Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide information to assist you in better understanding and evaluating our financial condition and results of operations. We encourage you to read this MD&A in conjunction with our unaudited consolidated financial statements and the notes thereto for the period ended March 31, 2020 included in Part I, Item 1 of this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. Please refer to the information under the heading “Cautionary Note Regarding Forward-Looking Statements” elsewhere in this report. References to the words “we,” “our,” “us,” and the “Company” in this report refer to NovoCure Limited, including its consolidated subsidiaries.
Overview
We are a global oncology company with a proprietary platform technology called Tumor Treating Fields, the use of electric fields tuned to specific frequencies to disrupt solid tumor cancer cell division. Our key priorities are to drive adoption of Optune and Optune Lua, our commercial Tumor Treating Fields delivery systems (collectively, our “Products”), and to advance clinical and product development programs intended to extend overall survival in some of the most aggressive forms of cancer.
Optune is approved by the United States Food and Drug Administration (“FDA”) under the premarket approval (“PMA”) pathway for the treatment of adult patients with newly diagnosed glioblastoma multiforme (“GBM”) in combination with temozolomide, a chemotherapy drug, and for adult patients with GBM following confirmed recurrence after chemotherapy as monotherapy treatment. We also have approval to market Optune for the treatment of GBM in the European Union (“EU”), Japan and certain other countries. Optune Lua is approved by the FDA under the humanitarian device exemption (“HDE”) pathway to treat malignant pleural mesothelioma (“MPM") in combination with standard chemotherapies. We have submitted an application to our notified body for CE Certification for Optune Lua in the EU.
We market Optune in the U.S., Austria, Germany, Israel, Japan, Sweden and Switzerland, which we refer to as our active markets, and we market Optune Lua in the U.S. With respect to the treatment of GBM, our sales and marketing efforts are principally focused on driving adoption with both neuro-oncologists and radiation oncologists. With respect to the treatment of MPM, our commercial efforts are principally focused on generating awareness with radiation oncologists and on establishing a dialogue with third-party payors around access to Optune Lua. We are expanding our commercial operations into France with an initial focus on developing key opinion leader relationships in GBM and establishing a path to reimbursement for our products.
We continue to work with payers to expand access to Optune for patients with GBM. In January 2020, the State of Israel Ministry of Health added Optune in combination with temozolomide to the Israeli medical services basket, establishing national reimbursement for Optune in newly diagnosed GBM in Israel. In March 2020, the German Federal Joint Committee (“G-BA”), updated its directive for Contracted Medical Care to include Tumor Treating Fields, establishing national reimbursement for Optune in newly diagnosed GBM in Germany.
As of March 31, 2020, the total number of contracted GBM lives was approximately 263 million in the U.S., approximately 111 million in our active EMEA markets and approximately 127 million in Japan.
Our general business operations and clinical trials have been impacted by the global COVID-19 pandemic, and we anticipate that it will continue to impact us in the near term. We are following the guidance of the World Health Organization, the U.S. Centers for Disease Control and Prevention, and local health authorities and are working to minimize the spread of COVID-19 through work-at-home policies for employees who are not directly involved in operations or patient support. Our field-based patient support teams continue to conduct in-person patient visits when possible and leverage technology to conduct new patient starts and provide ongoing patient support visits, virtually. We are respecting any restrictions on external visitors at the cancer centers, hospitals and research institutions we serve and utilizing telephone and web-based technologies to engage healthcare professionals and enable information sharing. Clinical trial site expansion has been materially delayed as clinical sites devote significant resources to COVID-19. We are actively monitoring the various components of our global supply chain in an effort to ensure we maintain adequate inventories of all key products. At this time, there is no material impact to our global supply chain. The pandemic did not have a material adverse effect on our financial results in the first quarter 2020.
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We believe the mechanism of action behind Tumor Treating Fields therapy may be broadly applicable to solid tumor cancers. Currently, we are conducting phase 3 pivotal trials evaluating the use of Tumor Treating Fields in brain metastases, non-small cell lung cancer (“NSCLC”), pancreatic cancer and ovarian cancer. We are also conducting phase 2 pilot trials evaluating the use of Tumor Treating Fields in liver cancer and gastric cancer. We plan to initiate additional randomized trials in GBM in order to further advance the scientific evidence supporting the use of Optune in GBM and to gather additional information about Optune's optimal use. We anticipate expanding our clinical pipeline over time to study the safety and efficacy of Tumor Treating Fields for additional solid tumor indications.
The enrollment timelines for our METIS, LUNAR and PANOVA-3 phase 3 pivotal trials are reliant on clinical trial site expansion. We are evaluating the initiation of new clinical trial sites using a risk-based framework in accordance with local regulations and site policies, but clinical trial site expansion has been materially delayed as clinical sites devote significant resources to the COVID-19 global pandemic.
The European Network for Gynaecological Oncological Trial Groups ("ENGOT") and The GOG Foundation, Inc. ("GOG"), third-party clinical trial networks, are collaborating with us on our INNOVATE-3 phase 3 pivotal trial, which we believe is facilitating enrollment at leading cancer centers. Notwithstanding delays in clinical trial site expansion related to the COVID-19 global pandemic, INNOVATE-3 patient enrollment trends continued to outpace our expectations in the first quarter, driving an acceleration in our anticipated enrollment timeline.
We now expect data from the METIS phase 3 pivotal trial in 2022, data from the LUNAR, PANOVA-3 and INNOVATE-3 phase 3 pivotal trials in 2023 with interim analyses in 2021 and data from the EF-31 phase 2 pilot trial in 2021. The table below presents the current status of the ongoing or completed clinical trials in our pipeline and anticipated timing of final data.
Our therapy is delivered through a medical device, and we have several product development programs underway intended to improve efficacy and usability for patients. We believe we have a robust patent and intellectual property portfolio, with over 180 issued patents and numerous patent applications pending worldwide. We believe we own global commercialization rights to our Products in oncology and that we are well-positioned to extend those rights into the future as we continue to find innovative ways to improve our Products.
In 2018, we entered into a License and Collaboration Agreement (the “Zai Agreement”) between us and Zai Lab (Shanghai) Co., Ltd. (“Zai”) pursuant to which we granted Zai a license to commercialize Optune in China, Hong Kong, Macau and Taiwan (“Greater China”). The Zai Agreement also establishes a development partnership intended to accelerate the development of Tumor Treating Fields in multiple solid tumor indications. For additional information, see Note 12 to the Consolidated Financial Statements in our 2019 10-K.
We view our operations and manage our business in one operating segment. For the three months ended March 31, 2020, our net revenues were $101.8 million. Our net income for the three months ended March 31, 2020 was $4.0 million. As of March 31, 2020, we had an accumulated deficit of $646.9 million. Our accumulated deficit primarily resulted from costs incurred in connection with our preclinical and clinical trial programs, costs incurred to commercialize our Products and general and administrative costs necessary to operate as a global oncology business.
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Critical Accounting Policies and Estimates
In accordance with U.S. generally accepted accounting principles (“GAAP”), in preparing our financial statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of net revenues and expenses during the reporting period. We develop and periodically change these estimates and assumptions based on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates.
The critical accounting policies requiring estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements can be found in our Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the “2019 10-K”). For additional information, see Note 1 to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report. There were no other material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our 2019 10-K.
Commentary on Results of Operations
Net revenues . Our revenues are primarily derived from patients using our Products in our active markets. We charge for treatment with our Products on a monthly basis. Our potential net revenues per patient are determined by our ability to secure payment, the monthly fee we collect and the number of months that the patient remains on therapy.
We also receive revenues pursuant to the Zai Agreement. For additional information regarding the Zai Agreement, see Note 12 to the Consolidated Financial Statements in our 2019 10-K.
Cost of revenues. We contract with third parties to manufacture our Products. Our cost of revenues is primarily comprised of the following:
• disposable transducer arrays;
• depreciation expense for the field equipment, including the electric field generator used by patients; and
• personnel, warranty and overhead costs such as facilities, freight and depreciation of property, plant and equipment associated with managing our inventory, warehousing and order fulfillment functions.
Operating expenses. Our operating expenses consist of research, development and clinical trials, sales and marketing and general and administrative expenses. Personnel costs are a significant component for each category of operating expenses and consist of wages, benefits and bonuses. Personnel costs also include share-based compensation.
Financial expenses, net . Financial expenses, net primarily consists of credit facility interest expense and related debt issuance costs, interest income from cash balances and short-term investments and gains (losses) from foreign currency transactions. Our reporting currency is the U.S. dollar. We have historically held substantially all of our cash balances in U.S. dollar denominated accounts to minimize the risk of translational currency exposure.
Results of Operations
The following discussion provides an analysis of our results of operations and reasons for material changes therein for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.
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Three months ended March 31, 2020 compared to three months ended March 31, 2019
The following table sets forth our consolidated statements of operations data:
Three months ended March 31,
2020 2019
Unaudited
Net revenues $ 101,828 $ 73,309
Cost of revenues 24,496 19,814
Gross profit 77,332 53,495
Operating costs and expenses:
Research, development and clinical trials 25,271 17,042
Sales and marketing 28,834 22,333
General and administrative 26,608 20,238
Total operating costs and expenses 80,713 59,613
Operating income (loss) ( 3,381 ) ( 6,118 )
Financial expenses (income), net 2,432 2,371
Income (loss) before income taxes ( 5,813 ) ( 8,489 )
Income taxes ( 9,765 ) 3,661
Net income (loss) $ 3,952 $ ( 12,150 )
Basic net income (loss) per ordinary share $ 0.04 $ ( 0.13 )
Weighted average number of ordinary shares used in computing basic net income (loss) per share 99,877,567 94,811,282
Diluted net income (loss) per ordinary share $ 0.04 $ ( 0.13 )
Weighted average number of ordinary shares used in computing diluted net income (loss) per share 108,100,623 94,811,282
The following table details the share-based compensation expense included in costs and expenses:
Three months ended March 31,
2020 2019
Unaudited
Cost of revenues $ 590 $ 426
Research, development and clinical trials 3,394 1,188
Sales and marketing 3,616 1,962
General and administrative 8,957 6,073
Total share-based compensation expense $ 16,557 $ 9,649
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Key performance indicators
We believe certain commercial operating statistics are useful to investors in evaluating our commercial business as they help our management and investors evaluate and compare the adoption of our Products from period to period. The number of active patients on therapy is our principal revenue driver. An "active patient" is a patient who is receiving treatment under a commercial prescription order as of the measurement date, including patients who may be on a temporary break from treatment and who plan to resume treatment in less than 60 days. Prescriptions are a leading indicator of demand. A "prescription received" is a commercial order for Optune or Optune Lua that is received from a physician certified to treat patients with our Products for a patient not previously on Optune or Optune Lua. Orders to renew or extend treatment are not included in this total.
The following table includes certain commercial operating statistics for and as of the end of the periods presented.
March 31,
Operating statistics 2020 2019
Active patients at period end
United States 2,023 1,778
EMEA:
Germany 514 510
Other EMEA 336 225
Japan 222 118
3,095 2,631
Three months ended March 31,
2020 2019
Prescriptions received in period
United States 986 925
EMEA:
Germany 207 254
Other EMEA 122 76
Japan 94 55
1,409 1,310
In the U.S., there were six active MPM patients on therapy as of March 31, 2020 and six MPM prescriptions were received in the three months ended March 31, 2020.
Three months ended March 31,
2020 2019 Change % Change
Net revenues $ 101,828 $ 73,309 $ 28,519 39 %
Net revenues. Net revenues increased $28.5 million, or 39%, to $101.8 million for the three months March 31, 2020 from $73.3 million for the three months ended March 31, 2019. This was primarily due to an increase of 464 active patients in our currently active markets, representing 18% growth, and an improvement in the net revenues booked per active patient. The increase in net revenues per active patient benefited from continued improvements in U.S. reimbursement rates.
For the three months ended March 31, 2020, we recognized $7.1 million in net revenues from Medicare beneficiaries billed under the coverage policy effective on September 1, 2019. We continue to work through typical administrative ramp-up issues and expect our net revenues from Medicare beneficiaries to continue to increase as we gain experience processing Medicare claims.
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Three months ended March 31,
2020 2019 Change % Change
Cost of revenues $ 24,496 $ 19,814 $ 4,682 24 %
Cost of revenues. Our cost of revenues increased by $4.7 million, or 24%, to $24.5 million for the three months ended March 31, 2020 from $19.8 million for the three months ended March 31, 2019. The increase in cost of revenues was primarily due to the cost of shipping transducer arrays to a higher volume of commercial patients. Gross margin was 76% for the three months ended March 31, 2020 and 73% for the three months ended March 31, 2019.
Operating Expenses.
Three months ended March 31,
2020 2019 Change % Change
Research, development and clinical trials $ 25,271 $ 17,042 $ 8,229 48 %
Sales and marketing 28,834 22,333 6,501 29 %
General and administrative 26,608 20,238 6,370 31 %
Total operating expenses $ 80,713 $ 59,613 $ 21,100 35 %
Research, development and clinical trials expenses. Research, development and clinical trials expenses increased $8.2 million, or 48%, to $25.3 million for the three months ended March 31, 2020 from $17.0 million for the three months ended March 31, 2019. The change is primarily due to an increase in clinical trial and personnel expenses for our phase 3 pivotal and phase 4 post-marketing trials and an increase in costs associated with medical affairs, basic research and engineering.
Sales and marketing expenses. Sales and marketing expenses increased $6.5 million, or 29%, to $28.8 million for the three months ended March 31, 2020 from $22.3 million for the three months ended March 31, 2019. The change was primarily due to an increase in marketing expenses related to the launch of Optune Lua and an increase in personnel costs to support our growing commercial business.
General and administrative expenses. General and administrative expenses increased $6.4 million, or 31%, to $26.6 million for the three months ended March 31, 2020 from $20.2 million for the three months ended March 31, 2019. The change was primarily due to an increase in personnel costs and an increase in professional services.
Three months ended March 31,
2020 2019 Change % Change
Financial expenses (income), net $ 2,432 $ 2,371 $ 61 3 %
Financial expenses, net. Financial expenses increased $0.1 million, or 3%, to $2.4 million for the three months ended March 31, 2020 from $2.4 million for the three months ended March 31, 2019.
Three months ended March 31,
2020 2019 Change % Change
Income taxes $ (9,765) $ 3,661 $ (13,426) (367) %
Income taxes. Income taxes decreased $13.4 million, or 367%, to a benefit of $9.8 million for the three months ended March 31, 2020 from $3.7 million for the three months ended March 31, 2019. In accordance with the changes to the U.S. tax code enacted in response to the economic impacts of COVID-19 signed into legislation on March 27, 2020 the Company recorded a net tax benefit of $11,269 in the first quarter of 2020. The benefit results from net operating loss carry-backs in the U.S. The change also reflects a change in the mix of applicable statutory tax rates in certain active jurisdictions.
Non-GAAP financial measures
We also measure our performance based upon a non-GAAP measurement of earnings before interest, taxes, depreciation, amortization and shared-based compensation ("Adjusted EBITDA"). We believe Adjusted EBITDA is useful to investors in evaluating our operating performance because it helps investors evaluate and compare the
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results of our operations from period to period by removing the impact of earnings attributable to our capital structure, tax rate and material non-cash items, specifically share-based compensation.
We calculate Adjusted EBITDA as operating income before financial expenses and income taxes, net of depreciation, amortization and share-based compensation. The following table reconciles net loss (which is the most directly comparable GAAP operating performance measure) to Adjusted EBITDA.
Three months ended March 31,
2020 2019 2018
Net income (loss) $ 3,952 $ (12,150) $ (20,724)
Add: Income tax (9,765) 3,661 3,194
Add: Financial expenses (income), net 2,432 2,371 4,853
Add: Depreciation and amortization 1,888 1,929 2,203
EBITDA $ (1,493) $ (4,189) $ (10,474)
Add: Share-based compensation 16,557 9,649 8,520
Adjusted EBITDA $ 15,064 $ 5,460 $ (1,954)
Adjusted EBITDA increased by $9.6 million, or 176%, to $15.1 million for the three months ended March 31, 2020 from $5.5 million for the three months ended March 31, 2019. This improvement in fundamental financial performance was driven by net revenue growth coupled with an ongoing commitment to disciplined management of expenses.
Liquidity and Capital Resources
We have incurred significant losses and cumulative negative cash flows from operations since our founding in 2000. As of March 31, 2020, we had an accumulated deficit of $646.9 million. To date, we have primarily financed our operations through the issuance and sale of equity and the proceeds from long-term loans.
At March 31, 2020, we had $331.3 million in cash, cash equivalents and short-term investments, an increase of $5.2 million compared to $326.1 million at December 31, 2019. The increase in our cash, cash equivalents and short-term investments was primarily due to cash flow from operations and the exercise of options partially offset by the purchase of field equipment.
We believe our cash, cash equivalents and short-term investments as of March 31, 2020 are sufficient for our operations for at least the next 12 months based on our existing business plan and our ability to control the timing of significant expense commitments. We expect that our research, development and clinical trials expenses, sales and marketing expenses and general and administrative expenses will continue to increase over the next several years and may outpace our gross profit. As a result, we may need to raise additional capital to fund our operations.
The following summary of our cash flows for the periods indicated has been derived from our unaudited consolidated financial statements, which are included elsewhere in this Quarterly Report.
Three months ended March 31,
2020 2019 Change % Change
Net cash provided by (used in) operating activities $ 1,957 $ (4,315) $ 6,272 (145) %
Net cash provided by (used in) investing activities (3,112) (989) (2,123) 215 %
Net cash provided by (used in) financing activities 4,503 16,970 (12,467) (73) %
Effect of exchange rate changes on cash and cash equivalents (59) (261) 203 (78) %
Net increase (decrease) in cash, cash equivalents and restricted cash $ 3,289 $ 11,405 $ (8,115) (71) %
Operating activities. Net cash provided by (used in) operating activities primarily represents our net income (loss) for the periods presented. Adjustments to net income (loss) for non-cash items include share-based compensation, depreciation and amortization, and asset write-downs and impairment of field equipment. Operating cash flows are
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also impacted by changes in working capital, principally trade receivables, trade payables and accrued expenses, inventories, and other long-term assets.
Net cash provided by operating activities was $2.0 million for the three months ended March 31, 2020, as compared to $4.3 million used in operating activities for the three months ended March 31, 2019. Gross profit increased by $23.8 million for the three months ended March 31, 2020 versus the three months ended March 31, 2019, fully funding incremental investments of $8.2 million in research and development and $12.9 million in sales, marketing, general and administrative expenses. The transition to positive cash flow from operations was primarily driven by a decrease in net loss and an increase in the amount of non-cash share-based compensation included in the reported net income (loss), offset by an increase in working capital.
Investing activities. Our investing activities consist primarily of capital expenditures to purchase property and equipment and field equipment, as well as investments in and redemptions of our short-term investments.
Net cash used in investing activities was $3.1 million for the three months ended March 31, 2020, compared to $1.0 million for the three months ended March 31, 2019. The increased net cash used in investing activities was primarily attributable to the purchase of property and equipment to support our growing commercial business. Financing activities. To date, our primary financing activities have been the sale of equity and the proceeds from long-term loans.
Financing activities. Net cash provided by financing activities was $4.5 million for the three months ended March 31, 2020, as compared to $17.0 million for the three months ended March 31, 2019. The year-over-year decrease in cash provided by financing activities was primarily related to a decrease in proceeds from the exercise of options.
As of March 31, 2020, our material outstanding indebtedness consisted of $150.0 million of principal outstanding under our term loan credit facility (the "2018 Credit Facility"). Interest on the outstanding loan is 9% annually, payable quarterly in arrears. The 2018 Credit Facility will mature on February 7, 2023, at which time any unpaid principal and accrued unpaid interest in respect of the loan will be due and payable. We may prepay amounts outstanding under the 2018 Credit Facility in full at any time. Any prepayment (whether permitted or mandatory) is subject to a prepayment premium and/or make-whole payment. The prepayment fee if we prepay outstanding loan amounts prior to February 7, 2021 is 2.0% and is 1.0% if made after the February 7, 2021 but prior to February 7, 2022. If we prepay outstanding loan amounts prior to August 7, 2020, we must pay a make-whole amount equal to the amount of interest that would have accrued on the amount of all principal we prepaid from the date of such prepayment through February 7, 2021. We must prepay the 2018 Credit Facility (i) in full or in part upon the entry into certain licensing arrangements and (ii) in full in the event of a change of control.
All obligations under the 2018 Credit Facility are guaranteed by certain of our domestic direct and indirect subsidiaries. In addition, the obligations under the 2018 Credit Facility are secured by a first-priority security interest in substantially all of the property and assets of, as well as the equity interests owned by, us and the other guarantors. The 2018 Credit Facility contains other customary covenants. As of March 31, 2020, we were in compliance with such covenants.
Contractual Obligations and Commitments
There have been no material changes from the information disclosed in our 2019 10-K.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements as defined under U.S. Securities and Exchange Commission (“SEC”) rules.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes from the information disclosed in our 2019 10-K.
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