NovoCure Limited (NVCR) Q1 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Novocure First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this call is being recorded. It is now my pleasure to introduce Senior Vice President of Finance and Investor Relations, Ms. Ashley Cordova.

Good morning, everyone, and thank you for joining us to review Novocure's first quarter 2019 performance. I am joined today by our Executive Chairman, Bill Doyle; our CEO, Asaf Danziger; our CFO, Wilco Groenhuysen; and our Chief Medical Officer, Ely Benaim. The slides presented today can be viewed on our Web site, www.novocure.com, by clicking on the link for first quarter 2019 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. Financials for the three months ended March 31, 2019, 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. With more than 2,600 patients on Optune as of March 31, 2019, we delivered another quarter of strong financial performance. We posted 73.3 million in net revenues representing 41% growth versus the first quarter of 2018. Our clinical pipeline continues to advance creating a significant market expansion opportunity. Our HDE application for malignant pleural mesothelioma is under review at the FDA and, with the first patients enrolling in our INNOVATE-3 trial in March, enrollment is now ongoing in four phase 3 pivotal trials. Data readouts from these trials are expected beginning in 2021. In addition to the compelling value creation potential of our advancing pipeline, we have several catalysts in 2019 to fuel continued top line growth. We expect a decision from CMS regarding our coverage reconsideration request for newly diagnosed GBM in the Medicare population and we expect a decision from the FDA regarding our HDE submission for malignant pleural mesothelioma. In addition, Zai Lab is working to obtain a trial wavier for regulatory approval of Optune in China for newly diagnosed and recurrent GBM this year and is actively preparing for a potential launch. I’ll delve into these three catalysts specifically before handing the call over to Asaf for a commercial update. We continue to work with payers to expand access to Optune for patients with GMB. As of March 31, 2019, more than 245 million Americans had coverage of Optune for newly diagnosed and/or recurrent GMB. Medicare is the sole remaining large U.S. payer who consistently denied coverage for Optune. As a reminder, 20% to 25% of our U.S. active patient population are beneficiaries of the Medicare fee-for-service program. In the fourth quarter of 2018, the Medicare DME MACs accepted our local coverage decision reconsideration request for the treated of newly diagnosed GBM. Novocure is the first company to progress through a recently updated DME MAC process that reflects policy changes in response to the 21st Century Cures Act. In conformance with the updated process, the DME MACs met in March with a Contractor Advisory Committee or CAC intended to inform the healthcare professional community of the evidence used in developing coverage determination and to promote communication between Medicare and the healthcare professional community. The CAC presentation and discussion centered on the strength of the scientific data and the general acceptance of Optune for the treatment of newly diagnosed GBM by the healthcare professional community. At the conclusion of the day, the CAC panel expressed their confidence that there is sufficient evidence to determine that Optune provides net positive health outcomes in the Medicare eligible population. We believe the CAC process was a positive step forward in a multistep process. The DME MACs are now working to draft a proposed local coverage decision or LCD for newly diagnosed GBM. Per CMS policy, the two DME MACs will issue a single joint LCD policy applicable in all DME regions. The timing of the publication of the proposed LCD is not specified by CMS policy guidelines. Once published, the proposed LCD will be subject to a 45-day public comment period and following that public comment period, a final LCD will be published. As a reminder, our decision to file for coverage followed the announcement by CMS that it had developed the methodology that will recognize commercial pricing for newly covered DME and that commercial pricing information will be taken into account when establishing a new fee schedule amount. Moving to mesothelioma, we submitted a humanitarian device exemption or HDE application to the FDA in October 2018 for approval in malignant pleural mesothelioma based on the successful completion of our STELLAR trial. The STELLAR trial demonstrated the significant extension of median overall survival to 18.2 months for patients treated with Optune plus pemetrexed and cisplatin or carboplatin. No serious device-related adverse events were reported. We received comments from the FDA on our HDE application and submitted a response in March. The FDA has 75 days until mid-May to review our response and act on the submission. Our discussions with the FDA have been constructive and our U.S. commercial teams are preparing for a 2019 launch. In the United States, the majority of mesothelioma patients are treated at approximately two dozen centers of excellence. We are currently in the process of hiring five mesothelioma territory managers to call on the multidisciplinary teams at these centers. Pending regulatory approval, their primary call point will be the radiation oncologists certified to prescribe Optune for mesothelioma. They will also work to educate medical oncologists and support the institutional review board approval process required under the HDE approval pathway. Upon approval, we will begin our dialogue with payers for coverage of malignant pleural mesothelioma. Positive coverage policies for GBM will not apply to mesothelioma and we anticipate that claims during the early launch phase will go through an appeal process with payers, similar to our early experience with GBM. Another 2019 catalyst for growth is the potential approval of Optune for GBM in China. As a reminder, we announced the license and collaboration agreement with Zai Lab in the third quarter of last year. Zai has begun to treat commercial patients in Hong Kong and has taken steps to progress the regulatory filing for Optune in China. Zai is seeking a trial wavier from the Chinese regulatory authorities enabling a potential launch in China as early as the fourth quarter of 2019. On the clinical development front, Zai is working to finalize the protocol for a phase 2 pilot trial in gastric cancer and is collaborating closely with our clinical teams to initiate trials in other key indications in China. I will now hand the call over to Asaf to review our first quarter commercial execution.

Thank you, Bill. Active patients, our main revenue driver, grew by 248 from 2,383 at year end to 2,631 at the end of Q1. The number of prescriptions for patients with newly diagnosed GBM, our main driver of active patients, also continued to grow. We had strong total prescription growth in Germany and Japan. The total number of prescriptions in the U.S. was affected by a decrease in the number of prescriptions for recurrent GBM which fluctuate quarter-over-quarter. Physicians are the primary source of information on treatment options for GBM patients. We believe the strength of physician recommendation often influences whether or not a patient will start Optune. Also the confidence and communication skills of individual prescribers at key centers can have a noticeable impact on our prescription flow. We have developed specific marketing resources to enhance communication across the multidisciplinary teams at cancer treatment centers and to prepare physicians to confidently recommend Optune to patients. We believe these new marketing resources already are having an impact in the field. I met with a radiation oncologist at the hospital in Bavaria recently who shared his personal experience. Our account managers follow the multidisciplinary treatment teams at cancer centers. At his center, German presentation on the importance of physician-patient communication made an impression on the neurosurgeon. This neurosurgeon is now routinely educating patients about Optune during his pre-surgery consults. As a result of this early education, the radiation oncologists who sees the patient after surgery finds it’s much easier to present Optune to patients and has seen a noticeable increase in early patient acceptance. We are rolling out similar programs globally. In Q1 2019, we drove 41% revenue growth compared to Q1 2018. In parallel, SG&A expenses grew by only 20% reflecting our continued commitment to delivering operating leverage in our commercial business. Our R&D investments grew 53% compared to the first quarter of 2018, as we now have four phase 3 pivotal trials and one phase 2 pilot trial open and enrolling. Notably, we continue to fund increased investments in our clinical pipeline and technology development with cash flow from the GBM business. With that, I will now turn the call back over to Bill for an update on our pipeline.

Just last week, the International Journal of Radiation Oncology, Biology and Physics known in the field as the Red Journal published data demonstrating that higher doses of Tumor Treating Fields improved survival of newly diagnosed GBM patients. This publication represents the first peer-reviewed analysis demonstrating patient level dose response to Optune. It provides a rigorous definition for Tumor Treating Fields dose and sets a framework for future work on Tumor Treating Fields dose symmetry and treatment planning. The Red Journal is the official journal of the American Society for Radiation Oncology and we believe that this prestigious publication will drive increased awareness of Tumor Treating Fields and the important role of treatment planning with the radiation oncology community. In order to further advance the scientific evidence supporting the use of Optune in GBM and gather additional information about Optune’s optimal use, we plan to initiate two additional randomized trials in GBM starting as early as 2019. The first trial will be designed to study the potential benefit of initiating Optune with radiation therapy versus initiation post radiation and it is intended to support possible label expansion. The trial will mirror the design previously contemplated in the GBA trial. We believe this trial will add key evidence supporting further adoption by radiation oncologists, a key customer segment for Optune. The second trial will be designed to identify potential efficacy signals when Optune is combined with temozolomide and several other therapeutic agents in a multifactorial trial design and is intended to identify optimal combination treatments. While the treatment of GBM provides an important opportunity for Novocure to improve patient outcomes and grow revenue, we believe it represents the tip of the iceberg for the company. We enrolled the first patients in our phase 3 pivotal INNOVATE-3/ENGOT-ov50 trial in ovarian cancer during the first quarter of 2019. The INNOVATE-3 trial will study Optune in combination with weekly paclitaxel in 540 patients with platinum-resistant ovarian cancer. Both the European Network for Gynaecological Oncological Trial groups or ENGOT and the U.S.-based GOG Foundation are collaborating with us on INNOVATE-3. ENGOT and GOG were involved in the development of the trial and the collaborations are intended to promote the INNOVATE-3/ENGOT-ov50 trial and to guide and facilitate enrollment at leading cancer centers in Europe and the United States. We are extremely pleased to partner with such respected third party clinical trial networks and view their association with Novocure as a sign of the increasing interest in Optune from the clinical community. We continue to perform basic research on Tumor Treating Fields as do members of the scientific community. At the American Association for Cancer Research annual meeting 2019 in late March, there were 48 presentations and a major symposium on Tumor Treating Fields. We announced six inaugural AACR-Novocure Tumor Treating Fields grant recipients in a noteworthy partnership that will provide critical resources to accelerate progress in the expanding field of Tumor Treating Fields research. Our teams came back from AACR energized. Attendance for the Tumor Treating Fields poster presentation and symposium were good and our team believes the questions received reflected genuine interest in the mechanism of action and a shared desire to better understand how Tumor Treating Fields can extend survival in some of the most aggressive forms of cancer. With that, I will turn the call over to Wilco to review our first quarter financial results.

Thank you, Bill, and thanks to everyone for joining us on the call this morning. Novocure delivered another quarter of strong financial performance. First quarter net revenues were 73.3 million growing 41% year-over-year and growing 5% quarter-over-quarter. Year-over-year revenue growth was driven by an increase of 622 active patients representing 31% growth and an increase in the net revenues per active patient. The year-over-year increase in net revenues per active patient was primarily driven by the improving reimbursement approval rates in Germany and by growth in Austria and Japan. With more than 2,600 patients on therapy as of March 31, 2019, the number of active patients on Optune has grown for 17 consecutive quarters since the initial presentation of our EF-14 data in newly diagnosed GBM. We expect to continue to see active patient growth driven by the steady growth in newly diagnosed prescriptions globally over the prior 11 quarters. Gross profit in the quarter was 53.5 million reflecting a 73% growth margin. Gross margin continues to benefit from increasing scale and ongoing efficiency initiatives. We are working hard to sustain and improve this key metric. Moving down the income statement, we continued to improve investments in research and development with 17 million R&D expenses in the quarter, up more than 50% versus the first quarter of 2018. As we work to enroll patients across four phase 3 clinical programs, we anticipate an R&D expense that will continue to increase in future quarters. Our first quarter SG&A expenses were 42.6 million, including 8 million in non-cash share-based compensation. SG&A expenses include increased marketing expenses to support Optune adoption and increases in our sales force globally. Our first quarter operating loss was 6.1 million and includes 17 million in R&D investments. Net loss for the quarter was 12.2 million, or $0.13 per share. We ended the first quarter with 256.6 million in cash, cash equivalents and short-term investments, an increase of 10.7 million from the prior quarter. Net cash flow used in operations was 4.3 million and we believe we have an extended cash runway that provides Novocure with financial stability and flexibility as we execute our core strategies. We believe Novocure has reached an important inflection point transitioning to cash generation, expanding globally and working to extend survival in some of the most aggressive forms of cancer. The trailing 12-month revenues approaching 270 million, five indications in our late-stage pipeline and a strong balance sheet, we believe we are well positioned to deliver both continued near-term revenue growth and significant growth in long-term shareholder value. Thank you for your time this morning. Now I will turn the call back over to the operator for questions.

Thank you. [Operator Instructions]. Our first question comes from the line of Vijay Kumar with Evercore. Your line is now open.

Hi, guys. Thanks for taking my question. Maybe I’ll start with the CAC panel, Bill. It looks like from your comments, you sound quite positive. I’m just curious. Have you had any contact with either DME since the CAC panel? And maybe flesh out why you guys feel confident on this CMS reimbursement coming through possibly in the back half?

Sure. So thanks very much for the question. This has obviously been a focus of ours as was described in the opening remarks. Over 245 million Americans have coverage for Optune but the group that doesn’t are the Medicare fee-for-service beneficiaries. So this has been a principal focus of ours. Historically, we have focused to help Medicare develop a process for what they now call novel DME. This is quite different from what they used to focus on which are beds and canes and that sort of thing. And it was a key milestone for us when they changed their guidance to include commercial pricing in their coverage approach. That triggered our filing of the LCD request for coverage and we filed just as CMS was changing their practices for evaluating these sorts of requests. So we’re the first company going through this new process. A key part of that process is the convening of a CAC. So this was the first DME CAC. It was an interesting group. The group that was assembled did not include EF-14 investigators. But nonetheless we presented to the group that did not have a lot of prior knowledge about Tumor Treating Fields. And at the end of the day they voted to support and determine that there was sufficient evidence that Optune provides a net positive health outcome for the Medicare eligible population. So that was the desired goal of that meeting. We achieved it. And now the next step is the drafting of the LCD itself. We believe this is underway at CMS and that will be followed by the public comment period. I’ll just make one note with respect to the public comment period. We do expect tremendous support during the public comment period. All of the relevant patient advocacy organizations have already been in touch with us to determine how they can best support us. And so we think that the process will unfold and that’s why we still remain confident that this will happen in 2019.

That’s helpful, Bill. And then maybe on the script volumes which the street focuses on, it’s becoming slightly more challenging for the street to model out. And I understand there is a new versus recurrent GBM dynamic going on. But I guess just from a headline perspective when we look at the active patient growth which has been growing well above script volumes, maybe just flesh out some of the dynamics here to give some confidence for the street on the script volume growth, particularly on the new GBM side and why that active patient revenue growth in the medium term should remain healthy?

Sure. So first of all, thanks for this question and I want to be – I do want to clarify this issue for everyone on the call. I’d encourage everybody to take a look at Slide 4 of our earnings presentation that shows the trends in newly diagnosed GBM prescriptions. So, of course, our as you call it headline prescription number consist of prescriptions for newly diagnosed GBM and for recurrent GBM. For us as a company we are driving growth and the way our team works is to drive growth in newly diagnosed scripts. This is the point during an evolution of GBM when Optune can have the most benefit for the patients. It’s also the point during which the patients will remain on therapy for the longest period of time. And of course that’s what drives our revenue. So we encourage everyone to first and foremost focus on active patients. That is the key revenue driver. With respect to prescriptions, I would also focus on newly diagnosed where we’ve seen growth in Q1 versus Q1 last year and also growth versus Q4 last year. The fluctuation is in recurrent GBM which will continue to fluctuate up and down. The one thing I would like to emphasize here is that we count only one script per patient. So when we get a newly diagnosed patient and they start therapy, those patients will typically continue on Optune therapy when they or if they progress. We don’t count that script the second time. So another way to think of it is every time we get a newly diagnosed patient script, we get one for newly diagnosed and we get a second one for recurrent GBM. We don’t count them that way. But that is really why we see this strong growth in patients on therapy. We expect to continue to see that growth even though the recurrent scripts will fluctuate quarter-to-quarter.

That’s helpful. And maybe one last one from me. Gross margins here at Q1 really strong, maybe some color on were there any one-off items on the gross margin line for Q1? How should we be thinking about this gross margin? Is this the new run rate level that we should be thinking about? Thank you.

Good morning, Vijay. This is Wilco. The good news is there’s no one-time benefit that affected the gross margin positively. As we said during the script, it’s a consequence of increasing scale which has of course a beneficial impact on gross margin. But also our ongoing efficiency initiatives are bearing fruit, if you want. So the 73% gross margin is not a fluke. It’s a result of hard work and is sustainable.

Thank you, guys.

Thank you. Our next question comes from the line of Cory Kasimov with JPMorgan. Your line is now open.

Hi. This is Arun on for Cory. Thanks for taking my questions. I have a couple of questions for you. The first one is a commercial-related question. Can you talk about what fraction of sales have come from the recurrent versus frontline GBM setting and what’s the duration of treatment in each of the respective settings? And I have a follow up for you.

Okay. So I think the question related to the differences between the first-line and the second-line setting. Is that correct?

Yes, what fraction of sales have come from the recurrent versus the frontline setting.

So in terms of active patients, approximately today 75% of those patients are newly diagnosed GBM and approximately 25% are recurrent GBM.

And can you also talk about the duration of treatment in each of these respective settings?

Sure. So the duration in the recurrent setting remains approximately four months. Actually the duration of therapy in the newly diagnosed has trended up a little bit to about nine months and we’re seeing an average duration in the mix of between 7.5 and 8 months.

And my second question is related to the commercial readiness. I know that you have mentioned in your prepared remarks regarding the approval in mesothelioma setting. So could you please talk about how we could leverage from the existing GBM sales force in preparing for the launch in that particular setting?

So thank you very much for the question. It’s Asaf. First of all, I would like to say that the mesothelioma indication is a very important indication for us. It’s the first indication outside the head or the brain. We are not going to basically sacrifice any sales force from the GBM. And our current plan is to hire another five territorial managers and they’re going to be in the same sale organization but going to be people that will focus on mesothelioma.

Okay. Thank you.

Thank you. And our next question comes from the line of Larry Biegelsen with Wells Fargo. Your line is now open.

Hi, guys. Good morning. Thanks for taking the question. On the Medicare process here, when do we learn about the pricing and how should we think about that today versus commercial?

So, as I mentioned, Larry, our decision to file for coverage followed the CMS announcement that it’s developed this new methodology to recognize commercial pricing. We have submitted our commercial pricing data to Medicare, so they have that. The fee schedule now will be assigned to our current HCPCS code and we would expect that information to come after the LCD reconsideration. So we are – at Novocure we’re very focused on both of course, but we would expect that information, the pricing information to come after the LCD.

Bill, just to be clear; after the final LCD comes out and then we’ll learn about pricing or is it before the final LCD?

We believe it’s after.

Okay. That’s helpful. And then on the METIS trial, could you please give us an update on enrollment? And I know the data release timing is 2021. Just any color and a little more precision on when we might see that data. I know it’s slipped a little bit from initially 2020 to maybe early 2021 in the recent past, but just a little more recent updated precision on that? Thanks for taking the questions, guys.

Yes. Larry, so recruitment now is ongoing at about 100 sites. So we now have all the sites opened and enrolling. We don’t report and as you know sort of a scorecard on recruitment, but we feel that this is proceeding as we hope it will proceed and we think we’re in good shape.

Just let me slip one more in there. Reimbursement in Germany and any update there and I’ll drop. Thanks for taking the questions, guys.

Yes, Larry, Wilco here. Good morning. No real update. As we said in prior quarters, the case-by-case reimbursement in Germany has developed strongly based on the data of TTFields. National reimbursement we don’t believe will have a material impact on the overall reimbursement in Germany. So the application is progressing according to the timelines that were set. We think it will probably lead to positive outcome. But if not a case-by-case basis, we’re successful as well.

Thanks, Wilco.

Thank you. And our next question comes from the line of Greg Fraser with SunTrust. Your line is now open.

Good morning, folks. Thanks for taking the questions. This is Greg Fraser on for Gregg Gilbert. Just want to follow up on the prescription growth and you talked about the decline in recurrent patients. Can you just comment specifically on the U.S. market and what prescription growth was for new diagnosed patients in the U.S. in the first quarter?

Sure. No, we don’t break down the prescriptions by region in that way but we do see that it’s consistent across regions.

Okay. For Medicare, assuming you do get the Medicare coverage for the roughly 25% of patients that are in Medicare that are already being treated, will the positive coverage decisions apply to those patients as they continue on therapy?

Yes. We believe that from the point it becomes active, it will apply to the patients who are currently receiving therapy and new patients as they become active patients. Yes.

Got it. And my last question is on reimbursement for EMEA, specifically for Israel and Switzerland. Can you just give us an update on where you stand in discussions with those countries and whether there are any important decision points coming this year?

It’s Asaf. Thank you for this question. So in Israel, once a year this review of what we call the national reimbursement basket and we hope that – and it’s happened in December, so we hope that we will get reimbursement, national reimbursement in Israel. However, we do start to use the German model in Israel and we hope that we will see in the future the fruit of this patient-by-patient reimbursement. In Switzerland, we are in the middle of the process, which review the package, so we are in ongoing interaction with the authorities in Switzerland.

Thank you.

Thank you. And our next question comes from the line of Difei Yang with Mizuho Securities. Your line is now open.

Hi. Good morning and thanks for taking my questions. So just a couple. The first one is on China. I apologize, you may have commented. I got on the phone a little later. So with regards to China, for the trial waiver, is that specifically related to GBM?

Yes.

Okay. Thank you. And how does the gastric cancer still – for the arrays that pull down the gastric cancer is at more or less similar to mesothelioma configuration, or is it drastically different?

No. So the torso arrays whether they are for mesothelioma or the abdominal applications, they’re all similar. In the brain, we have one size array. In the torso right now we have two size arrays to accommodate different body shapes. They’re based on the same technology and they’re essentially just different size configurations of the same technology.

Okay. Thank you. And then the next question is with regards on the innovation side, I think we have heard about the energy density and the impacts – and its impacts on the clinical outcome. How should we think about timing with regards to the next generation array updates or battery updates, et cetera?

Sure. So, again, as we described today, we were very pleased that the Red Journal has now published the data from EF-14 demonstrating dose response. This analysis now gives us the tools to do just as you described to further improve; first the arrays, the system and also our NovoTAL array planning system. So we have efforts focused on all of those. I think it’s too early for us to predict exactly when these various innovations will become available for patients. And I expect they will come not all at once, but in a series of improved releases over time.

Thank you and congrats on a great quarter.

Thank you.

Thank you. And I’m showing no further questions at this time. So with that, I’ll turn the call back over to Executive Chairman, Mr. Bill Doyle, for closing remarks.

So, we were very pleased to provide another strong quarter at Novocure. We provided progress both in terms of our commercial objective, which is to bring Optune therapy to all the GBM patients in the world who can benefit and within our pipeline to expand the availability of Tumor Treating Fields therapy to a number of the most difficult to treat cancers. I think now with four phase 3 trials underway, a second phase 2 trial underway and additional trials planned, as you heard additional trials in GBM as well as in additional indications, we think Q1 provided us with a strong foundation for the year. We didn’t get a question about this, but I’ll also note our cash balance has continued to increase and we’re pleased that we’re now transitioning to a cash flow generating company so that we can support all of these efforts in the pipeline and in improving the technology with cash generated from our business. So thank you for your interest in Novocure, and we’ll get back to Q2. Thank you.

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