Novocure Ltd (NVCR) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Novocure Second Quarter 2018 Earnings Conference Call. (Operator Instructions).

As a reminder, today's conference may be recorded.

I would now like to turn the call over to Ms. Ashley Cordova, Vice President, Finance and Investor Relations. Ma'am, you may begin.

Good morning, everyone, and thank you for joining us to review Novocure's second quarter 2018 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 2018 second 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.

Following our prepared remarks today, we will open the line for questions. I will remind everyone that our financials for the 3- and 6-months ended June 20, 2018, are available in our press release and in our 10-Q, both of which we released earlier this morning.

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

Thank you, Ashley, and good morning, everyone. The second quarter of 2018 was strong, with continued commercial momentum for Optune and continued progress on key clinical development programs.

Before we delve into the execution details for the quarter, I'd like to frame how we think about building long-term shareholder value. We're focused on 2 clear priorities. First, we are driving commercial adoption of Optune for the treatment of GBM. Second, we are advancing our clinical pipeline in a range of solid tumor cancers, in which we believe, Tumor Treating Fields can help patients.

This morning, Asaf will highlight commercial progress during the quarter, and Eilon will highlight recent progress in the pipeline. After that, Wilco will discuss our second quarter financial results.

But before I hand the call over to Asaf, I want to provide an update on the status of our discussions with Medicare. I am pleased to announce we submitted a local coverage determination, or LCD, request to the Medicare DME MACs on June 20, 2018. Our decision to file for coverage followed an announcement by the Centers for Medicare & Medicaid Services earlier in June, that it developed the pricing methodology for newly covered DME products that will recognize current commercial pricing, and that this information will be taken into account when establishing a new Medicare fee schedule amount. We believe this methodology reflects the significant progress made during our multiyear dialogue with CMS and will generate a commercially acceptable price for the Medicare fee-for-service program. The MACs should make a final LCD reconsideration decision within 90 days of the June 20 submission. The decision will state whether the MACs intend to keep the policy as it is or make it less restrictive. Assuming the MACs decide to revise the local coverage determination, our desired outcome, they would then follow the normal LCD development process. It is always difficult to predict the timing with the U.S. government, but our best guess is that it could take approximately 6 months for Novocure to secure Medicare coverage and payment for Optune, once we receive a favorable MAC decision to revise the LCD. This time line is an estimate, and we will continue to share material updates as we learn throughout the process.

With that, I will now hand the call over to Asaf to review the quarter.

Thank you, Bill. In the second quarter of 2018, Novocure demonstrated continued commercial momentum for Optune and continued progress on key clinical development programs. We delivered record quarterly revenue of $61.5 million, up 60% from the second quarter 2017 and 18% from the first quarter 2018.

There were 2 main contributors to second quarter revenue growth. First, we continue to increase active patients. Q2 was our 14th consecutive quarter of active patient growth since the initial presentation of EF-14 data. There were more than 2,150 patients on therapy at the end of the quarter, up 49% from the second quarter 2017 and 8% from the first quarter 2018. Second, we continue to increase the average net revenue per active patient and improve our gross to net revenue spread.

The positive trends in both active patients and reimbursement are supported, in part, by consistent growth in prescriptions for patients with newly diagnosed GBM. More than 900 prescriptions, nearly 75% of the Q2 total, were written for patients with newly diagnosed with GBM. This growth reflects our ongoing sales and marketing efforts, increased awareness of our 5-year survival and compliance data and the updated NCCN Guidelines. We believe that growth in prescription for newly diagnosed GBM is a sign of increasing physician confidence and belief in Optune.

Second quarter growth also reflects our early launch success in Japan, where we had 37 patients on therapy at the end of the quarter, contributing over $1 million in net revenue. Globally, we have 6 active markets, with an average penetration rate of 26% across these markets. We estimate our second quarter penetration was approximately 30% in the U.S., 20% in Germany and 10% in Japan. We believe there are many more GBM patients who can benefit from Optune than are currently on treatment. And driving adoption across the globe is an ongoing focus.

With that, I will now turn the call over to Eilon.

Thank you, Asaf. Today, I will highlight progress made since the last update in our clinical development program, including an update on mesothelioma.

We continue to advance our clinical pipeline in the 5 solid tumor indications with high unmet needs. Across all indications, we are studying Tumor Treating Fields in combination with the current standard of care, with the hope to advance the standard of care without adding incremental toxicity. We believe Tumor Treating Fields is a broadly applicable platform with multiple opportunities in solid tumor cancers. We don't often highlight our preclinical and early stage development programs in our quarterly earnings calls, but they do drive how we internally think about the significance of Tumor Treating Fields as a therapy.

Beyond GBM and the 5 indications currently under development, we have preclinical data in an additional 11 cell lines and proof of concept, or first in human data, in an additional 2 tumor types. Our preclinical research continues to deepen our understanding of Tumor Treating Fields and inform new areas of potential clinical utility.

In our current clinical pipeline, we have Phase III pivotal trials open and enrolling in non-small cell lung cancer and brain metastases from non-small cell lung cancer and in pancreatic cancer. INNOVATE 3 will be the sixth Phase III pivotal trial to study Tumor Treating Fields and should open later this year. The INNOVATE 3 trial will study Tumor Treating Fields in combination with weekly paclitaxel in 540 patients with platinum-resistant ovarian cancer. We intend to establish a partnership with the European Network of Gynaecological Oncological Trial groups, or ENGOT, to develop Tumor Treating Fields for ovarian cancer. The collaboration between Novocure and ENGOT will facilitate and promote the INNOVATE 3 trial in patients with recurrent ovarian cancer at leading European cancer centers.

We also recently opened our Phase II pilot HEPANOVA trial and anticipate first patient enrollment later this year. The HEPANOVA trial will study Tumor Treating Fields in combination with sorafenib in 25 patients with advanced liver cancer. This is a prospective, single-arm study with overall response rate as a primary endpoint. The sample size was based on the ability to detect an overall response rate of 20% in patients treated with Tumor Treating Fields, compared to the 4.5% overall response rate calculated from historical controls.

Transitioning to mesothelioma. As you know, we reported positive top line results from our STELLAR trial in April. We are extremely pleased with the results, as patients treated with Tumor Treating Fields, in combination with pemetrexed and cisplatin or carboplatin, saw clinically meaningful improvements in overall survival and progression-free survival. The STELLAR data has been accepted for presentation at the 19th World Conference on Lung Cancer hosted by IASLC in Toronto, and we look forward to sharing the detailed results of the study with the lung cancer community in late September.

As noted on our prior calls, we received Humanitarian Use Device designation for the use of Tumor Treating Fields for the treatment of pleural mesothelioma in 2017. And we plan to submit a Humanitarian Device Exemption application to the FDA for approval later this year. We have submitted a presubmission package to the FDA and have requested an informational meeting with the lung group. In parallel, the publication manuscript is being drafted for submission to a peer-reviewed journal later in 2018. Publication of the STELLAR data will strengthen our dialogue with payers postlaunch. And we believe it is a key driver of our ability to generate awareness of Tumor Treating Fields in mesothelioma.

I will now turn the call over to Wilco to review our financial results.

Thank you, Eilon. And thanks to everyone for joining us on the call this morning.

We ended the second quarter in a strong financial position. Total revenues for the second quarter was $61.5 million, growing 60% year-over-year and growing 18% versus the prior quarter. This represents trailing 12-month revenues of more than $250 million.

Second quarter revenues exceeded consensus by more than $2 million and reflects above-consensus growth in both active patients and net revenue per active patient.

Net revenues as a percentage of gross billings were 45% in the second quarter, in line with our continued expectations for the full year. The quarter-over-quarter improvement in our gross-to-net spread reflects improving patient mix and improving approval rates on case-by-case claims. As an example, in Germany, the approval rates for individual claims exceeded 55% in the first half of the year and continues to trend upwards.

Gross profit in the quarter was $41.7 million, reflecting a 68% gross margin.

Moving down the income statement. Our R&D expenses increased to $11.4 million. We anticipate that R&D expenses will continue to increase in future quarters as we continue to enroll patients in our Phase III pivotal trials.

Our SG&A expenses were $37.4 million, including $8.6 million in noncash share-based compensation.

While year-over-year revenue growth exceeded 60%, year-over-year SG&A expenses grew by only 20%. Driving operating leverage in our commercial business remains an ongoing focus, and we continue see the results of these efforts.

Our second quarter 2018 operating loss was $7.1 million, with our existing commercial business continuing to fund the pipeline. Net loss for the quarter was $15.5 million or $0.17 per share.

Net cash used in operations was $7.5 million, with an additional $0.8 million used in investing activities principally related to investments in (inaudible).

Cash flow from financing activities was $11.2 million and includes proceeds from option exercises in our employee share purchase plan. We ended the quarter with $219 million in cash and investments and continue to believe our strong cash position provides us financial stability and flexibility as we execute on our core strategies.

I would like to reiterate how pleased we are with the progress made during the second quarter. We saw a continued momentum in both our commercial and clinical activities and are excited about the future.

Novocure is a global oncology company with a proprietary platform technology, a growing commercial business with significant upside potential. We are focused on 2 clear priorities: first, drive a commercial adoption of Optune; and second, advancing our clinical pipeline to treat a range of solid tumor cancers. We believe we are well positioned to execute on both fronts.

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

(Operator Instructions) And our first question comes from the line of Vijay Kumar with Evercore ISI.

So maybe I'll start off with this CMS language, which we thought was incremental and positive. Maybe a couple of clarifications: one, why the LCD route and maybe not a national coverage? And that language around CMS benchmarking versus the commercial, can you give us some clarity on how that's going to play out? Is this going to be like drugs, where you look at the average commercial and get a percentage off of that? Or any clarification, I think, would be helpful.

So first of all, we do consider this to be very positive. And it basically starts with the June 10 CMS announcement, that it developed a new pricing methodology that will recognize current commercial pricing. I think as everyone on the call knows, we have, essentially, universal private pay coverage. And the central issue for us with CMS was that, in fact, that private pay base would be the basis of their calculations. So the fact that their new policy explicitly states that, I think, is good for Novocure. And it's also good for all innovators in novel medical device technology. This was one of several announcements that CMS makes that shows, I think, a real commitment by CMS to fix reimbursement issues in the DME area and to allow more rapid adoption of technology in health care in general. So for us, again, it's quite positive. This results in a 2-step process for Novocure with respect to Optune. As we stated, the first is the LCD reconsideration. This, we expect to take 90 days. We have all of the data that, again, you all know, including the NCCN Category I listing, the various JAMA publications, that all supports the use of Optune in GBM. And as we stated in the prepared remarks, assuming that the LCD reconsideration is positive, that will then start an LCD development process, which historically has taken 6 months. This is the result of Medicare creating a process that will fix the problem for all advanced BME. And this was, I think, the intent -- Medicare's intent all along, was not to come up with a Novacure-specific fix, but a fix that would address the overall problem that has historically plagued novel DME.

Maybe just on the LCD versus the MCD, and should we now assign this as pretty much a done deal, CMS? Or are there still uncertainties around the CMS actually paying for therapy?

Well, I think, with the U.S. government, it's never a done deal. I wish it were. I think this is a very positive step. I think, again, the explicit announcement that they would take into account the commercial pricing, I think the fact that we are very well positioned in the commercial sphere, are all positive. But again, I don't think we can ever say it's a done deal with the government until, in fact, it is a done deal.

Fair enough. And just maybe one question on the script volumes. It looks like Germany, EMEA was a little light. I know that number moves around quite a bit, but this is something that The Street focuses on. And maybe any comments on what happened with script volumes would be helpful.

Sure. So let me ask Asaf to comment on the volumes.

Yes, sure, Bill. So thank you for the question. So our main goal in the last couple of years is to, basically, to increase our adoptions. And we start with the indications for recurrent GBM, and then we can with the indications for newly diagnosed. And the important thing is to make sure that the patient -- most of the patients will be newly diagnosed patients. These are the patients who can benefit more from the treatment, and these are the patients who can stay longer on treatment. So what we're really happy to see is the shift, basically, in all our markets from recurrent to newly diagnosed. And this is what you actually see in Germany. You basically see more patients that can benefit, that can stay longer on treatment. And we also can bill for these patients and get payment for that.

So Vijay, just to underline it's the growth in newly diagnosed where we're really focused. And we've seen extremely positive trends in that regard during the quarter.

Our next question comes from Larry Biegelsen with Wells Fargo.

It's Adam Maeder on for Larry. I just wanted to follow up on reimbursement and the decision to pursue an LCD instead of MCD. Why the reconsideration? And was it rejected in the past? And then I have a follow-up.

Sure. So first of all, an LCD is faster than an MCD. So that's the simplest answer that we can give to the question.

Okay. And then just on script trends. In the U.S., why don't we see more of a benefit from the recent Level 1 NCCN Guidelines at the end of March? And then looking ahead, how should we think about Rx trends for the rest of the year?

So as I mentioned before, so NCCN Guidelines is something that we believe that we would start to see the impact in the next couple of quarters. In general, and I say it again, our goal is to make sure that, ideally, 100 of the script will be from newly diagnosed. This will be ideal for us. So we really believe that with NCCN Guidelines, and with the continued trend to move to a newly diagnosed patient and with our efforts to increase adoption, we believe that this will continue.

Okay. And any color as we look ahead?

Once again, I -- this is Bill, jumping in. We see continued levers for growth. As a subset, we have a focus on prescription growth for patients with newly diagnosed GBM. We see that. We see steady growth with, again, more than 900 prescriptions from newly diagnosed in Q2. We believe that this is a sign of increasing physician confidence and belief. They're not putting their bucket patients on the therapy. They're putting their healthy, newly diagnosed patients on the therapy. We believe that's positive. As you know, we've discussed that our focus has been to create confidence with physicians. And putting patients on at the time of diagnosis is clearly a sign of that. We also continue to work, as we discussed, with helping physicians to develop the skills they need to recommend strongly Optune for newly diagnosed GBM. In past quarters, I think we have elaborated on the fact that this is a new type of therapy for these oncologists. It's not something that a doctor does to a patient, like surgery, radiation or putting them in an infusion chair. This is a therapy that the patient has to participate in at home, and therefore, requires a different set of skills for the physician. We're seeing that. And so we believe that this will continue. And we're also continuing to drive awareness in the community. Again, approximately 60% of all GBM is treated by medical oncologists and radiation oncologists in the community setting. This is a more effuse setting, meaning that there are more clinicians that are treating fewer patients per clinician, and this is a second focus. So continue to drive confidence and strength of the physician recommendation and continue to drive awareness in the community. And these are the levers that, we think in the near term, will continue to drive the trends that we've seen.

Our next question comes from Gregg Gilbert with Deutsche Bank.

I have a couple -- a few. Wilco, first, it sounds like the gross-to-net improvements are driven by things that seem sustainable. If we look at the gross-to-net in the quarter, would you say that's a good level to use for future quarters? Or should we see continued improvements from here?

I think what you see in the second quarter is a continuation of what we expected to happen in the second quarter when we came out of the first quarter. I think as an example, the approval rate in our German market is improving. We're getting better at these case-by-case collection efforts. We've seen some improvement in the United States as well. So I think hitting the 45% point is a solid improvement over the first quarter, and we expect that to continue for the full year.

Okay, great. Switching over to mesothelioma and that opportunity, can you talk about what proportion of that patient group is in the Medicare segment? And is it fair to assume you would treat those patients for free, and if you don't secure Medicare coverage by then, as is been the case for GBM?

I think that it's a little bit early to say anything about that. In terms of patient population, when you look at the U.S. incidents, about 80% of eligible patients would probably be under Medicare. We're focusing on the HDE application right now and getting the approval. And we're finalizing our launch plan. So these are things that we're working on. We do want to emphasize that we're very pleased with the developments that Bill was just outlining on CMS discussions. We probably will not engage in CMS discussions on mesothelioma until GBM is resolved.

Okay, great. Lastly, perhaps, for Eilon. I know that the slide, we see the time lines on your Phase III readouts, et cetera, is unchanged. But can you update us, at least anecdotally, on how enrollment is going on your ongoing studies?

Sure, glad to do that. So as you know, we don't update on exact enrollment. We are on track for meeting the projected lot patient-in and data releases that we have released. I can give a little bit more color on basically, trial by trial. But I think the biggest point is that for METIS, we are now -- operationally, we're fully open. So all of our sites across the world are open, with the majority of the sites in the United States. So we've basically completed enrollment of sites. And we're really focusing more on the patient screening and enrollment aspect of the trial. I do think that this is also important for us because METIS does focus on radiation oncologists, okay, which is -- it's more than just a trial-specific population of physicians. It's actually a strategic imperative for us across all of our indications, okay, to educate radiation oncologists on Tumor Treating Fields. And actually, METIS is a one step in that direction. So as I said, we're on track for last patient-in in late 2019 and data in 2020. For LUNAR, for our non-small cell lung cancer trial, the -- we're still in the stage of increasing number of sites, okay. We have more than 30 sites across the United States and Canada right now. And we're working very hard to support the IRB approval processes and all the different aspects of site start-up. So that's, really, most of our emphasis at the moment on the LUNAR trial. I will stress the fact that PANOVA 3, our pancreatic trial, is still in very early stages of clinical ramp, okay. We have 13 sites currently open. And we're opening sites all the time. Interestingly, in pancreatic cancer, it is -- we're seeing a lot of interest from investigators, okay. In fact, we have more requests than we can entertain for opening sites, including major academic centers. So I think the enthusiasm there is there, and now we're acting upon it.

Our next question comes from the line of Cory Kasimov with JPMorgan.

This is Shawn on for Cory. So I guess in the event that Optune is approved for mesothelioma, will you be able to sort of leverage the ongoing conversations [with Baird] both in the U.S. and ex U.S., especially in terms of Medicare reimbursement? I'm just wondering if there's sort of some of the groundwork that's already being laid in your current conversations that can be used to bring forward in your subsequent conversations for other indications?

Yes, this is Bill. Again, as Wilco said, I think it's a little early to speak specifics in mesothelioma. However, I think you're -- the inference in your question is absolutely correct. When we started, of course, with GBM, it was a conversation about what is Tumor Treating Fields therapy. It was often a conversation that included a lot of physics, a lot of preclinical explanation. And I think we are well beyond that now. With the established approvals and reimbursements for GBM, I expect it will be a very different conversation and will certainly start in a very different place than the very basic place that we started with GBM.

Great. And then maybe you can talk a little bit about the genesis of the liver cancer program. Just wondering why this indication specifically. And maybe, what have we seen so far that gives you confidence.

Eilon, can you talk a little bit about work in liver?

Sure, yes, I'm happy to do that. So first of all, our -- let's go back to the basics. Tumor Treating Fields are definitely a -- they're a platform technology. It's one mechanism or one basic set of mechanisms that should work in multiple different solid tumor types. All of our preclinical evidence to date has shown that, really, any cancer type we've tried to treat preclinically, we've had success. There are different, of course, different treatment parameters and different optimizations we can perform at the preclinical level, and we translated that into the clinic. And I alluded to that in the prepared remarks as well. There's a lot of preclinical work which goes in, and we usually don't share this and we don't talk about it too much, but we don't just jump into the clinical trial. The HEPANOVA trial, our liver cancer -- beginning of our liver cancer program, is based on good, strong preclinical data. It's also based on simulation studies, on distribution and field intensities that we can achieve within the liver, which are very good. And so -- and of course, the safety results we have to date from our existing data set from pilot clinical trials in the torso, that had shown no additive systemic toxicities with chemotherapies. And so we feel very confident moving into another disease state, where local regional control of the disease can lead to improved patient outcomes.

(Operator Instructions) Our next question comes from the line of Difei Yang with Mizuho Securities.

So just a quick one, really, from a research perspective. Now that you have positive readouts on mesothelioma, how do you think about the probability of success for non-small cell lung cancer? The reason I'm asking that is that both are related to lung. And do you see any potential read-throughs?

Eilon?

Yes, sure. So look, I think first of all, it's the -- our encouraging data in mesothelioma, actually, they give us a certain level of confidence in something which we understand but physicians don't necessarily always get. And that is the distribution of the fields within the body. So electric fields within the chest, okay, do penetrate the entire chest cavity and can reach the disease no matter where it is there. We have data from a 42-patient non-small cell lung cancer pilot study, which was published in Lung Cancer a few years back, which actually showed tolerability, safety and very promising efficacy of Tumor Treating Fields in advanced non-small cell lung cancer. So I think that, together with the promising mesothelioma data, actually does give us a lot of confidence. And it gives the physicians confidence, I think, those who are doing the study, the lung cancer study, that this is a therapy which can be applied to the lungs. It can be used potentially to treat non-small cell lung cancer, should the study results be positive. And when we combine Tumor Treating Fields with other therapies, such as immunotherapies and taxanes specifically, we do see potential synergy preclinically, which we're trying to move into clinical utility in the LUNAR study.

Okay. And then I have just a quick question on the CMS process. So do you -- would you update us for that 90-day LCD decision? And additionally, roughly how many devices do you think are in the same category of Optune right now?

Again, I can't confirm the 90-day process for the LCD decision. And again, we submitted on June 20, so that's the benchmark. With respect to the other devices in the category, again, I don't really have an idea, to be honest. But it would cover things like Optune, which are therapies that are quite advanced and that are used by the patients in the home setting. I think if you look, there are more modern medicines like this in the category. An issue that CMS has had is that traditionally, this was the group that focused on things like oxygen bottles and walkers. And they just were not equipped to deal with things like Optune. So this is part of the reason why it was a multiyear process. It was a fundamental issue with CMS. And particularly, in the last year, we've seen a real determination by the administrator and her chief lieutenants to solve this problem. And we're very happy finally with the progress that they've made. And again, that's why we submitted. We've been -- we thought we had a very good case for LCD determination, given all the advancements and all the data that had been presented. But we were not willing to submit until there was a statement about the pricing methodology.

And I'm showing no further questions at this time. I would now like to turn the call back to Mr. Bill Doyle for closing remarks.

So I want to thank everyone for their interest in Novocure. I think management was extremely pleased with the progress that we've made during the quarter, both in terms of growing and refining our GBM business, and of course, the progress that we're making in the clinical pipeline. And I do want to take this opportunity to thank all of the Novocure employees worldwide. As you can imagine, a company that is a relatively new company, that's growing a global business and running the number of Phase III clinical trials plus the preclinical work that we're doing, requires incredible dedication from a really incredible team, and I want to thank them.

So take care, everyone, and we'll see you next quarter.

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