NovoCure Limited — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. Amounts are U.S. dollars. NovoCure develops and commercializes Optune, a Tumor Treating Fields therapy approved in certain markets for adult glioblastoma (GBM), and is testing it in other solid tumors.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net revenue | $73.3 million | $52.1 million | +41% |
| Gross profit / margin | $53.5 million / 73% | $33.9 million / 65% | Margin +8 percentage points |
| Operating expenses | $59.6 million | $46.6 million | +28% |
| Operating loss | $6.1 million | $12.7 million | Improved |
| Net loss | $12.2 million | $20.7 million | Improved |
| Basic and diluted loss per share | $0.13 | $0.23 | Improved |
| Cash used in operating activities | $4.3 million | $16.8 million | Lower cash use |
At March 31, cash and cash equivalents were $152.1 million and short-term investments were $104.5 million, totaling $256.6 million; restricted cash was $2.1 million. The company reported $150.0 million of term-loan principal outstanding ($149.3 million carrying value). Management said available cash, cash equivalents and investments were expected to fund operations for at least 12 months under its existing plan.
Revenue growth reflected 2,631 active patients at quarter-end, up from 2,009, and higher revenue per patient, particularly from improving reimbursement approvals in Germany and growth in Austria and Japan. Gross billings were $158.0 million versus $126.3 million. Q1 2019 revenue included amounts under the Zai Lab collaboration. By region, revenue was $46.6 million in the U.S., $22.5 million in EMEA, $3.4 million in Japan and $0.8 million in Greater China.
Material changes and management commentary
- Research, development and clinical-trial expense increased 53% to $17.0 million, primarily due to activity and personnel costs for clinical trials and increased medical-affairs and regulatory spending. Sales and marketing rose 23% to $22.3 million, and general and administrative expense rose 17% to $20.2 million.
- Gross margin increased from 65% to 73%, which management attributed to efficiency initiatives and scale. Cost of revenue rose 9%, mainly due to shipping arrays for a larger patient base.
- Management reported that the reduction in operating cash use reflected improved results and working-capital changes, among other factors. Exercise of options contributed $17.0 million of financing cash flow in the quarter.
- The company adopted lease accounting standard ASC 842 on January 1, 2019, recording right-of-use assets and lease liabilities. At March 31, lease liabilities totaled $14.8 million, including $3.8 million current and $11.0 million long term.
Outlook, risks and contingencies
- No specific numerical revenue or earnings guidance is provided in the filing. The company expects continued significant commercialization costs and higher R&D and clinical-trial spending as programs advance; these expenses may outpace gross profit, and additional capital may be needed.
- More than 245 million Americans had coverage for Optune for newly diagnosed and/or recurrent GBM, but Medicare fee-for-service had denied claims to date. Medicare beneficiaries represented approximately 20%–25% of the U.S. active patient population. The timing of a proposed local coverage determination for newly diagnosed GBM remained unclear.
- Clinical priorities included pivotal trials in brain metastases, non-small-cell lung cancer, pancreatic cancer and ovarian cancer, plus a phase 2 liver-cancer trial. The first patient entered the phase 3 INNOVATE-3 ovarian-cancer trial in March 2019; the company anticipated an event-driven interim analysis in 2022. It also planned two additional randomized GBM trials as early as 2019.
- Zai Lab was pursuing Chinese regulatory approval and a possible trial waiver that could support a China launch as early as Q4 2019; this was an expectation, not a confirmed launch date.
- A former director and an affiliated entity sued in Israel, claiming entitlement to 210,000 shares under an alleged 2003 verbal agreement. NovoCure said it considered the claim without merit and intended to defend it; no amount was accrued because loss was not considered probable and not reasonably estimable.
- The term loan is secured by substantially all assets of the company and specified subsidiaries. Certain licensing transactions and a change of control may require repayment, potentially with premiums or make-whole amounts. Management reported no material change to previously disclosed risk factors and no material change in contractual obligations during the quarter.
Important facts for investors to verify
- Whether patient additions and revenue per patient continue to support growth, and how much reported revenue depends on collaboration or licensing arrangements.
- Progress and timing of Medicare coverage decisions, appeals and reimbursement access in other markets.
- Clinical-trial enrollment, milestones and regulatory outcomes, including the anticipated ovarian-trial interim analysis and the MPM humanitarian device exemption application.
- Operating cash use, planned R&D and commercialization spending, the stated 12-month liquidity outlook, and any need for new financing.
- Term-loan covenants and potential prepayment obligations, as well as developments in the 210,000-share lawsuit.