Novocure (NASDAQ: NVCR) is a Portsmouth, New Hampshire based company that has developed TTFields (tumor-treating fields), a novel therapy that uses low-voltage alternating electrical currents to disrupt the growth of tumor cells. TTFields is the first therapy to prolong survival in glioblastoma, a potentially fatal brain tumor in more than a decade. It is also being tested in several other solid tumors. We are initiating coverage on Novocure with Buy rating and common share price target (intrinsic value) = $10.46 (enterprise discounted cash flow method).
- Stock Rating= Buy
- Stock price target (intrinsic value)= $10.46
- Current stock price= $7.76
- 52-week stock price range=$7.30 to $30.89
- Market cap= $661 million
- Average daily stock volume= 550,068
- Cash/cash equivalents= $200.85 million
- Cash reserves enough to last till= Q2, 2017
- Debt= $23.29 million
Figure 1: Novocure, common stock price chart (source: bloomberg.com)
Description of the product:
TTFields are low intensity, alternating electrical fields which disrupt mitotic division and growth of tumor cells with minimal effect on normal cells. The therapy is safer than radiation therapy. It is used in combination with other therapies like chemotherapy, and targets solid tumors. The therapy is delivered through a pair of transducers which are placed directly over the skin in the region surrounding the tumor. The delivery system (called Optune) can stay in place while the patients go about in their daily activities. The therapy is designed to be worn continuously throughout the day and night. The clinical efficacy of the system is directly proportional to the number of hours used. Patients are instructed to be use the system at least 18 hours a day. The second generation Optune system was approved by FDA earlier this month, and is smaller and lighter than the first generation system.
Figure 2: Optune System
TTFields, a revolutionary new therapy in glioblastoma, a fatal brain tumor:
Glioblastoma is a potentially fatal brain tumor that has extremely poor prognosis. About 12,500 cases of glioblastoma are diagnosed every year in the US alone. Global addressable glioblastoma market is more than $2.5 billion. The primary treatment is surgical resection followed by chemotherapy and or radiation. The first line chemotherapy is the Temozolomide, TMZ, which has several side effects. TMZ had annual sales of $1 billion globally. Novocure's therapy is approved in recurrent as well as newly diagnosed glioblastoma.
Combination of TTFields therapy with TMZ resulted in significant improvement in median overall survival (OS) in newly diagnosed glioblastoma (median OS=20.5 months vs. 15.6 months with TMZ alone, figure 3), source=10-Q, 10-K. It was recommended as an adjunct therapy in newly diagnosed glioblastoma in the recent National Comprehensive Cancer Network (NCCN) guidelines.
Figure 3: Results of TTFields therapy in newly diagnosed glioblastoma (source: 10-K).
In a late stage clinical trial in the recurrent glioblastoma, the therapy extended overall median OS (used as monotherapy), but it did not reach statistical significance (median OS of 6.6 months vs. 6 months). However, significant increase in median OS was seen when the subgroup of patients who use the therapy more than 18 hours per day was analyzed (median OS 7.7 months vs. 4.5 months) as shown in figure 4. Patient compliance is thus an important factor determining the clinical efficacy of the system. TTFields is FDA approved to treat both newly diagnosed and recurrent glioblastoma in the U.S.
Figure 4: Results of TTFields as monotherapy in recurrent glioblastoma (source: 10-K).
TTFields could become a standard of care as adjunct therapy in treatment of pancreatic cancer, brain metastasis, and ovarian cancer:
Figure 5: Novocure, product pipeline
About 53,000 new cases of pancreatic cancer were diagnosed in the US in 2016. Most cases are already in advanced stage at time of diagnosis and only 7.7% patients are alive after five years. The median OS of the gemcitabine, first line chemotherapy is only 6.7 months.
Interim data from the first cohort of 10 patients in advanced, non-resectable pancreatic cancer showed that median OS increased to 14.9 months when TTFields was combined with gemcitabine. Patient enrollment in this phase 2 trial has been completed and results are expected later this year.
About 98,000 to 1,70,000 cases of brain metastasis due to various cancers are diagnosed in the US annually. About 40% of these cases are due to non-small cell lung cancer (NSCLC). Solitary brain metastasis may be candidates for surgical resection and stereotactic radiosurgery (SRS).
After a successful phase 2 trial in patients with brain metastasis due to NSCLC, Novocure plans to initiate a phase 3 trial combining TTFields with SRS. Global sales of SRS in treatment of head cancers were $140 million in 2014, and are projected to reach $365 million by 2025 (at 9.2% annual growth rate).
About 12,600 cases of recurrent ovarian cancer are diagnosed annually in the US. TTFields and weekly paclitaxel chemotherapy are being tested in a phase 2 clinical trial in recurrent ovarian cancer. Patient enrollment has been completed and trial results are expected later this year.
Preclinical data also showed that combining TTFields with checkpoint inhibitors increased tumor control by enhancing antitumor immunity. This represents huge potential market for the therapy in combination with check-point inhibitors.
There are no similar competing therapies already in the market or under development at present.
Novocure's management consists of professionals with vast experience in the industry, including at Johnson & Johnson (Chairman of Medical Device Research), Deka Research and Development (General Manager), Cephalon and Phillips Electronics (CFO, Senior V.P.), Carmel Biosensors (Head of Electrophysiology), Pfizer and Bristol-Myers Squibb (Director of Oncology). Details can be accessed here.
Valuation of the common stock:
Figure 6: Novocure, significant active patient growth.
The company reported Q2, 2016 financial results recently. Q2, 2016 revenue increased to $17.9 million from Q2, 2015, thus reflecting 174% growth. There was 110% increase in active patients (year-over-year) to 891 at the end of second quarter 2016.
Optune system costs $21,000 per month. The average reimbursement for this system is $14,000 per month and average therapy duration for each patient is 9 months. The potential medically eligible new cases of glioblastoma every year are 9300 cases in the US, 10,000 cases per year in the EU, and 1100 cases per year in Japan.
We assumed 12% quarterly growth in active patients in glioblastoma indication till 2019 and then 3% annual growth (till patent expiry in 2034). The annual cost of therapy was assumed as $126,000 ($14K/month). Using this growth trajectory, we estimate the therapy to achieve about 71% peak market penetration in glioblastoma and peak annual sales of $856 million in the U.S. and Europe.
We modeled peak $576 million of risk-adjusted annual revenue from pancreatic cancer indication (in 2034) with assumptions of annual incidence=48,000 cases/year in the U.S. and Europe, per patient cost=$100K, peak market penetration of 30% in 2034 and probability of reaching the market equal to 30% (which is the average for therapies in phase 2 trials as per Milken Institute data).
In calculating peak revenue estimates from TTFields in brain metastases, we used SRS as a comparative therapy. Global SRS market was estimated as $156.8 million in 2014 and is estimated to reach about $411 million by 2025 (annual 9% growth). Brain metastases accounted for 68% of SRS market in 2014. Using similar revenue from TTFields in brain metastases and risk-adjusting it with probability of success=67%, we modeled about $120.6 million of revenue in 2025. We expect revenue to grow at 5% annually after 2025 till 2034 (patent expiry), thus obtaining peak global annual $188 million of revenue from this indication.
In calculating the future revenue from use of the therapy in recurrent ovarian cancer, we input annual incidence in the U.S. and Europe= 12,600 cases, 40% peak market penetration (in 2034), treatment cost = $100K per patient and probability of reaching the market equal to 30% (average for therapies in phase 2 trial). Using these assumptions, we forecast peak risk-adjusted revenue of $151 million in 2034 from this indication.
Total risk-adjusted revenue from all these clinical indications was calculated=$1.77 billion in 2034 at patent expiry (and 3% annual decline after that). Cost of revenue was input=55% (in line with current quarter). R&D expenses were input=$28 million in 2016 and 17.6% of revenue (risk-adjusted at 30%) after that. Sales and marketing expenses were input=$60 million for 2016 and 3% annual growth after that. General and Administrative expenses were input=$52 million in 2016 and 3% annual growth after that. Depreciation & Amortization was input=7.3% of revenue (risk-adjusted at 30%). Income tax rate of 35% was used. Reinvestment rate was assumed as 90% of net income. These ratios are average for biotech/pharma industry. McKinsey's NOPLAT formula was used to calculate terminal value. Discount rate of 10% was used.
In calculating the fair value of equity, we adjusted non-operating assets like cash reserves, operating loss carry-forwards, over-funded pension assets and liabilities like debt, operating lease liability and employee stock options liability.
Using undiluted share count, we calculated intrinsic value/common share= $10.46. The spreadsheet can be accessed at this link.
Institutions have accumulated shares in the first quarter, 2016. Total of 2.2 million shares bought by 20 institutions in Q1, 2016. FMR, LLC owns 5.3 million shares or 6.7% of the float. Stepstone group bought 1.8 million shares in the first quarter. Hedge fund, Highline Capital bought $22 million worth of shares in Q1, 2016. Insider sentiment is positive and they accumulated $579K worth of shares in last 3 months. Sell-side analysts have provided price targets ranging from $9 to $16/share recently.
Risks in the investment:
The risks are similar to those for any emerging biotechnology company and as described in our previous reports. Various product candidates mentioned above might fail to succeed in clinical trials, side effects might limit their use, regulatory agencies might not approve them and healthcare insurers might not reimburse them. The company may need to raise significant cash to pay its debt and develop its clinical programs after one year. Future capital raise may dilute existing shareholders and put downward pressure on the stock price.
In conclusion, we maintain bullish view on Novocure in view of little competition, large potential markets, positive institutional and insider sentiment, and up-coming catalysts. We are adding it to our model portfolio as of 8/3/2016 with price target =$10.46 (suggested allocation=1% of portfolio).
Updated firm model portfolio:
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Disclosure: I am/we are long NVCR.
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.
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