported that 20–25% of U.S. active patients were Medicare fee-for-service beneficiaries; appeals faced substantial delays. Reimbursement decisions remain a material commercial risk.
- Other key risks include dependence on Optune and GBM, uncertain market acceptance and patient compliance, clinical and regulatory failure or delay, competition, and reliance on third-party manufacturing and some single-source components. Foreign exchange exposure was not hedged.
- The company triggered a $5.5 million Technion settlement payment by reaching the cumulative net-sales milestone in Q4 2017 and expected to pay it in Q1 2018. A prior IPO-related class action was dismissed in December 2017; the appeal deadline expired without an appeal. The auditors issued unqualified opinions on the financial statements and internal controls.
- Adoption of the new revenue standard on January 1, 2018 was expected to increase receivables by $3.2 million and deferred revenue by $0.6 million, with a $2.6 million cumulative reduction to accumulated deficit. The Tax Cuts and Jobs Act tax accounting included provisional estimates, with further analysis still required.
Most important facts for investors to verify
- Whether patient starts, treatment duration, compliance and prescription conversion continue to support revenue growth.
- How much reported growth reflects recurring patient activity versus payer coverage changes, accrual accounting and the one-time transition benefit; monitor receivables and collections.
- Progress toward Medicare coverage and payment, German reimbursement review, and reimbursement in other markets.
- Clinical-trial enrollment, results and regulatory milestones, especially the 2018–2020 timelines and any changes to study plans.
- Cash runway, ongoing operating cash use, debt service and covenants under the post-year-end $150 million credit facility.
- Execution of supplier diversification and any material manufacturing, quality, regulatory, legal or tax developments.