Good day, ladies and gentlemen, and welcome to Novocure Second Quarter 2019 Performance Conference Call. [Operator Instructions] As a reminder, this conference call maybe recorded. I would now like to introduce your host for today’s conference Ms. Ashley Cordova, Senior Vice President of Finance and Investor Relations. Ma’am you may begin..

Good morning, everyone, and thank you for joining us to review Novocure’s second 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 website, www.novocure.com, by clicking on the link for second 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 and six months ended June 30, 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. We are pleased to announce a strong second quarter during which we achieved significant milestones in our commercial business and made progress on drivers of long-term value creation. We achieved our first ever quarter of positive operating income.

Cash flow from the GBM business continues to fund increased investments in our clinical pipeline and further technology development. In May, the NovoTTF-100L System was approved by the FDA to treat malignant pleural mesothelioma in combination with standard chemotherapies via the HDE pathway. This is our first FDA approved torso device.

We are enrolling four Phase 3 pivotal trials, creating a significant market expansion opportunity, treating some of the most aggressive forms of cancer. Beyond the compelling value creation potential of our advancing pipeline, we achieved a number of important milestones in the first half of 2019 and momentum continues into the third quarter.

After a multi-year process, in May the durable medical equipment Medicare Administrative Contractors or DME MACs issued a proposed local coverage determination that provides Medicare beneficiary coverage of Optune for newly diagnosed GBM, subject to certain restrictions.

The proposed LCD was subject to a 45-day public comment period, which closed in late June. Comments were provided to the DME MACs by more than 200 patients and caregivers, 80 healthcare providers and five cancer advocacy groups.

In addition, 42 members of Congress sent a letter to the CMS administrator urging the removal of any coverage limitations that are not supported by FDA approvals or private market coverage policies.

Last week, the DME MACs released the final LCD and fee schedule amount that provides coverage and pricing of Optune for newly diagnosed GBM, effective September 1, 2019. In response to public comments, the final coverage criteria eliminated or revise many of the restrictive criteria originally proposed. This is a major milestone for Novocure.

We are pleased to see the Medicare coverage process come to a conclusion and we’ll continue to work to expand access to Optune for all patients who may benefit.

In other progress during the quarter, our partner Zai Lab has submitted an application to the Chinese regulatory authorities to designate Optune as an innovative medical device and is pursuing a clinical trial waiver for the GBM indication in China. Should a clinical trial waiver be granted, Zai Lab intends to launch Optune in China before year end.

With that introduction, I’ll hand the call over to Asaf..

Thank you, Bill. The second quarter was transformative for Novocure. We achieved record quarterly net revenues of $86.7 million and a gross margin of 76%, generating our first as a quarter of positive operating income.

In May, NovoTTF-100L was approved by the FDA to treat patients with unresectable, locally advanced or metastatic malignant pleural mesothelioma or MPM. MPM is a rare cancer that has been strongly linked to asbestos exposure.

This approval represents the first FDA approved treatment advanced in over 15 years for the 3000 Americans diagnosed with MPM annually. The approval also marks Novocure’s first FDA approved torso indication and we believe shows the promise of TTFields in multiple solid tumor types, including some of the most aggressive forms of cancer.

We have initiated a phase launch for MPM shaped by our learnings from our GBM rollout. In 2019 we will focus on certifying radiation oncologists and driving adoption at the approximately 30 centers that we believe see the majority of U.S. MPM patients.

While the radiation oncologist will be the exclusive prescriber for MPM in the U.S., we know from our GBM experience that communication across the multidisciplinary teams at cancer treatment centers is critical to driving adoption.

As such, our field teams are working to educate the surgeons, pulmonologist and medical oncologist that see MPM patients to ensure they have the information needed to confidently recommend NovoTTF-100L to patients. We are pleased with the early execution and positive initial response.

We certified our first MPM prescribers in early June, less than two weeks after FDA approval. Certifications are ongoing and information has been requested by multiple sites to support the required IRB approval. We expect our first MPM patient to start therapy in the third quarter. Moving to GBM. More than 2,700 patients were on Optune at quarter’s end.

The number of prescriptions for patients with newly diagnosed GBM continued to grow. $86.7 million in Q2 net revenues represent an increase of more than 40% versus the same period last year. We continue to believe the strength of prescriber’s recommendation often influences whether or not a patient will start Optune.

The confidence and communication skills of individual prescribers can have a noticeable impact on our prescription flow. We have strengthened our physician speaker programs to encourage communication across the multidisciplinary teams at GBM treatment centers and to prepare prescribers to confidently recommend Optune to patients.

We have also launched a tool to help physicians introduce Optune in a patient friendly manner, intended to increase patient acceptance. The early feedback from both our sales force and physicians has been overwhelmingly positive. I will now hand the call over to Ely for an update on our advancing clinical pipeline..

Thank you, Asaf, and good morning everyone. Tumor Treating Fields therapy has shown promise across a variety of solid tumor cancers.

Phase 3 pivotal trials are ongoing in four indications; brain metastases, lung cancer, pancreatic cancer and ovarian cancer, creating the potential for substantial revenue growth driven by a cadence flow of new indication allowing to commencing as early as 2022.

We’ll also have a Phase 2 trial open in liver cancer and an additional 12 solid tumor cell lines with preclinical data that has shown a response to Tumor Treating Fields. On today’s call, I will give a brief update on the progress of each of our programs, beginning with METIS.

METIS is our Phase 3 pivotal trial testing the effectiveness of stereotactic radiosurgery plus Tumor Treating Fields compare to stereotactic radiosurgery alone, in patients with brain metastases resulting from non-small cell lung cancer.

We have opened the trial to 270 patients and enrollment is ongoing at more than 85 sites across North America, Europe and Israel. We anticipate data will be available for METIS in 2021.

LUNAR is our Phase 3 pivotal trials testing the effectiveness of Tumor Treating Fields in combination with immune checkpoint inhibitors or docetaxel versus immune checkpoint inhibitors or docetaxel alone for patients with non-small cell lung cancer, who progress during or after platinum-based therapy.

We have opened the trial to 534 patients and enrollment is ongoing at more than 65 sites across North America and Europe. We now expect the interim analysis in the second half of 2020 with final data from LUNAR in 2022. PANOVA-3, our pancreatic cancer trial and INNOVATE-3, our recurrent ovarian cancer trial are performing well in their ramp-up phase.

We anticipate final data from these trials will be available in 2022 and 2024 respectively. We are also working to finalize the protocol for our next randomized trial in GBM, intended to support possible label expansion, studying the potential benefit of initiating Optune, concurrent with radiation therapy versus initiating Optune post radiation.

We will provide updates on these trials as they develop. Beyond our clinical pipeline, there is an increase in interest from the scientific community, driving external research on Tumor Treating Fields broadly. We have 29 investigator-sponsored trials open, spending a range of topics and 30 ongoing inovitro preclinical studies.

The inovitro is a bench research system which enables independent researchers to study the effect of Tumor Treating Fields inovitro. We awarded the inaugural AACR-Novocure Tumor Treating Fields Research Grants in April and are committed to expend in the program in 2020.

We’re working to develop similar partnerships with other organizations that share our desire to support and expand innovative research on Tumor Treating Fields. With that, I’ll turn the call over to Wilco to review our finance..

Thank you, Ely. And thanks to everyone for joining us on the call this morning. Novocure ended the second quarter in a strong financial position with more than 2,700 GBM patients on Optune as of June 30, 2019. The number of active patients has grown for 18 consecutive quarters since the initial presentation of an EF-14 data in newly diagnosed GBM.

More than 12,000 patients have been treated today globally, and trailing 12-month net revenues now exceed $290 million. Second quarter net revenues were $86.7 million growing 41% year-over-year and growing 18% quarter-over-quarter. Revenue growth was driven by an increase in active patients and an increase in net revenues per active patient.

The increase in net revenues per active patient was primarily driven by improved reimbursement rates, which we believe are sustainable. The improved reimbursement rates also resulted in additional benefit of approximately $5 million to second quarter net revenues that we do not expect to be a significant in future quarters.

Gross profit in the quarter was $65.6 million, reflecting a 76% gross margin. Gross margin continues to benefit from ongoing efficiency initiatives and increasing scale. We believe that the reduction in cost of revenues per active patient is sustainable and we remain focused on improving this key metric.

Moving down the income statement, we continue to be increase investments in research and development with $19.5 million in R&D expenses in a quarter up more than 71% versus the second quarter of 2018.

This was primarily driven by an increase in clinical trial and personnel expenses for our Phase 3 pivotal trials and an increase in cost associated with medical affairs, regulatory and engineering. As we worked or enrolled patients across four Phase 3 clinical programs, we anticipate that R&D expenses will continue to increase in future quarters.

Our second quarter SG&A expenses were $45 million, an increase of 20% versus the second quarter of 2018, driven primarily by increased marketing expenses related to the launch of NovoTTF-100L for MPM and increased personnel costs. Net loss for the quarter was $1.3 million, or $0.01 per share. Cash flow from operations was $9.1 million.

Cash flow from the GBM business is funding increased investments in our clinical pipeline and technology development. We ended the second quarter with $284.6 million in cash, cash equivalents and short-term investments, an increase of $28 million from the prior quarter.

Our strengthening financial performance coupled with our cash on hand provides us with stability and flexibility as we strive to extend survival in some of the most aggressive forms of cancer.

Novocure is a global oncology company with a proprietary platform therapy, positive cash flow from an established and growing commercial business and a significant market expansion opportunity from an advancing pipeline in multiple indications.

Our focus is unwavering on disciplined execution intended to deliver both sustainable near-term growth from existing indications and significant long-term shareholder value from our pipeline. Thank you for your time this morning. Now I will turn the call back over to the operator for questions..

Thank you. [Operator Instructions] And our first question comes from Vijay Kumar from Evercore. Your line is open..

Thanks guys for taking my question and congrats on nice revenue this year. I just want to understand, or maybe if you could clarify on the revenue beat, the $5 million improved reimbursement. This is sustainable, right? All that you’re saying is do not expect a similar incremental increase of $5 million going forward.

The magnitude is going to be smaller, but this $5 million, what we saw was sustainable..

Good morning, Vijay, This is Wilco. Let me try to give a little bit extra color on the $5 million. As we stated in the script, we saw substantial improvements in reimbursement rates. So first of all, you have the benefit in revenue from that improvement. But secondly, under the applicable revenue recognition policy, which is ASC 606.

You also then have to take a look at the estimated collection rates within your portfolio. And we were able to update those estimations as well. And that’s particularly, it was writing that $5 million. So it’s driven by a substantial uptick in collection also leading to an adjustment and anticipates collection rates in our portfolio.

And we think, it will continue at some level, but it’s not going to be a sustainable in – at that $5 million level. And I think from a comparative perspective, $82 million net revenue was probably the right number to compare quarterly performance up to..

I see. Okay. That’s more so – what you’re saying, is this $5 million it was more of a one-off because you had a catch-up payment..

Yes. That’s not a way to describe it probably shorted and more efficiently. Yes, thanks Vijay..

Okay. And then a couple of other quick follow-ups from me, one, I know a strip volumes is something that The Street focus on – it was good to see up sequential increase up 4%, I think, you said first meso patient in 3Q, so that implies no script from mesothelioma into 2Q.

Is that correct? And could you just breakdown the performance, new GBM patient versus recurring GBM?.

So first of all, you’re absolutely right that we have not received a mesothelioma prescription yet. We expect that in Q3. And so this is entirely GBM. And during the quarter, we saw a 1,041 newly diagnosed scripts and that’s a 5% increase from Q1..

That’s helpful, Wilco. And then maybe one last one on the interim readout on non-small cell. My understanding was the second half readout. There was no change in timeline versus maybe the prior Q versus 1Q. The expectation was it would be second half 2021. Can you confirm the – timeline did not change.

And with the follow-up to that, what is the endpoint here, Bill, on the interim readout.

Is there a chance that if you have a pass of signal, this trial could be stopped? Or I’m just curious on what the pre-specified endpoints are here?.

Yes. So I think with all readouts, there is three possibilities of interim readouts. One is a futility signal. That’s something that we’ve never seen in any of our clinical trials of course. Second is to continue the trial, because it’s moving on target. And then in exceptional circumstances, the trial can be stopped for success.

You’ll recall that our GBM Phase 3 trial was in fact stopped for success at the interim, but I wouldn’t want to set the expectation that every single one of our trials will be stopped at the interim for success..

That’s a helpful though. Thank you, guys..

Thank you. And our next question comes from Esther Rajavelu from Oppenheimer. Your line is open..

Good morning. Thank you for taking my questions.

I had a question on gross margin now with Medicare reimbursement for GBM and the launch of – launch in mesothelioma, can you help us understand the pushes and pulls on gross margin and when you would expect to get coverage for mesothelioma from Medicare?.

It’s a whole bunch of questions, Esther. Good morning, this is Wilco. Let’s start with gross margin as we stated in our disclosure, we’re very pleased. We continue to progress in inappropriate gross margin, both revenue growth as well as through efficiency and scale benefits that we see in our cost of goods.

But you probably recall that we’ve been treating Medicare patients all along. And that was one of the commitments we made as a company to make the therapy available to all patients, including Medicare patients, while we were entering into the long dialogue we’ve had with Medicare to come to coverage and fee.

So the costs, the operating expenses are all in our P&L. So the additional revenue that we will now expect to receive from the coverage and the fee that has been published by Medicare, we will benefit both our top line but we’ll also benefit our gross margin. MPM is a little bit too early to call.

I guess that depends on volume and it depends on the progress in reimbursement. Initially, we’ll probably put a little bit pressure on MPM, but really it’s too early to make any meaningful comment on it..

Got you. But overall to me it sounds like we should expect that Medicare reimbursement benefit to offset the mesothelioma hit on the gross margin line..

Yes, I think that’s a safe assumption, yes..

Okay. Got you. Okay. And then in terms of getting reimbursement for the historically – for the historical claims over the last several years, you had mentioned in your press release with the reimbursement that there is a process that you can go through.

Can you help us understand that process a little bit better?.

Yes. So from the beginning, as Wilco said, we made the strategic decision to provide our therapy to Medicare beneficiaries, while our discussions with Medicare were unfolding. Throughout that period we peeled all denials through the heavily backlogged ALJ process with CMS.

We expect to continue to do that and there’s no doubt that the recent approval will likely tells our appeals through the ALJ process. And I don’t think it’s appropriate for us to talk about any potential settlement discussions at this time..

Got you.

And then my last question is on the international front, about – the Japanese market, about what proportion of patients treated in Japan are medical tourists from China? Do you have any estimates on that? Or are they all sort of Japanese nationals?.

It’s a good question. It’s Asaf. All our Japanese patients, or the patient that we treat in Japan they all Japanese patients..

Got you. Thank you very much..

Thank you. Our next question comes from Cory Kasimov from JPMorgan. Your line is open..

Hey, good morning guys. Thanks for taking my questions. First one is just going back to reimbursement, trying to understand the dynamics a little bit better for 2Q and more importantly going forward. So you obviously had a nice uptake in revenue per patient in the quarter even excluding that $5 million one-time payment.

This is obviously before Medicare is kicking in.

So can you talk a little bit about this run rate from prior quarters to 2Q? And then how we should be thinking about it going forward?.

Yes. Overall, as we said, we see overall improvement in reimbursement rates, Corey, good morning by the way. Net revenues per active patient in the quarter were about $10,000 per month. And we’ve seen, for instance, in the U.S., the 7% year-over-year improvement in that.

So the $5 million and the substantial improvement of reimbursements rates is predominantly a result of improved reimbursement in the United States..

Okay.

And then with Medicare reimbursement kicking in on September 1, can you just remind us of the percent of patients within your approved indications that will fall within this channel?.

Sure. So we’ve consistently said that about 25% of our patients are Medicare patients. The approval of coverage is for newly diagnosed patients, and approximately 75% of those 25% are newly diagnosed, and we would expect the substantial majority of those to be covered under the policy..

Okay. That’s helpful.

And then last question is, with regard to the narrowing and refining of timelines for some of those key coming trials LUNAR in particular, is that being driven by initial event accrual or pace of enrollment going from 2020 to 2H20 for that interim?.

Yes, it’s principally the pace of accrual. As we’re getting further into trials, we’re able to refine the referral patterns a little more specifically. And that’s why we updated that particular number..

Okay, great. Thanks for taking the questions..

Thank you. Our next question comes from Greg Gilbert from SunTrust. Your line is open..

Yes. Hi. On the LUNAR question, a follow-up on that. Are you finding any issues with the number of patients that are rapidly moving to PD-1s in the frontline? And is that slowing enrollment and what drove the push out on the PANOVA timeline as well? And then I have a couple follow-ups..

Yes. So first of all, the PANOVA timeline has not been adjusted. The only adjustment was on LUNAR. We don’t see any particular difficulty in recruiting patients as a result of any one particular factor. It is a busy area though as you know, because there are other combination trials ongoing.

And that may have some main effect, but it’s really not a big deal..

Okay. I apologize, I thought PANOVA was adjusted versus a prior timeline. Maybe I have old info there. And then as it relates to the trends in Europe, can you talk about demand trends there given the sequential decline in prescriptions? And I think active patients were relatively flattish quarter on quarter.

Anything we should be aware of in Europe?.

It’s Asaf. Thank you for the question. So let’s talk about the big picture in Germany, our prescription year-over-year grow by 18%. Last quarter was showed quarter relatively of selling day by 6%. We still believe that these many patients in Europe that can benefit from this therapy and we will continue to push our business forward.

We don’t see any significant events beside the thing that I just mentioned..

Okay. And then lastly, I don’t think you answered this part, that the process and the timeline for Medicare reimbursement for mesothelioma.

Is that something you can walk us through?.

Sure. So, specifically the coverage policy takes effect on September 1 – for meso, I’m sorry..

Yes, for meso.

You don’t get that one for free, right?.

So I will take. So we always say that we will approach Medicare since 75% of the meso patients are Medicare population. We always mentioned, we will approach Medicare for coverage and pricing after our approval on GBM. So, we will continue to work with Medicare and it’s very similar to our process with the GBM.

So we cannot define any timeline right now..

Okay. Thanks, guys..

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

Hi. Good morning, and thanks for taking my question. So a quick one with regards to mesothelioma commercial coverage.

Would you walk us through the process you are expecting and the rough timeline to get this side of the population covered?.

Yes, sure. This time I realized the question is about a mesothelioma. I’ve been so focused on GBM in last five years. So this will also follow the same process that GBM followed initially. So clinicians will prescribe the therapy to patients. And if they’re privately insured, we’ll then approach their carriers on a named patient basis.

And then when volumes become at a certain level, we can then work to establish coverage policies in those carriers. So this will take us through sort of a standard policy just for everyone on the line. We don’t expect material revenue in 2019 as we work through this process..

So Bill from your experience with GBM, is this something like this is a lengthy process. Maybe it takes two to three years to get majority of the patients covered..

So, I don’t think it’s going to take three years. But it really is a function of getting the patients on therapy and then applying to the carriers. I think the fact that this is a small indication with relatively few patients compared to other areas in which we’re working, actually makes it a little bit easier than some of the larger indications..

Okay. Thank you. And then, I wonder if you could make comments with regards to the timeline to the decision from China side, whether the GBM trial can be waived.

Is this a 2019 decision?.

So our expectation is the decision is a 2019 decision..

Okay. Thank you..

Thank you. Our next question comes from David Nierengarten from Wedbush Securities. Your line is open..

Thanks for taking my question. It’s on GBM. According to my math, duration of treatment would have had to increase a bit for the quarter.

I know you don’t generally talk about that, but going forward with Medicare reimbursement, patients of course are older, would you anticipate a change in trend in duration of therapy or maybe to put it another way? If you could remind us if there are any differences in duration on treatment in the clinical trial by age going on prior data or real world data that you have disclosed in scientific meetings.

Thanks..

Hi. Thank you for the question. So we are not expecting treating duration difference at all. And we are not talking about the exact treatment duration, but from our experience in different trials, there’s no meaningful treatment duration difference between ages..

And remember David, we have been treating this patient population for years..

Yes. Okay. Thank you..

Thank you. [Operator Instructions] And we do have a follow-up from Vijay Kumar from Evercore. Your line is open..

Hey guys, just one not quick clarification. The reimbursement – step up the $5 million that you mentioned.

Was this related to the commercial side or on the Medicare side?.

Thanks, Vijay for the follow-up question. It is related to the commercial side. And it is a result, as I said of improved reimbursement performance. We hope that performance, we have continued to improve and that’s why we stayed that we don’t think it’s going to be a significant as we saw in the second quarter.

But we are working very hard to get better and better at reimbursement. And then your question on Medicare, we do think that with billing starting and the coverage and the fee being effective on September 1, our experience with commercial payers and Medicare is not going to be any different that you have to go through.

Let’s call it administrative ramp up process where it takes a certain period of time before paperwork processes, everything has been ironed out. So we do expect that to affect to certain extent, which is very difficult to predict, to be honest in Q3 and probably also somewhat in Q4.

So it’s not like flip the switch, 75% or 25% are being reimbursed at 13.2. It’s going to take a little while before all these processes are honed and working smoothly..

This is helpful. Thank you..

Thank you. And we do have a follow-up from Greg Gilbert from SunTrust. Your line is open..

Thanks. Perhaps premature, but in the long setting your population is up, see not the large frontline setting, but maybe you could give us a little color on how many years do you think it would take to be able to access the frontline setting, assuming your current trial goes as you hope. Thanks..

Sure. So Greg, I think it would – it will require another clinical trial. So it’s probably three to four years or more to move to frontline. This is an area that we haven’t really planned out in detail yet. So I’d say, typical with any one of our indications..

Okay. Thanks..

Thank you. And I am showing no further questions from our phone lines. I’d now like to turn the conference back over to Bill Doyle for any closing remarks..

Sure. So first of all, I want to thank everybody on the line and thank you for your continued interest in Novocure. As Asaf said during his remarks, Q2 really was a transformative quarter for Novocure. We received Medicare coverage and reimbursement. I think as you know, this is something that we’ve been working on for years.

We received FDA approval for mesothelioma, our first torso indication. We’ve increased our gross margin and had strong revenue growth which resulted in our first ever quarter with positive operating income.

I think this is particularly important given that this is the backdrop here is continued growth in funding for our R&D and our technology development. And we’re still generating positive operating income. We made continued progress in our Phase 3 clinical program, which is clearly the driver of our long-term value expansion.

And we all couldn’t be more thankful for the contributions of our team. We couldn’t be more thankful for the contributions of our clinicians and our patients. And we feel particularly well positioned today as we drive forward in our core strategies. So thank you all..

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