NovoCure Limited — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Amounts are U.S. dollars; financial statement figures are in millions unless otherwise stated. NovoCure is a commercial-stage oncology company developing tumor treating fields (TTFields); its commercial product, Optune, was marketed for glioblastoma in the United States, Germany, Switzerland and Japan.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $13.1 million | $5.2 million | Up 151% |
| Gross profit / margin | $5.1 million / 38.9% | $1.3 million / 25.2% | Margin up 13.7 percentage points |
| Operating expenses | $37.0 million | $23.3 million | Up 59% |
| Operating loss | $(31.9) million | $(21.9) million | Loss widened |
| Net loss | $(35.4) million | $(23.3) million | Loss widened |
| Operating cash flow | $(31.0) million | $(28.5) million | Cash use increased |
- Revenue growth reflected increased Optune adoption: U.S. revenue was $12.0 million versus $5.0 million; Europe, Japan and other-market revenue was $1.0 million versus $0.2 million. U.S. revenue accounted for most sales.
- Cost of revenue rose 105% to $8.0 million, mainly with higher adoption, array shipments and staffing to support shipments. Sales and marketing expense increased 109% to $13.3 million; research and clinical expense increased 15% to $11.4 million; general and administrative expense increased 76% to $12.3 million.
- Q1 net loss included $5.5 million of non-cash share-based compensation. Income tax expense rose to $3.0 million from $0.7 million, primarily due to higher statutory provisions in Switzerland and the United States and an increased provision for uncertain tax positions.
- At March 31, cash and cash equivalents were $115.9 million and short-term investments were $119.8 million, totaling $235.8 million. Current assets were $263.6 million and current liabilities $29.4 million. The company reported an accumulated deficit of $423.5 million.
- Long-term loan carrying value was $23.2 million; principal outstanding was approximately $25.0 million. The loan bears 10% annual interest. Up to $75 million remained available to draw under the facility through June 30, 2016, subject to facility terms and covenants.
- Cash and cash equivalents declined $3.5 million during the quarter. Cash, cash equivalents and short-term investments together declined $33.8 million, reflecting operating cash use and other activity.
Commercial and operating developments
- Prescriptions received increased to 755 from 437; active patients at quarter-end increased to 797 from 372. The 12-month prescription fill rate was 75%.
- Management attributed higher commercial spending to expanding U.S. and German operations and establishing operations in Switzerland and Japan. Operating expenses, including research, commercialization and administration, were expected to continue increasing.
- Optune received U.S. approval in October 2015 for newly diagnosed glioblastoma in combination with temozolomide. Management anticipated NCCN guideline inclusion in 2016. The company hoped for Japanese approval for this indication in late 2016, following its December 2015 application amendment.
- The company had responded in April 2016 to FDA questions on its application for the second-generation Optune system and hoped to begin U.S. marketing in Q3 2016, assuming no further FDA requests.
- In a 20-patient first cohort of the PANOVA pancreatic cancer trial, the company reported preliminary results against historical gemcitabine controls: median progression-free survival of 8.3 versus 3.7 months and median overall survival of 14.9 versus 6.7 months. The filing describes these as preliminary comparisons, not randomized control results. Enrollment in a second cohort was expected to finish in 2016, with data anticipated in 2017.
Outlook, risks and contingencies
- Management said existing cash, cash equivalents and short-term investments, together with the ability to control the timing of significant expense commitments, were expected to fund operations for at least 12 months; this assessment also referenced the $75 million facility availability through June 30, 2016. The company may need additional capital and stated it expects significant operating losses for at least the next several years; profitability may never be achieved.
- Key risks include adoption and reimbursement of Optune, regulatory approvals and clinical outcomes for additional indications, manufacturing and third-party supply, and the need for future financing. The report states that risk factors had not materially changed from the 2015 Form 10-K.
- Revenue is recognized when cash is collected and other recognition criteria are met because the company said it lacked sufficient payer payment history to estimate collections reliably. Consequently, reported revenue includes collections for both current- and prior-period Optune use.
- The term loan is secured by substantially all assets of the borrower and guarantors and includes minimum-liquidity and pro forma net-sales covenants, among other terms. Unrecognized tax benefits were $2.0 million; the company did not expect a significant related tax payment within the next year. No material legal proceedings or off-balance-sheet arrangements were reported.
- The filing reported no material change in contractual commitments during the quarter. Management assessed disclosure controls as effective at the reasonable-assurance level and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and prescription-to-active-patient conversion continue, and how the 75% fill rate develops.
- Whether Optune reimbursement, adoption and collections support reported revenue and gross-margin improvement.
- Available liquidity after operating cash burn, the June 30, 2016 expiration of the remaining term-loan draw, and compliance with loan covenants.
- FDA and Japanese regulatory progress for the second-generation system and newly diagnosed glioblastoma indication.
- Clinical-trial enrollment, follow-up and results for PANOVA and other indications, distinguishing preliminary historical-control comparisons from controlled evidence.
- The effect of rising commercialization and share-based compensation costs on losses, cash use and potential shareholder dilution.