Novocure Ltd (NVCR) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Novocure fourth-quarter 2016 earnings results conference call. (Operator Instructions). As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Ashley Cordova, Vice President of Finance and Investor Relations. You may begin.

Good morning, everyone, and thank you for joining us to review Novocure's fourth-quarter and full-year 2016 performance. I'm joined today by our Executive Chairman, Bill Doyle; our CEO, Asaf Danziger; our CFO, Wilco Groenhuysen; and our Chief Science Officer and Head of Research and Development, Eilon Kirson.

The slides that will be presented today can be viewed on our home page, www.novocure.com, by clicking on the link for 2016 fourth-quarter financial results, located in the events section on our Investor Relations page.

Before we start, I'd like to remind you that our discussions during this conference call will include forward-looking statements, and actual results could differ materially from those projected in these statements. These statements involve a number of risks and uncertainties, some of which are beyond our control, including those risks and uncertainties described from time to time in our SEC filings. We do not intend to update publicly any forward-looking statement except as required by law.

We will first make some brief prepared remarks and will then move to a question-and-answer session. I will remind everyone that our financials for the three and 12 months ended December 31, 2016, are available in our press release and in our 10-K, both of which were released earlier this morning.

With that, I'll now turn the call over to Bill Doyle.

Thank you, Ashley, and good morning, everyone. Before we jump into the details of the quarter, I want to spend a few moments to reflect on the many milestones we achieved in 2016. As we have consistently emphasized, Novocure has a simple, two-pronged strategy. We are focused on accelerating commercial adoption of Optune for the treatment of GBM, and we are committed to developing TTFields for the treatment of a variety of other solid tumors. In 2016, we made good progress on both fronts.

Throughout 2016, we delivered consistent quarter-over-quarter and year-over-year active patient and revenue growth. We made substantial improvements in coverage and contracting, and now have more than 180 million covered lives in the United States. In August, we completed the launch of our second-generation Optune system, which weighs 2.7 pounds and is less than half the weight and size of our first-generation system. In December, we received regulatory approval for newly diagnosed GBM in Japan.

And importantly, in November we presented the long-term analysis of our EF-14 Phase III pivotal trial in newly diagnosed GBM, showing Optune plus temozolomide provided an unprecedented 70% improvement in four-year survival compared to temozolomide alone. Optune plus temozolomide is the first treatment in more than a decade to significantly improve outcomes for patients with newly diagnosed GBM.

We also meaningfully advanced our clinical pipeline in 2016. We continue to believe that our profoundly different approach to cancer treatment can improve the lives of patients battling some of the most aggressive forms of solid tumor cancers.

In October, we enrolled the first patient in our Phase III pivotal trial in brain metastases from non-small cell lung cancer. In December, we completed and shared top-line results from our Phase II pilot trials in advanced pancreatic cancer and recurrent ovarian cancer. And in December, we presented interim results from our Phase II pilot trial in mesothelioma.

Just last week, we enrolled the first patient in our Phase III pivotal trial in advanced non-small cell lung cancer for patients who have failed platinum-based chemotherapies. TTFields is a profoundly different approach to cancer treatment. We believe our clinical research demonstrates that treatment with TTFields affects fundamental aspects of cell division and can have broad applicability across a variety of solid tumors. We believe TTFields has the potential to increase survival when used in combination with other cancer treatments without significantly increasing side effects.

I will now hand the call over to Asaf for a bit more color on our performance.

Thank you, Bill, and good morning, everyone. The fourth quarter of 2016 was the eighth quarter in a row of active patient growth for Novocure since the presentation of our successful EF-14 trial data in newly diagnosed GBM. At 2016 year end, we had nearly 1,100 active patients on treatment. This represents 80% growth versus 2015. We ended the year with 256 patients in EMEA, reflecting the increasing importance of our non-US markets. Crossing the 1,000 active patient mark was a significant milestone for the Company and for me personally.

Beyond our growth in active patients, we continued to work with payers to expand coverage of Optune in the fourth quarter. As of January 1, 2017, US payers administrating plans for more than 180 million lives had issued positive coverage policies. This is an increase of more than 50 million lives versus the end of the third quarter of 2016. We have also negotiated contracts to establish Optune as an in-network benefit for more than 130 million American lives. Additionally, we continue to advance our discussions with public payers in our other active markets.

Importantly, we had net revenues of more than $30.2 million in the fourth quarter. Our full-year net revenues were $82.9 million, representing 150% growth, 2016 versus 2015. Revenue growth was mainly driven by increased Optune adoption in the United States in Germany, and by moving to accrual-based revenue recognition for part of our billings.

Optune is a completely different treatment for glioblastoma, and our first commercial goal in each market is to generate awareness. In parallel, our sales teams continuously call upon prescribers to strengthen their perception of Optune. They also make sure prescribers have the necessary resources to effectively discuss Optune with their patients.

We now have globally more than 60 salesforce colleagues calling on [35] physician at almost 800 centers worldwide. We currently believe we have largely built the sales and marketing organization necessary to support commercial adoption in the US and Germany.

Before handing the call over to Wilco to discuss the financials, I also want to mention the progress we made in our clinical trial pipeline in the fourth quarter.

I remember starting our first clinical patient on treatment with TTFields 14 years ago. It is with pride that I can say that in addition to almost 1,100 active commercial patients on therapy at year's end, we have encouraging Phase II pilot trial data in non-small cell lung cancer, pancreatic cancer, ovarian cancer, and mesothelioma.

With that, I will hand the call over to Wilco.

Thank you, Asaf, and good morning, everyone. Fourth-quarter 2016 net revenues increased to $30.2 million compared to $12.4 million for the same period in 2015, representing 144% growth. Our non-US business generated $3.7 million in net revenues during the quarter, up 247% from last year. Sequentially, net revenues for Q4 were up approximately 40% from the prior quarter. For the 12 months ended December 31, 2016, net revenues increased to $82.9 million compared to $33.1 million for the same period in 2015, representing 151% growth.

It is important to note that Q4 net revenues included $8.5 million in accrual-based net revenues, including $4 million in net revenues for which cash had not yet been collected at quarter end. On a comparable all-cash basis, fourth-quarter 2016 net revenues would have been $26.2 million, representing 111% growth versus the prior year, and 21% growth versus the prior quarter.

You will note that in our 10-K and the slides accompanying this webcast, we provide a new table in our financial disclosure that includes gross billings, and a breakout for accrual-based versus cash-based net revenues associated with these gross billings.

Gross billings reflect the total charges for active patients on therapy without any deductions or adjustments for payer discounts, patient financial assistance, or charitable care. 19% of our fourth-quarter 2016 gross billings qualified for accrual-based revenue recognition. All of the net revenues recognized on an accrual basis represent charges to US-based third-party payers driven by the increase in positive coverage policies and negotiated contracts, which enabled us to reliably estimate a fixed and determinable amount that would ultimately be collected from these payers.

We continue to recognize revenue on a cash basis for the remaining payers with whom we do not have contracts and with whom we have not built up sufficient history to reliably estimate their individual payment patterns. We anticipate there will be an extended period of time when our revenue is a mix of cash-based and accrual-based revenue.

Cost of revenues for the fourth-quarter 2016 were $11 million, an increase of 74% from the same period in the prior year. This compares to an 85% increase in gross billings from the same period in the prior year, and reflects margin improvement resulting from an increase in active patient volume. For the 12 months ended December 31, 2016, cost of revenues, excluding the second quarter impairment loss, increased to $39.9 million compared to $20.6 million for the same period in 2015, representing 94% growth.

Additionally, we had a $6.4 million impairment loss with respect to the write-off of our first-generation Optune system field equipment in the second quarter.

Operating expenditures in the fourth quarter 2016 were $37.1 million, including $15.7 million in sales and marketing expenses, $8.5 million in research and development expenses, and $13 million in G&A expenses. This compares to operating expenses of $36.7 million during the fourth quarter of 2015 and represents an increase of 1% year-over-year.

This increase in operating expenses was primarily driven by an increase in sales and marketing expenses stemming from the expansion of our salesforce, and other commercial functions to support the promotion of Optune for newly diagnosed GBM, and an increase in G&A expenses. These increases were partially offset by a decrease in research and development costs stemming from the conclusion of our EF-14 pivotal trial in newly diagnosed GBM. We expect to further improve operating leverage in 2017.

For the 12 months ended December 31, 2016, operating expenses were $151.9 million, including $59.4 million in sales and marketing expenses, $41.5 million in research and development expenses, and $51 million of G&A expenses. This compares to operating expenses of $116.5 million for the 12 months ended December 31, 2015, and represents an increase of 30% year-over-year.

Net loss for the fourth-quarter 2016 was $22.2 million compared to $32.9 million for the same period in 2015. Net losses for the 12 months ended December 31, 2016, were $131.8 million compared to net losses of $111.6 million for the same period in 2015.

Our fourth-quarter 2016 net cash used in operating activities was $13.7 million. In addition, we invested $3.4 million in PP&E and field equipment to support our commercial business. Net cash used in operating activities for the fourth-quarter 2016 was favorably impacted by approximately $9.1 million in one-time events, as well as temporary improvement in working capital.

As of December 31, 2016, we had $99.8 million in cash and cash equivalents, and $119.9 million in short-term investments, for a total balance of $219.6 million in cash, cash equivalents, and short-term investments.

Entering 2017, we believe we have established a strong foundation upon which we are building a global oncology business. We realized 2016 net revenues of $82.9 million, an increase of more than 150% versus the prior year. We improved our ability to collect payment by improving coverage in contracting in the US, and we saw significant active patient and revenue growth in EMEA.

We presented a long-term analysis of EF-14 data in which Optune plus temozolomide demonstrated unprecedented long-term survival compared to temozolomide alone through four years. We announced promising top-line results in our Phase II pilot programs in pancreatic cancer and ovarian cancer, and also announced encouraged interim results from a Phase II pilot trial in mesothelioma.

Ending the year with $220 million cash on hand, and with our infrastructure substantially built, we believe we have the resources to reach profitability in our GBM business alone.

With that, I would like to thank everyone for their time this morning and for their interest in Novocure.

Operator, can we please poll for questions?

(Operator Instructions). Tao Levy, Wedbush.

Just a couple questions on my end. First, any update on Japan reimbursement, timing, and next steps there?

Good morning, it's Asaf. On Japan reimbursement, we are right now in the informal process of filing, which basically this is the process in Japan. There is a lot more informal interaction before formal filing. And we believe that in the next few weeks, we will do the final filing for reimbursement. And we are expecting to get results later on this year.

Perfect. And then maybe we can just touch on maybe new prescriptions. When you preannounced back in January, they were a little bit softer than expectations. I was just wondering maybe if you could talk around if there are any new programs or initiatives you've put in place to help accelerate new prescriptions. And also if you could comment on the upcoming departure of the Chief Commercial Officer. Thank you.

Good morning, Tao. It's Bill. As we've described a number of times, and it's always worth emphasizing, when we presented our final analysis in November at SNO, for the first time we showed a significant improvement in long-term survival for GBM patients, and really the first time that a substantial number of GBM patients can have hope of long-term survival.

Also during the year, we continued to expand upon the tools needed to grow prescriptions. And this really starts back with receiving FDA approval for newly diagnosed GBM at the end of 2015, and having the interim data published in JAMA in December 2015, then the receipt of the NCCN guidelines inclusion in July of last year.

Of course we introduced the smaller, lighter Gen 2 in August. We have expanded our salesforce over the course of the year, to the point now where we think we have full coverage in the US with approximately 50 reps. We've made tremendous progress in coverage and contracting, and that really came toward the end of 2016.

And then, finally, we released the Phase II data in the other indications, which I think underlines a very virtuous cycle that we expect to see. As confidence builds in the pancreatic cancer, mesothelioma, ovarian cancer, it strengthens the confidence in GBM.

In GBM specifically, we're focused, first and foremost, on building awareness of our profoundly different cancer therapy in the prescriber market. We know that as we've moved from recurrent GBM to newly diagnosed GBM, we've had to devote significant efforts into the community, where approximately 60% of these patients are treated. And that has resulted in a big increase in the number of certified centers.

You'll recall we ended the year with about 250 centers certified. We ended this year with about 500 centers certified in the U.S. So that was another tremendous effort and focus of the Company.

So the next step here is really to drive experience of the clinicians. They need to have awareness and then they need to gain experience. We've built a model that's extremely easy for clinicians. They essentially write a script and send it to us, and then we take it from there. But that's not obvious. Again, because this is profoundly different, because at least until very recently it's not studied in medical school, we have to get in there and build that experience. And then, ultimately, the clinicians need the confidence to not only discuss this with patients but to really provide the strong endorsement that's supported by our data.

And that's I think what our real focus is now, is to make sure everyone has the experience, and then drive the confidence. And we're building tools for our salesforce and for our various clinical customer-facing organizations to make that happen.

So, we think that there are many, many more patients who can benefit from Optune therapy, both in the US and around the world. We think that we've now built the tools, and we think that we have the strategy to go after and drive further adoption.

And with that, let me turn it back over to Asaf to comment on our recent organizational changes.

Thank you. So, in the last five years, Peter built from scratch our business organization, our sales and marketing. And in the last couple of weeks, we basically built three different businesses: one in Europe, the other one in Japan, and of course the main one, in the US. He built it in a way that right now these three leaders report directly to me. And he did a very, very good job to create this business from scratch and we are very happy with that.

From now on, I will manage the business all over the world. And we are not planning to add another layer in the organization.

Okay. Perfect. Thank you so much for the answers.

Greg Fraser, Deutsche Bank.

It's Greg on for Gregg Gilbert. I was wondering if you could comment on what the reception has been for clinicians since you presented the final EF-14 data. And maybe you could comment on any forward-looking indicators for Optune demand that you're monitoring.

Sure. So, I was at SNO; I think everybody here was at SNO. It was a tremendous presentation from Professor Stupp, a packed ballroom. And I think that, again, this is a therapy that's unanticipated by the community. We've now had a couple of years to begin to train the community. But I think one of the remaining questions that the community had was: what was the long-term benefit of the therapy? For instance, would the lines cross? Was this something that somehow provided a benefit early in therapy, but that benefit would dissipate over time?

And I think that the new data resoundingly showed that that was not the case. That, in fact, the survival benefit that was seen at the interim analysis, if anything, the statistics improved in the long-term analysis. So I think that was an important -- I won't call it a signal; it was an important fact for the community, and I think it's been extremely well received.

In terms of future indications, we don't guide, as you know. But of course internally, we do a tremendous amount of work. We have -- our teams are in the field continuously. We're engaged at all of our centers. We have very specific call frequency patterns as a function of size and importance. So again, we're fully engaged with our prescriber base. And now that we have a fully staffed sales organization, we're able to interact at the frequency that we think is appropriate.

Thanks for that color. A couple of other quick ones. What was the average net revenue per month that you recognized in Q4, and how do you expect that to change in 2017? And can you comment on how we should think about operating expenses for the year?

Yes. Morning, Greg. This is Wilco. In the past we talked about the net revenue on paid claims, and we talked about $14,000 on average. We have not seen any meaningful change in that particular net revenue number. So that's what has been consistently the case in the past, and we expect it to be on that level, going forward, in the foreseeable future.

Cory Kasimov, JPMorgan.

This is Whitney on for Cory. Just to go back to the Chief Commercial Officer role, you mentioned you're not planning to fill it. With the changes that are happening, do you expect there to be any change in the strategy, then, going forward? Or will it just be business as usual with just -- without that role?

Thank you for the question. No, we're not expecting to change the strategy at all. We are just going to continue our business as usual.

Okay. And then in terms of the 19% of the 4Q gross billings that were eligible for accrual-based revenue, can you help us think about how that could trend over 2017? Maybe at least in the US, but worldwide also?

Yes, hi. This is Wilco again. It's difficult to say how it will trend over 2017. What we can say is that the 19% is primarily driven by the contracted payers that we talked about in prior quarters as well. We talked about the effective dates of those particular contracts, and the 19% represents a partial quarter for some of those payers. So we would expect that 19% as a proportion to go up.

But again, as we've talked about in the past, there's certainly going to be an extended transition phase where part of our revenue will be recognized on an accrual basis, such as that 19%, but then at a higher percentage going forward. But there will still be a cash-based accrual component in our revenue as well, which we tried to disclose in a way that you can analyze and determine how our overall performance is developing with that additional table in our financial disclosure.

Great. Thanks for taking the questions.

Mark Schoenebaum, Evercore ISI.

This is Jon Miller on for Mark today. I suppose a couple of things have already been touched on, but just to get a little bit more clarity. I noticed that you had some sequential declines in US scripts, Q4 over Q3. And I know you guys have said in the past that a lot of the growth is going to come, ex-US, in 2017. I was just wondering what the trend is going to be in the US specifically. Is that fully penetrated? Should we expect that to hover, or is that going to grow at all?

This is Bill. And again, we don't guide, going forward, primarily because introducing a profoundly new therapy, it's very difficult to predict the exact trajectory. In my past experience in these types of businesses -- and again, this is a little bit different than the pharmaceutical industry -- it tends to be a little more stair-step. But we think that there are many, many more patients who can benefit from Optune therapy than currently are receiving it. We've never said that the US was not going to grow in 2017. In fact, we are expending a tremendous amount of effort to make sure that all the patients who can benefit from Optune therapy do benefit from Optune therapy.

In November -- again, I'm just highlighting something that we're very proud of -- we did present the best long-term data ever in GBM. We expect this year to publish further sub-group analysis from the EF-14 trial that will also underline the strength for patients. We expect to publish the quality of life data. We always have talked about the good quality of life for patients, the lack of systemic toxicity, but we'll publish the detailed statistics later this year. And as I said, with all the tools that we've built, we are doing everything in our power to drive penetration.

Great. Thanks so much. One other question. I know that you said that you expect to continue to grow operating margin, and that's great. I have a question about the R&D run rate, especially considering you say that you expect to reach profitability on GBM revenues alone. How committed are you to the other indications? And what are your expectations for R&D spend, going forward, as you start looking at later stage trials in other indications?

Hi, it's Asaf. Our commitments to bring other indications to the market never change. And as we always said, we are running right now two Phase III trials, and we are planning to open another one this year. So there's no change in our strategy regarding additional indications.

Yes, and I just want to underline that because it's such an important point. I think the good news here is that we can fund, or we believe we can fund, our full clinical program on the revenues from our GBM business. And we also believe that the GBM business is the tip of the iceberg. Particularly in light of the data that we presented in December, -- and we expect to present in more detail at conferences over the course of the year -- the strength in pancreatic cancer, the strength in ovarian cancer, the strength in mesothelioma, what we've previously seen in non-small cell lung cancer. These are important indications where the five-year survival rates remained unacceptably low, notwithstanding other advances in the field.

We've seen, in all of our preclinical and early clinical work, that our therapy can be used with other therapies, whether it's chemotherapy or immunotherapy, and provide a significant additional benefit without toxicity. And these facts are really critical to us as a Company and our mission. Again, you can hear I'm underlining this because -- notwithstanding the fact that we're committed to breakeven -- that in no way is changing our commitment to our clinical future.

Great. Thank you so much.

Larry Biegelsen, Wells Fargo.

It's Lei calling in for Larry, and thanks for taking my question. I just want to start with the Q4, the accrual-based revenue. You said 19% of your gross billing qualified for accrual-based revenue recognition, so that's 19% of roughly $64 million. That comes out to about $12 million. Is the difference between the $12 million and $8.5 million of accrual-based net revenue reported -- is that just a difference between the gross and net ASP? Or is there something else in there?

Leah, this is Wilco. Good morning. First of all -- and I forgot to mention that in the earlier question. I think it's a major milestone for this Company that we've been able to, under the very strict regs governing revenue recognition, that we've been able to switch to accrual-based revenue recognition in the fourth quarter. So I want to make sure that we're able to emphasize that.

With respect to the gross to net, you're absolutely right. I'd like to point out that also to an earlier question on what our trend is, with respect to net revenue as a percentage of gross revenue, these are payers under contract where certain deductions that we also disclose with respect to gross and net revenue do not apply. So the gross to net for that particular part of our revenue is favorable compared to the average that we've disclosed in the past.

Got it. And when you talked about you expect to have a mix of cash-based and accrual-based revenue methods for an extended period of time, are we talking multi-quarters, through this year? Or are we talking beyond 2017?

Yes, that's hard to predict. It depends on payment patterns. It depends on history and our ability to accurately forecast collection. It's definitely a matter of quarters. Whether that will be limited to 2017 or also go into 2018, that's impossible to determine right now. But certainly in 2017, I would expect a mix of cash-based and accrual-based revenue rec.

Okay. And then as far as the Medicare fee-for-service part of the business, is there any update on coverage and the progress you are making there?

Yes. So, thanks for the question. Again, that's the one area in the US market where we continue not to have contracting or coverage. Just to remind everyone, that represents between 20% and 25% of our business. Also to remind everyone, notwithstanding the fact that we're not yet covered by the Medicare fee-for-service program, we continue to serve all of the Medicare population. So we are not denying Optune therapy for patients in that program. We also continue to bill the Medicare program. And we're actively engaged in the -- what unfortunately is very heavily backlogged ALJ process on those claims. So we're treating the patients, we're billing Medicare, and we're proceeding with discussions.

Now, on the discussion front, many of the accomplishments in 2016 that I enumerated earlier have been extremely important for our discussions with Medicare. Principal among them were the JAMA publication of the interim results, and then the NCCN guideline listing. And then, finally, the final analysis, as I said that unequivocally showed the benefits, the long-term benefits, for the patient population. We now have the opportunity to provide all of those data to the senior members of CMS.

Now, another fact of the matter is of course with the election and the changing of the guard, there has been a period across all of Washington where things have slowed down. But we're happy to say that things are getting back to normal. In fact, I was in Washington last week, and I think that we are in the strongest position we ever have been with CMS. And also remind everybody that this is a process. And by that I mean that when something new is -- like Optune therapy, is introduced to the market, the first step is to establish the commercial adoption and commercial reimbursement and coverage rates. We have substantially done that now in the fourth quarter. I think that now leaves us in the position where we can finish our business with CMS.

Great. Thanks for that. Very helpful. And just last two. One, just any other GBM-related data presentations we should be looking for in 2017? And then also the LUNAR trial that you started enrollment last -- you announced the enrollment for last week. How long do you think the enrollment will take for the 500-plus patients? Thanks.

This is Eilon Kirson. So we are expecting this year to have additional sub-group analyses of the EF-14 data set. And I think this will also be important to build confidence in the data and understand the exact details of how the therapy works. In addition, we will perform and present significant quality of life data in conferences this year. And this will be the first time actually that we will have a full quality of life analysis, and not just initial looks at that sort of data. So we do expect that it'd be multiple additional data points throughout the year regarding the GBM data.

Regarding enrollment in our LUNAR trial, our lung cancer trial, Phase III: as we've said, we enrolled our first patients just recently. And we will now increase the number of sites and increase the number of geographies in which the trial is open and available to patients. And we expect to continue enrollment according to what we have talked about before, with last patients in, in 2019.

Thanks again.

Gregg Gilbert, Deutsche Bank.

Thanks for taking our follow-up. Bill, you said numerous times you don't guide, and we understand that. But you are two-thirds roughly into a new quarter, after a quarter in which scripts were disappointing in the US, all your comments notwithstanding about stair steps and takes time. Perhaps you can offer some confidence on how trends are. Not guidance; but two-thirds into a quarter, to give folks a sense that we are on the stair step, or we're on a new step. I think the market's in need of some additional commentary in light of the slow script growth, the departure, et cetera. Again, not asking you to guide; but you are two-thirds into a new quarter. Thanks.

Yes. So, my suggestion is if you really take a look at the active patient growth, you'll see consistent eight quarters of active patient growth. That's of course the number that we focus on, because that's the number that drives revenue. It's made up, of course, of a combination of our growth in scripts, our fill rate, and also the duration of therapy, which continues to increase as we shift from a base that was largely recurrent GBM to an increasing proportion of newly diagnosed GBM. So I think that's probably the best indicator that we can provide, is to focus on that trend.

Thank you. And I'm showing no further questions at this time.

I'd like to hand the call back over to Mr. Bill Doyle for any closing remarks.

So again, I want to thank everybody for making the time to join us this morning. In closing, I think we had a really tremendous 2016 in terms of what our team was able to achieve in bringing our new therapy to market. And we look forward to another year of accomplishment as we get going here. So thanks very much for your continued support.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Everyone have a great day.