Novocure Ltd (NVCR) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Novocure's Third Quarter 2017 Conference Call. (Operator Instructions)

As a reminder, today's conference call is being recorded.

It is now my pleasure to hand the conference over to Ms. Ashley Cordova, Vice President of Finance and Investor Relations. Ma'am, you may begin.

Good morning, everyone, and thank you for joining us to review Novocure's third quarter 2017 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 presented today can be viewed on our website, www.novocure.com, by clicking on the link for 2017 third quarter financial results, located in the Events section on our Investor Relations page.

Before we start, I would 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 statements, 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 nine months ended September 30, 2017, are available in our press release and in our 10-Q, both of which were released earlier this morning.

With that, I will now hand the call over to Bill Doyle.

Thank you, Ashley, and good morning, everyone. Consistent with prior quarterly calls, we will review our progress during the quarter in the context of our core strategic objectives. First, we're focused on driving commercial adoption of Optune for the treatment of glioblastoma. Second, we are committed to advancing our clinical pipeline. And finally, we are dedicated to driving operating leverage in our commercial business and delivering long-term shareholder value. I will provide a pipeline update later in this morning's call, but I'll ask Asaf first to review our commercial activities during the quarter. Asaf?

Novocure reported net revenues of $50.1 million in Q3 2017 at 131% versus Q3 2016. This represents our ninth consecutive quarter of triple-digit year-over-year revenue growth. We have 1,683 active patients on treatment at the end of Q3 2017, an increase of 71% from the end of Q3 2016 and 15% from the end of Q2 2017. This marks our eleventh consecutive quarter of active patient growth since the initial presentation of our EF-14 Phase III pivotal trial data in newly diagnosed GBM in November 2014.

The U.S. and Germany continue to be our largest active commercial market, together representing 94% of our global prescription volume in Q3 2017. We estimate our Q3 market share was 25% in the U.S. and 22% in Germany.

Notably, we saw a favorable shift in prescription mix in Q3 2017 with newly diagnosed GBM representing more than 60% of our total prescription volume. We believe this move towards newly diagnosed GBM should allow active patient growth to outpace prescription growth in future quarters.

Our sales and marketing efforts continue to focus on building prescriber confidence in Optune for the treatment of GBM. For example, at ASCO in September, we had a significant commercial presence and the five-year survival and quality of life data from our EF-14 trial was featured in an oral presentation.

We believe this presentation was well received and radiation oncologists appear easier to engage with our team and to understand how they could gain access to Optune for their patients with GBM. Also, during Q3, we updated our marketing material to include the 5-year survival data from our EF-14 trial. Optune is the first treatment in more than 10 years to increase median survival in newly diagnosed GBM.

For 5 consecutive years, Optune plus temozolomide demonstrated consistently sustained, superior rates of survival in newly diagnosed GBM. The five-year survival rate was 13% for Optune plus temozolomide versus 5% of temozolomide alone. Optune plus temozolomide demonstrated superior overall survival of all patients that were analyzed regardless of MGMT methylation status, extent of resection, age, performance status or gender.

We believe our message of unprecedented 5-year survival results will resonate with prescribers and patients. Our sales teams are now in the field messaging the 5-year data to target prescribers.

With that, I will turn the call back to Bill to review our progress in R&D.

Thank you, Asaf. In addition to our commercial progress during the third quarter, our continued investments in R&D have led to meaningful advances in our understanding of Tumor Treating Fields.

Our preclinical research focuses on investigating the multiple pathways through which Tumor Treating Fields exert their effects and complement other anticancer therapies. Preclinical data presented at ASTRO describes how using Tumor Treating Fields with radiation therapy may enhance the efficacy of radiation or other DNA damaging agents. These data provide a scientific rationale for the development of alternative strategies for using Tumor Treating Fields and served as the basis for the G-BA decision to support a clinical trial studying Optune for the treatment of newly diagnosed GBM in Germany. The proposed G-BA trial design will examine the benefits of starting Optune concurrent with radiation therapy and temozolomide prior to the initiation of maintenance temozolomide.

On the clinical front, we continue to recruit patients for 2 ongoing Phase III pivotal trials. Our LUNAR trial in non-small cell lung cancer and our METIS trial in brain metastases from non-small cell lung cancer.

In September 2017, the FDA approved an IDE supplement to amend the protocol for our METIS trial designed to accelerate the pace of enrollment by expanding the eligible patient population. Among other updates, the protocol now allows for the enrollment of patients with infratentorial brain metastases based on new scientific information supporting a specialized array layout to treat infratentorial tumors.

We also continue to collect data on patients in our ongoing STELLAR trial, a Phase II trial in mesothelioma. As a reminder, we enrolled our last patient in the STELLAR trial in March 2017. With a minimum of 12 months follow-up, we anticipate top-line data in mid-2018.

On the engineering front, in September, we initiated a pilot test of our tan-colored transducer arrays in Europe. This is a device improvement stemming directly from patient feedback. Pending successful completion of the pilot test, we plan a full rollout of tan-colored transducer arrays in Europe and plan to file a PMA supplement application with the FDA in the United States.

We also highlighted our ongoing research on electric field distribution in tissues during three oral presentations at the IEEE Conference in July 2017. This research is critical to understand possible ways to increase efficacy by optimizing the delivery, or dose, of Tumor Treating Fields.

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

Thank you, Bill and good morning, everyone. Our third quarter net revenues grew 131% to $50.1 million, compared to $21.7 million for the same period last year. Sequentially, net revenues for the third quarter were up 31% from the second quarter of 2017. 70% of our net revenues came from the United States with the balance from the EU, principally, Germany.

Revenue growth was driven by an increase in active patients, improving collection from our active patients and a one-time benefit from the transition to accrual-based revenue for a portion of our German payers in the third quarter.

Net revenues as a percentage of gross billings improved to 49% in the third quarter from 44% in the second quarter, driven by the previously referenced onetime benefit in Germany, an increase in the approval rate for German claims and an acceleration of cash collections in the United States.

In the fourth quarter of 2017, without the benefit from our transition to accrual-based revenue, we estimate that net revenues as a percentage of gross billings will be approximately 46%.

We are engaged in constructive dialogues with the government payers in the United States, Germany, Switzerland and Japan. We expected that any positive reimbursement decision resulting from these discussions will be the next likely trigger to drive significant improvement in net revenue as a percentage of gross billings for future claims.

Gross profit in the quarter was $35 million or 70% of net revenues, compared to $10.6 million or 49% of net revenues for the same quarter last year. The improved margin was driven both by improved net revenues as a percentage of gross billings and by the ongoing efforts to reduce our cost of revenues with efficiency initiatives and scale.

Moving down to the income statement, our R&D expenses were $9.3 million for the third quarter of 2017, compared to $10.2 million for the same period last year. We anticipate that R&D expenses will increase in future quarters as we continue to enroll patients in Phase III pivotal trials.

We are committed to funding research and development activities to advance our clinical pipeline and realize the full value of our technology across multiple solid tumor indications.

Our SG&A expenses for the quarter were $31.6 million, compared to $28.6 million for the same period last year. Driving operating leverage in our commercial business has been a core strategic objective of ours in 2017, and we continue to see the result of these efforts.

In the third quarter of 2017, we delivered 131% year-over-year revenue growth with only 11% year-over-year growth in SG&A expenses.

Our third quarter 2017 operating loss was $5.9 million, compared to an operating loss of $28.3 million for the same period last year. It is important to note that our third quarter 2017 operating loss includes $8.6 million in share-based compensation to employees.

Net loss for the third quarter 2017 was $11.5 million, or $0.13 per share, compared to a net loss of $33.6 million, or $0.39 per share, for the same period last year.

Our ongoing focus on leveraging our existing infrastructure has resulted in significant year-over-year reduction in cash burn. Cash flow from operations in the third quarter of 2017 was $2.5 million, the first quarter with positive cash flow from operations in our history.

At September 30, 2017, we had $82.1 million in cash and cash equivalents and $104.5 million in short-term investments for a total balance of $186.6 million in cash, cash equivalents and short-term investments. The third quarter of 2017 also marked the first quarter in our history that our contribution margin exceeded SG&A expenses with the GBM commercial, this is beginning to fund the pipeline, a key milestone in our anticipated path of profitability.

It has been 2 years since our initial public offering. We had transformed from a company with $9 million in quarterly net revenues in the third quarter of 2015, to a company with more than $50 million in quarterly net revenues in the third quarter of 2017.

During these 2 years, we received approval of Optune for the treatment of newly diagnosed GBM and presented unprecedented 5-year survival results for Optune plus temozolomide in patients with newly diagnosed GBM. We reported Phase II pilot trial data in pancreatic cancer, ovarian cancer and mesothelioma with Tumor Treating Fields consistently demonstrated an anti-mitotic effect. Investing in our future, we opened 2 Phase III pivotal trials in non-small-cell lung cancer and brain metastases from non-small-cell lung cancer.

While we are extremely proud of the progress our entire team has made over the last years, we believe we are still at the beginning of our journey. Optune is the first treatment in more than 10 years to increase median overall survival in newly diagnosed GBM, and we wake up every day focused on bringing Optune to as many patients with glioblastoma who may benefit from it. Tumor Treating Fields shows promise for a variety of solid tumors, and we are committed to advancing our clinical pipeline to realize the full value of our technology. Finally, we are focused on delivering long-term shareholder value, both from the execution of the commercial and clinical objectives and from a disciplined management of our expenses and resources.

With that, I'll open the call to questions. Operator?

(Operator Instructions) And our first question will come from the line of Tao Levy with Wedbush.

So maybe a couple clarifications. First, Wilco, can you quantify the one-time benefit from the accrual accounting that you received? I assume that's mainly in Germany, right?

It was mainly in Germany. As I mentioned, our overall gross-to-net revenue as a percentage of gross billings was about 49% in the quarter. Without that switch, it would've been approximately 46%. So I estimated some $4 million benefit in the third quarter from that switch to accrual-based revenue recognition in Germany.

Got you. And congratulations on being cash flow positive from operations, but that includes this one-time benefit, right? So we shouldn't assume continued cash flow positive out of Novocure going forward? Is that fair?

No, I don't think it includes that in the accrual. Basically it goes to accounts receivable and bills collected. So I think the cash flow is more reflection of our ability to improve collection.

And in terms of a go-forward basis, should we assume you'll remain cash flow positive?

That would be guidance, Tao. And you know how we feel about that. If I can interrupt you for one second, and I probably shouldn't, but when you look at our improvement in cash flow over the last year, it is a leverage story and management of working capital story. And as I explained during the prepared remarks, we grew our revenue by 131%, SG&A grew by 11%. If you take out non-cash share-based compensation, it was essentially flat. So that leverage, the quality of the cash flow improvement is sustainable.

Yes, sure. Perfect. And then lastly, Japan reimbursement, any news on that front? I would've thought you would've heard something by now.

Yes. It's Asaf. Basically there's no news. We continue the negotiation with MHLW and there's no new news.

Our next question will come from the line of Gregg Gilbert with Deutsche Bank.

I have a few. First I'll start with Bill, one of my favorite questions on CMS reimbursement. Can you describe the tenure of those discussions and are you still viewing this, I hope, as a when not an if?

So that's correct. Again, as we said in previous calls, unfortunately, CMS doesn't have a clock. So it's very difficult for us to predict the when. But all of the progress that we've made in terms of the presentation of 5-year data; the presentation of subgroup data where, in fact, we showed the lowest hazard ratio of any subgroup in the over 65 population; the continued increase of adoption in the commercial market... all of those factors are positively affecting the discussions. And again, while I can't predict the time, I believe it's a matter of time and not a matter of yes or no.

And how would you compare this government group versus other countries in thinking about reimbursement? Is it different in the different regions in terms of what the're stuck on?

Every region is different. Some have very specific defined processes. I think the appreciation of the data is similar in all jurisdictions, but the process through which the therapy is ultimately paid for is almost completely different country by country.

Got it. In terms of the competitive landscape for GBM, can you comment on anything that's in late-stage development that you have your eye on that could affect the competitiveness of your product I suspect you think Optune could be used in combination with other things. But can you frame that for us in terms of your thinking of other late stage GBM approaches that are out there?

Yes, I'll ask Eilon to say a few words on this topic.

Okay. Bill, thank you very much. We continue always to evaluate new data that comes out in GBM. We don't comment on rumors of what may come out. We always look at different combinations, the best combinations to try with Tumor Treating Fields, and everything that we have tested to date pre-clinically has actually shown very nice effect together with emerging therapies, be they a new checkpoint inhibitors or standard chemotherapies. And so in any case, we believe that Tumor Treating Fields can serve as the basis for any new treatment that comes out.

Maybe one last follow-up, sorry, one extra. But to what degree are you talking to other companies about clinical trials of Optune outside of the GBM settings, or do we have to wait for you to validate in later stage trials Optune by itself. Or in your own studies before having an external collaboration sort of strategy outside of GBM?

We're talking to multiple companies about various combinations, both at the pre-clinical level and the clinical level. We released a trial that is starting with marizomib, which is a Celgene trial. We're going to be doing an arm with Tumor Treating Fields and marizomib. And again, based on all our data to date, all our pre-clinical data and clinical data, Tumor Treating Fields can serve as a very good backbone for future trials testing new therapy.

(Operator Instructions) Our next question will come from the line of Lei Huang with Wells Fargo.

It's Lei calling in for Larry Biegelsen. Can we just talk about OUS for a minute. So OUS revenue was almost $15 million in the quarter. Was $4 million of that the one-time benefit from Germany?

This is Wilco. Yes, that's correct, $4 million was related to the German switch. It's not an exact number, approximately $4 million.

Okay, fair enough. Okay. So even if we take out that approximately $4 million one-time benefit, we're still pretty healthy increase quarter-over-quarter in terms of revenue growth versus the prescription growth and active patient growth was a little more modest. What's driving that revenue growth to be a lot more robust versus prescription growth and patient volume growth?

Yes. So first of all thanks for teeing it up. I think we've shown significant revenue growth even if you get that one-time bump from the switch to accrual in Germany. There's a function largely of active patient count - we've added more than 200 active patients in the quarter, substantial active patient growth in United States, substantial active patient growth in Europe. It all leads to quarter-over-quarter, if you net out that $4 million, still a very substantial revenue growth. With, as I said here in the call, SG&A essentially flat, leading to the leverage. I'd like to emphasize it one more time, the first positive cash flow quarter in our history.

Okay. Great. And then can you give the number of training centers, Optune training centers in the U.S. and OUS? I didn't see in the slides or the press release.

We have almost 700 training centers in the United States, 663 to be precise. In Europe, we have approximately 230 certified sites, and as you know, were also preparing for Japan upon the reimbursement. We have about 150 certified sites in Japan.

Japan, got it. Okay. And just on Japan, if I can ask one more. How confident are you that you could hear something on reimbursement before year-end?

As I mentioned before, we're still working under the assumption, which was the old assumption, that we will have reimbursement decision by year-end.

Our next question will come from the line of Cory Kasimov with JP Morgan.

This is Shawn, on for Cory. Just a couple of quick ones for me. So first, can you remind us of which other European markets you're in? And I know it's currently Germany and Austria at the very least, but which other ones are you currently in? What other EU markets might you'll be looking to get into in the near term?

So, thank you for the question. So right now, we are mainly in Germany and the other countries are Switzerland, Israel and Austria. In Austria, we already announced it a couple weeks ago, we have national coverage and we already have a contract with the Austrian government. We are not planning to approach any other countries in the near future.

Okay, that's helpful. And then regarding the METIS trial - you talked about expanding the patient population. I believe that it was by including patients that had infratentorial mets -- does it change your thinking at all in terms of the time frame for the readout? Does that -- does it push it forward at all?

Thanks for the question. This is Eilon. We're still feeling the same time line, okay. We don't think this is going to push the time line in any way.

Okay. Great. And then just one more quick one. Can you maybe share the current patient mix between the treatment refractory patients and treatment-refractory patients in GBM?

Yes. So the way that we think about it is based on when the patient starts the therapy during their course of their disease. So we have 2 buckets of patients. We have patients who start after their radiation therapy. We call those patients the newly diagnosed patients, and then we have patients who will start later in the course of their disease, after they've progressed and those are the recurrent patients. We've shown in our data that while both groups benefit, patients who start earlier benefit more, and so it's been one of our objectives to encourage prescribers to prescribe earlier in the course of disease rather than wait until the recurrence. And that mix continues to shift towards newly diagnosed. In this quarter, we described that approximately 60% of our prescriptions were for newly diagnosed and 40% were for recurrent, and that is an increase from where we've been historically.

Our next question will come from the line of Difei Yang with Mizuho Securities.

Just a couple. First of all, do you see a difference between the German patients versus the American patients on compliance rate? Is there a gap? Is there any way to bridge the gap to improve our compliance rate?

So the response is that we don't see any difference. They are pretty similar.

Okay. Then I think you talked about technology improvement, the next-generation technology, as you said earlier. Could you frame it for us from the patient's perspective, what are the key benefits for patients?

Sure. First of all if we take one step back, we have ongoing engineering efforts to continue to improve the technology, both from a convenience perspective, because again, we want to make it easier and easier for patients to comply, and we also believe that by improving compliance, ultimately, we will improve efficacy for patients, as well. So it's very important to us.

The biggest change today that I think we talked about was the rollout of our gen 2 device which was a major improvement for patients, significantly reducing the size, weight, noise, increasing battery life, et cetera of the device. We continue to look for opportunities to further improve the field generator, but we've now turned our significant attention to the arrays.

One of the things that we've heard consistently, and for those of you who are not familiar with the details of the therapy, our transducer arrays from day 1 have been sort of a bright surgical white color and patients have consistently asked for more flesh tone or Band-Aid color to make the arrays a little less conspicuous. And so that product is now being piloted in Europe. And we assume a successful conclusion of that pilot and the rollout in the U.S. and it's a PMA supplement in the U.S that we have to file. As soon as we get that sign off, we'll roll it out in the U.S.

From there, there's a whole host of other opportunities to further improve the array. We're focused on the hydrogel adhesive, there are more modern hydrogels available then when we originally designed the arrays. We're looking at ways to make the arrays more comfortable. We're looking at ways of improving the connectivity for the device. So I would expect, over time, to see a whole host of additional improvements. But the first will be the rollout of the tan arrays.

Okay. Then my final question on the transition from cash to accrual based accounting. So where are we on a very high level? Are we 50% down, 75% down?

I think so. First of all, we mentioned that net revenue as a percentage of gross billings was 49% in the quarter, substantial improvement from the second quarter, where it was 44%. If you take out that one-time benefit of switching to accrual, it's essentially at 46%. And therefore, I would recommend looking at net revenues as a percentage of gross revenues and modeling it out, that percentage and the development of that percentage, which will be also triggered by national reimbursement decision that, as we just talked about, will go up over time. With those decisions, if they are favorable. Probably the better way of modeling out our net revenue is a percentage of gross billings.

Ladies and gentlemen, this concludes our question-and-answer session for today. So now it's my pleasure to hand the conference back over to Mr. Bill Doyle, Executive Chairman, for some closing comments or remarks. Sir?

So thank you everyone for participating in our Q3 call. I think Wilco nicely summarized our progress over the last 2 years, and I just want to take this opportunity to thank our team globally. It's been an incredible amount of effort, hard work, that's gone into the growth and the progress that Wilco described. Looking forward as Wilco also said, we're just at the beginning, and we have a lot more work to do, patients to help and we've got the team to do it. So thank you all.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program, and you may all disconnect. Everybody have a wonderful day.