Novocure Ltd (NVCR) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NovoCure Third Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, this conference call may be recorded. I would like to turn the conference over to Ashley Cordova, Senior Vice President of Finance and Investor Relations. You may begin.

Good morning, everyone, and thank you for joining us to review NovoCure's third quarter 2018 performance. I am 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 & Development, Eilon Kirson. The slides presented today can be viewed on our website, www.novocure.com, by clicking on the link for 2018 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 statement, 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 9 months ended September 30, 2018, are available in our press release and in our 10-Q, both of which were released earlier this morning.

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

Thank you, Ashley, and good morning, everyone. Q3 2018 was another solid quarter for NovoCure, with continued revenue growth, supported by commercial momentum in newly diagnosed GBM and tangible progress in our clinical development programs. We reported revenue of $64.8 million in Q3 2018. The number of patients on therapy has grown for 15 consecutive quarters since the initial presentation of our EF-14 data in newly diagnosed GBM, and we exited the quarter with more than 2,250 active patients on Optune. We have established commercial operations in 6 countries and remain committed to driving adoption of Optune for the treatment of GBM around the globe.

This quarter, I am particularly pleased with the strategic collaboration we announced with Zai Lab. Zai Lab is a Shanghai-based biopharmaceutical company that shares our passion for bringing innovative treatments to patients in need. The collaboration agreement grants Zai Lab a license to commercialize Optune in China, Hong Kong, Macau and Taiwan and establishes a development partnership intended to accelerate the development of Tumor Treating Fields in multiple solid tumor indications.

The Zai collaboration is aligned with our priorities to make Optune available to patients throughout the world and to develop Tumor Treating Fields in indications beyond GBM. I look forward to working with the Zai Lab team.

Speaking specifically of progress in our clinical pipeline, we recently submitted a Humanitarian Device Exemption, or HDE, application to the FDA for approval in malignant pleural mesothelioma, which we believe brings us one step closer to our first indication outside of the brain. We believe the combination of our growing commercial business in GBM and the pipeline potential of Tumor Treating Fields in a variety of other solid tumor indications differentiates NovoCure from most companies at our stage of development.

Before I hand the call to Asaf, I want to review the status of our discussions with Medicare. As you know, in June 2018, we submitted a local coverage determination, or LCD, reconsideration request to the Medicare DME MACs. Per CMS and Medicare policy, the 2 DME MACs will issue a single joint policy applicable in all DME regions. Our decision to file for coverage followed the announcement by CMS that it developed a pricing methodology for newly covered DME products that will recognize current commercial pricing and that this information will be considered when establishing a new Medicare fee schedule.

CMS finalized the revised guidance to govern how Medicare sets fees for newly covered DME in October 2018 and has updated the Medicare claims processing manual. We believe the implementation of the previously announced language reflects CMS leadership's commitment to modernize how DME is reimbursed by Medicare. In October, the DME MACs confirmed they have accepted our LCD reconsideration request for the treatment of newly diagnosed GBM and plan to take steps to publish a final LCD.

The MACs also confirmed that they plan to follow a new process during the LCD reconsideration, which reflects policy changes resulting from the 21st Century Cures Act. Under the new LCD reconsideration process, the DME MACs plan to assemble a Contractor Advisory Committee, or CAC, prior to publishing a proposed LCD for Optune for newly diagnosed GBM. The proposed LCD will be subject to a 45-day public comment period, and following the CAC and comment period, a final LCD for newly diagnosed GBM will be published. The LCD will take effect at least 45 calendar days following publication of the final LCD to allow adequate notice to the provider community. The DME MACs have not provided a specific timeline, but have confirmed they are working diligently on the process for Optune.

With that, I'll now hand the call over to Asaf.

Thank you, Bill. Prescriptions for patients with newly diagnosed GBM continue to grow in the third quarter, driven primarily by prescriptions from radiation oncologists in the U.S. and Germany and neurosurgeons in Germany and Japan. We believe that radiation oncologists are very strong partners for the use of TTFields for GBM. We believe that patients are more likely to choose Optune upon receipt of a confident physician recommendation. As a result, we have initiated several patient-focused programs to drive patient awareness of Optune and its unprecedented 5-year survival data in newly diagnosed GBM.

These initiatives include Facebook Live events, Optune open houses in local markets and an expansion of our buddy program that connects patients and caregivers considering Optune directly with users who have experience with Optune. We also launched a new marketing campaign in August in the U.S. called Put GBM on Pause, Put Life on Play. This campaign highlights Optune's long-term survival and quality of life benefits for newly diagnosed GBM patients in a way intended to resonate with both patients and physicians. We are committed to driving adoption of Optune for the treatment of GBM and are equally focused on advancing our pipeline.

In the third quarter, operating income generated by the GBM business contributed to investments in research and development. We continue to believe there is significant value in NovoCure's platform, which combines an established commercial business with significant pipeline potential.

With that, I will turn the call over to Eilon to highlight progress in our research and development activities.

Thank you, Asaf. As you all know, Tumor Treating Fields uses electric fields tuned to specific frequencies to disrupt cancer cell division. This single mechanism of action provides multiple opportunities in solid tumor cancers. In all tumor cell lines we have tested, Tumor Treating Fields has had a consistent effect. We have not yet found a tumor cell line that does not respond to Tumor Treating Fields. In all of our research to date, Tumor Treating Fields has proven to be additive to or potentially synergistic with certain other anticancer agents, with no observed dose-limiting cumulative toxicity.

In our current clinical pipeline, we have 3 Phase III pivotal trials open and enrolling in non-small cell lung cancer, in brain metastases from non-small cell lung cancer and in pancreatic cancer. We also have a Phase II pilot trial open in liver cancer and plan to open a fourth Phase III pivotal trial in ovarian cancer later this year.

In September, we presented the final results of our STELLAR registration trial in mesothelioma. The STELLAR data demonstrated a significant extension in median overall survival among patients treated with Tumor Treating Fields, plus standard of care chemotherapy, compared to historical control data of patients who received standard of care chemotherapy alone. Malignant pleural mesothelioma patients who received Tumor Treating Fields with pemetrexed and cisplatin or carboplatin experienced median overall survival of 18.2 months compared to 12.1 months in a historical control. No serious device-related adverse events were reported.

As noted on our prior calls, we received Humanitarian Use Device designation for the use of Tumor Treating Fields for the treatment of malignant pleural mesothelioma in 2017, allowing for FDA approval via the HDE pathway. In the third quarter, we held a pre-submission meeting with the CDRH lung group of the FDA, and we have recently submitted our HDE application, which we believe brings us one step closer to our first potential torso indication.

We have seen significant growth in the number of publications and abstracts on Tumor Treating Fields in recent years, which we believe has led to increasing awareness of Tumor Treating Fields across multiple disciplines. This research informs both our clinical and engineering plans as we look to further develop our platform technology. Previously presented analysis of EF-14 data demonstrated that more time on Optune predicted an increased survival benefit.

At ASTRO earlier this week, Dr. Matt Ballo, a radiation oncologist at West Cancer Center, presented a post-HOC analysis of patient data from our EF-14 Phase III pivotal trial, which demonstrated that higher electric field intensity and power density delivered to the tumor bed were associated with improved overall survival, independent of compliance. Power density was the most significant driver. For Tumor Treating Fields, delivered dose can now be defined as a factor of both power density at the tumor bed and time on therapy. Based upon these findings, we believe influencing the delivered dose of Tumor Treating Fields has the potential to further improve patient outcomes.

Similar to the way one thinks of radiation therapy as a therapy applicable to many types of solid tumor cancers, we believe that over the years and as more supportive evidence is generated, Tumor Treating Fields has the potential to be thought of in the same broadly applicable manner.

I look forward to sharing progress towards the realization of this vision in future calls. With that, 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 third quarter in a strong financial position. Third quarter net revenues were $64.8 million, growing 29% year-over-year and growing 5% quarter-over-quarter. This represents trailing 12-month revenues of more than $232 million. Sequential revenue growth was driven both by active patient growth and by ongoing improvements in the gross to net spread. Improvements in the gross to net spread were primarily driven by an increase in the proportion of claims for patients with newly diagnosed GBM and the resulting increase in reimbursement approval rates on case-by-case basis claims.

In Germany, the approval rate for individual claims is now approaching 60%. In September 2018, the German Federal Joint Committee, or G-BA, announced that they will evaluate Optune for newly diagnosed GBM without the need to develop additional evidence through a clinical trial. This decision starts a regular methods evaluation process for newly diagnosed GBM through IQWiG, the German Institute for Quality and Efficiency in Healthcare. This is an acceleration of our previously anticipated timeline to secure national reimbursement for Optune in Germany through the 137e pathway. We believe this speaks to the strength of our EF-14 data. We continue to bill payers for individual cases as we advance through the national reimbursement review process in Germany.

Gross profit in the quarter was $45.8 million, reflecting a 71% gross margin. Ongoing efficiency initiatives and improvements in the gross to net spread have both contributed to margin expansion.

Moving down the income statement. We continue to increase investments in research and development, with $13.1 million in R&D expenses in the quarter. We have 3 ongoing Phase III pivotal trials, creating the potential for multiple interim or final data readouts within the next 3 years. With an advancing clinical pipeline, we anticipate that R&D expenses will continue to increase in future quarters.

Our SG&A expenses were $38 million, including $8.8 million in noncash share-based compensation. Driving operating leverage in our commercial business remains an ongoing focus, and we continue to see the results of our efforts.

Our third quarter 2018 operating loss was $5.2 million, with operating income generated by the GBM business, contributing to investments in research and development. Net loss for the quarter was $11.7 million or $0.13 per share. We had positive net cash flow from operations in the third quarter of $5.6 million, with $1 million net cash used in investing activities, principally related to investments in PP&E. We ended the third quarter with more than $227 million cash, cash equivalents and short-term investments, an increase of $8.7 million versus the second quarter. We believe we have an extended cash runway that provides NovoCure with financial stability and flexibility as we execute our core strategies.

NovoCure is a mid-cap global oncology company with a proprietary platform, an established commercial business and significant upside potential from an advancing pipeline in multiple solid tumor cancer indications. We are focused on 2 clear priorities: first, to provide commercial adoption of Optune; and second, advancing our clinical pipeline to treat a range of solid tumor cancers. We continue to believe we are well positioned to execute on both fronts.

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

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

So maybe, Bill, a big picture question, right? So in this environment, for [road stocks] or where the numbers are not in line with the -- where Street numbers are, it's been a really challenging environment. So maybe help frame the context of script trends, right, because I understand that number moves around quite a bit. Was this something that happened with recurrent GBM or newly diagnosed? I know you mentioned radiation oncologists as being the primary drivers. So is there something changing? And how should we be thinking about scripts going forward?

Good morning, Vijay, and thanks very much for your question. So I'll start, and if Asaf has any comments, he can add on. So again, this was a very solid quarter for NovoCure, with progress in both of our key strategy focus areas, commercial growth as well as developments in our clinical programs.

With respect to scripts, our real focus, of course, is, in the long term, to provide Optune to all the patients around the world that can benefit. Our focus specifically is on growth in newly diagnosed GBM. This is where patients benefit the most from therapy and where, of course, the company benefits the most because we have a longer duration of therapy. We saw continued growth in that area. And that also, I think, reflects the continued confidence of clinicians in the therapy because they're using it first.

With respect to the prescribers, radiation oncologists, neuro-oncologists -- pardon me, neurosurgeons and radiation oncologists are all partners with respect to GBM. We find, however, that this is a natural fit with the radiation oncology community. Eilon detailed data, very impressive data, that was just presented at ASTRO with respect to the effect of power density on the overall survivals. It's absolutely clear that as power density increases, the overall survival also increases. These are the kind of data that radiation oncologists are used to dealing with. They understand it. So all of the prescriber groups are important, but I think long-term, the radiation oncologists are our natural partners with respect to Tumor Treating Fields.

That's helpful. Maybe a couple of positives in the quarter was -- one was the German government deciding to go ahead with the reimbursement process without the need for a clinical trial. And obviously, we had the CMS update. So I just want to touch on both of those topics, right? So relative to Germany, how -- when we -- when the timeline is being pulled forward, is this now -- is -- can we expect this addition within the next 6 months or 12 months? Like what's the process and how should we be thinking about German reimbursement rates trending up or when that 60% reimbursement takes up to 100%?

And second, on CMS LCD update, I think you mentioned it's a new process that they're following, the 21st Century Cures Act. So you have the CAC committee. So who is involved in the CAC committee because I think you had a Washington State tech assessment recently, so I'm not really sure how all of those flows in. So any comments around CMS, your comfort around reimbursement trends being positive on the CMS side, I think that would be helpful.

So Vijay, that's a lot of questions in one statement. But let me try and break it down. So simply, we believe that the news in Germany and CMS are both very positive developments for NovoCure. I'll start with Germany. The fact that the G-BA determined that they do not require additional clinical evidence, we view, and I think it was communicated to us, that it's the result of the strength of the EF-14 data and that no additional clinical evidence is required. So while we don't know the precise timing of any governmental process, we believe that this does accelerate the process by 2 to 3 years.

That said, we are -- and again, I think it's the result of the strong EF-14 data. We're now receiving reimbursement for approximately 60% of the prescriptions that are filled in Germany. That number has continued to rise, and we will continue to work to increase that further. But I think the takeaway here is good news for NovoCure, increased confidence in Optune therapy for newly diagnosed GBM and a dramatically accelerated timeline to governmental coverage.

With respect to Medicare, here, we also believe that this is good news on a number of different fronts for NovoCure. As I stated in my comments, it's clear to us, and I think this is, to some degree, as a result of our conversations, that the leadership of CMS is committed to modernizing the way that they make decisions and the way that they reimburse novel DME, and this is the category where our therapy falls. And so I think for future indication, this is all going to be very good.

One of the most important things is this -- and this was the result of the 21st Century Cures Act, this is now going to be a much more transparent process and will include feedback from the community. I don't think we know precisely who will be represented on the CAC. I'd mentioned to you before, we don't believe that this Washington analysis has anything to do with how NovoCure will be viewed, and then we think at -- there's already very positive, call it pharmacoeconomic, data on Optune therapy in GBM and we expect more of that to be developed. But this is a -- now there's a defined process. In these calls before, we've always said we feel good, but we don't know what the process is. Now there's a process, and we also -- while we don't have exact timing, we do have the commitment from CMS, and this is the result of direct conversations, that they are focused on Optune and proceeding deliberately with the process.

Our next question comes from the line of Difei Yang of Mizuho Securities.

Just a couple. So Bill, if you think about, on the very high level, your growth for GBM patients in the U.S., where do you think we are on the growth curve? Are we still mid-cycle growth, or do you think we're kind of getting to the flat part of the growth?

Yes. So thanks for the question. Again, I think that that is a very important question. We do -- as everyone knows, we don't guide. I think that this -- and the reason that we don't guide is that this is -- difficult for us to predict the timing of this. This is still a relatively small number of patients. The therapy is new and requires the education of the clinicians. And as I mentioned earlier, it's the education of neuro-oncologists, neurosurgeons and radiation oncologists.

I think we indicated in the remarks that we're making real progress here and particularly with our natural partners in radiation oncology.

That said, we're today at approximately 28% to 30% penetration in the U.S. We believe there are far many more patients in the U.S., Germany and Japan, our active markets who can benefit. And I personally don't believe that we are near to where we will be ultimately in GBM. That said, it's not easy to predict the timing, and we've always said it will be sort of a choppy path to -- I think when it comes to the peak.

Yes. And then turning to the power density and electrical fields, are these parameters -- can be changed, or dialed up or down by the physicians?

So thank you very much. That's an excellent question. Today, actually, physicians can, by performing a planning procedure, place the arrays in different locations on the patient's head, leading to an optimization of the dose, of the delivered dose to the patient and the power density in the tumor bed. So yes, this is something that a physician can actually act upon. And it's actually a joint effort here. So it's -- the physician can optimize the delivered dose by increasing the power density to the tumor bed, and then with good support and by educating patients, they can help patients remain on therapy for more time. And that leads to better compliance, better outcomes, which we have discussed in the past, that compliance is correlated with the overall survival in the EF-14 data set, and by optimizing both of those aspects, hopefully, lead to the best patient outcomes.

Our next question comes from the line of Larry Biegelsen of Wells Fargo.

So again, a couple of questions on the U.S., which people are perceiving to look like it's plateauing based on the prescription data, the prescription number. So Bill, can you give us more color on what you're doing to drive greater adoption? I heard some new programs in the prepared remarks, but a little more color on what you're doing to drive greater adoption, even by your preferred metric of new -- newly diagnosed prescriptions. It was pretty similar from second quarter to third quarter at slightly over 900. So what are you doing to drive greater adoption? And I had a couple of follow-ups.

Sure. I will let Asaf comment specifically on that.

So first of all, thank you very much for the question. I think that as Bill mentioned, and we also mentioned that in previous calls, we're talking about a small indication and the prescription is something that can be choppy from time to time. The important thing is that if I'm looking on the last full year, which we started in recurrent GBM, which was 100% of our treated population, right now, we -- our -- 75% of our scripts come from newly diagnosed patients. And this is the important thing. This is the patients that can benefit more. And also, this is the patient that can -- basically driving the business, they are staying more, a longer time on therapy.

So we feel very good about the fact that we will continue to, basically, to increase the newly diagnosed patient in our -- from our total patients on treatment. And we do launch a few marketing campaigns. The first one is like Put GBM on Pause, Put Life on Play, and we see that -- we start to see that in the patient and also in the physician side, we would start to see that these campaigns are working. And -- but all in all, I think that our -- the fundamental business has remained unchanged, and we feel comfortable and we are -- we believe that we will continue to grow the -- our business.

And then, Bill, how much -- on CMS, how much of the process is going to be public? And is it still plausible that we could have a positive decision in 2019? At this point, we're trying to figure out how to model 2019. Some of us have some assumptions for Medicare reimbursement in 2019. So -- and then just lastly on mesothelioma, what's the plan for the rollout? Are you going to give the product away for free? What's the plan for reimbursement? And is there going to be an investment needed in the sales force to drive adoption?

Yes. So thanks, Larry. I'll take the first part on CMS, and then Asaf will answer the question with respect to the mesothelioma rollout. So the simple answer is that I think it's extremely plausible that we complete the process in 2019. As I said, CMS hasn't promised anything to us, but they have told us specifically that this is the top of the pile and that they are going to act with real deliberate attention to this. As you can imagine that -- timing is something that we focused on with them, and the direct answer is it's absolutely plausible that this happens in 2019.

And regarding mesothelioma, so let's start from the end of your question if we're planning to give it for free. Well, we are planning to use the same method that we have used in GBM, and we feel very comfortable with that method. However, regarding CMS, we are not planning to engage anything with CMS regarding mesothelioma before we have finalized the GBM. I will -- we're right now building our launch plans and -- but in general, we are -- not believe that we will need to build a huge business unit for that.

(Operator Instructions) Our next question comes from the line of Cory Kasimov of JPMorgan.

This is Matthew on for Cory. Just wondering on the clinical front, for the HEPANOVA trial, given that it looks like you're only recruiting 25 patients, and these patients tend to progress pretty quickly, I'm wondering if you're able to give us some color on potential timing for the data.

So thank you very much for that. The pilot HEPANOVA trial is open for enrollment. We do anticipate to have our first patient in this year. Okay, we do not yet have first patient in. We will, of course, announce this when it happens. And yes, since it's about 25 -- it's 25 patients on the trial, we're looking -- it will take probably about a year to enroll. So you can expect last patient in end of next year, I think that's very reasonable.

Great. And then any internal threshold for this indication as far as like what you'd like to see?

Can you repeat the question, I'm sorry?

Any threshold or any bar that you'd like to see in this initial pilot study as far as...

Well, this is for -- okay. Yes, that's always a good question. The -- it's a small study. Okay? This is a pilot study. It's going to be the first time we're actually treating hepatocellular carcinoma patients with Tumor Treating Fields. And our first target is always to prove safety, okay? Although we do not expect Tumor Treating Fields to cause any systemic toxicities, and that's consistent throughout all of our clinical data to date, you always need to look at that first, okay? It's also a slightly different population than other diseases. Each disease state has a different color of different type of populations. And we need to see that these patients use the therapy properly, that it's feasible.

I think all of this is very clear to us that it should be okay. I mean, we're not expecting any issues there, but that's really the primary target. And then the results serve usually to power our larger studies and actually see what can we reach and what type of benefit do we expect to be able to give these patients in these larger studies.

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 first of all, I'd like to thank everyone on the call, and I'd like to thank, as I typically do, the NovoCure team for another solid quarter of performance. I can't thank you enough for the continued growth and the drive to increase the number of prescriptions for newly diagnosed GBM in the markets that we serve. I want to thank you for the execution of the Zai Lab strategic partnership in China. We think this is extremely important for our future, to both bring our therapy to the very large Chinese patient community, but also to leverage the excellent clinics in China to advance our -- and accelerate our clinical pipeline.

I need to thank our group, our regulatory group and our reimbursement group for the progress with the DME MACs in Medicare. I think this is the first time that we have, really, a tangible process to reach the goal that's important to all of us, which is to receive appropriate reimbursement for the Medicare patients that we're treating, and also for our clinical and regulatory team for submitting the HDE application to the FDA for malignant pleural mesothelioma. This is an incredible amount of work for those of you who have made submissions to the FDA, and to do it in this period of time is really extraordinary, and to open the Phase II trial in liver cancer that was discussed.

For our investors, I want to assure everyone that the fundamentals of our investment pieces are unchanged. We continue to drive the commercial business in GBM around the world. That business is contributing to supporting our R&D pipeline. That pipeline includes the 3 open Phase III trials and the soon-to-be-open fourth trial in ovarian cancer, again, an extraordinary effort around the world.

And to our finance team for assuring that we can do this with the resources that we have on our balance sheet without requiring additional capital raises. So another solid quarter, great progress, and we look forward to reporting future progress. Thank you.

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.