NovoCure Limited — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Financial amounts are in U.S. dollars; unless noted, figures below are in millions. NovoCure is a commercial-stage oncology company developing Tumor Treating Fields (TTFields); its principal commercial product is Optune for glioblastoma (GBM).
Financial results
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $38.4 | $17.9 | $73.3 | $31.0 |
| Gross profit | $25.2 | $1.7 | $48.4 | $6.8 |
| Gross margin | 65.7% | 9.5% | 66.1% | 21.9% |
| Operating expenses | $40.8 | $38.9 | $77.3 | $76.0 |
| Operating loss | $(15.5) | $(37.2) | $(28.9) | $(69.2) |
| Net loss | $(21.2) | $(40.6) | $(39.2) | $(76.0) |
| Basic and diluted loss per share | $(0.24) | $(0.48) | $(0.45) | $(0.90) |
| Cash used in operating activities | $(5.9) | $(29.4) | $(32.8) | $(60.4) |
Q2 revenue increased 114% year over year; first-half revenue rose 137%. Growth reflected higher Optune sales in the U.S. and other active markets. Revenue includes both accrual-based recognition and cash collected for therapy in the current and earlier periods. For Q2, gross billings were $87.2 million, of which 24% qualified for accrual-based recognition; recognized accrual revenue was $19.1 million and cash-basis revenue was $19.3 million.
Q2 gross margin was affected by a $6.4 million impairment of first-generation field equipment in Q2 2016. Excluding that impairment, the comparative Q2 2016 gross margin was approximately 45.3%; the filing says the company does not expect the product conversion to cause another material impairment. First-half 2017 share-based compensation was $12.1 million.
Liquidity, debt and balance sheet
- At June 30, 2017, cash and cash equivalents were $80.2 million and short-term investments were $104.2 million, totaling $184.4 million; restricted cash was $1.5 million.
- Operating cash use for the first half was $32.8 million. Cash, cash equivalents and short-term investments together declined $35.6 million during the period.
- Current assets were $236.5 million and current liabilities were $35.2 million. Total liabilities were $139.5 million and shareholders’ equity was $117.5 million.
- Term-loan principal outstanding was $100.0 million; the balance-sheet carrying amount, net of discount and issuance costs, was $96.8 million. The loan bears 10% annual interest, payable quarterly, and is secured by substantially all assets of the company and certain guarantors. It includes a quarterly minimum-liquidity covenant and pro forma net-sales requirements.
- Management stated that cash and short-term investments at June 30 were sufficient for operations for at least the next 12 months under its existing business plan. The company also said it may need additional capital and expects continued operating losses and rising expenses.
Commercial, clinical and operating developments
- Active Optune patients at quarter-end totaled 1,460, versus 891 a year earlier. Q2 prescriptions received were 1,059, versus 657; the company reported a 70%–75% prescription fill rate over the 12 months ended June 30.
- More than 204 million Americans had available coverage for Optune for newly diagnosed and/or recurrent GBM, and contracts established in-network benefits for more than 174 million lives. Medicare fee-for-service beneficiaries remained 20%–25% of the U.S. active patient population; the company said Medicare had denied its claims to date.
- Management highlighted final analyses of its phase 3 newly diagnosed GBM trial: two-year survival was 43% with Optune plus temozolomide versus 30% with temozolomide alone, and five-year survival was 13% versus 5%.
- The company was conducting or planning trials in brain metastases, non-small-cell lung cancer, pancreatic cancer, ovarian cancer and mesothelioma. It received humanitarian use device designation for pleural mesothelioma in May 2017; this is a step toward, but not approval of, a U.S. humanitarian device exemption.
- Japan approved the second-generation Optune system in March 2017. NovoCure had applied for a defined reimbursement rate for newly diagnosed GBM and anticipated Japanese reimbursement feedback in Q3 2017.
Material changes, outlook and risks
- Research and development expense declined 17% in both Q2 and the first half, primarily following completion of the EF-14 phase 3 pivotal trial. Sales and marketing expense rose 12% in both periods as commercial operations expanded; general and administrative expense rose 15% in Q2 and 9% in the first half.
- Financial expense increased to $2.2 million in Q2 and $4.6 million in the first half, primarily due to interest and debt-cost amortization following the July 2016 drawdown of the remaining $75 million available under the term loan.
- No specific revenue or earnings guidance was provided. Management expects research, development, clinical, sales and marketing, and administrative expenses to continue increasing over the next several years, and says profitability may not be achieved.
- Two putative class actions related to the 2015 IPO were consolidated. The company considers the amended complaint without merit and intends to defend itself; it recorded no liability because loss was not considered probable and the amount could not be reasonably estimated.
- Unrecognized tax benefits were $3.2 million at June 30, 2017; the company did not expect significant tax payments related to them within the next year. It reported no material change in contractual obligations during Q2 and no off-balance-sheet arrangements.
- Management reported disclosure controls were effective at the reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and patient additions persist, and how much reported revenue depends on accrual recognition versus cash collections.
- Optune reimbursement, particularly the status of Medicare fee-for-service coverage and Japan’s reimbursement decision.
- Cash burn, the 12-month liquidity assessment, and compliance with the term-loan liquidity and sales covenants; also assess the cost and restrictions of the secured 10% debt.
- Progress and regulatory outcomes for pipeline indications, including the steps required after mesothelioma HUD designation.
- Developments in the IPO-related litigation and any change in the company’s assessment of potential loss.