NovoCure Limited — Q3 2017 Form 10-Q
Business and period. NovoCure develops and commercializes Tumor Treating Fields (TTFields), principally through Optune for glioblastoma (GBM). This unaudited report covers the quarter and nine months ended September 30, 2017; financial figures below are U.S. dollars.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $50.1m | $21.7m | $123.4m | $52.6m |
| Gross profit | $35.0m | $10.6m | $83.4m | $17.3m |
| Gross margin | 69.8% | 48.7% | 67.6% | 32.9% |
| Operating loss | $(5.9)m | $(28.3)m | $(34.8)m | $(97.4)m |
| Net loss | $(11.5)m | $(33.6)m | $(50.7)m | $(109.7)m |
| Operating cash flow | $2.5m | $(33.5)m | $(30.2)m | $(93.9)m |
Revenue rose 131% year over year in Q3 and 134% for the nine-month period. Management attributed growth to higher Optune sales in the U.S. and other active markets, as well as partial adoption of accrual revenue recognition. Q3 revenue included $35.7m recognized on an accrual basis, $3.1m for therapy provided in the quarter and $11.3m collected for therapy in prior periods. The comparable 2016 quarters reported no accrual-basis revenue; therefore, reported growth is not solely a measure of contemporaneous sales. Q3 U.S. revenue was $35.3m and EMEA revenue $14.8m.
Q3 cost of revenue was $15.2m, up 36%, primarily reflecting more patients and higher field-equipment depreciation. Nine-month 2016 gross profit was affected by a $6.4m impairment charge for first-generation Optune equipment; no such charge was reported in 2017. Operating expenses were $40.9m in Q3 (+5%) and $118.2m for nine months (+3%). Nine-month R&D expense declined 15% to $28.1m, while sales and marketing increased 9% to $47.5m and G&A increased 12% to $42.7m. Nine-month share-based compensation was $20.8m.
At September 30, 2017, cash and cash equivalents were $82.1m and short-term investments $104.5m; total current assets were $241.9m versus current liabilities of $41.0m. The company reported $100.0m principal outstanding under its term loan (carrying value $97.0m), bearing 10% annual interest payable quarterly. Nine-month cash, cash equivalents and short-term investments decreased $33.7m from year-end 2016. Accumulated deficit was $571.3m.
Changes, outlook, and risks
- Commercial scale expanded: 1,683 active patients at quarter-end versus 985 a year earlier; Q3 prescriptions received were 1,076 versus 690. The U.S. accounted for 1,234 active patients and EMEA 448.
- Management said cash and short-term investments were sufficient for at least the next 12 months under its business plan, but expects continuing losses and higher R&D, clinical, sales, marketing, manufacturing and distribution spending; additional capital may be needed. No specific revenue or earnings guidance was provided.
- A $5.5m payment to Technion is anticipated in Q1 2018 following expected achievement of a cumulative net-sales milestone in Q4 2017; the amount had already been accrued in Q4 2016.
- Reimbursement remains a key commercial dependency. More than 210m Americans had available coverage and contracts covered more than 178m lives, but Medicare fee-for-service had denied claims to date and represented 20–25% of the U.S. active patient population. About half of German claims were approved in Q3. Austria’s national reimbursement contract was signed, while German national reimbursement steps and a Japanese reimbursement decision remained pending.
- Management highlighted final EF-14 trial analyses: two-year survival was 43% with Optune plus temozolomide versus 30% with temozolomide alone, and five-year survival was 13% versus 5%; reported quality-of-life analyses indicated longer maintenance of quality of life with the combination. The company was advancing trials in multiple solid-tumor indications.
- Two consolidated putative class actions allege securities-law misstatements or omissions in the 2015 IPO materials. The company said it would defend the claims; it recorded no liability because loss was not considered probable and could not be reasonably estimated. Unrecognized tax benefits were $3.5m, with timing and amount of any payment uncertain.
Important facts for investors to verify
- How much of future revenue reflects current-period treatment versus prior-period collections and accrual-recognition changes.
- Whether patient growth converts into sustained collections, particularly given Medicare denials and variable international reimbursement.
- Cash burn, the 10% term-loan cost and covenant compliance, and whether additional financing will be required.
- Achievement and payment timing of the Technion sales milestone, and outcomes of the IPO litigation and tax discussions.
- Enrollment, results and regulatory progress for Optune and the company’s other TTFields trials and indications.