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This Promising Healthcare Stock Is Down 50% From Its Highs; Should You Buy the Dip?

By Patrick Bafuma – Sep 9, 2021 at 11:12AM

Key Points

  • Novocure stock has dropped significantly recently, despite the company's proven technology.
  • A new market for explosive growth may be right around the corner.
  • The business is favorably valued compared with its peers, considering its next massive potential market.

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Novocure has been fantastic for investors, up over 1,600% in the past five years. But in the past six months, shareholders have been on a roller coaster.

Novocure (NVCR -0.70%) is the producer of a cancer-fighting wearable device called Optune. Its tumor-treating technology uses low-power electrical fields to interfere with a cancer cell's ability to multiply. The stock skyrocketed 40% in a single day back in April on positive news for Optune in tests for non-small cell lung cancer (NSCLC), but shares have fallen 40% since their June highs. Is now the time to reexamine this $14.5 billion oncology med-tech?

The low-hanging fruit is gone

A recent slowdown in Optune sales spooked investors earlier this summer as the company reported an annual increase of only 6% in active patients at the end of June. Although the average reimbursement price improved by more than $400 per patient per month in the second quarter versus the same period last year, the company only saw a 15% year-over-year increase in net revenue for its wearable technology in the most recent quarter.

And with that, it seems Optune's low-hanging fruit has disappeared. It's not surprising, as Optune received its first approval for a certain type of brain cancer called glioblastoma in 2011, and since then has only added a rare form of lung cancer, called mesothelioma, to its approval list.

A doctor and a patient in a hospital bed shaking hands.

Image source: Getty Images. 

Wall Street overreacted

Shares were whacked again at the beginning of July when the company reported results for a single-arm study of just 21 patients using Optune in combination with the oral chemotherapeutic Nexavar for a form of liver cancer called hepatocellular carcinoma. Because it was a single-arm study, the company could only compare its results to historical control data, and with fewer than two dozen patients evaluated, the numbers were too small to draw any meaningful conclusions about efficacy.

On the bright side, there were no significant adverse events as a result of Optune treatment, even though the patients who received it had more advanced cases of the disease than historical controls. And while the percentage of patients who either had no worsening of their disease or at least partial improvement (called "disease control rate") was better with Novocure's treatment (76% versus 40%-50% for historical controls),  it was less than Wall Street was hoping.

The med-tech company is moving forward with the program and designing a phase 3 trial, but for now, investors should put the hepatocellular carcinoma market on the back burner. Instead, it's worth focusing on the multiple other ongoing phase 3 trials that have large addressable markets and data expected before the end of 2023.

Can Novocure's share price rocket past previous highs?

Despite slowing sales, there is hope that Optune's growth can be reignited. In its Q2 results, the company lists multiple data readouts expected before the end of 2023:

  • Interim analysis of a phase 3 trial for recurrent ovarian cancer in Q3 2021
  • Interim analysis of a phase 3 pivotal trial in locally advanced pancreatic cancer sometime in 2022
  • Final data from a phase 3 trial in NSCLC sometime in 2022

While final data for the ovarian and pancreatic cancer markets is estimated to be presented in 2023, prior phase 2 studies by the company suggested improved overall survival for all three of these forms of cancer. Novocure believes that its current phase 3 pipeline will provide 20 times the potential market opportunity of today.

Expecting all three indications to flourish may be wishful thinking, but the biggest market of the three, NSCLC, looks like an inevitable approval. An independent data monitoring committee recommended reducing the number of patients in the NSCLC trial by almost half the intended size and stated it would possibly be unethical for patients to be randomized to the control arm.

This news sparked a 40% rise in a single trading day in April, and for good reason. With just over 130,000 lung cancer deaths each year in the U.S. alone and NSCLC making up 84% of those cases, at $13,000 a month for Optune, there is potential to reach revenue of over a billion dollars a month for the stage IV NSCLC market alone.

Even now, Novocure is still not cheap compared with other med-tech titans. Its price-to-sales ratio of 27 outpaces those of robotic surgery superstar Intuitive Surgical (25), innovative insulin pump maker Dexcom (also 25), and respiratory device maker ResMed (13). While these other med-tech companies are still growing to an extent, there is an opportunity for explosive growth with Novocure. The data monitoring committee's NSCLC recommendation significantly increases the likelihood of Optune's approval in this indication, which would reignite growth.

I personally think there is little reason to be scared by today's valuation given the large addressable markets ahead, and healthcare investors should consider adding Novocure to their watch lists.

Patrick Bafuma has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Novocure. The Motley Fool has a disclosure policy.

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