NovoCure: A Stalwart With More Upsides

Summary

  • Though there are many companies to choose from, I focus on leading innovators with either novel therapeutics or technologies.
  • NovoCure is a premier developer of tumor treating fields that already enjoyed early market success for glioblastoma multiforme and mesothelioma.
  • As the firm is aggressively expanding its indication, you can expect more sales growth and data reporting to come this year and beyond.
  • I do much more than just articles at Integrated BioSci Investing: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »

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NovoCure

"I have already made up my mind, don't confuse me with facts." - Phillip Fisher (Warren Buffett's mentor)

Author's Note: This article is an abridged version of an article originally published for members of the Integrated BioSci Investing marketplace on April 28, 2022.

Biotech investing is a special endeavor because you can see an innovator deliver hope to a seemingly hopeless situation. That is to say, you witness patients (who could be your loved ones) living longer. As a shareholder, you're also handsomely rewarded when you invested early on. Now, I'm attracted to oncology innovators because my father-in-law passed away in recent years due to cancer. As such, I made it a mission to honor him by assisting companies that are developing novel treatments for cancers.

On that note, I'd like to revisit another stellar cancer innovator known as NovoCure (NASDAQ:NVCR). The company leverages the electromagnetic properties of the cell to design a breakthrough technology that decimates many aggressive cancers. In the first several years of the launch, it's been a significant market success. Nevertheless, I strongly believe that there are substantial upsides. In this research, I'll feature an analysis of NovoCure and share with you my expectations for this intriguing growth equity.

NVCR chart

StockCharts

Figure 1: NovoCure chart

About The Company

As usual, I'll deliver a brief corporate overview for new investors. If you are familiar with the firm, I suggest that you skip to the subsequent section. Headquartered in St. Helier, Jersey, NovoCure is a global oncology leader that dedicates its efforts to the innovation and commercialization of a novel cancer treatment dubbed Tumor Treating Fields (i.e., TTF). Notably, TTF is delivered by a device known as Optune that is portable and convenient for patients.

Optune for GBM

NovoCure

Figure 2: Optune TTF for glioblastoma

As an uncanny method of attacking cancerous cells, TTF is highly efficacious and safe against many deadly cancers. Therefore, the technology has been approved and launched for three indications. They include both newly diagnosed and recurrent glioblastoma multiforme (i.e., GBM) as well as mesothelioma. To boost further growth, NovoCure is investigating TTF for other cancers such as non-small cell lung cancer (i.e., NSCLC), brain metastases, and pancreatic, ovarian, liver as well as gastric cancers.

pipeline

NovoCure

Figure 3: Therapeutic pipeline

Commercialization Progress

Asides from convenience, Optune is proven to extend survival in the high-quality Phase 3 (EF14) trial of over 700 patients afflicted by newly diagnosed GBM. Compared to temozolamide (i.e., TMZ) alone, the Optune/TMZ combo demonstrated the remarkable 43% vs. 31% (at 2-year) and 13% vs. 5% (at 5-year), respectively. As the p-values indicate strong statistical significance, you can bet that the efficacy are due to TTF rather than random occurrences.

strong Optune efficacy

NovoCure

Figure 4: Strong Phase 3 EF-14 trial data

Riding excellent clinical outcomes, it's not surprising how TTF garnered signs of early market success. You can see from the figure below that sales jumped from $52.1M in 2018 to the remarkable $137.5M in 1Q2022 (with 3.5K patients on the therapy). In 1Q2022, the revenues in the US, EMEA, and Japan correspondingly tallied at $97.4M, $27.0M, and $8.8M, respectively.

Interestingly, you can see that sales growth has cooled off a bit in the previous two years. In my view, that's related to the effects of the pandemic. In other words, it's more difficult to market to physicians during COVID due to health concerns. As the pandemic is subsiding (and the robust expansion is ongoing), you can anticipate a much stronger sales ramp up in the next few years.

aggressive sales growth

NovoCure

Figure 5: Aggressive sales ramp-up

Upcoming Expansion

Shifting gears, let us analyze the upcoming expansion because it'll give you more insight on what to expect from this stock. As you can see, NovoCure only penetrated 35% of the 11.2K patients with GBM. With COVID subsiding, you can imagine that sales would have two more folds increase for that market.

In the longer horizon, you can appreciate that various label expansions for NSCLC, ovarian, and brain metastasis would correspondingly deliver to 46K, 16K, 38K, and 43K patients. Among other expansions, you're looking at a total of 155K patients which is at least 39X folds higher in potential sales.

large market

NovoCure

Figure 6: Gargantuan market potential

Viewing the figure above, the current Phase 3 programs alone would give a 14X increase in market opportunities. Simply put, there is much more untapped market potential for TTF. Of upcoming catalysts, there's the LUNAR trial for lung cancer that is poised to report data later this year. Next year, you have the ENGOT-ov50/INNOVATE-3 DATA for ovarian cancer and the data of the METIS trial for brain metastasis. In 2024, there's the PANOVA-3 trial outcomes for pancreatic cancer. As a whole, you can appreciate that there are many catalysts to power long-term growth for NovoCure.

upcoming catalysts

NovoCure

Figure 7: Upcoming catalysts

As LUNAR is the most immediate upcoming catalyst, you should forecast its chances of a positive data release. Leveraging my Integrated System of forecasting, I ascribed the 65% (i.e., more than favorable) chances of a positive data event. I based my rationale on TFF's prior data, my two-plus decades of forecasting experience, and my intuition. In a nutshell, you can expect very strong upcoming data from the LUNAR trial. I noted in the prior research,

Don't let my 65% throw you off. My forecast is based on categorical rather than numerical per se. As such, my 65% equates to an 85% numerically. As I keep track of my forecasting over the years, you can see my records to get a feel for what to expect from the upcoming event.

Competitor Landscape

Regarding competition, NovoCure TTF is competing against conventional chemoradiation therapies and immunotherapies. They are the bread and butter treatments for cancer that will not go away. Notwithstanding, TTF represents a novel and efficacious/safer approach that confers competitive advantages. Additionally, there are new treatment modalities that exert stronger competitive pressure than conventional drugs. I noted in the prior research,

There are novel treatments like CAR-T, CAR-NK, and CAR-macrophage. Notably, CAR-T is already approved for blood cancers. Though these novel CARs have not been proven effective for solid tumors, that's where future developments are heading. You can bet there will be some CARs that would be highly effective against solid tumors. That aside, there are the tumor-infiltrating lymphocytes (i.e., TILs) of Iovance Biotherapeutics (IOVA) that have demonstrated extremely robust efficacy for cancers. Regardless of the competition, there is always a strong demand for novel therapeutics. The oncology space is vast and thereby affords many blockbusters.

Financial Assessment

Just as you would get an annual physical for your well-being, it's important to check the financial health of your stock. For instance, your health is affected by "blood flow" as your stock's viability is dependent on the "cash flow." With that in mind, I'll assess the 1Q'2022 earnings report for the period that ended on March 31.

As follows, NovoCure procured $137.5M in net revenue for the quarter compared to $134.6M for the same period a year prior. As such, its revenues have a 2.1% year-over-year (YOY) revenue growth rate. You can see that the growth rate is cooling down. Notwithstanding, if you multiply that figure by 4 (i.e., the forward estimate for the year), you're looking at $550M, which is over halfway toward $1B. Coupled with the aforementioned catalysts, you can anticipate the growth to leap much higher in the coming years.

That aside, the research and development (R&D) for the respective quarters registered at $42.2M and $45.9M. Here, the R&D is slightly trended down. Generally speaking, I'd like to see an increasing R&D trend because the capital invested today can turn into blockbuster profits tomorrow. After all, you have to plant a tree to enjoy its fruits.

Additionally, there were $4.6M ($0.04 per share) net losses compared to $4.2M ($0.04 per share) decline for the same comparison. On a per-share basis, the bottom line remains essentially the same. For a commercial-stage operator, you want to see the net earnings increase over time.

financials

NovoCure

Figure 8: Key financial metrics

About the balance sheet, there were $932.3M in cash, equivalents, and investments. Against the $110.6M quarterly OpEx), there should be adequate capital to fund operations into 3Q2024. Now with the $137.5M in revenue, the cash runway should be extended much longer. Simply put, the cash position is extremely strong relative to the burn rate.

While on the balance sheet, you should check to see if NovoCure is a "serial diluter." After all, a company that is serially diluted will render your investment essentially worthless. Given that the shares outstanding increased from 102.6M to 104.1M, my math reveals a 1.4% annual dilution. At this rate, NovoCure easily cleared my 30% cut-off for a profitable investment.

Valuation Analysis

It's important that you appraise NovoCure to determine how much your shares are truly worth. Before running our figure, I liked to share with you the following:

Wall Street analysts typically employ a valuation method coined Discount Cash Flows (i.e., DCF). This valuation model follows a simple plug-and-chug approach. That aside, there are other valuation techniques such as price/sales and price/earnings. Now, there is no such thing as a right or wrong approach. The most important thing is to make sure you use the right technique for the appropriate type of stocks.

Given that developmental-stage biotech has yet to generate any revenues, I steer away from using DCF because it is most applicable for blue-chip equities. For developmental biotech, I leverage the combinations of both qualitative and quantitative variables. That is to say, I take into account the quality of the drug, comparative market analysis, chances of clinical trial success, and potential market penetration. For a medical diagnostic device, I focus on market penetration and sales. Qualitatively, I rely heavily on my intuition and forecasting experience over the decades.

Molecules and franchises

Market potential and penetration

Net earnings based on a 25% margin

PT based on 104.1M shares outstanding and 10 P/E

"PT of the part" after appropriate discount

TTF for GBM, mesothelioma and various cancers (NSCLC, pancreatic, ovarian, brain mets, etc).

$6B (Estimated from the $582.25B global cancer market).

$1.5B $144.09 $100.86 (30% discount TTF is approved for 3 indications with others still in various Phase 3 trials).
Others N/A N/A N/A N/A

The Sum of The Parts

$78.12

Figure 9: Valuation Analysis

Potential Risks

Since investment research is an imperfect science, there are always risks associated with your stock regardless of its fundamental strengths. More importantly, the risks are "growth-cycle dependent." At this point in its life cycle, the main concern for NovoCure is whether the company can boost its revenues further. The immediate concern is if LUNAR would generate positive data this year.

As I'm confident in LUNAR's chances of success, I correspondingly ascribed a 35% risk of failure. In case of a negative data release, you can expect the shares to tumble by 30% and vice versa. Notably, the magnitude of the decline is not as great as my usual 50%, because TTF is already successfully launched for three indications and generating significant revenues.

Conclusion

In all, I recommend NovoCure as a buy with a 4.8/5 stars rating. On a two to three years horizon, I expect the new $100.86 price target to be reached. NovoCure is a story of successful innovation that delivers hope to patients and rewards for shareholders. Over the years, the stock has grown to over $8B in market capitalization. In other words, if you want to buy out the whole company that's how you'd have to pay. Being a disruptive technology, TFF demonstrated its therapeutic prowess as it garnered approval and marketing success for GBM (one of the deadliest forms of cancers) as well as mesothelioma. Though sales have flattened out in the last few quarters, I strongly believe that it'll be ramped up to a new high in the next few years. And, that's due to the resolution of the pandemic as well as various label expansions. Looking ahead, you can anticipate a positive report for the LUNAR trial. Then next year, you'd have two more Phase 3 trials to be reported. In 2024, there's another catalyst to power long-term growth.

As usual, I'd like to remind investors that the choice to buy, sell, or hold NovoCure is always yours to make. In my view, you should continue to hold your shares or diversify into 1/4 of a full position to hold for the long term.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

Additional disclosure: As a medical doctor/market expert, I'm not a registered investment advisor. Despite that I strive to provide the most accurate information, I neither guarantee the accuracy nor timeliness. Past performance does NOT guarantee future results. I reserve the right to make any investment decision for myself and my affiliates pertaining to any security without notification except where it is required by law. I'm also NOT responsible for the action of my affiliates. The thesis that I presented may change anytime due to the changing nature of information itself. Investing in stocks and options can result in a loss of capital. The information presented should NOT be construed as recommendations to buy or sell any form of security. My articles are best utilized as educational and informational materials to assist investors in your own due diligence process. That said, you are expected to perform your own due diligence and take responsibility for your action. You should also consult with your own financial advisor for specific guidance, as financial circumstances are individualized. That aside, I'm not giving you professional medical advice. Before embarking on any health-changing behavior, make sure you consult with your own doctor.

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