NovoCure Limited — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; quarterly figures below include the three months ended December 31, 2016. Amounts are U.S. dollars unless stated otherwise.
Business context
NovoCure is a commercial-stage oncology company developing Tumor Treating Fields (TTFields). Its principal commercial product, Optune, was marketed for adult patients with newly diagnosed or recurrent glioblastoma (GBM). Commercial operations were active in the United States, Germany, Switzerland and Japan. The company’s strategy was to grow Optune adoption while developing TTFields for additional solid tumors.
Financial and operating performance
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net revenue | $82.9 million | $33.1 million |
| Gross profit | $36.6 million | $12.5 million |
| Gross margin | 44.2% | 37.7% |
| Operating loss | $115.3 million | $104.0 million |
| Net loss | $131.8 million | $111.6 million |
| Net loss per share | $1.54 | $3.67 |
| Cash used in operating activities | $107.6 million | $99.9 million |
Gross margin includes a $6.4 million impairment of first-generation Optune equipment in 2016. Annual expenses included $41.5 million for research, development and clinical trials, $59.4 million for sales and marketing, and $51.0 million for general and administrative costs. Net loss widened despite substantial revenue growth; share-based compensation expense rose to $21.4 million from $11.9 million.
In Q4 2016, revenue was $30.2 million, gross profit $19.3 million, operating loss $17.9 million and net loss $22.2 million. Q4 2015 revenue was $12.4 million and net loss was $32.9 million. NovoCure began recognizing some revenue on an accrual basis in Q4 2016; $8.5 million was recognized on that basis during the quarter and year, including $4.0 million not yet collected at year-end. The remainder of 2016 revenue was recognized on a cash basis.
Commercial indicators improved: 2,808 new prescriptions were received in 2016, up 58% from 2015, and 1,091 patients were active on therapy at year-end, up 80%. Quarterly prescription fill rates were 70%–75%. FY 2016 revenue was $72.8 million in the United States, $10.0 million in EMEA and $0.1 million in Japan.
Liquidity, debt and balance sheet
At December 31, 2016, cash and cash equivalents were $99.8 million and short-term investments were $119.9 million, totaling $219.6 million, compared with $269.4 million a year earlier. Working capital was $225.0 million; total assets were $282.1 million and shareholders’ equity was $142.3 million. The company reported an accumulated deficit of $519.9 million.
Outstanding term-loan principal was $100.0 million, bearing 10% annual interest, payable quarterly, and due in January 2020. The loan is secured by substantially all company assets and includes a quarterly minimum-liquidity covenant and annual pro forma net-sales requirements; NovoCure reported compliance at year-end. Management stated that available cash, cash equivalents and short-term investments were sufficient for at least the next 12 months under its existing plan, while also expecting continued losses and potentially needing additional capital.
Changes, outlook and material items
- Revenue increased 151% year over year, principally reflecting increased Optune sales following FDA approval for newly diagnosed GBM in October 2015 and broader commercialization. Sales and marketing expense rose 53%; general and administrative expense rose 51%.
- R&D and clinical-trial expense declined 5%, mainly as EF-14 trial costs and second-generation system development costs decreased, partly offset by higher personnel costs.
- The July 2016 U.S. approval and rollout of second-generation Optune led to discontinuation of first-generation manufacturing and a $6.4 million equipment impairment.
- Management expected R&D, clinical, sales and marketing, and administrative spending to increase over the coming years. The filing provides no specific revenue or earnings guidance.
- Pipeline plans included a phase 3 pancreatic-cancer trial expected to commence in 2017; completion of enrollment in the mesothelioma STELLAR trial in 2017, with data anticipated in 2018; and continued development of phase 3 trials in brain metastases and NSCLC. The filing reported the first LUNAR NSCLC-trial patient enrolled in February 2017. Early pancreatic and ovarian results cited were from small, single-arm studies using historical controls and are not definitive comparative evidence.
- Coverage and reimbursement remain significant uncertainties. Medicare fee-for-service denied claims to date; beneficiaries represented 20%–25% of U.S. active patients in 2016, and NovoCure said it could not bill those patients for amounts Medicare did not pay. Management also cited delays in Medicare appeals. Coverage arrangements and reimbursement pathways in Europe and Japan were not fully established.
- A single-source supplier provided ceramic discs used in arrays. Its agreement ran through July 21, 2017, and NovoCure did not intend to renew under current terms; a qualified second source was expected to begin production shipments in the first half of 2017.
- A $5.5 million payment to the Technion is contingent on reaching $250 million in cumulative net sales or a qualifying transaction; the company recorded a provision in 2016. Two putative class actions filed in January 2017 alleged misstatements or omissions in the IPO materials. NovoCure disputed the claims, recorded no accrual, and said the loss could not be estimated.
Investor facts to verify
- Whether prescription growth converts into sustained active-patient growth, treatment duration and collected revenue, and how the new accrual-based revenue recognition develops.
- Cash burn and runway against management’s 12-month liquidity assessment, including the effects of continued operating losses and the 10% secured debt.
- Medicare appeal outcomes, commercial and government payer coverage, and the timing and terms of reimbursement in Germany, Switzerland and Japan.
- Second-source supplier production, regulatory qualification and continuity of supply following the Harris agreement’s July 2017 end date.
- Randomized, controlled results and regulatory progress for pipeline indications; interpret pilot-study results cautiously because several used historical controls.
- Developments in the IPO litigation and the timing or triggering of the contingent Technion payment.