Novocure Limited: A Novel Approach But One That May Work For Investors

| About: NovoCure (NVCR)
This article is now exclusive for PRO subscribers.


Badly timed IPO and a weak market have led to a poor stock performance, but the fundamentals tell a different story.

Optune is doing well, the data is supportive of progress and the pipeline of development efforts is promising.

Stock, near an all-time low, is trading at a significant discount to other biotech names that are focusing on cancer treatments, which is unwarranted.

Novocure (NVCR), down 40% from the IPO levels, seems to be still facing doubts that the business faced when it went public, but the business is changing for the good at a much better pace than what the stock seems to be acknowledging. This might be a good time take a look at this commercial stage oncology company.

The performance post-IPO has been far from impressive, but whether one blames the poor timing of the IPO, weakness seen in the broader biotech space or lack of awareness among investors as well as the medical community about the different approach adopted by the company to treat cancer, there is hardly any doubt about the long-term prospects, the quality of management, visibility into the product ramp or the liquidity of the balance sheet, factors that play a key role in bringing down a lot of healthcare names.

The company is working successfully to move beyond glioblastoma with its noninvasive cancer-fighting device to treat other types of cancer, be it pancreatic cancer, brain metastasis, non-small cell lung cancer, ovarian cancer or mesothelioma, even though the market continues to doubt. Even though there seems to be ample liquidity to take the business through to break even, with $236 million in cash, having long-time backers like Pfizer (NYSE:PFE), Medtronic (NYSE:MDT) and Johnson & Johnson (NYSE:JNJ) and their strong balance sheets should provide both a floor to the stock and an assurance to the investors that the development initiatives are being closely followed by traditional consolidators in the healthcare space.

A different approach

Source: Novocure presentation

As most readers may know, the idea behind the company is to use electrical fields (Tumor Treating Fields, or TTFields) for treating cancer, rather than other firms going for surgery, radiation and chemotherapy. Delivering a therapy with a portable device in a field that is largely dependent upon drug-based therapies is bound to raise doubts, but this different approach may be both a challenge as well as an opportunity.

Marketing a novel approach may pose a challenge for any healthcare name, but now that the treatment is fast getting accepted among the medical community, investors may like the adoption cycle and the visibility that comes with the ramp.

The company charges a single, monthly fee of approximately $14,000 per month of therapy for each active patient, a predictable revenue model that is bound to draw fans among investors.

An approach that seems to be working

Source: Novocure

Whether one looks at the triple digit revenue growth, driven by increasing adoption of Optune therapy after the FDA approval of Optune for the treatment of newly diagnosed glioblastoma (GBM), the leading indicators of demand, like prescriptions, or the number of active patients, which may be a good leading indicator of future collections, the demand for this novel approach seems to be growing fast.

One can very well surmise that this is just the beginning, considering last quarter was the first quarter that included trends after the EF­14 superiority data was disclosed to the oncology community, there were 121 prescribers who wrote a prescription for Optune for the first time during the latest quarter and there are approximately 9,300 GBM patients per year that can be considered as candidates for treatment with Optune in the U.S.

Geographically, so far, it's mostly U.S. and Germany, which constitutes more than 80% of the EMEA prescription volume, that are driving growth, but with expected ramp in Japan and more sales reps as well as increasing practitioners coming onboard, topline growth should benefit.

Strong Pipeline

Image: Novocure

Just as the benefits of commercial adoption of Optune flow through, there is a decent potential for growth from Tumor Treating Fields therapy treating additional solid tumors and the developmental pipeline looks healthy enough to instill confidence. Last month, the company enrolled the last patient for both the PANOVA as well as INNOVATE trial.

A good opportunity to monetize the mismatch

EV/Sales next fiscal yr.













As the sheet above shows, the market not just seems to be indifferent about these positive fundamentals, especially when one compares the business against other biotech players that are focusing on cancer treatments, but the valuation difference is also significant, even if one takes into account all the doubts related to different approaches to treatment.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.