When it comes to oncology therapies, most people probably think about drugs, but NovoCure (NVCR 3.31%) has a radically different approach. Its portable anti-cancer device is already on the market, and it appears to be a helpful add-on treatment for glioblastoma. With time, it could nab further regulatory approvals for other indications, massively expanding its addressable market as a result.
But does that make the stock a smart investment right now? It's complicated, so let's unpack the relevant details to find out.
Why NovoCure stock is worth considering
One of the major reasons why NovoCure might be worth adding to your portfolio is that it's a highly innovative business with a proven cancer-treating product that's hard to imitate.
NovoCure makes the Optune, a wearable medical device that constantly emits tumor treating fields (TTFields) which make it harder for certain kinds of tumor cells to grow and survive. The idea is that patients who can wear it the most time each day will get a larger benefit to their five-year survival rate than those who wear it less. The device is approved for three indications within oncology, two of which are for glioblastoma and one for mesothelioma. And that's how it brought in $537 million in revenue for 2022, up 116% compared to five years prior.
While one of its approvals is for using the Optune as a monotherapy, the other approved indications and nearly all of the ongoing clinical investigations for other indications entail co-administration with chemotherapies and other oncology medicines. In other words, most of the time, clinicians will be looking to use the company's product as an add-on to their standard set of cancer treatments. That means, at the moment, it has no direct competition in the U.S.
In terms of upcoming catalysts which would justify a purchase of its shares in the near term, over the next couple of years, there will be at least three data readouts from clinical programs that could drive the stock to rise. It also has a trio of planned or ongoing programs in phase 3 trials that could be a good setup for further commercialization opportunities in the next few years. And, as it advances with the research and development (R&D) process, it'll continue to make improvements to the Optune, which could make subsequent versions even more effective for its intended purposes.
NovoCure isn't a slam-dunk investment
As the lone U.S. developer of a TTFields device, NovoCure's market is ripe for penetration, assuming clinicians believe the data saying it works, which implies it shouldn't need to spend too much on marketing to get ahead. But one of the troubles with NovoCure is that it's not consistently profitable despite its product being on the market and approved for multiple indications. Over the trailing-12-month (TTM) period, it only had around $9 million in free cash flow (FCF).
Uptake for the Optune may be losing steam, too. Per its second-quarter earnings report, revenue fell by 11% year over year, reaching just over $126 million. Management says that the decline is due to "reduced collections from previously denied or appealed claims," which could mean that the company is struggling to get insurance companies to cover its treatment. If that's true, it doesn't bode well for the continued penetration of the U.S. market.
Finally, there's the mediocre performance of NovoCure's stock, which lost 63% of its value over the last three years while the market gained 40%. Inconsistent profitability is likely part of the story. A bigger part is likely its presentation of some phase 3 clinical trial data at a conference in early June. Its shares tanked immediately, so you can guess what the market thinks about the data it presented.
There's not any rush on NovoCure
Given the above, it's hard to see what would drive an investor to buy shares of NovoCure today. While things might change in the future, it does not appear to be the case that oncologists are flocking to get their patients using the Optune if they're eligible. Part of that may be a lack of awareness about the treatment, but its efficacy -- offering less than 10 months of extra survival time given around-the-clock usage of the device -- is likely also a barrier.
If this company's TTFields continue to improve, this company could one day produce a must-have adjunct treatment for certain cancers. That'd cement its place in the market, enable more consistent profitability, and support the bull thesis. But until then, there doesn't seem to be much to invest on, and the downside risk for shareholders has been significant so far. So I suggest giving this one a pass.
