Aggressive forms of cancer can be devastating to patients and their families. This kind of diagnosis brings uncertainties about the quality of life and the length of time a patient has left. Healthcare company Novocure (NASDAQ:NVCR) aims to improve both these aspects for patients. 

Novocure approaches cancer treatments differently than most of its peers; it uses electric fields to disrupt cancer cell division, and the frequency it uses does not affect healthy cells. In its investor presentation, Novocure noted a normal intestine cell has a natural frequency of 50 kHz. However, several cancer cells types have a natural frequency in the 150 kHz to 200 kHz range. With a wide effective treatment zone gap, Novocure's products disrupt the harmful cells while ignoring the healthy ones. 

What is the base market?

Glioblastoma (GBM) is an aggressive brain cancer form that can lead to death in under six months. To interfere with cancer cell growth, a drug called Temozolomide is often prescribed, which has extended the survival period to 16 months according to Novocure. With Novocure's Optune device turned on 70% to 90% of the time, that period could be extended further to 22 months. And 86% of patients survived longer when using the device for more than 12 hours daily, according to a phase 3 trial published in 2017.  

Man talking to doctor.

SOURCE: GETTY IMAGES

Outcomes like this give investors optimism that Novocure will innovate and treat different cancer types. Business success follows treatment achievements and Novocure has delivered there as well. Revenue grew 15% last quarter with particular growth in China (130%), Japan (22%),  and Africa (29%). Revenue also grew in Europe and the Middle East, though Novocure did not specify how much.

All together, Novocure's revenue numbers are still providing respectable international growth, yet the stock is within 10% of its 52-week low and down 50% from its high. What gives?

Novocure's Domestic slowdown is troubling investors.

During the second-quarter, U.S. revenue only grew 7%. This is disappointing because the same quarter last year fell amid the COVID-19 pandemic (April 1 to June 30). Over that period, healthcare services were disrupted and many people avoided the doctor's office. After COVID cases decreased earlier this year, there was an uptick in undiagnosed cases of cancer. Because of this, Novocure should have seen more domestic growth versus the prior year.

In Novocure's conference call, management noted they are five years post-launch for GBM treatment and so growth is expected to be moderate, rather than the prior growth rates of 30% or 40%. Novocure does call out a 37% GBM penetration rate in the U.S., so it still has plenty of room in that market to grow. 

Contradicting the growth availability, the revenue generated in the U.S. has been shrinking. Second-quarter revenue was still up over last year, but prior quarters do not show a seasonality aspect to their business. Management has not commented on the shrinkage in either their first or second-quarter conference calls. 

Metric Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021
 U.S. Revenue $81.2 million $92.6 million $97.7 million $85.9 million $87.1 million

Data Source: Novocure. 

Investors should keep a watchful eye on the domestic revenue number when Novocure reports its third-quarter earnings on Oct. 28. It could signal which direction the stock will move. If domestic revenue continues shrinking or goes sideways, Novocure will need to develop new treatments and revenue streams to provide stock appreciation.

Future markets are the key to Novocure's success.

Novocure is not a one-trick pony with only GBM treatments. It has an FDA-approved mesothelioma treatment as well. Looking at its phase 3 trials, the company is investigating brain metastasis, non-small cell lung cancer (NSCLC), pancreatic cancer, and ovarian cancer therapies. Additionally, it is compiling pre-clinical data for many other cancer types.

A major opportunity is NSCLC, with 193,000 cases diagnosed each year in the U.S. Compared to Novocure's primary GBM treatment pool of 12,000 annual diagnoses, there is a potential 16-fold in market opportunity. While still in phase 3 trials, an independent data monitoring committee recommended Novocure decrease its sample size and shorten the trial period due to early success. They also noted it might be unethical to continue the control arm of the experiment. While Novocure cannot see the results, it is a positive sign that the review board essentially said the technology works well enough that trial patients shouldn't be refused treatment due to being randomly selected into the control group.

If the FDA approves even half these treatments, Novocure could be a massive winner. However, there is always the risk that trials could fail and tank the stock. Investors need to consider their risk tolerance before becoming a Novocure shareholder.

The current valuation is dependent on future achievements. 

At 21 times price to sales, Novocure isn't a cheap stock and already has success built into the price. Novocure is free cash flow positive and sometimes delivers a net income profit. Both of these factors should ease investors' minds about the valuation. If the company's treatments receive more regulatory green lights, Novocure's success will translate into more optimism reflected in the stock price. More approvals will also create more revenue and allow Novocure to reach scale, creating even stronger bottom-line growth.

Novocure makes a great biotech play that isn't as risky as peers that don't have any FDA approvals under their belt. Of course, that translates to a less explosive upside, but there is a lower probability of business implosion. Investors have seen a successful trial in two products more are likely. Novocure is a great investment for those with a long time horizon and an ability to handle a bumpy stock price ride. Picking up a few shares at a 50% discount would be a wise move for patient but risk tolerant investors.

 
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.