NovoCure Limited — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Unaudited financial figures are in U.S. dollars; monetary amounts below are shown in millions unless stated otherwise. NovoCure develops and commercializes Tumor Treating Fields (TTFields) systems, including Optune for glioblastoma and Optune Lua for malignant pleural mesothelioma.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $134.7 million | $101.8 million | +32% |
| Gross profit / margin | $108.3 million / 80% | $77.3 million / 76% | Margin +4 percentage points |
| Operating income (loss) | $(0.1) million | $(3.4) million | Improved |
| Net income (loss) | $(4.1) million | $4.0 million | Turned to a loss |
| Adjusted EBITDA | $21.1 million | $15.1 million | +40% |
| Operating cash flow | $17.8 million | $2.0 million | Improved |
Revenue growth reflected 359 more active patients in active markets, a 12% increase, and improved net revenue per active patient. Active patients totaled 3,454 at quarter-end versus 3,095 a year earlier; prescriptions received were 1,402 versus 1,409. Gross margin improvement and a 9% decrease in cost of revenue per active patient per month (excluding Zai Lab sales) reflected operating efficiencies and scale.
Research, development and clinical trial expense rose 82% to $45.9 million, primarily reflecting clinical-trial, product-development, preclinical research, personnel and medical-affairs investment. Sales and marketing expense increased 9% to $31.4 million; general and administrative expense increased 17% to $31.1 million. Q1 2021 net loss included $1.4 million of income tax expense, compared with a $9.8 million tax benefit in Q1 2020; the prior-year period included a one-time $11.3 million benefit related to U.S. tax-code changes.
At March 31, 2021, cash and cash equivalents were $314.5 million and short-term investments were $549.9 million, totaling $864.4 million. Current assets were $1,015.2 million and current liabilities were $110.5 million. Long-term debt, net, was $559.6 million; the $575.0 million principal amount is 0% convertible senior notes due 2025. The company had no borrowings under its $150 million revolving credit facility and reported compliance with its covenants. Management said available cash, cash equivalents and short-term investments were sufficient for at least the next 12 months under its existing business plan.
Cash, cash equivalents and restricted cash increased by $79.8 million during the quarter. Investing cash flow of $54.2 million was mainly driven by net maturities of short-term investments; it should not be interpreted as operating cash generation. Management reported $17.8 million of operating cash flow, attributing the increase from the prior-year period to higher cash earnings, lower interest payments, tax refunds and timing of receipts and payments.
Material changes and notable items
- Revenue growth and higher gross margin were accompanied by increased R&D spending; the company recorded a small operating loss and a net loss for the quarter.
- NovoCure early adopted ASU 2020-06 effective January 1, 2021. The modified-retrospective adoption increased reported long-term debt by $129.0 million, reduced additional paid-in capital by $132.5 million and reduced accumulated deficit by $3.5 million. It also eliminates separate equity accounting for the notes’ conversion feature and is expected to reduce future interest expense.
- Q1 Medicare fee-for-service revenue was $9.4 million, up 32% year over year. Management said it had experience to recognize approximately two-thirds of expected contribution from Medicare beneficiaries. Prior-period appeals-related revenue reverted to normalized levels in Q1 2021.
- Revenue by geography included $85.9 million from the U.S., $26.4 million from Germany, $8.6 million from other EMEA, $8.3 million from Japan and $5.5 million from Greater China.
Outlook, commentary and risks
- No specific revenue, earnings or cash-flow guidance was provided. Management expects R&D, sales and marketing, and general and administrative expenses to continue increasing over the next several years and cautioned that they may outpace gross profit; additional capital may be needed.
- Commercial priorities include expanding adoption of Optune and Optune Lua. The company was expanding commercial operations into France, initially focusing on physician relationships and reimbursement, and was evaluating broader access to Optune Lua outside the U.S.
- The pipeline includes Phase 3 trials in brain metastases, NSCLC, ovarian cancer and pancreatic cancer. In April 2021, the LUNAR trial monitoring committee recommended reducing planned enrollment from 534 to approximately 276 patients, with 12-month follow-up after the last enrollment. The company filed an IDE supplement seeking FDA approval of the protocol change. This is a post-quarter development, not a Q1 result.
- In April 2021, FDA approved the IDE application for the KEYNOTE B36 Phase 2 trial of TTFields with pembrolizumab in first-line NSCLC. The company also reported completion of its HEPANOVA Phase 2 pilot trial in liver cancer; full results were not presented in the filing.
- COVID-19 had no material financial impact through Q1, according to management, but continued to disrupt operations and create volatility in healthcare systems. Fluctuations in surgeries and radiation therapy affected the eligible patient population in some regions, and virtual engagement posed challenges to commercial education and clinical trials.
- The filing describes forward-looking risks including adoption and reimbursement, regulatory approvals, clinical-trial outcomes, manufacturing and supplier capacity, intellectual property, and business disruption. Management reported no material changes to previously disclosed risk factors, no material change in internal controls, and no legal proceedings expected to materially affect financial position or results.
Key facts for investors to verify
- Whether patient growth and revenue per patient continue to support revenue growth, and how Medicare claim collections compare with management’s expected contribution.
- Whether the higher R&D investment produces clinical progress, particularly LUNAR’s proposed enrollment change and the timing and outcomes of other pivotal trials.
- How operating expenses, operating cash flow and liquidity evolve against management’s warning that expenses may outpace gross profit and could require additional financing.
- The effects of the 0% convertible notes, including conversion and potential share dilution, and the accounting and future interest-expense impact of ASU 2020-06.
- The duration and commercial consequences of COVID-19-related disruptions, reimbursement developments, and the pace of adoption across markets.