What happened
Novocure (NVCR 3.31%) shares dropped after publishing the results of an important clinical trial. The headlines looked positive at first glance, but the study raised concerns that lung cancer treatment might not have a place in the market. As a result, the stock tumbled 42% in June, according to S&P Global Market Intelligence.
So what
Novocure has developed multiple treatments for advanced and aggressive cancers, including malignant pleural mesothelioma and glioblastoma. The company's treatments use electric fields to disrupt tumor growth, and they have been shown to effectively kill cancer cells and extend life expectancy in several contexts.
Novocure's recent phase 3 Lunar clinical trial tested their technology's efficacy in combination with standard chemotherapy for non-small cell lung cancer. The trial was successful, demonstrating a clinically meaningful increase in patient survival rates. It was the first study in seven years to show increased efficacy in that sort of chemotherapy treatment. As a result, Novocure is much more likely to have a new indication approved for its technology, which would open the door to new revenue opportunities.
Image source: Getty Images.
Unfortunately, some oncologists were left unimpressed with the practical application of the tech. Following the presentation at a meeting of the American Society of Clinical Oncology, some doctors noted that the trial conditions don't reflect the current standard of care.
The role of checkpoint inhibitors has evolved since Novocure first designed this product, so there may be serious limitations to the number of cases in which it can be used. That could severely impact the clinical and commercial viability of this indication, and that's obviously not good for Novocure's cash flows.
Now what
Novocure burned nearly $17 million in operating activities last quarter, and it has nearly $1 billion in cash and short-term investments on the books. That burn rate was substantially elevated from one year ago, primarily due to expenses related to trials, research and development, and sales functions. This suggests the company has a significant cash runway with its current capitalization, but something needs to change to justify the stock's valuation.
Novocure's price-to-sales ratio is 8.5, which is aligned with several established tech companies that produce cash flow and have relatively high growth rates. This means that investors are betting on the company's product pipeline to yield multiple treatments that gain regulatory clearance and hit the market.
That's fairly common for early-stage biotechs and certain healthcare stocks, but it's difficult for investors to quantify the potential outcomes. Novocure has several candidates at various stages, but the speculative nature of this investment means the stock is likely to be volatile for the foreseeable future.
