NOVOCURE LIMITED
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is intended to provide information to assist you in better
understanding and evaluating our financial condition and results of operations.
We encourage you to read this MD&A in conjunction with our unaudited
consolidated financial statements and the notes thereto for the period ended
September 30, 2021 included in Part I, Item 1 of this Quarterly Report on
Form 10-Q. This discussion contains forward-looking statements that involve
risks and uncertainties. Please refer to the information under the heading
"Cautionary Note Regarding Forward-Looking Statements" elsewhere in this report.
References to the words "we," "our," "us," and the "Company" in this report
refer to NovoCure Limited , including its consolidated subsidiaries.
Critical Accounting Policies and Estimates
In accordance with U.S. generally accepted accounting principles ("GAAP"), in
preparing our financial statements, we must make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of net revenues and expenses during the reporting period.
We develop and periodically change these estimates and assumptions based on
historical experience and on various other factors that we believe are
reasonable under the circumstances. Actual results may differ from these
estimates.
The critical accounting policies requiring estimates, assumptions and judgments
that we believe have the most significant impact on our consolidated financial
statements can be found in our 2020 10-K. For additional information, see Note 1
to our unaudited consolidated financial statements in Part I, Item 1 of this
Quarterly Report. There were no other material changes to our critical
accounting policies and estimates as compared to the critical accounting
policies and estimates described in our 2020 10-K.
Overview
We are a global oncology company with a proprietary platform technology called
Tumor Treating Fields ("TTFields"), which are electric fields tuned to specific
frequencies that disrupt cancer cell division. Our key priorities are to drive
commercial adoption of Optune and Optune Lua, our commercial TTFields delivery
systems, and to advance clinical and product development programs intended to
extend overall survival in some of the most aggressive forms of cancer.
Optune is approved by the U.S. Food and Drug Administration ("FDA") under the
Premarket Approval ("PMA") pathway for the treatment of adult patients with
newly diagnosed GBM in combination with temozolomide, a chemotherapy drug, and
for adult patients with GBM following confirmed recurrence after chemotherapy as
monotherapy treatment. We also have approval or a CE certificate to market
Optune for the treatment of GBM in the European Union ("EU"), Japan and certain
other countries. We market Optune in the U.S. , Austria , Germany , Israel , Japan ,
Sweden and Switzerland , which we refer to as our "active markets." With respect
to GBM, our sales and marketing efforts are principally focused on driving
adoption with both neuro-oncologists and radiation oncologists. We are expanding
our commercial operations into France with an initial focus on developing key
opinion leader relationships in GBM and establishing a path to reimbursement for
our Products.
Optune Lua is approved by the FDA under the Humanitarian Device Exemption
("HDE") pathway to treat MPM in combination with standard chemotherapies. We
have received CE certification to market Optune Lua (under the name
"NovoTTF-100L") in the EU and Switzerland . We currently market Optune Lua in the
U.S. , and are evaluating plans to expand access to our therapy for MPM patients
in other markets. With respect to MPM, our commercial efforts are principally
focused on generating awareness, educating thoracic oncologists about the
benefits of TTFields, and establishing a dialogue with third-party payers around
access to Optune Lua.
We believe the mechanism of action behind TTFields therapy may be broadly
applicable to solid tumor cancers. Currently, we are conducting phase 3 pivotal
trials evaluating the use of TTFields in non-small-cell lung cancer ("NSCLC"),
brain metastases from non-small-cell lung cancer ("brain metastases"), ovarian
cancer and pancreatic cancer. In 2020, we enrolled our first patient in our
global phase 4 TRIDENT trial to test the potential survival benefit of
initiating Optune concurrent with radiation therapy versus following radiation
therapy in patients with newly diagnosed GBM. We recently concluded a phase 2
pilot trial evaluating the use of TTFields in liver cancer and are conducting a
phase 2 pilot trial in gastric cancer, as well as testing the potential
incremental survival benefit of TTFields delivered using high-intensity arrays
versus standard arrays. We anticipate expanding our clinical pipeline
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over time to study the safety and efficacy of TTFields for additional solid
tumor indications and combinations with other cancer treatment modalities.
In 2018, we granted Zai Lab (Shanghai) Co., Ltd. ("Zai") a license to
commercialize Optune in China , Hong Kong , Macau and Taiwan ("Greater China")
under a License and Collaboration Agreement (the "Zai Agreement"). The Zai
Agreement also establishes a development partnership intended to accelerate the
development of TTFields in multiple solid tumor cancer indications. For
additional information, see Note 12 to the Consolidated Financial Statements in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2020 (the "2020 10-K").
In April 2021 , we announced that an independent data monitoring committee
("DMC") informed Novocure that the pre-specified interim analysis for the phase
3 pivotal LUNAR trial for the treatment of NSCLC was accelerated given the
length of accrual and the number of events observed, to date. The interim
analysis included data from 210 patients accrued through February 2021 . After
review of the interim analysis, the DMC concluded that the LUNAR trial should
continue with no evidence of increased systemic toxicity. The DMC went on to
comment that the continued accrual to 534 patients as proposed in the original
protocol, given the current rate of accrual and the interim data presented, is
likely unnecessary and possibly unethical for patients randomized to control.
For this reason, the DMC recommended an adjustment of accrual to approximately
276 patients with a 12-month follow-up following the enrollment of the last
patient. The DMC believes this amended protocol would provide adequate data
regarding toxicity and efficacy, providing sufficient overall power, as well as
potentially providing important information regarding efficacy within treatment
subgroups. In May 2021 , the FDA approved our investigational device exemption
("IDE") supplement incorporating the recommended protocol changes and we expect
final data in 2022.
In April 2021 , the FDA approved our IDE application to initiate the KEYNOTE B36
phase 2 pilot trial to study TTFields with pembrolizumab in first-line NSCLC
through our clinical collaboration with MSD (a tradename of Merck & Co.). As of
September 30, 2021 there were five KEYNOTE B36 clinical trial sites actively
evaluating patients for enrollment.
In May 2021 , we entered into a clinical trial collaboration with GT Medical
Technologies, Inc. , to develop TTFields together with GT Medical Technologies'
GammaTile Surgically Targeted Radiation Therapy for the treatment of recurrent
GBM, expanding our research in the treatment of GBM. We plan to conduct a phase
2 pilot study to test the effectiveness and safety of neo-adjuvant TTFields
followed by resection, GammaTile Therapy, and adjuvant TTFields for recurrent
GBM. This clinical trial collaboration presents an important opportunity to
study the radio-sensitizing effect of TTFields.
In July 2021 , we announced the final results of our phase 2 pilot HEPANOVA trial
investigating TTFields together with sorafenib, a kinase inhibitor, in 27
patients with advanced liver cancer. Historical control data showed an objective
response rate of 4.5% and disease control rate of 43% for patients treated with
sorafenib alone. In 21 evaluable patients, HEPANOVA showed a 9.5% objective
response rate and 76% disease control rate, as well as 5.8 months of progression
free survival. These results are even more encouraging when considering the poor
prognosis of the study population. Over half of the patients in HEPANOVA were
categorized as Child-Pugh Class B , compared to 5% in the historical control,
indicating significant liver functional compromise. Research conducted to date
has shown that TTFields anti-mitotic effect requires extended exposure to the
therapy for maximum impact and this was a challenge for HEPANOVA with a median
treatment duration of only 10 weeks. Of the patients who received at least 12
weeks of therapy, the disease control rate reached 91% with an objective
response rate of 18%. These data demonstrate that TTFields have the potential to
extend survival in advanced liver cancer. Our team, along with trial
investigators, are actively designing a phase 3 pivotal trial that contemplates
TTFields therapy together with the current standard of care, including
immunotherapy.
In September 2021 , we announced that the FDA granted breakthrough designation to
the NovoTTF-200T System, a TTFields delivery system intended for use together
with atezolizumab and bevacizumab for the first-line treatment of patients with
unresectable or metastatic liver cancer. The designation offers us an
opportunity to interact with FDA experts throughout the premarket review phase
and allows for prioritized review of regulatory submissions.
Also in September 2021 , we entered into a clinical collaboration with Roche to
develop TTFields together with Roche's anti-PD-L1 therapy, atezolizumab, for
treatment of patients with metastatic pancreatic ductal adenocarcinoma (mPDAC).
We plan to conduct a phase 2 pilot study to test the safety and efficacy of
TTFields together with atezolizumab, gemcitabine and nab-paclitaxel as a
first-line treatment for mPDAC. This clinical
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collaboration will study the immune-shielded environment of the pancreas and
investigate our ability to improve clinical outcomes for patients with this
deadly disease. We will be the study sponsor and Roche is providing atezolizumab
for the trial.
In October 2021 , we and Zai announced that the final patient has been enrolled
in EF-31, a Novocure-sponsored, phase 2 pilot trial conducted by Zai Lab
evaluating the safety and efficacy of TTFields in combination with chemotherapy
as a first-line treatment in patients with gastric adenocarcinoma. Zai has
enrolled approximately 30 patients in Greater China . The protocol is designed to
include 25 evaluable patients who receive at least one tumor assessment.
In October, 2021, we announced that the final patient has been enrolled in our
phase 3 pivotal INNOVATE-3 trial evaluating the efficacy of TTFields together
with paclitaxel for treatment in patients with platinum-resistant ovarian
cancer. The European Network for Gynecological Oncological Trials and The GOG
Foundation , Inc. collaborated with Novocure on the design and facilitation of
this trial. Following the completion of enrollment, the independent Data
Monitoring Committee will conduct the pre-specified interim analysis pursuant to
the trial protocol. Final data is anticipated in 2023.
The enrollment timelines for our PANOVA-3 trial are reliant on the ability of
our clinical sites to administer the trial in accordance with protocol
specifications. A shortage of nab-paclitaxel, commercially known as Abraxane,
has had an impact on the chemotherapy supply at clinical sites. Furthermore, due
to the denial of an importation license for Abraxane by the National Medical
Products Administration , we are unable to expand our clinical trial footprint
into Greater China at this time. As such, we now anticipate final data in 2024.
The table below presents the current status of the ongoing clinical trials in
our oncology pipeline and anticipated timing of final data.
[[Image Removed: nvcr-20210930_g1.jpg]]
Our therapy is delivered through a medical device and we continue to advance our
Products with the intention to extend survival and maintain quality of life for
patients. We have several product development programs underway that prioritize
impact on both TTFields' dose and patient ease of use.
We continue our efforts to optimize array design to improve patient comfort for
all torso and abdominal indications, improve skin adhesion and increase
degrees-of-motion. In the third quarter, we discontinued enrollment in a
clinical usability study for a new, flexible torso array due to establishing
enhanced capabilities for collecting usability feedback. We will continue to
follow enrolled patients in order to gather applicable data.
Our oncology intellectual property portfolio contains over 185 issued patents
and numerous patent applications pending worldwide. We believe we own global
commercialization rights to our Products in oncology and are well-positioned to
extend those rights into the future as we continue to find innovative ways to
improve our Products.
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We view our operations and manage our business in one operating segment. For the
three and nine months ended September 30, 2021 , our net revenues were $133.6
million and $401.8 million , respectively. Our net loss for the three and nine
months ended September 30, 2021 , was $13.1 million and $31.9 million ,
respectively. As of September 30, 2021 , we had an accumulated deficit of $659.5
million . Our net loss resulted primarily from net revenue growth which was more
than offset by increasing investments in research and development to advance our
pipeline programs and increase acceptance of TTFields across the global oncology
community.
Impact of COVID-19
The COVID-19 pandemic did not have a material impact on our financial results
through the third quarter of 2021. The pandemic has had and is having an impact
on our day-to-day operations, which varies by region based on factors such as
geographical spread, stage of containment and recurrence of the pandemic in each
region. We believe the prolonged disruption caused by the COVID-19 pandemic is
resulting in persisting volatility across global health care systems, such as
fluctuations in patient volumes and changes in patterns of care in certain
regions, including in areas where the pandemic eased during the quarter. For
example, we continue to see fluctuations in the timing of surgeries, radiation
therapy and advanced disease progression in certain regions, which has had some
adverse influence on the eligible patient population for Optune. TTFields is an
emerging modality in cancer care and requires significant educational effort to
drive awareness and acceptance of our therapy. We have relied heavily on virtual
engagement to manage these educational efforts for more than a year, which poses
challenges to our ability to effectively communicate and engage with our
customers and partners around the world. The COVID-19 pandemic is also having an
impact on clinical trial enrollments, study operations, and regulatory
responsiveness.
Given the aggressive nature of the cancers that we treat, we believe that the
fundamental value proposition of the TTFields platform remains unchanged. We
continue to evaluate and plan for the potential effects of the COVID-19 pandemic
on our business moving forward. The extent to which the COVID-19 pandemic may
impact our business and clinical trials in the future will depend on further
developments, which are highly uncertain and cannot be predicted with
confidence. The COVID-19 pandemic may also have the effect of heightening many
of the other risks described in our risk factors disclosed in our 2020 10-K.
Commentary on Results of Operations
Net revenues. Our revenues are primarily derived from patients using our
Products in our active markets. We charge for treatment with our Products on a
monthly basis. Our potential net revenues per patient are determined by our
ability to secure payment, the monthly fee we collect and the number of months
that the patient remains on therapy.
We also receive revenues pursuant to the Zai Agreement. For additional
information regarding the Zai Agreement, see Note 12 to the Consolidated
Financial Statements in our 2020 10-K.
Cost of revenues. We contract with third parties to manufacture our Products.
Our cost of revenues is primarily comprised of the following:
•disposable arrays;
•depreciation expense for the field equipment, including the electric field
generator used by patients; and
•personnel and overhead costs such as facilities, freight and depreciation of
property, plant and equipment associated with managing our inventory,
warehousing and order fulfillment functions.
Operating expenses. Our operating expenses consist of research, development and
clinical trials, sales and marketing and general and administrative expenses.
Personnel costs are a significant component for each category of operating
expenses and consist of wages, benefits and bonuses. Personnel costs also
include share-based compensation.
Financial expenses, net. Financial expenses, net primarily consists of credit
facility interest expense and related debt issuance costs, interest income from
cash balances and short-term investments and gains (losses) from foreign
currency transactions. Our reporting currency is the U.S. dollar. We have
historically held substantially all of our cash balances in U.S. dollar
denominated accounts to minimize the risk of translational currency exposure.
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Results of Operations
The following discussion provides an analysis of our results of operations and
reasons for material changes therein for the three and nine months ended
September 30, 2021 as compared to the three and nine months ended September 30,
2020 . The tables contained in this section report U.S. dollars in thousands
(except share, patient, and prescription data).
The following table sets forth our consolidated statements of operations data:
Three months ended September 30, Nine months ended September 30,
2021 2020 2021 2020
Unaudited Unaudited
Net revenues $ 133,606 $ 132,660 $ 401,818 $ 350,413
Cost of revenues 30,206 28,395 85,190 78,365
Gross profit 103,400 104,265 316,628 272,048
Operating costs and expenses:
Research, development and clinical
trials 48,141 32,818 144,372 88,008
Sales and marketing 32,580 29,364 98,075 86,658
General and administrative 31,231 27,061 95,116 79,073
Total operating costs and expenses 111,952 89,243 337,563 253,739
Operating income (loss) (8,552) 15,022 (20,935) 18,309
Financial expenses (income), net 1,981 3,983 5,567 9,032
Income (loss) before income taxes (10,533) 11,039 (26,502) 9,277
Income taxes 2,591 1,755 5,391 (5,614)
Net income (loss) $ (13,124) $ 9,284 $ (31,893) $ 14,891
Basic net income (loss) per ordinary
share $ (0.13) $ 0.09 $ (0.31) $ 0.15
Weighted average number of ordinary
shares used in computing basic net
income (loss) per share 103,731,147 101,234,306 103,281,380 100,601,427
Diluted net income (loss) per
ordinary share $ (0.13) $ 0.09 $ (0.31) $ 0.14
Weighted average number of ordinary
shares used in computing diluted net
income (loss) per share 103,731,147 108,643,814 103,281,380 108,113,416
The following table details the share-based compensation expense included in costs and expenses:
Three months ended September Nine months ended September
30, 30,
2021 2020 2021 2020
Unaudited Unaudited
Cost of revenues $ 808 $ 767 $ 2,368 $ 1,916
Research, development and clinical trials 7,761 5,101 21,390 12,275
Sales and marketing 5,806 4,677 16,706 13,061
General and administrative 11,383 9,576 32,038 28,196
Total share-based compensation expense
$ 72,502 $ 55,448 21
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Key performance indicators
We believe certain commercial operating statistics are useful to investors in
evaluating our commercial business as they help our management team and
investors evaluate and compare the adoption of our Products from period to
period. The number of active patients on therapy is our principal revenue
driver. An "active patient" is a patient who is receiving treatment under a
commercial prescription order as of the measurement date, including patients who
may be on a temporary break from treatment and who plan to resume treatment in
less than 60 days. Prescriptions are a leading indicator of demand. A
"prescription received" is a commercial order for Optune or Optune Lua that is
received from a physician certified to treat patients with our Products for a
patient not previously on Optune or Optune Lua. Orders to renew or extend
treatment are not included in this total.
The following table includes certain commercial operating statistics for and as
of the end of the periods presented.
September 30,
Operating statistics 2021 2020
Active patients at period end
North America (1) 2,223 2,218
EMEA:
Germany 562 533
Other EMEA 425 369
Japan 292 241
Total 3,502 3,361
Three months ended September 30, Nine months ended September 30,
2021 2020 2021 2020
Prescriptions received in period
North America (1) 931 955 2,815 2,909
EMEA:
Germany 220 239 705 677
Other EMEA 119 91 391 351
Japan 110 86 321 265
Total 1,380 1,371 4,232 4,202
(1) North America includes data for the United States and Canada for the third
quarter of 2021 and the United States only for all other periods.
There were 13 active MPM patients on therapy as of September 30, 2021 and 15 MPM
prescriptions were received in the three months ended September 30, 2021 .
Three and nine months ended September 30, 2021 compared to three and nine months
ended September 30, 2020
Three months ended September 30, Nine months ended September 30,
2021 2020 % Change 2021 2020 % Change
Net revenues $ 133,606 $ 132,660 1 % $ 401,818 $ 350,413 15 %
Net revenues. Net revenues increased 1% to $133.6 million for the three-month
period ending September 30, 2021 from $132.7 million for the same period in
2020, and increased 15% to $401.8 for the nine-month period ended September 30,
2021 from $350.4 for the same period in 2020. The increase resulted primarily
from an increase of 141 active patients in our currently active markets,
representing 4% growth, and the launch of Optune in China .
In the third quarter of 2021, we recorded only de minimus revenue from the
successful appeal of previously denied claims for Medicare fee-for-service
beneficiaries billed prior to established coverage, versus the $8.0 million that
we recorded in the third quarter of 2020. We continue to actively appeal and
pursue previously denied claims for
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beneficiaries billed prior to established coverage, but the cadence and amount
of these Medicare payments are impossible to predict.
In the third quarter 2021, we recorded $10.6 million and $28.1 million in
revenues from Medicare fee-for-service beneficiaries billed under the coverage
policy effective on September 1, 2019 for the three and nine month period ended
September 30, 2021 , an increase of 9% and 4% from the $9.7 million and $26.9
million recognized in the same period in 2020.
We believe we have completed our administrative ramp-up towards processing
Medicare claims and efficiently pursuing appeals. Approximately 25% of our
current Medicare fee-for-service beneficiaries began use of TTFields therapy
prior to the effective date of coverage and, as a result, are not contributing
revenue at the time of billing. We expect to realize additional benefit as the
mix of Medicare fee-for-service beneficiaries shifts to include a greater
percentage of patients who have started therapy under the coverage policy
effective September 1, 2019 .
Three months ended September 30, Nine months ended September 30,
2021 2020 % Change 2021 2020 % Change
Cost of revenues $ 30,206 $ 28,395 6 % $ 85,190 $ 78,365 9 %
Cost of revenues. Our cost of revenues increased by 6%, to $30.2 million for the
three months ended September 30, 2021 from $28.4 million for the same period in
2020, and increased by 9% to $85.2 for the nine months ended September 30, 2021
from $78.4 for the same period in 2020. For the three and nine month period, the
increase in cost of revenues was primarily due to the cost of shipping
transducer arrays to a higher volume of commercial patients and increasing
shipments of equipment to Zai Lab. We continue to focus on opportunities to
increase efficiencies and scale within our supply chain. This includes
evaluating new materials, manufacturers, and processes that could lead to lower
costs.
Excluding sales to Zai, cost of revenues per active patient per month decreased
6% and 6% to $2,485 and $2,475 for the three and nine months ended September 30,
2021 from $2,630 and $2,622 for the same period in 2020. Cost of revenues per
active patient is calculated by dividing the cost of revenues for the quarter
less equipment sales to Zai for the quarter by the average of the active
patients at the end of the prior quarter and the ending active patients in the
current quarter. This quarterly figure is then divided by three to estimate the
monthly cost of revenues per active patient. Sales to Zai are deducted because
they are sold at cost and in anticipation of future royalties from Zai, and Zai
patient counts are not included in our active patient population. Product sales
to Zai totaled $4.2 million and $8.0 for the three and nine months ended
September 30, 2021 compared to $2.2 million and $3.8 million for the three and
nine months ended September 30, 2020 .
Gross margin was 77% for the three months ended September 30, 2021 compared to
79% for the three months ended September 30, 2020 . Gross margin was 79% for the
nine months ended September 30, 2021 and 78% for the nine months ended
September 30, 2020 . The moderately lower gross margin in the third quarter 2021
was driven by an increase in Zai Lab purchases in the quarter.
Operating Expenses.
Three months ended September 30, Nine months ended September 30,
2021 2020 % Change 2021 2020 % Change
Research, development and
clinical trials $ 48,141 $ 32,818 47 % $ 144,372 $ 88,008 64 %
Sales and marketing 32,580 29,364 11 % 98,075 86,658 13 %
General and administrative 31,231 27,061 15 % 95,116 79,073 20 %
Total operating expenses $ 111,952 $ 89,243 25 % $ 337,563 $ 253,739 33 %
Research, development and clinical trials expenses. Research, development and
clinical trials expenses increased 47% to $48.1 million for the three-month
period ended September 30, 2021 from $32.8 million for the same period in 2020,
and increased 64% to $144.4 million for the nine-month period ended
September 30, 2021 from $88.0 in the same period in 2020. For the three and nine
month period, the change is primarily due to an increase in clinical trial and
personnel expenses for our phase 3 pivotal and label expansion trials, an
increase in development and
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personnel expenses to support our product development programs, increased
investments in preclinical research, and the expansion of our medical affairs
activities.
Sales and marketing expenses. Sales and marketing expenses increased 11% to
$32.6 million for the three months ended September 30, 2021 from $29.4 million
for the same period in 2020, and increased 13% to $98.1 million for the
nine-month periods ended September 30, 2021 from $86.7 million for the same
period in 2020. For the three and nine month period, the change was primarily
due to an increase in personnel and professional services costs as we continue
to enhance our commercial capabilities in anticipation of potential future
approvals in new indications. Accordingly, we are investing heavily in our
market access capabilities in order to evaluate opportunities, identify optimal
access pathways, and successfully gain reimbursement in new geographies.
General and administrative expenses. General and administrative expenses
increased 15% to $31.2 million for the three months ended September 30, 2021
from $27.1 million for the same period in 2020, and increased 20% to $95.1
million for the nine months ended September 30, 2021 from $79.1 million for the
same period in 2020. For the three and nine month periods, the change was
primarily due to an increase in personnel costs and professional services.
Three months ended September 30, Nine months ended September 30,
2021 2020 % Change 2021 2020 % Change
Financial expenses (income),
net $ 1,981 $ 3,983 (50) % $ 5,567 $ 9,032 (38) %
Financial expenses, net. Financial expenses decreased 50% to $2.0 million for
the three months ended September 30, 2021 from $4.0 million for the same period
in 2020, and decreased 38% to $5.6 for the nine months ended September 30, 2021
from $9.0 for the same period in 2020. For the three and nine month periods, the
decrease was primarily due to the absence of interest payments as a result of
the loan repayment in August 2020 .
Three months ended September 30, Nine months ended September 30,
2021 2020 % Change 2021 2020 % Change
Income taxes $ 2,591 $ 1,755 48 % $ 5,391 $ (5,614) (196) %
Income taxes. Income taxes increased 48% to $2.6 million for the three months
ended September 30, 2021 from $1.8 million for the same period in 2020, and
increased 196% to $5.4 million for the nine months ended September 30, 2021 from
a benefit of $5.6 million for the same period in 2020. For the three months
ended September 30, 2021 the increase reflects a change in the mix of applicable
statutory tax rates in certain jurisdictions. For the nine months ended
September 30, 2021 , the increase was primarily due to a net one-time tax benefit
of $11.3 million , which was recorded in the first quarter of 2020 in response to
the changes in the U.S. tax code related to the economic impacts of the COVID-19
pandemic. The variance also reflects a change in the mix of applicable statutory
tax rates in our active jurisdictions.
Non-GAAP financial measures
We also measure our performance using a non-GAAP measurement of earnings before
interest, taxes, depreciation, amortization and shared-based compensation
("Adjusted EBITDA"). We believe Adjusted EBITDA is useful to investors in
evaluating our operating performance because it helps investors evaluate and
compare the results of our operations from period to period by removing the
impact of earnings attributable to our capital structure, tax rate and material
non-cash items, specifically share-based compensation.
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We calculate Adjusted EBITDA as operating income before financial expenses and
income taxes, net of depreciation, amortization and share-based compensation.
The following table reconciles net income (loss), which is the most directly
comparable GAAP operating performance measure, to Adjusted EBITDA.
Three months ended September 30, Nine months ended September 30,
2021 2020 % Change 2021 2020 % Change
Net income (loss) $ (13,124) $ 9,284 (241) % $ (31,893) $ 14,891 (314) %
Add: Income tax 2,591 1,755 48 % 5,391 (5,614) (196) %
Add: Financial income
(expenses), net 1,981 3,983 (50) % 5,567 9,032 (38) %
Add: Depreciation and
amortization 2,734 2,188 25 % 7,584 6,677 14 %
EBITDA $ (5,818) $ 17,210 (134) % $ (13,351) $ 24,986 (153) %
Add: Share-based compensation 25,758 20,121 28 % 72,502 55,448 31 %
Adjusted EBITDA $ 19,940 $ 37,331 (47) % $ 59,151 $ 80,434 (26) %
Adjusted EBITDA decreased by 47% to $19.9 million for the three months ended
September 30, 2021 from $37.3 million for the same period in 2020, and decreased
by 26% to $59.2 for the nine months ended September 30, 2021 from $80.4 for the
same period in 2020. The decrease was driven by increased investments in
research and development activities intended to further our exploration of
TTFields therapy, and in sales and marketing readiness initiatives in
anticipation of future potential launches in new indications. Adjusted EBITDA as
a percentage of net revenues was 15% in the third quarter, due to research and
development investment reaching 36% of third quarter net revenues. We believe
these focused investments are critical to our efforts to realize the long-term
potential of the TTFields platform.
Liquidity and Capital Resources
We have incurred significant losses and cumulative negative cash flows from
operations since our founding in 2000. As of September 30, 2021 , we had an
accumulated deficit of $659.5 million . To date, we have primarily financed our
operations through the issuance and sale of equity and the proceeds from
long-term loans.
At September 30, 2021 , we had $933.8 million in cash, cash equivalents and
short-term investments, an increase of $91.2 million compared to $842.6 million
at December 31, 2020 . The increase in our cash, cash equivalents and short-term
investments was primarily due to the cash flow from operations and the exercise
of options.
We believe our cash, cash equivalents and short-term investments as of
September 30, 2021 are sufficient for our operations for at least the next 12
months based on our existing business plan and our ability to control the timing
of significant expense commitments. We expect that our research, development and
clinical trials expenses, sales and marketing expenses and general and
administrative expenses will continue to increase over the next several years
and may outpace our gross profit. As a result, we may need to raise additional
capital to fund our operations.
The following summary of our cash flows for the periods indicated has been
derived from our unaudited consolidated financial statements, which are included
elsewhere in this Quarterly Report:
Nine months ended September 30,
2021 2020 Change % Change
Net cash provided by operating activities
$ 22,685 50 % Net cash provided by (used in) investing activities 354,256 140,791 213,465 152 % Net cash provided by (used in) financing activities 22,050 (130,645) 152,695 (117) % Effect of exchange rate changes on cash and cash equivalents (139) 152 (291) (191) % Net increase (decrease) in cash, cash equivalents and restricted cash$ 444,519 $ 55,965 $ 388,554 694 % Operating activities. Net cash provided by operating activities primarily represents our net income (loss) for the periods presented. Adjustments to net income (loss) for non-cash items include share-based compensation, depreciation and amortization, and asset write-downs. Operating cash flows are also impacted by changes in 25 -------------------------------------------------------------------------------- Table of Contents operating assets and liabilities, principally trade payables, deferred revenues, other payables, prepaid expenses, inventory and trade receivables. Net cash provided by operating activities was$68.4 million for the nine months endedSeptember 30, 2021 , as compared to$45.7 million provided by operating activities for the nine months endedSeptember 30, 2020 . Gross profit increased by$44.6 million for the nine months endedSeptember 30, 2021 versus the nine months endedSeptember 30, 2020 , partially funding incremental investments of$56.4 million in research and development and$27.5 million in sales, marketing, general and administrative expenses. The increase in positive cash flow from operations was primarily driven by higher cash earnings, lower interest payments, the receipt of income tax refunds, as well as the timing of receipts and payments in the ordinary course of business. Investing activities. Our investing activities consist primarily of investments in and redemptions of our short-term investments as well as investments in property and equipment. Net cash provided by investing activities was$354.3 million for the nine months endedSeptember 30, 2021 , compared to$140.8 million provided by investing activities for the nine months endedSeptember 30, 2020 . The net cash provided by investing activities for the nine months endedSeptember 30, 2021 was primarily attributable to$364.2 million of net proceeds from maturity of short-term investments, partially offset by the purchase of$9.9 million of property and equipment. The net cash provided by investing activities for the nine months endedSeptember 30, 2020 was primarily attributable to the to the net proceeds generated from the sale of investments for cash needed to prepay the 2018 credit facility. Financing activities. To date, our primary financing activities have been the sale of equity and the proceeds from long-term loans. Net cash provided by financing activities was$22.1 million for the nine months endedSeptember 30, 2021 , as compared to$130.6 million used in financing activities for the nine months endedSeptember 30, 2020 . The net cash provided by financing activities for the nine months endedSeptember 30, 2021 andSeptember 30, 2020 included proceeds from the exercise of options and purchase of shares under the Company's stock option plan and employee share purchase plan ("ESPP"). The cash used in financing activities for the nine months endedSeptember 30, 2020 was primarily related to the prepayment of the 2018 credit facility. Convertible Notes OnNovember 5, 2020 , we issued$575.0 million aggregate principal amount of 0% Convertible Senior Notes due 2025 (the "Notes"). The Notes are senior unsecured obligations. The Notes do not bear regular interest, and the principal amount of the Notes will not accrete. The Notes are convertible at an initial conversion rate of 5.9439 ordinary shares per$1,000 principal amount of the Notes, which is equivalent to an initial conversion price of approximately$168.24 per ordinary share. Prior to the close of business onJuly 31, 2025 , a holder of Notes may convert their Notes at any time during any calendar quarter (and only during such calendar quarter), if the last reported sale price of ordinary shares for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter, is greater than or equal to$218.712 . The Notes are also convertible at the option of the holders upon the satisfaction of certain other conditions and during certain periods, and if the Company exercises its right to redeem the Notes as permitted or required by the indenture. On or afterAugust 1, 2025 until the close of the business on the business day immediately preceding the maturity date, holders may convert all or any portion of their Notes at the conversion rate at any time irrespective of the foregoing conditions. InJanuary 2021 , we irrevocably elected to settle all conversions of Notes by a combination of cash and our ordinary shares and that the cash portion per$1,000 principal amount of Notes for all conversion settlements shall be$1,000 . Accordingly, from and after the date of the election, upon conversion of any Notes, holders of Notes will receive, with respect to each$1,000 principal amount of Notes converted, cash in an amount up to$1,000 and the balance of the conversion value, if any, in our ordinary shares For more information, see Note 10(a) to the Consolidated Financial Statements in the 2020 10-K. Term loan credit facility OnNovember 6, 2020 , we entered into a new three-year$150.0 million senior secured revolving credit facility with a syndicate of relationship banks (the "2020 Credit Facility"). We may, subject to certain conditions and limitations, 26 -------------------------------------------------------------------------------- Table of Contents increase the revolving credit commitments outstanding under the 2020 Credit Facility or incur new incremental term loans in an aggregate principal amount not to exceed an additional$100.0 million . The commitments under the 2020 Credit Facility are guaranteed by certain of our subsidiaries and secured by a first lien on our and certain of our subsidiaries' assets. Outstanding loans will bear interest at a sliding scale based on our secured leverage ratio from LIBOR plus 2.75% to LIBOR plus 3.25% per annum. Additionally, the 2020 Credit Facility contains a fee for the unused revolving credit commitments at a sliding scale based on our secured leverage ratio from 0.35% to 0.45%. The 2020 Credit Facility contains financial covenants requiring maintenance of a minimum fixed charge coverage ratio and specifying a maximum senior secured net leverage ratio, as well as customary events of default which include a change of control. As ofSeptember 30, 2021 , we were in compliance with such covenants. As ofSeptember 30, 2021 , we had no outstanding balance borrowed under the 2020 Credit Facility. Contractual Obligations and Commitments There have been no material changes from the information disclosed in our 2020 10-K. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements as defined underU.S. Securities and Exchange Commission ("SEC") rules. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes from the information disclosed in our 2020 10-K. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as ofSeptember 30, 2021 . The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in theSEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as ofSeptember 30, 2021 , our Chief Executive Officer and Chief Financial Officer have concluded that, as ofSeptember 30, 2021 , our disclosure controls and procedures were effective at the reasonable assurance level. Changes in Internal Control over Financial Reporting There has been no change in our internal control over financial reporting during the quarter endedSeptember 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 27
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