NovoCure Limited — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; filed October 29, 2020. NovoCure develops and commercializes Tumor Treating Fields systems, including Optune for glioblastoma (GBM) and Optune Lua for malignant pleural mesothelioma (MPM).
Financial performance
Amounts below are U.S. dollars in millions, except per-share data. Comparisons are with the corresponding 2019 period.
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $132.7 | $92.1 | $350.4 | $252.1 |
| Gross profit | $104.3 | $69.2 | $272.0 | $188.3 |
| Gross margin | 79% | 75% | 78% | 75% |
| Operating income (loss) | $15.0 | $3.9 | $18.3 | $(1.1) |
| Net income (loss) | $9.3 | $1.9 | $14.9 | $(11.5) |
| Adjusted EBITDA | $37.3 | $20.1 | $80.4 | $42.6 |
| Basic EPS | $0.09 | $0.02 | $0.15 | $(0.12) |
Q3 revenue rose 44% and nine-month revenue rose 39%. Management attributed growth primarily to 610 additional active patients in established markets, improved net revenue per active patient, and higher Zai Lab collaboration revenue. Active patients reached 3,361 at quarter-end, up 22% year over year. Cost of revenue grew more slowly than revenue, supporting higher gross margins. Nine-month operating expenses increased 34%, including a 59% rise in R&D, reflecting clinical trials, product development, preclinical research, and medical affairs investment.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $45.7 million, versus $19.7 million in 2019. Capital spending was $9.2 million.
- Cash and cash equivalents were $234.5 million at September 30; restricted cash was $0.9 million. Short-term investments were zero, down from $148.8 million at year-end 2019.
- The company repaid its $150 million term loan on August 18, 2020, using matured investments. The loan carried 9% interest; repayment included a $3 million premium and accrued interest and expenses. No term-loan balance remained at quarter-end.
- Current assets were $383.5 million and current liabilities $95.3 million. Total liabilities were $124.0 million, including leases and deferred revenue. The filing says available cash and investments were sufficient for at least 12 months under the existing business plan.
- Management was negotiating a proposed $150 million senior secured revolving facility, potentially expandable to $250 million; closing and terms were not assured.
Outlook, developments, and risks
- Management expects R&D, sales and marketing, and general and administrative expenses to continue increasing and potentially outpace gross profit; additional capital may be needed.
- COVID-19 had not materially affected results, commercial operations, or the global supply chain through Q3. Management cautioned that future patient-volume and care-pattern disruptions could affect prescriptions and clinical trials.
- Clinical programs include Phase 3 trials in brain metastases, NSCLC, pancreatic, and ovarian cancer, and Phase 2 pilot trials in liver and gastric cancer. Final HEPANOVA data were expected in Q1 2021. A KEYTRUDA combination study in first-line NSCLC was expected to begin in the first half of 2021 after a regulatory-strategy change.
- China approved Optune for newly diagnosed and recurrent GBM in May 2020. The company recognized $10 million and $27 million of Medicare fee-for-service revenue in Q3 and the first nine months, respectively, and recorded about $8 million of Q3 incremental revenue from successful appeals of previously denied claims.
- A $11.3 million U.S. net operating loss carryback tax benefit was recorded in Q1, contributing to the nine-month income tax benefit of $5.6 million. Q3 financial expense included the loan prepayment premium and write-off of remaining issuance costs.
- No legal proceedings or material changes to previously disclosed risk factors were reported. Management stated disclosure controls were effective.
Important facts for investors to verify
- Whether patient growth and revenue per patient can sustain revenue growth, including the timing and durability of Medicare collections and Zai Lab collaboration revenue.
- Progress, enrollment, timing, and outcomes of pivotal and pilot trials, as well as regulatory and reimbursement milestones for current and future indications.
- Availability and final terms of the proposed revolving credit facility, and whether cash generation can support planned investment without additional financing.
- Future expense growth, share-based compensation, and dilution; nine-month share-based compensation was $55.4 million and ordinary shares outstanding increased to 101.7 million.
- Potential further effects of COVID-19 on patient care, commercial activity, clinical trials, and supply chains.