The stock market loves instant gratification. When forced to wait for a potentially good thing to pay off, some traders can begin to lose interest. Cancer treatment company Novocure (NVCR 2.36%), which uses low-power electrical fields to disrupt the growth of cancer cells, is now trading 50% below its highs.
The company has numerous clinical trials of its technology underway, but traders sold the stock lower after its most recent quarterly earnings report came and went without fresh approvals for new indications from the U.S. Food and Drug Administration (FDA). However, here are three reasons why Novocure is an opportunity for investors at recent prices.
1. Clinical trials are making progress
Let's start by addressing the elephant in the room -- the company's need of new regulatory approvals for its tech to be used in treating additional types of cancers. Novocure invented and builds medical devices that emit low-powered electrical fields, called tumor-treating fields (TTF); the fields disrupt the division of cancer cells, stunting their growth. Traditional forms of cancer treatment such as chemotherapy kill both cancerous and healthy cells, often making the patient ill. However, tumor-treating fields don't have any known affect on healthy cells.
So far, the FDA has approved Novocure's Optune tumor-treating fields system for three cancer types:
- Recurrent glioblastoma
- Newly diagnosed glioblastoma
- Mesothelioma
Image Source: Getty Images
There are two ways to view this from an investor's standpoint. First, these cancers are rare, which limits Novocure's addressable market. On the other hand, they have been great test cases for its TTF technology because these cancers have high mortality rates.
It could bode well for the company's chances of approval in other cancer types that it successfully started with some of the worst types. Novocure has several new applications in clinical trials, including:
| Cancer type | Phase |
|---|---|
| Brain metastasis | 3 |
| Non-small cell lung cancer | 3 |
| Pancreatic cancer | 3 |
| Ovarian cancer | 3 |
| Liver cancer | 2 |
| Gastric cancer | 2 |
Data from its phase 3 non-small cell lung cancer trial should arrive in 2022, brain metastasis in 2023, and interim data for ovarian cancer is due soon. These things take time, though, which requires investors to take a patient approach. Until or unless the story changes, such as news from a trial, it isn't easy to explain Novocure's significant share price movements as anything other than noise.
2. Expanding addressable market
Approximately 1.8 million cancer cases were diagnosed in the United States in 2020. Each year, doctors diagnose roughly 13,000 glioblastoma cases. In other words, Novocure's primary approved cancer type accounts for just 0.6% of U.S. cancer cases.
Its ongoing trials have the potential to be a massive deal in terms of expanding Novocure's addressable market. The big-ticket trial will be for non-small cell lung cancer -- among the most common types. About 235,000 lung cancer cases will be diagnosed in the U.S. this year, and the vast majority of these will be non-small cell.
Medical technology and pharmaceutical businesses derive their competitive "moats" from patents on their technology, which protect their intellectual property from copycat competitors for many years. Not only will Novocure have patent protection, it's also the only company that has even worked on developing this type of technology. Its only competition comes from other forms of treatment such as chemotherapy, leaving it an open path to capture any growth in the use of its approach.
3. The business has stable financials
Novocure posted operating losses of $12.3 million through the first six months of 2021 vs. $3.2 million of operating income in the same period last year. That shift could help explain some of the downward pressure on the stock price over the past few months, but I don't think that this should be a huge red flag for investors.
With numerous clinical trials going on, Novocure has had to step up its investments in research and development, spending $96 million through the first six months of 2021 compared to $55 million in last year's first half. Additionally, the company is profitable on an adjusted EBITDA basis, which takes stock-based compensation out of the calculation. By that metric, it generated $39 million through the first six months of this year.
I believe that as its technology receives regulatory approval for additional types of cancer, Novocure's revenue growth will accelerate and the business will turn consistently profitable. The expenses here lay in developing the technology. Profitability should dramatically increase as its addressable market does.
The stock is on sale
Now that the stock has fallen, Novocure's market cap has come down to $11 billion -- low enough that significant revenue gains should allow the stock to appreciate in reflection of that growth.
The stock presently trades at a price-to-sales ratio of 20, which I believe is a fair valuation; analysts are forecasting 13% revenue growth in 2022, and FDA approvals could significantly accelerate that further in the coming years.
There are always risks to investing in medical companies when they have important pass/fail decisions about their treatments ahead of them. Still, with Novocure trading now at a lower valuation, investors seem to have an opportunity for long-term upside -- at a reasonable entry level that includes potential for growth even from its technology's existing approvals alone.
