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Is Novocure a Buy?

By Zhiyuan Sun - Apr 20, 2021 at 6:30AM

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Once a stock goes up 50% in a single day, it can be hard to keep the momentum going.

On April 13, Novocure (NVCR -0.90%) stock jumped after the company received a green light to accelerate a pivotal phase 3 study. The investigation involves its medical device, Optune, to treat advanced-stage non-small-cell lung cancer (NSCLC). Optune is a portable device that applies small alternating electric currents to cancer cells in the patients' bodies, disrupting their replication process and causing cell death. The electric currents' frequency is specifically tuned to target cancer cells while avoiding healthy ones.

In 2015, the U.S. Food and Drug Administration (FDA) approved Optune to treat glioblastoma, the most deadly form of brain cancer. Since then, Novocure's revenue has soared. Can it keep up its rate of growth in the future

Female doctor analyzing brain scans.

Image source: Getty Images

What's the big deal?

An independent data monitoring committee in charge of Optune's phase 3 clinical trial for NSCLC recently decided to shorten the study. Instead of enrolling 534 patients and following up over 18 months, Novocure only need a total of 276 patients with 12 months of follow-up. The company is still blind to the study results.

The obvious result is that the study would take less time and probably cost less to run. However, it's important to look at the context and the wording of the press release. 

Typically, independent committees do not allow principal investigators to reduce sample sizes for a study unless the experimental treatment had a huge benefit for patient survival. Said another way, if Optune plus standard of care (SOC) treatments had only a small survival benefit compared to SOC alone, then it would require more patient enrollment for that endpoint to be visible.

This is further reinforced by the fact that the committee said it would be "unnecessary" and "unethical" to continue admitting patients to the control group. The only reason that a committee would find it unethical to halt patients receiving SOC in such cases is because the experimental drug is keeping them alive for much longer. All of this suggests that Optune will replicate its success in treating NSCLC in phase 2.

That would be a huge step forward for Novocure. By 2026, market research firms estimate the NSCLC treatment market will grow to $43 billion, a 13.4% per year increase from 2019. By comparison, the glioblastoma treatment opportunity will likely grow to just $1.8 billion by 2027 from about $874 million today.  

Can you count on Novocure? 

Last year, Novocure grew its sales by 41% to $494.4 million. Simultaneously, its cash flow from operations improved from $27 million in 2019 to $99 million in 2020.

There are only about 3,411 patients on Optune, and the device has a staggering price of $21,000 per month. However, glioblastoma patients' life expectancy stands at a mere 15 to 17 months after diagnosis, so there's a massive benefit to anything that could improve their survival outcomes to justify the cost. In clinical studies, glioblastoma patients who received Optune and temozolomide (a chemotherapy) lives a median of 24.5 months compared to 19.8 months for those who received temozolomide alone.

At various points between now and 2035, multiple patents associated with Optune are due to expire, putting various aspects of Novocure's revenue at risk. The company sees this too, and is heavily reinvesting in research and development (R&D) -- as much as 26.7% of revenue -- to keep the momentum going. In 2019, the FDA expanded Optune's label to include mesothelioma as well. Pretty soon, the agency could also clear it for NSCLC.

Trading at 41 times revenue, Novocure stock is pretty expensive when looking at its past financials. Luckily, it's right on the edge of entering the 11-figure NSCLC treatment market, and with that in mind, its valuation looks more reasonable. Even after the pop, Novocure is still a great stock for those interested in biotech.

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