It's been a challenging year for NovoCure (NVCR -0.36%), an oncology-focused biotech. The stock is down by 35% since early January. Though marketwide issues probably didn't help, NovoCure mostly has itself to blame for its year-to-date performance. Its shares declined after a disappointing fourth-quarter update.
Still, the stock could have significant upside potential. NovoCure's average price target on Wall Street is $32.57, according to Yahoo! Finance. That implies it could jump by almost 70% from its current levels. Should investors be as bullish as the Street on NovoCure?
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Looking at NovoCure's business
NovoCure develops and markets wearable devices that emit electrical fields, known as tumor-treating fields (TTFields), which inhibit the growth of cancer cells. These devices don't necessarily replace traditional therapies; they are often used concurrently with them (although in some cases, they can be stand-alone treatments). This innovative approach to treating one of the leading causes of death worldwide has found some success.
NovoCure markets two devices: Optune Gio, cleared to treat an aggressive type of brain cancer called glioblastoma, and Optune Lua, approved to target both metastatic non-small cell lung cancer (NSCLC) and malignant pleural mesothelioma, a rare, aggressive lung cancer. Greater adoption of these devices in markets where they're available is helping improve NovoCure's financial results. In the first quarter, the company's revenue increased by 12% year over year to $155 million.
It had 4,268 active patients on therapy as of the end of the period, an 11% increase compared to the year-ago period. However, NovoCure remains unprofitable; its net loss per share in the first quarter was $0.31. True, that was better than the $0.36 reported in the year-ago period. But given the uncertain environment and ongoing market volatility, investors may have a deep bias for well-established, profitable stocks at the moment.
So NovoCure's shares could remain somewhat turbulent in the short run. However, recent developments could help the company turn things around and match the Street's estimates.
Will the catalysts ahead be enough?
NovoCure has achieved several clinical and regulatory milestones in the past six months. In April, it received clearance from the relevant European authority for Optune Lua for the treatment of metastatic NSCLC. NovoCure estimates that more than 400,000 patients are diagnosed with NSCLC every year on the continent. Though its device will only target a small portion of this total, the regulatory nod significantly expands its addressable market.
Optune Lua has been approved in the U.S. for NSCLC only since October. In the U.S., approximately 30,000 patients become eligible for the device out of 193,000 annual NSCLC diagnoses. NovoCure still has a massive white space in this niche -- even getting to 5,000 patients in NSCLC alone would be a gigantic win for the company.
Meanwhile, in December, it announced positive results from a phase 3 clinical trial for its TTFields for unresectable, locally advanced pancreatic adenocarcinoma. This was the first time any treatment showed a statistically significant benefit in overall survival for patients with this type of pancreatic cancer, which is mostly out of reach by current standards of care. It has a five-year survival rate of just 13%, while its death rates are increasing, even as they decrease for most other types of cancer. NovoCure estimates 67,000 annual diagnoses in the U.S., so there is a vast unmet need.
The company appears likely to secure another key approval here and go on to make progress in this field. Yet the stock is still down massively for the year, even though it jumped following recent developments, including the NSCLC approval in Europe. What gives? NovoCure's consistent net losses remain a concern.
However, if you're willing to look past those and the somewhat elevated risk they add to the stock, NovoCure could be an excellent pickup at current levels. Pending approval in pancreatic cancer and solid progress in NSCLC, revenue could grow substantially and allow the healthcare specialist to turn a profit.
Wall Street analysts might be onto something here. But if you follow their lead, it's essential to start with a small position in the stock and then add more only once (or if) it continues to show good progress.
