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NovoCure (NASDAQ:NVCR)
Q4 2018 Earnings Conference Call
Feb. 28, 2019 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Novocure 2018 earnings conference call. [Operator instructions] I would now like to hand the call over to Ms. Ashley Cordova, senior vice president, finance and investor relations. You may begin.

Ashley Cordova -- Senior Vice President, Finance and Investor Relations

Good morning, everyone, and thank you for joining us to review NovoCure's fourth quarter and full-year 2018 performance. I'm joined today by our executive chairman, Bill Doyle; our CEO, Asaf Danziger; our CFO, Wilco Groenhuysen; and our chief scientific 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 fourth quarter and full-year 2018 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 lines for questions. Financials for the three and 12 months ended December 31, 2018, are available in our press release and in our 10-K, both of which we released earlier this morning.

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

Bill Doyle -- Executive Chairman

Thank you, Ashley, and good morning, everyone. 2018 was a particularly productive year for Novocure. We entered the year with two clear priorities. First, to drive commercial adoption of Optune for the treatment of GBM and second, to advance our clinical pipeline.

We finished the year with growth in our GBM business globally and tangible progress in our clinical development program. Highlights included growing our annual revenue by more than 40%, presenting our STELLAR data in malignant pleural mesothelioma, enrolling the first patient in our Phase III pivotal PANOVA 3 trial for pancreatic cancer and signing our collaboration agreement with Zai Lab to bring Optune to China. Specific to the fourth quarter, we continue to grow our GBM business globally and invested $15 million in research and development. We recorded nearly $70 million in net revenues and posted our 16th consecutive quarter of active patient growth since the initial presentation of our EF-14 data.

In December, post-hoc analysis of EF-14 was published in The Journal of Neuro-Oncology demonstrating that more time on Optune predicted increased survival. A separate post-hoc analysis presented at ASTRO in October showed that higher levels of energy at the tumor bed predicted increased survival in GBM independent of time on therapy. The Tumor Treating Fields dose density can be defined as the time on therapy times the energy delivered. In our EF-14 trial, patients received the highest dose densities of Tumor Treating Fields at the best survival outcomes.

With this knowledge, our engineering efforts are now geared toward Optune system improvement to increase efficacy and extend survival. Moving outside the brain. We've received comments from the FDA on our application for approval in malignant pleural mesothelioma and are currently preparing our response. We hope to receive approval from malignant pleural mesothelioma in 2019.

Approval for mesothelioma would be the first FDA approval for an indication in the torso. We have three additional Phase III pivotal trials in brain metastases, non-small cell lung cancer and pancreatic cancer and are preparing to open a fourth Phase III pivotal trial in ovarian cancer. We are also recruiting a Phase II pilot trial in liver cancer and are working with Zai Lab to initiate a Phase II pilot trial in gastric cancer in China. We continue to perform basic research on Tumor Treating Fields as do members of the scientific community.

In the fourth quarter, there were 13 presentations on Tumor Treating Fields at ASTRO, 55 presentations on Tumor Treating Fields at the EANO and more than 70 presentations on Tumor Treating Fields at SNO. In December, we announced four inaugural research brands with AACR, the American Association of Cancer Research, representing a joint effort to promote and support innovative research on Tumor Treating Fields. AACR will also include a special session on Tumor Treating Fields at its annual meeting in 2019 titled Tumor Treating Fields, a fourth modality in cancer treatment. Novocure is a high-growth oncology company with significant growth opportunities remaining in GBM and in future potential indications.

Our balance sheet is strong. We ended 2018 with $246 million in cash, cash equivalents and short-term investments. And largely have been able to fund our investments in clinical trials and Optune technology improvements with cash flow from the GBM business. While GBM alone provides an important opportunity for Novocure to improve patient outcomes and grow revenue, it represents the tip of the iceberg for the company.

With that, I'll now hand the call over to Asaf, who will share a bit more color on commercial execution within the quarter.

Asaf Danziger -- Chief Executive Officer

Thank you, Bill. There were almost 2,400 patients on Optune at year-end. The novel prescriptions for patients with newly diagnosed GBM continue to grow in the fourth quarter. Year over year, the total number of prescriptions for patients with newly diagnosed GBM grew 40% in 2018.

In the U.S., total prescriptions grew 4% quarter over quarter. We continue to focus our sales and marketing efforts on increasing physician confidence and belief in the clinical benefits of Optune and increasing adoption in the community setting, particularly among the Asian oncologists. In EMEA, total prescriptions grew 12% quarter over quarter. Notably, net revenues grew 24% quarter over quarter, driven by further improvement in the reimbursement approval rate of individual claims in Germany and by increasing adoption in Austria.

In Germany, the approval rate for individual claims is now almost 65%. 2018 was our first full year of commercial activity in Japan. We signed contracts with more than 100 hospitals to provide Optune therapy to newly diagnosed GBM patients. In 2018, we filled 162 prescriptions and delivered more than $6.3 million in net revenues.

We remain excited about the opportunity to grow adoption of Optune in this key market. Looking forward, we believe there is significant opportunity for further growth in our GBM business across geographies. Our teams continue to focus on driving adoption through physician education, clinical research and well permitted direct-to-patient outreach. We believe there are many more patients who can benefit from Optune than are currently on therapy.

With that, I'll now turn the call over to Wilco to review our financial results.

Wilco Groenhuysen -- Chief Financial Officer

Thank you, Asaf, and thank you to everyone for joining us on the call this morning. We ended the fourth quarter in a strong financial position. Net revenues were $69.7 million, grown 30% year over year and growing 8% quarter over quarter. Sequential revenue growth was driven by an increase in active patients.

Full-year 2018 net revenues were more than $248 million. Gross profit in the quarter was $46.6 million, reflecting a 67% gross margin. Moving down the income statement. We continue to increase investments in research and development with $50 million in R&D expenses in the quarter.

As we work to enroll patients across three Phase III clinical programs, we anticipated R&D expenses will continue to increase in future quarters. Notably, we funded our increased investments in R&D with cash flow from the GBM business. Our fourth-quarter SG&A expenses were $40.3 million, including $9 million in noncash share-based compensation. SG&A expenses include increased marketing expenses to support Optune adoption, increases in our sales force globally.

Our fourth-quarter 2018 operating loss was $8.7 million, with operating income generated by the GBM business contributing to investments in research and development. Net loss for the quarter was $15.6 million or $0.17 per share. We had positive net cash flow from operations in the fourth quarter of $16.8 million, with $1.8 million net cash used in investment activities, principally related to investments in PP&E. We ended the fourth quarter with $245.9 million cash, cash equivalents and short-term investments, an increase of $18.2 million versus the third quarter.

We believe we have an extended cash runway that provides Novocure with financial stability and flexibility as we execute our core strategies. At Novocure, we are working to extend survival in some of the most aggressive forms of cancer by developing and commercializing Tumor Treating Fields. With annual revenues approaching $250 million, four indications in our late-stage pipeline and a strong balance sheet, we believe we move into 2019 well-positioned to deliver both continued near-term growth and significant long-term shareholder value. With that, I'll open the call to questions.

Operator? 

Questions and Answers:

Operator

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

Vijay Kumar -- Evercore ISI -- Analyst

Hey, guys. Thanks for taking my question. So maybe Bill, I just want to start at the high-level, '18 was a fantastic year for you guys. A lot of optimism around the pipeline opportunity.

I think I've gotten some few questions on guidance. What is that, that we should be expecting, right? And I think you mentioned revenue growth of 40%. How should we be thinking of revenue preparation metric and maybe script volumes? It seems like that script volume number has been a little volatile. So maybe any color on how we should be thinking about script volumes?

Bill Doyle -- Executive Chairman

Sure. Vijay, thanks very much for the -- noting the progress that we made in the year. I'll make a couple of comments and then I'll see if Asaf has anything to add. But, as you know, we do not guide, so start there.

No. 1, not withstanding that fact, we believe that we have significant opportunity to grow the GBM business in the U.S.A. and in the other markets in which we participate and in markets where we don't participate. That said, it's -- because we have a relatively small indication in GBM and by that I mean relatively small incident and as I've said to many investors, you can't take the incidents and divide by 52 weeks in order to draw a straight line.

It is more of what I've always called [Inaudible]

Asaf Danziger -- Chief Executive Officer

[Inaudible] some technical problem, he is on the other side of the world right now. So I'll continue. Basically, we continue to grow in newly diagnosed, and we still think that is enough patients that can benefit from the therapy. And we are putting a lot of efforts as usual in adoption.

So all in all, we continue to put more patients on therapy every quarter, and we're very happy with that.

Vijay Kumar -- Evercore ISI -- Analyst

And then, just maybe one follow up. I think Bill you mentioned mesothelioma, you've heard from the FDA. Was this the second review cycle? I'm just curious on the approval time line whether this is first half versus second half? Thank you.

Eilon Kirson -- Chief Scientific Officer and Head of Research and Development

This is Eilon. I'll take that one. So first of all, I'll answer the question directly, this is the first review cycle, OK. We did receive comments from FDA, and we are currently in ongoing and productive discussions with FDA.

We're planning on submitting our response soon. And we do expect to get approved in 2019, OK. I'll remind you that this approval -- submission is based on the results that we presented at IASLC in 2018 showing a significant extension in median overall survival of the patients treated with Tumor Treating Fields together with standard chemotherapy, OK, compared to standard chemotherapy alone, in fact we saw 18.2 months median survival compared to 12.1 months, which is the expected historical control. Again, we are continuing to have productive discussions with FDA and we will be submitting very soon.

Vijay Kumar -- Evercore ISI -- Analyst

Gotcha. Apologies if I can have one more, on gross margins. I think that number moved Q-on-Q, maybe any comments around what moved the GM line? And I'll hop off.

Wilco Groenhuysen -- Chief Financial Officer

Vijay, this is Wilco. Thanks for the question. Overall, our gross margin trend is improving -- has been improving over a number of quarters, and we expect it to continue to improve with volume increasing. Fourth quarter was affected by a one-time charge related to the opening of our European Operating Center from which we think we can more efficiently serve our EU patients.

So it was a one-time impact that effected the gross margin in the fourth quarter and expect further improvement in the future.

Vijay Kumar -- Evercore ISI -- Analyst

Thanks, guys.

Operator

Thank you. Our next question is from the line of Difei Yang of Mizuho Securities. Your line is open.

Difei Yang -- Mizuho Securities -- Analyst

Hey, good morning, and thanks for taking my question. So just a couple, would you remind us what was the reimbursement rate in Germany a year ago?

Wilco Groenhuysen -- Chief Financial Officer

Good morning. As we said, it's about 65% now, which is a considerable improvement. And it's coming from, I think, about 55% -- mid-50s in 2017.

Difei Yang -- Mizuho Securities -- Analyst

OK. And then the second question is around Sweden. How should we think about the uptick for commercialization in Sweden?

Asaf Danziger -- Chief Executive Officer

Thank you for your question. It's Asaf. So in Sweden, we are basically right now building our infrastructure to treat GBM patients and we implement the national reimbursement that we have in Sweden in the different areas of Sweden. The reimbursement process over there is signed by a different region.

And we feel that we're doing the right thing, and we really know that many patients are going to benefit in Sweden from our therapy.

Difei Yang -- Mizuho Securities -- Analyst

From revenue standpoint, should we be thinking about the growth in Sweden more or less resembles in Japan last year? Or it will be slower, faster, trying to find a reference point?

Asaf Danziger -- Chief Executive Officer

It's difficult to say. We think, overall, the margins -- the Swedish market opportunity is about 10% of the German opportunities to put that in perspective. We're very pleased with the national reimbursement, as you know. We're now starting our activities to put patients on therapy.

It's very difficult to predict whether it's going to have the identical trajectory as we've seen in Japan. We certainly hope so, but we're working very hard to put more and more patients on therapy.

Difei Yang -- Mizuho Securities -- Analyst

OK. Thank you. Then, my final question is with regards to the evolving cancer therapy landscape. So we know IO or PD-1 agents started to take -- to change some of the standard of care.

And how are you thinking about potentially running trials with the TTFields in combo with checkpoint inhibitors?

Eilon Kirson -- Chief Scientific Officer and Head of Research and Development

Thank you for that question. This is Eilon. So first of all, it is a very exciting time, I think, in oncology, and with the emergence of checkpoint inhibitors in immuno-oncology, we're seeing really a shift in standard-of-care in various types of tumors. We've already actually taken steps to work together with immuno-oncology, LUNAR trial in non-small cell lung cancer allows patients to receive checkpoint inhibitors together with Tumor Treating Fields.

The other indications we're working on in checkpoint inhibitors are not yet standard-of-care. And so we have not had planned this ourselves, but we'll definitely keep up to speed with the latest standard-of-care. And when we plan our future trials, we always take into consideration the latest and emerging therapies. And we know that Tumor Treating Fields can be used effectively at least preclinically together with various types of therapies, such as the classic chemotherapies.

If it's with taxanes where we know there is real synergy and we know that there is also a additive effect together with immune checkpoint inhibitors. And so all of this together gives us a lot of confidence that we're going to be able to continue to plan our trials and perform ourselves in combination with the latest and most up-to-date standard-of-care.

Difei Yang -- Mizuho Securities -- Analyst

OK. Thank you for taking my questions and congratulations for a great 2018.

Asaf Danziger -- Chief Executive Officer

Thank you.

Wilco Groenhuysen -- Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Cory Kasimov of JP Morgan. Your line is open.

Cory Kasimov -- J.P. Morgan -- Analyst

Thanks. Good morning, guys. I appreciate you taking the questions. So first of all, I'm curious what you expect to be the key points of focus at next week's Medicare CAC meeting? How you're thinking about the potential outcomes there?

Bill Doyle -- Executive Chairman

Cory, this is Bill. Can everyone here me?

Cory Kasimov -- J.P. Morgan -- Analyst

I can hear you.

Bill Doyle -- Executive Chairman

I'm calling from the Hong Kong Society of Neuro-Oncology. So as a subset the other side of the world. So first of all, just to remind everyone that we have -- we're now in the midst of what CMS calls the LCD reconsideration process or the local coverage decision reconsideration process. We submitted our request for reconsideration to Medicare in June 2018.

The DME MACs accepted our request in October '18. Although they said that they plan to follow a new process that they're implementing for all novel DME. So because it's a new process, Cory, we probably know less than, than we would if this were tried and true. As you said, the CAC will meet next week on the 6th.

The agenda has been published. And we know that Novocure will have the opportunity to present our data and our rationale for reconsideration. We also know that there is a one hour and 45-minute Q&A session where the CAC members will have the opportunity to ask questions of our team. They will review the key question that Medicare poses to them and then have a summary discussion, this is all in public, for one hour and 45 minutes at the end.

At this point in time, we don't have additional details. I'll state that we do know because this is stated in the policy manual that the CAC is an Advisory Committee and the final decision will rest with the MACs. We're prepared to present our, as you know, best-in-category survival data and also Optune's general acceptance within the physician community. And we process the panel will have a fair and open review of our data.

We continue to work with Medicare, educate them based on all the new data that was continued to be generated on Tumor Treating Fields. As we've noted in the script, there were tremendous number of publications and presentations in the back half of last year. But other than that, Cory, we're -- that's what we know.

Cory Kasimov -- J.P. Morgan -- Analyst

OK. That's helpful. And then my follow-up question is around these interim data looks that you have for your Phase III trials that will start next year. I'm wondering how much power is built into them at the interim? And do you first see a reasonable likelihood of stopping these trials early for positive efficacy? Or is this more about passing futility analysis? If I recall correctly, EF-14 was stopped at the interim, I think.

Eilon Kirson -- Chief Scientific Officer and Head of Research and Development

Thanks, Cory. This is Eilon, I'll take that. So first of all, you're right. EF-14 was stopped early at the interim analysis due to the highly successful overall survival and progression-free survival advantage over the control group.

To a certain extent, luckily, at that point, we had already enrolled almost all the patients on the trial, which allowed us also to have a long-term full analysis of the data, which was published in JAMA in 2017. But with that being said, it's very hard to predict what's going to happen in future trials. We'd be happy if that would be the outcome, but we really cannot say what will happen at these interim analysis. We're not disposing right now the exact split in the alpha or the P-value split between the interim and the final analysis.

These are event-driven calculations and it's very specific to each trial. I'm sure that as we get there, we will be discussing this in much more detail.

Cory Kasimov -- J.P. Morgan -- Analyst

OK. And it is the non-small cell lung cancer that will have the first interim release based on current event rates, right?

Eilon Kirson -- Chief Scientific Officer and Head of Research and Development

Yes. That's what it looks like.

Cory Kasimov -- J.P. Morgan -- Analyst

OK. Thank you, guys. Good luck next week.

Operator

Thank you. [Operator instructions] Our next question comes from the line of Larry Biegelsen of Wells Fargo. Your line is open.

Larry Biegelsen -- Wells Fargo Securities -- Analyst

Hey, guys. Thanks. Good morning. Thanks for taking the question.

Couple of quick points for me. Wilco, just to start, last year, you gave us a little bit of "guidance" for the GAAP revenue as a percent of gross billing, I think, 45, 46 at the start of the year. That's what it came in at. For 2019, any color on that? And then, Eilon, on the -- just a follow up to Cory's question on STELLAR and LUNAR, any idea that interim analysis would be the first half or the second half of 2020? And I have one follow up.

Wilco Groenhuysen -- Chief Financial Officer

Thanks, Larry. Let me take up with the question on gross to net. We did come in at the levels that we expected to come in. I think that's fairly good handle for 2019 as well.

Of course, the next material step would be Medicare. The outcome of Medicare would have a potentially substantial impact on that percentage.

Eilon Kirson -- Chief Scientific Officer and Head of Research and Development

OK. And this is Eilon. I'll take the second question, Larry. So again, these are event-driven interim analysis.

And so it'll really depend how the patients are doing on the trial, both controlled patients and treatment patients. And so it's really hard press to predict exactly where in 2020 this could come in.

Larry Biegelsen -- Wells Fargo Securities -- Analyst

OK. Thank you. And then just lastly, on mesothelioma and the reimbursement there. There are funds available for these patients.

Any color you can add today on how that might play out once you do get approval? Thanks for taking the questions.

Bill Doyle -- Executive Chairman

Larry, we don't have additional color. Our focus right now is on approval. We are expecting that approval this year. We're also preparing for the launch, and -- but we don't have any additional color on reimbursement at this time.

Larry Biegelsen -- Wells Fargo Securities -- Analyst

All right, guys. Thanks for taking the questions.

Operator

Thank you. And at this time, I'm showing no further questions. I'd like to turn the conference back over to Mr. Bill Doyle for the closing remarks.

Bill Doyle -- Executive Chairman

So thanks, everyone, for your continued interest and support in Novocure. We had really an outstanding 2018. And as Wilco mentioned in his remarks, we feel that we are exceptionally well-positioned from all sides really to jump into 2019 to continue execution of our two core priorities, growing the GBM business globally and advancing our clinical pipeline. So thanks again, and have a great day.

Operator

[Operator signoff]

Duration: 28 minutes

Call Participants:

Ashley Cordova -- Senior Vice President, Finance and Investor Relations

Bill Doyle -- Executive Chairman

Asaf Danziger -- Chief Executive Officer

Wilco Groenhuysen -- Chief Financial Officer

Vijay Kumar -- Evercore ISI -- Analyst

Eilon Kirson -- Chief Scientific Officer and Head of Research and Development

Difei Yang -- Mizuho Securities -- Analyst

Cory Kasimov -- J.P. Morgan -- Analyst

Larry Biegelsen -- Wells Fargo Securities -- Analyst

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