What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-23 compared with 2022-02-24 · 58 added, 52 removed, 321 unchanged (26% of the section changed)

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References to the words "we," "our," "us," and the "Company" in this report refer to NovoCure Limited, including its consolidated subsidiaries .

We are a global oncology company with a proprietary platform technology called Tumor Treating Fields ("TTFields"), which are electric fields tuned to specific frequencies that disrupt cancer cell division.

Our key priorities are to drive commercial adoption of Optune and Optune Lua, our commercial devices, and to advance clinical and product development programs intended to extend overall survival in some of the most aggressive forms of cancer.

We are a global oncology company with a proprietary platform technology called Tumor Treating Fields ("TTFields"), which are electric fields that exert physical forces to kill cancer cells via a variety of mechanisms.

Our key priorities are to drive commercial adoption of Optune and Optune Lua, our commercial TTFields devices, 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 U.S.

Food and Drug Administration ("FDA") under the Premarket Approval ("PMA") pathway for the treatment of adult patients with newly diagnosed glioblastoma ("GBM") together with temozolomide, a chemotherapy drug, and for adult patients with GBM following confirmed recurrence after chemotherapy as monotherapy treatment.

We also have a CE certificate to market Optune for the treatment of GBM in the European Union ("EU"), as well as approval or local registration in the United Kingdom ("UK"), Japan and certain other countries.

We also have a CE certificate to market Optune for the treatment of GBM in the European Union ("EU"), as well as approval or local registration in the United Kingdom ("UK"), Japan, Canada and certain other countries.

Optune Lua is approved by the FDA under the Humanitarian Device Exemption ("HDE") pathway to treatment malignant pleural mesothelioma ("MPM") together with standard chemotherapies.

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We are actively evaluating opportunities to expand our international footprint.

We believe the physical mechanism of action behind TTFields therapy may be broadly applicable to solid tumor cancers.

Currently, we are conducting phase 3 pivotal studies evaluating the use of TTFields in non-small cell lung cancer ("NSCLC"), ovarian cancer, brain metastases from non-small cell lung cancer ("brain metastases") and pancreatic cancer.

In 2021, we completed patient enrollment in our phase 3 pivotal NSCLC and ovarian cancer studies with data anticipated in 2022 and 2023, respectively.

Additionally, we have multiple ongoing phase 2 pilot studies evaluating the use of TTFields in gastric cancer, for which patient enrollment is complete, and stage 3 NSCLC, as well as testing the potential incremental survival benefit of TTFields delivered using high-intensity arrays versus standard arrays.

We are designing several phase 2 pilot studies in partnership with oncology leaders to further explore the capabilities of TTFields.

We are also currently conducting a global phase 4 post-marketing study testing the potential survival benefit of initiating Optune concurrent with radiation therapy versus following radiation therapy in patients with newly diagnosed GBM.

In 2021, we presented data from our phase 2 pilot study studying the use of TTFields in liver cancer and are currently evaluating protocol design options for a large, randomized study in this indication.

We believe the physical mechanisms of action behind TTFields therapy may be broadly applicable to solid tumor cancers.

We recently completed patient follow-up and announced top line results from our pivotal LUNAR study evaluating the use of TTFields in the treatment of non-small cell lung cancer ("NSCLC") together with standard therapies.

Patients treated with TTFields and standard therapies demonstrated a statistically significant and clinically meaningful improvement in overall survival over standard therapies alone.

The LUNAR study also showed a statistically significant and clinically meaningful improvement in overall survival when patients were treated with TTFields and immune checkpoint inhibitors, as compared to those treated with immune checkpoint inhibitors alone, and a positive trend in overall survival when patients were treated with TTFields and docetaxel versus docetaxel alone.

We expect to present full results of the LUNAR study at a future medical conference.

In addition to the LUNAR study, we are conducting pivotal studies evaluating the use of TTFields in the treatment of ovarian cancer, brain metastases from NSCLC ("brain metastases") and pancreatic cancer.

We are also conducting a pivotal study testing the potential survival benefit of initiating Optune concurrent with radiation therapy versus following radiation therapy in patients with newly diagnosed GBM.

We have one ongoing pilot study evaluating the use of TTFields in the treatment of stage 3 NSCLC and are designing several additional pilot and pivotal studies in partnership with oncology leaders to further explore the capabilities of TTFields.

We anticipate expanding our clinical pipeline over time to study the safety and efficacy of TTFields for additional solid tumor indications and combinations with other cancer treatment modalities.

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We believe the prolonged disruption caused by COVID-19 is resulting in increased volatility across global health care systems, such as fluctuations in patient volumes and changes in patterns of care in certain regions, which is currently impacting and might continue to impact our business and clinical studies in the future.

For example, we continue to see fluctuations in the timing of surgeries and radiation therapy in certain regions, which has had some adverse influence on the eligible patient population for Optune.

We have also have been impacted by staff disruptions and turnover internally and at treatment sites, clinical study sites and third-party providers, either directly as a result of illness or indirectly as a result of vaccine mandates and other changes in terms of employment.

For example, outside the U.S., localized lockdowns are causing disruptions in the ability to monitor clinical studies.

TTFields is an emerging modality in cancer care and requires significant educational effort to drive awareness and acceptance of our therapy.

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Our net revenues were $537.8 million for the year ended December 31, 2022, $535.0 million for the year ended December 31, 2021 and $494.4 million for the year ended December 31, 2020.

Our net loss was $58.4 million for the year ended December 31, 2021, net income was $19.8 million for the year ended December 31, 2020 and net loss was $7.2 million for the year ended December 31, 2019.

Our net loss was $92.5 million for the year ended December 31, 2022, net loss was $58.4 million for the year ended December 31, 2021 and net income was $19.8 million for the year ended December 31, 2020.

As of December 31, 2022, we had an accumulated deficit of $778.5 million.

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Sales and marketing

Sales and marketing expenses consist primarily of personnel costs, travel, marketing and promotional activities, commercial shipping and facilities costs.

Over the next few years, we expect to continue to make significant expenditures associated with selling and marketing our Products, primarily in connection with continued commercialization in the United States, EU and Japan for the treatment of our approved indications.

Sales and marketing expenses consist primarily of personnel costs, travel, marketing and promotional activities, medical education, commercial shipping and facilities costs.

Over the next few years, we expect to continue to make significant expenditures associated with selling and marketing our Products, primarily in connection with continued commercialization in North America, the EU and Japan for the treatment of our approved indications.

General and administrative

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Both models requires management to apply judgment and make estimates, including:

• the expected term of the stock option award, which we calculate using the simplified method, in accordance with ASC No.718-10-S99-1 (SAB No.

110) as we have insufficient historical information regarding our stock options to provide a basis for an estimate;

• the expected share price volatility of our underlying ordinary shares, which since the beginning of 2021, we estimate based on a combination of our own stock price and a representative group of publicly traded biopharmaceutical and medical technology companies with similar characteristics to us ("peer-based companies") for a period matching the expected term assumption when there is not sufficient historical information for our ordinary shares (prior to 2021 our estimation was based on the historical volatility of peer-based companies);

• beginning with the first quarter of 2022, the computation of expected volatility is based on the historical volatility the Company's shares, beginning with the first quarter of 2021 and prior to the first quarter of 2022, the computation of expected volatility is based on a combination of actual historical share price volatility of comparable publicly-traded companies and the historical volatility the Company's shares.

Prior to the first quarter of 2021, due to the lack of sufficient historical information for the Company, the computation was based on actual historical volatility of comparable publicly-traded companies;

• beginning with the first quarter of 2021, the expected term of options granted is calculated using the Company's historical and future exercise behavior.

Prior to the first quarter of 2021, it was calculated using the average between the vesting period and the contractual term to the expected term of the options in effect at the time of grant;

• the risk-free interest rate, which we base on the yield curve of U.S.

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We recognize share-based compensation costs only for those shares expected to vest over the requisite vesting period of the award, which is generally the option vesting term of four years, using the accelerated method.

We recognize compensation costs for the value of performance stock units ("PSU") over the performance period when the vesting conditions become probable in accordance with ASC 718.

The table below summarizes the assumptions that were used to estimate the fair value of the options granted to employees during the periods presented:

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Total 5,529 5,662 5,613

In the U.S., there were 11 active MPM patients on therapy as of December 31, 2021 and 48 MPM prescriptions were received in the year ended December 31, 2021.

(1) North America includes data for the United States and Canada for the second half of 2021 and all of 2022, and the United States only for the first half of 2021 and 2020.

Worldwide, there were 7 active MPM patients on therapy as of December 31, 2022 and 33 MPM prescriptions were received in the year ended December 31, 2022.

Year ended December 31, 2022 compared to year ended December 31, 2021

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Net revenues increased by $2.8 million, or 1%, to $537.8 million for the year ended December 31, 2022 from $535.0 million for the year ended December 31, 2021.

This primarily was due to an increase of 176 active patients, representing 5% growth and increased efficiency in our revenue operations, offset by a reduction in net revenue per active patient in Germany.

For the year ended December 31, 2021, we recorded $40.3 million in revenues from Medicare fee-for-service beneficiaries billed under the coverage policy compared to $36.1 million for the year ended December 31, 2020.

We believe we have completed our administrative ramp-up for processing Medicare claims and efficiently pursuing appeals.

In 2021, we did not record material revenue from the successful appeal of previously denied claims for Medicare fee-for-service beneficiaries billed prior to established coverage, compared to approximately $19 million in incremental net revenues recorded in 2020.

This was primarily due to an increase in collections from previously denied and appealed claims in the U.S.

offset by a reduction in German approval rates as a result of updated coverage criteria, and the impact of foreign exchange rate fluctuations.

In 2022, we recorded $32 million in revenue from the successful appeal of previously denied claims for Medicare fee-for-service beneficiaries billed prior to established coverage.

We continue to actively appeal and pursue previously denied claims for beneficiaries billed prior to established coverage, but the cadence and amount of these Medicare payments are impossible to predict.

We believe collections from those claims which were most accessible were largely exhausted in 2022 and the remaining outstanding claims will take time to collect.

As a result, we expect future net revenue to more closely reflect core drivers of net revenue:

number of active patients on therapy, duration of therapy, and net realized price per month.

Year ended December 31,

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Cost of revenues.

Our cost of revenues increased by $8.4 million, or 8%, to $114.9 million for the year ended December 31, 2021 from $106.5 million for the year ended December 31, 2020.

The increase in cost of revenues primarily was due to increased array utilization and shipping costs to a higher volume of active patients, which

increased 5% in the year ended December 31, 2021 compared to the year ended December 31, 2020.

An increase of $5 million in product sales to Zai in the year ended December 31, 2021 compared to the year ended December 31, 2020 contributed to the increase in cost of revenues.

Excluding sales to Zai, cost of revenues per active patient per month decreased 5% to $2,474 for the year ended December 31, 2021 from $2,602 for the year ended December 31, 2020 due to on-going efficiency initiatives and scale.

Our cost of revenues were $114.9 million for the year ended December 31, 2022, virtually unchanged from $114.9 million for the year ended December 31, 2021.

Excluding sales to Zai, cost of revenues per

active patient per month were $2,481 for the year ended December 31, 2022 compared to $2,474 for the year ended December 31, 2021.

Cost of revenues per active patient is calculated by dividing the cost of revenues for the year less product sales to Zai for the year by the average of the active patients at the end of the each quarter in the current year and the end of the year active patients from the prior year.

This annual figure is then divided by twelve to estimate the monthly cost of revenues per active patient.

Sales to Zai are deducted because they are made at cost and in anticipation of future royalties from Zai, and Zai patient counts are not included in our active patient population.

Product sales to Zai totaled $11.3 million for the year ended December 31, 2021 compared to $6.3 million for the year ended December 31, 2020.

Sales to Zai are deducted because they are made at burdened cost and in anticipation of future royalties from Zai, and Zai patient counts are not included in our active patient population.

Product's cost sold to Zai totaled $11.1 million for the year ended December 31, 2022 compared to $11.3 million for the year ended December 31, 2021.

Gross margin was 79% for the year ended December 31, 2022 and 79% for the year ended December 31, 2021.

Gross margin continues to benefit from ongoing efficiency initiatives and increasing scale and is tempered by product sales to Zai.

Our gross margins are affected by our ability to achieve efficiencies of scale, the number of active patients and array usage within a given period, product mix, and product modifications.

Increased product sales to Zai have the effect of tempering gross margin, as those products are sold at cost.

Year ended December 31,

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Research, development and clinical studies expenses increased by $4.8 million, or 2%, to $206.1 million for the year ended December 31, 2022 from $201.3 million for the year ended December 31, 2021.

The change is primarily due to an incremental $31.6 million in clinical studies and clinical administration expenses, $5.5 million in product development expenses, $3.5 million in preclinical and basic research expenses, and $3.4 million in clinical affairs expenses.

We expect growth in our research and development investments to continue into 2022 as we work to advance our pipeline programs and increase acceptance of Tumor Treating Fields across the global oncology community.

The change is driven by an increase of $4.8 million in product development and regulatory affairs expenses.

We expect growth in our research and development investments to continue into 2023 as we work to advance our pipeline programs and increase acceptance of TTFields across the global oncology community.

We balance our investments in research and development with our organizational capacity to effectively execute our strategic initiatives.

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Sales and marketing expenses increased by $36.6 million, or 27%, to $173.7 million for the year ended December 31, 2022 from $137.1 million for the year ended December 31, 2021.

The change primarily was due to increases of $7.0 million, $4.0 million and $2.6 million in health policy, marketing and sales expenses, respectively, which are intended to support our growing commercial business and reimbursement efforts, including an incremental $5.7 million invested in pre-commercial activities associated with potential commercial launches in additional cancer indications and expansion into new markets in our approved indications.

The change primarily was due to increases of $22.7 million, $2.9 million and $2.9 million in marketing, health policy, and sales expenses, respectively, which are intended to increase awareness and acceptance of TTFields in our approved indications and enhance our commercial capabilities in anticipation of potential future approvals in new indications.

Additionally, we are investing in market access capabilities in order to evaluate opportunities, identify optimal access pathways, and successfully gain reimbursement in new geographies.

General and administrative expenses.

General and administrative expenses increased by $6.6 million, or 5%, to $132.8 million for the year ended December 31, 2022 from $126.1 million for the year ended December 31, 2021.

The change primarily was due to increase of $10.1 million in expenses associated with personnel costs and professional services, as well as an increase of $4.6 in expenses associated with supply chain optimization.

The change primarily was due to increases of $5.0 million and $2.5 million in information technology infrastructure and supply chain optimization, respectively, and offset by a decrease in expenses associated with personnel costs and professional services.

Year ended December 31,

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Financial (expenses) income, net $ 7,677 $ (7,742) $ 15,419 (199) %

Financial expenses, net.

Financial expenses, net, decreased by $4.6 million, or 37%, to $7.7 million for the year ended December 31, 2021 from $12.3 million for the year ended December 31, 2020.

The change primarily was due to a prepayment premium related to the 2018 Credit Facility, amortization costs related to the issuance of our convertible notes and expenses related to the senior secured revolving credit facility.

See Note 10 to the Consolidated Financial Statements.

Financial (expenses) income, net.

Financial expenses, net, decreased by $15.4 million, or 199%, to $7.7 million income for the year ended December 31, 2022 from $7.7 million expense for the year ended December 31, 2021.

In 2022, financial income was primary driven by interest income and amortization of investment premiums on our cash, cash equivalents and short term investments.

In 2021, financial expenses were primarily driven by foreign exchange expenses.

Year ended December 31,

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Income taxes.

Income tax expenses increased by $8.0 million, or 468%, resulting in a tax expense of $6.3 million for the year ended December 31, 2021 compared to a tax benefit of $1.7 million for the year ended December 31, 2020.

The change was primary due to a net one-time tax benefit of $11.3 million which was recorded in the first quarter of 2020 in response to the changes in the U.S.

tax code related to the economic impact of the COVID-19 pandemic.

Without this one-time benefit in 2020, income taxes expenses decreased $3.3 million in 2021 driven by a change in the mix of applicable statutory tax rates in our active jurisdictions.

Income tax expenses increased by $4.4 million, or 70%, resulting in a tax expense of $10.7 million for the year ended December 31, 2022 compared to a tax expense of $6.3 million for the year ended December 31, 2021.

The increase was primarily due to an increase in income before taxes in the U.S.

Non-GAAP financial measures

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Adjusted EBITDA decreased by $32.8 million, or 54%, to $28.1 million for the year ended December 31, 2022 from $60.8 million for the year ended December 31, 2021.

This decrease was in part due to a $59.8 million increase in investment in research, development and clinical studies expenses (net of share-based compensation expenses), intended to advance our pipeline programs and increase acceptance of TTFields across the global oncology community, as well as an incremental $5.7 million invested in pre-commercial activities associated with potential commercial launches in additional cancer indications and expansion into new markets in our approved indications.

This decrease was primarily driven by an increase in sales and marketing expenses intended to increase awareness and acceptance of TTFields in our approved indications, enhance our commercial capabilities in anticipation of potential future approvals in new indications, and expand our international footprint.

Liquidity and capital resources

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Operating cash flows are also impacted by changes in operating assets and liabilities, principally trade payables, deferred revenues, other payables, prepaid expenses, inventory and trade receivables.

Net cash provided by operating activities was $82.8 million for the year ended December 31, 2021 compared to $99.1 million for the year ended December 31, 2020.

Gross profit increased by $32.3 million in 2021 versus 2020, partially funding incremental investments of $69.3 million in research and development and $37.7 million in sales, marketing, general and administrative expenses.

The year over year decrease in cash provided by operating activities was driven by lower cash earnings, offset by lower interest payments, as well as the timing of receipts and payments in the ordinary course of business.

Net cash provided by operating activities was $30.8 million for the year ended December 31, 2022 compared to $82.8 million for the year ended December 31, 2021 a decrease of $ 52.0 million.

The decrease in net cash provided by operating activities was primarily driven by a $43.2 million increase in sales, marketing, general and administrative expenses to enhance our capabilities in anticipation of potential future approvals of new indications and entry into potential new markets, and a $4.8 million increase in research and development expenses.

In addition, finance income increased by $15.4 million and tax expenses increased by $ 4.4 million, offsetting a $2.8 million increase in gross profit and a $17.0 million change in working capital.

Upcoming use of cash in operations will include payments in the normal course of business of $42.1 million in purchase obligations with certain of our suppliers, primarily for the purchase of Product components along with other commitments to purchase goods or services.

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Net cash provided by financing activities was $15.5 million for the year ended December 31, 2022 compared to $25.7 million for the year ended December 31, 2021.

The net cash provided by financing activities for 2021 was primary attributable to proceeds from exercise of options and issuance of shares pursuant to the ESPP.

The net cash provided by financing activities for 2020 primarily was attributable to $558.4 million in proceeds from the convertible note issuance and $31.8 million in proceeds from exercise of options and shares related to the ESPP partially offset by $150.0 million in repayment of the 2018 Credit Facility (as described below).

The net cash provided by financing activities for 2022 was primarily attributable to $10.3 million in proceeds from the exercise of options and $5.2 million in proceeds from the issuance of shares pursuant to the ESPP.

The net cash provided by financing activities for 2021 was primarily attributable to $21.2 million in proceeds from the exercise of options and $4.5 million in proceeds from the issuance of shares pursuant to the ESPP.

Convertible Notes

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The 2020 Credit Facility contains financial covenants requiring maintenance of a minimum fixed charge coverage ratio and specifying a maximum senior secured net leverage ratio, as well as customary events of default which include a change of control.

As of December 31, 2021, we were in compliance with such covenants.

As of December 31, 2022, we had no outstanding balance borrowed under the 2020 Credit Facility.

For additional information, see Note 12(c) to the Consolidated Financial Statements.

On February 17, 2023, we gave irrevocable notice to the administrative agent under the 2020 Credit Facility that we terminated all commitments, effective February 22, 2023.

This effectively terminated the 2020 Credit Facility, as our ability to borrow and our obligations to comply with all covenants ended on such date.

The liens and guaranties in favor of the lenders are released.

There are no early termination fees payable and as of February 22, 2023 we had no outstanding balance borrowed under the 2020 Credit Facility.

2020 Prepayment of 2018 term loan

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In 2020, we terminated the 2018 Credit Facility and prepaid the principal amount in full.

The prepayment included $150.0 million in principal repayment and $3.0 million in prepayment premium, plus accrued and unpaid interest and expenses payable through the payoff date.

The prepayment

included $150 million in principal repayment and $3.0 million in prepayment premium, plus accrued and unpaid interest and expenses payable through the payoff date.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis