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Is Novocure Stock Overvalued?

By Brian Withers and Brian Feroldi - Apr 30, 2021 at 7:11AM

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Did the market overreact to the company's good news?

Medical device company Novocure's (NVCR 5.47%) shareholders have been cheering the company's recent success in its phase 3 clinical trial as the stock responded on the good news from an independent data monitoring company's positive findings. On a Fool Live episode recorded on April 14, Fool contributors Brian Feroldi and Brian Withers discuss the company's recent news and whether the stock is now overvalued.

Brian Feroldi: Okay, let's move on to Novocure ticker symbol N-V-C-R. This is a company that is focused on cancer, specifically a medical device that admits electric waves that inhibit cell division. Novocure investors had a huge day yesterday. The company basically announced that the company has a phase 3 trial going on involved in lung cancer. Currently, the device is only approved in brain cancer and mesothelioma. Those are tiny niche markets. The company has several pipeline projects in place, clinical trials to expand this technology into much larger indications. One of them is lung cancer, which is the No. 1 by patient volume. Yesterday, during the middle of the clinical trial, in the middle of a clinical trial, an independent data monitoring committee comes out and reviews the data.

Novocure was completely blinded to the data, but the independent data monitoring committee said, "It is likely unnecessary and possibly unethical for patients randomized to the control arm to wait to 534 patients 18-month follow-up." They've reduced recommending the sample size of that 276 patients at a 12-month follow-up. Essentially, what they're telling you is this thing is working so well, it's unethical to give people a placebo effect.

We don't have any data to back that up, but holy cow, does that indicate that this is really working in this indication. If you look at the company's results without any of these expanded indications, pretty good. Patient growth of 17%, that's globally. In the U.S. and Germany, in Japan, up across the board, revenue of 45%, gross margin 80% here already, net income was up 15%. They are spending like crazy on R&D right now to fund all these trials. The fact that they are profitable at all is there a really good indication.

Over the next couple of years, we have tons of phase 2 and phase 3 data readouts coming that could continue to push the stock higher. Phase 2 data on liver cancer, ovarian cancer, lung cancer, gastric cancer, pancreatic cancer, and brain metastases, all of which could dramatically expand this company's addressable market opportunity.

Brian Withers: Brian, Novocure delivered a nice surprise yesterday and spiffy-popped for a number of our members. But it makes me think, is the stock amount overpriced?

Feroldi: Well, I will go to Tom Engle and say it's short-term expensive, long-term cheap, if indeed it can extend it into those additional indications. If the company does not get additional approval and it's just stuck within a brain metastasis, excuse me, brain cancer and mesothelioma, it's definitely overpriced today. There's no doubt about it if the company can continue to expand into those other cancers and boy, was that data we got this week a good indication that it can, then I don't think it's crazy expensive.

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