Insulet and Novocure Are Going Gangbusters

Insulet (PODD -3.42%) and Novocure (NVCR -1.54%) both recently knocked the cover off of the ball in their recent earnings reports. Can investors expect more of the same?

In this episode of The Motley Fool's Industry Focus: Healthcare, host Shannon Jones and Fool.com contributor Brian Feroldi discuss what went right for these two companies in the first quarter and whether they can keep the momentum up.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on May 8, 2019.

Shannon Jones: We've got two companies posting some pretty impressive stats. Let's start with the first and that's insulin pump maker Insulet Corporation, ticker PODD. Stock is up nearly 20% off of earnings, Brian. This is a space. I know that you know better than anybody out there. You worked in the med device space for, what was it, about a decade or so?

Brian Feroldi: I worked for Insulet Corporation.

Jones: There you go! Now I'm really curious to hear, what did you think about their earnings this particular quarter?

Feroldi: I mean, they just knocked the cover off the ball basically all around. We saw sales growth of 29%. That was ahead of their guidance and ahead of the Street estimates. We saw their gross margin ticked up. We saw earnings per share on the bottom line, that was a multi-million-dollar beat. And on top of all that, they increased their guidance for the full year by a few million dollars. The report was pretty much spotless across the board. Beyond that, they reaffirmed their long-term guidance for 2021. This is a company that's targeting $1 billion in revenue, 70% gross margin, which would be continued expansion, and a mid-teens operating margin. So they reaffirmed that on the quarter call. Basically, it was a great report all around. No surprise to see the stock was up huge in response.

Jones: No, no surprise there. Impressive stats when you just consider how competitive this space is, especially going up against the likes of Medtronic, and also Tandem, who we covered in earnings last week as well. They also posted some pretty impressive numbers, also showing they're encroaching on Medtronic's space. But Insulet doesn't have its own automated system just yet. Is that right, Brian? That's something potentially on the way that could make that $1 billion in revenue all the more attainable, right?

Feroldi: That is completely true. Yeah, these guys do go up directly with Tandem. Tandem just posted spectacular results too. You guys covered them on the show last week. It is so nice to see that yet another company in this space is also doing well. It just tells me that the category itself is growing very quickly.

But to your point, yes. Insulet does not have an automated insulin delivery system as of yet. That product should be available within about a year or so. They are a little bit behind on that. But clearly, that is not holding them back, because this is a company that makes an insulin pump that is worn on the body that does not have any tubing, and just the appeal of a system that is completely wireless, which makes them stand out from the competition, is clearly leading to strong growth without that key feature.

Jones: Yeah. I continue to say it, I know I've said it a number of times on this show before, but the diabetes space, just in terms of innovation, with wearable tech that's actually driving health outcomes, is pretty remarkable. I don't think it gets nearly the amount of love and appreciation that it should. These companies are really on the forefront of that. We'll come to a point where literally on your Apple Watch, you'll be able to not only track your glucose readings, but an algorithm will be able to then drive exactly how much insulin you're getting, and this will all be completely automated, really taking away a lot of the pain and inconvenience that a lot of these systems, and just overall paradigms, have right now.

Feroldi: Yeah, I totally agree. The next couple of years should be very exciting in this space. People with diabetes have a lot to look forward to. But yeah, I agree, the med tech companies that compete in the diabetes space don't get enough attention from investors. But a lot of them have been tremendous winners.

Jones: Yeah. Huge winners, especially for 2018. All right, let's round things out with our last med tech earnings winner. That's a company called Novocure, ticker NVCR. This is a company that's been paving the way really in the fight against cancer. Making its mark by treating one of the more aggressive forms of cancer, brain cancer, glioblastoma, with a technology that's really centered around, of all things, electrical fields. Brian, catch all of our listeners up to speed. What is their tech, and how in the world are they doing this?

Feroldi: This is a company that I've followed with great interest for a number of years and I've actually talked about several times on the show before. This is a very odd duck med tech company. They make a medical device that uses electric fields to inhibit cell division and fight cancerous tumors. Their device is used alongside standard of care chemotherapy/ radiation therapy to improve health outcomes. It looks like a swimming cap that you put on your head. It has some wires on it. And while you wear it, it inhibits cell division in tumors and fights, as of right now, a deadly form of brain cancer called glioblastoma multiforme.

This company has just thrown up unbelievable growth over the last couple of years as more and more providers have been willing to use this oddball therapy to treat cancer. We saw a continuation of that in the first quarter. Revenue growth was up 40%. Strong growth in the U.S. and international markets, specifically Japan and Germany. We saw gross margin expansion. Their net loss dropped by almost half to $12 million. That's notable because this is a company that is significantly ramping up its spending on R&D.

Jones: With this company being centered around a solid tumor indication, you mentioned the glioblastoma indication, they've got a pipeline lined up going after pancreatic cancer, ovarian cancer, lung cancer. Solid tumors are really the holy grail of many of these biopharma companies that are trying to come out with innovative therapies. These solid tumors are really complex, and oftentimes it's not a one-and-done treatment, or a one-size-fits-all treatment. So they haven't had a whole lot of luck in the solid tumor indication. So to see a company like this with an electrical field technology, basically leveraging physics to, in many cases, shrink the size of tumors, is giving hope to a lot of patients, especially in glioblastoma. This is oftentimes where patients are literally counting the days or the weeks in terms of survival. This is a technology, the Optune System, that is giving them more months to live. Really impressive tech. I'll be really curious to see just logistically how their tech works with some of these other indications. It's one thing when you put on a skull cap, if you will, that has electrodes; it's a whole nother thing when you're trying to treat pancreatic and ovarian cancer with this technology. But, to have something separate from the standard chemo, radiation and surgery -- in some cases it's a supplement to those things, but to have something new, with potentially fewer side effects, less complications, is truly innovative in a space where cancer continues to be the No. 1 killer in the world.

Feroldi: Yeah, totally. You mentioned before, another big thing that happened this quarter was, they moved their ovarian cancer study into Phase 3 trials. So now that is their fourth clinical study that's studying Optune in Phase 3. They now are in Phase 3 studies with brain metastases, lung cancer, pancreatic cancer, and ovarian cancer. All of those markets dwarf the brain cancer market. I mean, they are just enormous. If the company can have success in any of those indications, the addressable market for this company just explodes.

In the meantime, the other exciting thing to note about this company is, they are currently pending FDA approval for mesothelioma. That's a cancer that, if they can win it, is a very small market. The revenue upside potential from that potential approval isn't that game-changing. The big thing for investors would be, it would be their first indication that they could potentially win outside of brain cancer, and really prove out that the therapy can be used in other areas of the body beyond the brain. All in all, tons to like here.