NovoCure Ltd 10-Q

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, 2023 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. 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 2022 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 2022 10-K. Overview 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, our commercial TTFields device, 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, 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. We have also received CE certification in the EU and approval or local registration to market Optune Lua in certain other countries. We market Optune and Optune Lua in multiple countries around the globe with the majority of our revenues coming from the use of Optune in the U.S., Germany and Japan. We are actively evaluating opportunities to expand our international footprint. In March 2023, we announced the reimbursement and availability of Optune together with temozolomide for the treatment of adult patients with newly diagnosed GBM in France. The order registering Optune on the List of Reimbursable Product and Services became effective March 15, 2023 and we are now treating patients. We believe the physical mechanisms of action behind TTFields therapy may be broadly applicable to solid tumor cancers. In January 2023, we 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. Full results from the LUNAR study will be presented at the American Society of Clinical Oncology annual meeting in June. 15 Table of Contents 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 global pivotal study testing the potential survival benefit of initiating Optune concurrent with radiation therapy versus following radiation therapy in patients with newly diagnosed GBM. In March 2023, we announced the final patient enrolled in the pivotal METIS study evaluating the efficacy of TTFields therapy following stereotactic radiosurgery for the treatment of patients with brain metastases from NSCLC. Following the completion of enrollment, patients will be followed for a minimum of 12 months with final data anticipated in 2024. 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. The table below presents the current status of the ongoing clinical studies in our pipeline and anticipated timing of data. Our therapy is delivered through a medical device and we continue to advance our Products with the intention to extend survival and maintain quality of life for patients. We have several product development programs underway that are designed to optimize TTFields delivery to the target tumor and enhance patient ease of use. One of these initiatives is the launch of new arrays, which are thinner, lighter and more flexible. We plan to submit for regulatory approval in the U.S. via PMA supplement in the second half of this year. Our intellectual property portfolio contains hundreds of issued patents and numerous patent applications pending worldwide. We believe we possess global commercialization rights to our Products in oncology and are well-positioned to extend those rights into the future as we continue to find innovative ways to improve our Products. In 2018, we granted Zai Lab (Shanghai) Co., Ltd. ("Zai") a license to commercialize Optune in China, Hong Kong, Macau and Taiwan ("Greater China") under a License and Collaboration Agreement (the "Zai Agreement"). The Zai Agreement also establishes a development partnership intended to accelerate the development of TTFields in multiple solid tumor cancer indications. For additional information, see Note 12 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the "2022 10-K"). We view our operations and manage our business in one operating segment. For the three months ended March 31, 2023, our net revenues were $122.2 million. Our net loss for the three months ended March 31, 2023 was $53.1 million. As of March 31, 2023, we had an accumulated deficit of $831.5 million. Our net loss resulted primarily from increasing investments designed to support our commercial business, geographic expansion and pre-commercial activities associated with potential future indication launches. 16 Table of Contents Impact of COVID-19 In March 2020, the World Health Organization (“WHO”) declared COVID-19 a global pandemic. Since the pandemic began, we have been following the guidance of the WHO, the U.S. Centers for Disease Control and Prevention, and local health authorities in all of our active markets and we have adjusted the way we conduct business to adapt to the evolving situation. The COVID-19 pandemic did not have a material impact on our financial results through the first quarter of 2023. The pandemic has had and is having an impact on our day-to-day operations, which varies by region based on factors such as geographical spread, stage of containment and recurrence of the pandemic in each region. 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, 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. We have relied heavily on virtual engagement to manage these educational efforts since the onset of the pandemic, which poses challenges to our ability to effectively communicate and engage with our customers and partners around the world. Given the aggressive nature of the cancers that we treat, we believe that the fundamental value proposition of the TTFields platform remains unchanged. We continue to evaluate and plan for the potential effects of COVID-19 on our business moving forward. The extent to which the COVID-19 pandemic may impact our business and clinical studies in the future will depend on further developments, which are highly uncertain and cannot be predicted with confidence. The COVID-19 pandemic may also have the effect of heightening many of the other risks described in our risk factors disclosed in our 2022 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 2022 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 arrays; • depreciation expense for the field equipment, including the electric field generator used by patients; • patient support and other personnel costs; 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 studies, 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 income (expenses), net . Financial income (expenses), net primarily consists of interest income from cash balances and short-term investments, credit facility interest expense and related debt issuance costs, 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. 17 Table of Contents 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, 2023 as compared to the three months ended March 31, 2022. The tables contained in this section report U.S. dollars in thousands (except share, patient, and prescription data). The following table sets forth our consolidated statements of operations data: Three months ended March 31, 2023 2022 Unaudited Net revenues $ 122,182 $ 137,547 Cost of revenues 29,614 27,727 Gross profit 92,568 109,820 Operating costs and expenses: Research, development and clinical studies 59,704 42,234 Sales and marketing 51,169 37,884 General and administrative 41,944 30,508 Total operating costs and expenses 152,817 110,626 Operating income (loss) (60,249) (806) Financial income (expenses), net 9,169 (1,709) Income (loss) before income taxes (51,080) (2,515) Income taxes 1,981 2,132 Net income (loss) $ (53,061) $ (4,647) Basic net income (loss) per ordinary share $ (0.50) $ (0.04) Weighted average number of ordinary shares used in computing basic net income (loss) per share 105,667,072 104,186,120 Diluted net income (loss) per ordinary share $ (0.50) $ (0.04) Weighted average number of ordinary shares used in computing diluted net income (loss) per share 105,667,072 104,186,120 The following table details the share-based compensation expense included in costs and expenses: Three months ended March 31, 2023 2022 Unaudited Cost of revenues $ 2,006 $ 952 Research, development and clinical studies 11,779 6,801 Sales and marketing 11,644 6,655 General and administrative 13,655 10,637 Total share-based compensation expense $ 39,084 $ 25,045 18 Table of Contents Key performance indicators We believe certain commercial operating statistics are useful to investors in evaluating our commercial business as they help our management team 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 2023 2022 Active patients at period end United States (1) 2,168 2,257 Germany 477 529 Japan 382 327 Others 440 436 Total 3,467 3,549 Three months ended March 31, 2023 2022 Prescriptions received in period United States (1) 1,051 935 Germany 208 220 Japan 72 102 Others 165 127 Total 1,496 1,384 (1) United States includes data for Canada for the first quarter of 2022 and the United States only for all other periods. For the first quarter of 2023, Canada is included in "Others". There were 12 active MPM patients on therapy as of March 31, 2023 and 15 MPM prescriptions were received in the three months ended March 31, 2023. Three months ended March 31, 2023 compared to three months ended March 31, 2022 Three months ended March 31, 2023 2022 % Change Net revenues $ 122,182 $ 137,547 (11) % Net revenues. Net revenues decreased 11% to $122.2 million for the three-month period ended March 31, 2023 from $137.5 million for the same period in 2022. The decrease resulted primarily from $5.4 million in reduced collections from previously denied or appealed claims in the U.S., a $2.1 million negative impact in Germany following contract negotiations with several large German payers, and a decrease of 82 global active patients on therapy. We believe the outstanding denied and appealed claims that 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: number of active patients on therapy, duration of therapy, and net realized price per month. We continue to actively appeal and pursue the remaining previously denied claims, but the cadence and size of these collections are difficult to predict. 19 Table of Contents Three months ended March 31, 2023 2022 % Change Cost of revenues $ 29,614 $ 27,727 7 % Cost of revenues. Our cost of revenues increased by 7% to $29.6 million for the three months ended March 31, 2023 from $27.7 million for the same period in 2022. The increase in cost of revenues was primarily due to an increase in patient support capacity in anticipation of treating larger patient populations in new cancer indications and new geographic regions, as well as increased shipments of equipment to Zai Lab. Gross margin was 76% for the three months ended March 31, 2023 and 80% for the three months ended March 31, 2022. Excluding sales to Zai, cost of revenues per active patient per month was $2,608 for the three months ended March 31, 2023, an increase of 8% from $2,413 for the same period in 2022, primarily due to increased patient support capacity. Cost of revenues per active patient is calculated by dividing the cost of revenues for the quarter less equipment sales to Zai for the quarter by the average of the active patients at the end of the prior quarter and the ending active patients in the current quarter. This quarterly figure is then divided by three to estimate the monthly cost of revenues per active patient. Sales to Zai are deducted because they are sold 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 $2.6 million for the three months ended March 31, 2023 compared to $1.9 million for the three months ended March 31, 2022. Our gross margins are impacted by current and future product enhancements, such as the ongoing launch of next generation arrays. We continue to focus on opportunities to increase efficiencies and scale within our supply chain. This includes evaluating new materials, manufacturers, and processes that could lead to lower costs. Operating Expenses. Three months ended March 31, 2023 2022 % Change Research, development and clinical studies $ 59,704 $ 42,234 41 % Sales and marketing 51,169 37,884 35 % General and administrative 41,944 30,508 37 % Total operating expenses $ 152,817 $ 110,626 38 % Research, development and clinical study expenses. Research, development and clinical study expenses increased 41% to $59.7 million for the three-month period ended March 31, 2023 from $42.2 million in the same period in 2022, primarily driven by a $8.7 million increase in clinical trial and personnel costs primarily from PANOVA-3 and METIS, an increase of $3.3 million in engineering and regulatory affairs costs and an increase of $5.0 million in other personnel expenses. Total research and development expenses can fluctuate quarter-to-quarter dependent upon the amount of clinical research organization services delivered, clinical materials procured and the number of trials actively underway within a given quarter. Sales and marketing expenses. Sales and marketing expenses increased 35% to $51.2 million for the three-month period ended March 31, 2023 from $37.9 million for the same period in 2022. This change was primarily due to an increase of $5.0 million in costs associated with geographic expansion and pre-launch activities intended to increase awareness in TTFields in anticipation of future approvals in new indications and $5.0 million in other personnel expenses. 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 37% to $41.9 million for the three months ended March 31, 2023 from $30.5 million for the same period in 2022. This change was primarily due to increased personnel to support potential new indication launches, new geographic launches, supply chain expansion and information technology enhancements. 20 Table of Contents Three months ended March 31, 2023 2022 % Change Financial income (expenses), net $ 9,169 $ (1,709) (636) % Financial income (expenses), net. Financial expenses decreased 636% to $9.2 million in income for the three months ended March 31, 2023 from $1.7 million in expenses for the same period in 2022. The change was primarily due to $9.2 million in increased interest income and $1.5 million in foreign exchange rate fluctuations. Three months ended March 31, 2023 2022 % Change Income taxes $ 1,981 $ 2,132 (7) % Income taxes. Income taxes decreased $0.2 million, or 7% to $2.0 million for the three months ended March 31, 2023 compared to a tax expense of $2.1 million for the same period in 2022. The change reflects a change in the mix of applicable statutory tax rates in active jurisdictions. Non-GAAP financial measures We also measure our performance using 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 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 income (loss), which is the most directly comparable GAAP operating performance measure, to Adjusted EBITDA. Three months ended March 31, 2023 2022 % Change Net income (loss) $ (53,061) $ (4,647) 1,042 % Add: Income tax 1,981 2,132 (7) % Add: Financial expenses (income), net (9,169) 1,709 (636) % Add: Depreciation and amortization 2,722 2,610 4 % EBITDA $ (57,527) $ 1,804 (3,289) % Add: Share-based compensation 39,084 25,045 56 % Adjusted EBITDA $ (18,443) $ 26,849 (169) % Adjusted EBITDA decreased by $45.3 million, or 169%, to a loss of $18.4 million for the three month period ended March 31, 2023 from income of $26.8 million for the same period in 2022. This decrease was primarily attributable to increased growth investments intended to expand our capacity to treat larger patient populations, to enhance commercial capabilities and to increase awareness of TTFields in anticipation of potential future approvals in new indications, and a reduction in revenue as described above. 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, 2023, we had an accumulated deficit of $831.5 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, 2023, we had $958.0 million in cash, cash equivalents and short-term investments, a decrease of $11.4 million compared to $969.4 million at December 31, 2022. We believe our cash, cash equivalents and short-term investments as of March 31, 2023 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 operating expenses will continue to increase over the next several years and may outpace our gross profit as we 21 Table of Contents prepare to expand into additional indications beyond GBM. 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, 2023 2022 Change % Change Net cash provided by (used in) operating activities $ (16,727) $ (3,687) $ (13,040) 354 % Net cash provided by (used in) investing activities 82,287 (17,410) 99,697 (573) % Net cash provided by financing activities 5,204 3,141 2,063 66 % Effect of exchange rate changes on cash and cash equivalents 41 (25) 66 (264) % Net increase (decrease) in cash, cash equivalents and restricted cash $ 70,805 $ (17,981) $ 88,786 (494) % Operating activities. Net cash used in or provided by operating activities represents our net income (loss) for the periods presented, share-based compensation and depreciation and amortization. Operating cash flows are also impacted by changes in working capital. Net cash used in operating activities increased by $13.0 million million from $3.7 million net cash used in operating activities for the three months ended March 31, 2022 to $16.7 million net cash used in operating activities for the three months ended March 31, 2023. This increase was a result of net income decreasing $48.4 million, offset by a $27.2 million decrease in working capital and a further offset of $8.1 million in cash to non-cash based expenses, primarily consisting of shared-based compensation. The decrease in working capital includes a $22.0 million decrease in accounts receivable, an increase of $4.3 million in accounts payable and accrued expenses and a $2.1 million decrease in inventories. Investing activities. Our investing activities consist primarily of investments in and redemptions of our short-term investments as well as investments in property and equipment. Net cash provided by investing activities was $82.3 million for the three months ended March 31, 2023, compared to $17.4 million used in investing activities for the three months ended March 31, 2022. The $82.3 million net cash provided by investing activities for the three months ended March 31, 2023 was primarily attributable to $88.4 million of net proceeds from the maturity of short-term investments and the purchase of $6.1 million of property and equipment. The $17.4 million net cash used in investing activities for the three months ended March 31, 2022 was primarily attributable to $12.3 million of net purchase in short-term investments and by the purchase of $5.1 million of property and equipment. Financing activities. To date, our primary financing activities have been the sale of equity and the proceeds from long-term loans. Net cash provided by financing activities was $5.2 million for the three months ended March 31, 2023, as compared to $3.1 million provided by financing activities for the three months ended March 31, 2022. The net cash provided by financing activities for the three months ended March 31, 2023 and March 31, 2022 included proceeds from the exercise of options under the Company's stock option plan. Convertible Notes On November 5, 2020, we issued $575.0 million aggregate principal amount of 0% Convertible Senior Notes due 2025 (the “Notes”). The Notes are senior unsecured obligations. The Notes do not bear regular interest, and the principal amount of the Notes will not accrete. The Notes are convertible at an initial conversion rate of 5.9439 ordinary shares per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of approximately $168.24 per ordinary share. The Notes are convertible at the option of the holders upon the satisfaction of certain other conditions and during certain periods, and if the Company exercises its right to redeem the Notes as permitted or required by the indenture. On or after August 1, 2025 until the close of the business on the business day immediately preceding the maturity date, holders may convert all or any portion of their Notes at the conversion rate at any time irrespective of the foregoing conditions. 22 Table of Contents In January 2021, we irrevocably elected to settle all conversions of Notes by a combination of cash and our ordinary shares and that the cash portion per $1,000 principal amount of Notes for all conversion settlements shall be $1,000. Accordingly, from and after the date of the election, upon conversion of any Notes, holders of Notes will receive, with respect to each $1,000 principal amount of Notes converted, cash in an amount up to $1,000 and the balance of the conversion value, if any, in our ordinary shares. For more information, see Note 10a. to the Consolidated Financial Statements in the 2022 10-K. Term loan credit facility On November 6, 2020, we entered into a new three-year $150.0 million senior secured revolving credit facility with a syndicate of relationship banks (the "2020 Credit Facility"). 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 was no early termination fee payable. The commitments under the 2020 Credit Facility were guaranteed by certain of our subsidiaries and secured by a first lien on our and certain of our subsidiaries’ assets. Outstanding loans bore interest per annum at a sliding scale based on the our secured leverage ratio from 2.75% to 3.25% above the applicable interbank borrowing reference rate for the currency in which the loan is denominated. Additionally, the 2020 Credit Facility contained a fee for the unused revolving credit commitments at a sliding scale based on our secured leverage ratio from 0.35% to 0.45%. The 2020 Credit Facility contained 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, which are no longer applicable. Contractual Obligations and Commitments There have been no material changes from the information disclosed in our 2022 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 2022 10-K.