NovoCure Limited — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; financial amounts are U.S. dollars unless stated otherwise. NovoCure develops and commercializes Tumor Treating Fields, principally through its Optune system for glioblastoma (GBM), while advancing clinical programs in other solid tumors.
Financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $64.8 million | $50.1 million | $178.4 million | $123.4 million |
| Gross profit | $45.8 million | $35.0 million | $121.4 million | $83.4 million |
| Gross margin | 70.7% | 69.8% | 68.0% | 67.6% |
| Operating loss | $5.2 million | $5.9 million | $25.0 million | $34.8 million |
| Net loss | $11.7 million | $11.5 million | $47.9 million | $50.7 million |
| Net loss per share | $0.13 | $0.13 | $0.52 | $0.57 |
| Operating cash flow | $5.6 million | $2.5 million | $(18.7) million | $(30.2) million |
- At September 30, 2018, cash and cash equivalents were $123.0 million, short-term investments $104.7 million, and restricted cash $2.2 million. Current assets were $296.8 million against current liabilities of $48.1 million.
- Debt principal was $150.0 million under a 9% term loan due February 2023; its balance-sheet carrying amount, net of discount and issuance costs, was $149.2 million. The loan is secured by substantially all assets and includes prepayment premiums and customary covenants.
- Accumulated deficit was $628.0 million. Nine-month share-based compensation was $29.2 million, a significant non-cash expense.
Changes versus the prior comparable period
- Q3 revenue rose 29%; nine-month revenue rose 45%. Management attributed growth to Optune adoption in the U.S. and Germany and Japan launch activity; nine-month growth also benefited from an improved gross-to-net spread. The prior-year comparison was partly affected by one-time benefits from the 2017 cash-to-accrual revenue transition.
- Period-end active patients increased to 2,252 from 1,683 a year earlier. Q3 prescriptions totaled 1,243 versus 1,076; more than 930 Q3 prescriptions were for newly diagnosed GBM.
- Nine-month operating loss narrowed despite higher costs: operating expenses rose 24%, including increases in clinical-trial, commercial, and administrative spending. Q3 net loss was broadly unchanged year over year.
- Nine-month operating cash use improved by $11.6 million year over year. Financing cash flow included $149.1 million of net new loan proceeds and repayment of $100.0 million of the prior loan.
Outlook, developments, and risks
- Management expects significant expenses and operating losses for at least the next several years and says R&D, sales and marketing, and administrative costs are expected to rise. It believes cash, cash equivalents, and short-term investments at quarter-end are sufficient for at least 12 months under its current plan, but says additional capital may be needed; profitability is not assured.
- In September 2018, NovoCure signed an exclusive China, Hong Kong, Macau, and Taiwan license and collaboration with Zai Lab. Consideration includes a $15 million upfront fee expected in Q4 2018, up to $78 million in development, regulatory, and commercial milestones, and tiered royalties of 10% to the mid-teens. Zai is to source products from NovoCure at fully burdened manufacturing cost.
- NovoCure submitted an FDA Humanitarian Device Exemption application for mesothelioma in October 2018 and anticipated a U.S. launch in 2019, subject to approval. Management noted the FDA may request additional studies; HDE products may face profit limitations.
- Medicare fee-for-service had denied Optune claims to date and represented 20%–25% of the U.S. active patient population. In October, DME MACs accepted a coverage reconsideration request for newly diagnosed GBM, but not recurrent GBM; no decision timeline was provided. Management also described reimbursement reviews in Germany, Switzerland, and Israel.
- The company is conducting or planning trials in several other cancers. It reported final STELLAR mesothelioma results of median overall survival of 18.2 months versus a 12.1-month historical control, while noting the comparison was against historical data. No serious device-related adverse events were reported.
- ASC 606 was adopted January 1, 2018. It changed reported revenue and net loss in the periods presented and makes direct comparison with 2017 less straightforward. The company also reported that its Israeli tax audit concluded, with a $2.5 million payment in Q2; no material changes to previously disclosed legal proceedings or risk factors were reported.
Important facts for investors to verify
- Whether Optune patient growth and payer collections continue to support revenue growth and gross margins, particularly given unresolved Medicare coverage.
- Receipt and accounting treatment of the Zai upfront payment, and whether any milestones or royalties are achieved.
- FDA review progress, any additional evidence requirements, and the timing and economics of a potential mesothelioma launch.
- Cash burn, future financing needs, and the secured loan’s covenants, interest burden, and prepayment provisions.
- The effect of ASC 606 and non-cash share-based compensation on comparisons of reported results and underlying operating performance.