Business context and reporting period
NovoCure develops and commercializes Tumor Treating Fields (TTFields) systems for solid tumors. This Form 10-Q covers the quarter and six months ended June 30, 2020. Its commercial products included Optune for glioblastoma (GBM) and Optune Lua for malignant pleural mesothelioma (MPM). Financial figures below are U.S. dollars; millions unless stated otherwise.
Financial performance and liquidity
- Revenue: Q2 revenue was $115.9 million, up 34% year over year; first-half revenue was $217.8 million, up 36%. Management attributed growth to more active patients and improved revenue per patient, including improved U.S. reimbursement rates.
- Profit and margins: Q2 gross profit was $90.5 million, with a 78% gross margin versus 76% a year earlier. Operating income was $6.7 million and net income was $1.7 million, versus a $1.3 million net loss in Q2 2019. First-half operating income was $3.3 million versus a $4.9 million operating loss; net income was $5.6 million versus a $13.4 million net loss. First-half results included an $11.3 million U.S. tax benefit from net operating loss carrybacks; pretax loss was $1.8 million.
- Expenses: Q2 operating expenses rose 30% to $83.8 million, including research and development (R&D) up 54% to $29.9 million. First-half operating expenses increased 33% to $164.5 million. Adjusted EBITDA, a non-GAAP measure, was $28.0 million in Q2 and $43.1 million for the first half, up 64% and 91%, respectively.
- Cash flow: Operating cash flow was $12.7 million in Q2 and $14.7 million for the first half, compared with $9.1 million and $4.8 million, respectively, in 2019. First-half investing cash outflow was $6.4 million and financing cash inflow was $9.8 million.
- Liquidity and debt: Cash, cash equivalents and short-term investments totaled $346.7 million at June 30, up from $326.1 million at year-end 2019. The company reported $150.0 million principal outstanding on its term loan (carrying value $149.5 million), bearing 9% annual interest and maturing February 2023. It was in compliance with loan covenants. Management said available funds were sufficient for at least 12 months under its existing plan.
Material changes versus the prior comparable period
- Active patients increased to 3,278 at quarter-end from 2,726 a year earlier (about 20% growth in active markets). Q2 prescriptions received were 1,422 versus 1,362.
- Gross margin improved, while R&D, sales and marketing, and general and administrative expenses all increased. Management cited clinical and product development, commercial staffing and reimbursement efforts, and Optune Lua launch spending.
- Trade receivables rose to $76.0 million from $58.9 million at December 31, 2019; the first-half cash flow statement reflected a $25.9 million increase in accounts receivable.
- Ordinary shares outstanding increased to 101.0 million from 99.5 million at year-end.
Guidance, outlook, risks and unusual items
- No quantified revenue or earnings guidance was provided. Management expects R&D spending to continue increasing as programs advance, and said operating expenses may outpace gross profit over the next several years, potentially requiring additional capital.
- Management reported no material first-half financial, commercial or global supply-chain impact from COVID-19 and did not anticipate a material impact based on information available at filing. Future effects on the business and clinical trials remain uncertain.
- Medicare fee-for-service revenue under the coverage policy was $10.8 million in Q2 and $18.9 million in the first half. Management said claims processing was progressing and expected further experience with appeals to support recognition of additional revenue from eligible beneficiaries.
- China approved Optune for newly diagnosed and recurrent GBM in May 2020. The company recognized Zai collaboration revenue over the agreement period; Q2 included an $8 million approval milestone and the first half also included a $2 million clinical-trial milestone, recognized over the remaining performance period through September 2024.
- Clinical and development updates included completion of initial MAXPOINT treatment-planning software development and enrollment of the last patient in the HEPANOVA liver-cancer pilot in July. A July collaboration with MSD was intended to study TTFields with KEYTRUDA in first-line NSCLC. These are forward-looking development activities, not established commercial results.
- The filing reported no legal proceedings and no material changes to previously disclosed risk factors. Key risks include reimbursement and claims collection, product adoption, clinical and regulatory outcomes, supply/manufacturing, and the uncertain effects of COVID-19.
Important facts for investors to verify
- Whether revenue growth and active-patient additions persist, and how much growth reflects recurring therapy revenue versus collaboration milestones.
- Medicare reimbursement, appeals and receivables collection, including the timing and amount of any additional revenue recognition.
- Whether expense growth, particularly R&D, can be supported by gross profit and available liquidity without additional financing.
- Loan repayment terms, 9% interest burden and February 2023 maturity, including any prepayment provisions.
- Clinical-trial timing, regulatory progress and commercial adoption for Optune Lua and the China launch; the filing provides no quantified financial guidance.