Shares of NovoCure (NVCR), a maker of niche medical devices, shot about 68% higher on Jan. 5. Investors were cheering clinical trial results for what could be the company's most important product to date.
Is NovoCure a good stock to buy now, or will its recent gains fizzle out? Here's what you should know before taking any chances with your hard-earned money.
What NovoCure does
NovoCure develops and markets devices that emit electrical fields in an effort to shrink tumors. The company's lead product at the moment, Optune, is a battery-powered hat that's approved to treat glioblastoma, a form of brain cancer diagnosed roughly 13,000 times per year in the U.S.
NovoCure also markets a similar device that patients strap to their chest and back called Optune Lua. Optune Lua is currently approved to treat mesothelioma, a rare condition diagnosed approximately 3,000 times per year in the U.S.
Why NovoCure stock shot higher
The Lunar study enrolled hundreds of patients with stage 4 non-small cell lung cancer (NSCLC) that kept growing despite a round of standard chemotherapy. Investigators randomized patients to receive standard treatments plus an Optune Lua device, or standard treatments on their own. The stock shot up because the company told investors the Lunar trial met its primary endpoint, an improvement to overall survival as compared to standard therapies alone.
Success for the Lunar trial is especially encouraging to investors because it means Optune Lua could have a much larger addressable patient population than Optune. Lung cancer isn't the most common malignancy, but it claims more lives than any other. This is partly because it's rarely diagnosed before it reaches advanced stages.
An estimated 46,000 Americans receive a second round of treatment for stage 4 NSCLC annually. Better screening practices could lower this figure in the years ahead, but it still represents a huge increase to NovoCure's addressable patient population.
Image source: Getty Images.
Reasons to remain cautious
NovoCure needs Optune Lua to succeed as a treatment for the larger lung cancer population, or its investors will suffer. Optune was approved to treat glioblastoma in the U.S. over a decade ago, but the company still hasn't achieved profitability.
Investors are generally keen to overlook bottom-line losses when sales are soaring, but this isn't the case here. In the third quarter of 2022, total revenue fell 2% year over year.
NovoCure said there was a significant improvement in overall survival for lung cancer patients during the Lunar trial. Unfortunately, we still don't know how much of an improvement was measured, because management decided to keep that data secret.
It isn't unusual for drugmakers to keep successful cancer trial results under wraps until they can be presented to a crowd of oncologists at a scientific conference. If it later turns out that the improvements to overall survival aren't strong enough to drive demand from lung cancer patients, shareholders could get stuck with significant losses.
A buy now?
NovoCure is still reporting losses, but its cash runway is probably long enough to carry the company through a potential launch of Optune Lua as a lung cancer treatment. The company finished September with $970 million in cash and short-term investments, after burning through $55 million in the first nine months of 2022.
Investors who already have NovoCure shares in their portfolio may want to keep them there. That said, I can't call the stock a smart buy at its present valuation. The company's market cap has ballooned to $12.5 billion, even though we still can't be sure Optune Lua will become a popular lung cancer treatment. It's probably best to wait for a full presentation of results from the Lunar trial before starting a new position in this risky stock.
