I’ve already made up my mind, don’t confuse me with facts. – Phillip Fisher (Warren Buffett’s mentor)
Author’s note: This is an abridged version of an article originally pre-published in Integrated BioSci Investing for our members.
For biotech investing, you should focus on any relevant clinical trial data reports. A strong clinical report for the pipeline’s crown jewel usually improves your stock’s fundamentals significantly. In response to such a development, stocks usually (but not always) rebound strongly. However, when the data is negative, you can bet the stock will almost always fall.
NovoCure Limited (NASDAQ: NVCR) embodies the above phenomenon. Despite its large market cap, the stock surged over 72% on the same day that the LUNAR study returned extremely solid results. In this study, I will present a fundamental analysis of NovoCure while focusing on the impact of the latest data development.
Figure 1: NovoCure diagram.
about the company
As usual, I will provide new investors with a brief company overview. If you’re familiar with the company, I suggest you skip to the next section. I stated in my previous article,
Headquartered in St. Helier, Jersey, NovoCure is a leading global oncology company dedicated to innovating and commercializing a novel cancer treatment called Tumor Treating Fields (ie, TTF). Specifically, TTF is delivered by a device called Optune, which is portable and convenient for patients. A sinister method of attacking cancer cells, TTF is highly effective and safe against deadly cancers. As you know, the technology has been approved and launched for two indications. They include both newly diagnosed and recurrent glioblastoma multiforme (ie GBM) and mesothelioma. To further fuel growth, NovoCure is investigating TTF in other cancer types such as non-small cell lung cancer (ie NSCLC), brain metastases, and pancreatic, ovarian, liver and gastric cancer.
Figure 2: Therapeutic pipeline.
Tumor Treat Field – A Novel Approach
Many biotech companies claimed to have a novel treatment approach. While most do, there isn’t a single company that has treatment technology as differentiated and disruptive as NovoCure. In fact, the company harnesses the power of low-voltage electromagnetism to treat some of the deadliest cancers.
As you can understand, this is in stark contrast to the traditional use of therapeutics. More importantly, Tumor Treating Field (ie TTF) can also be used in combination with conventional medicine to increase their effectiveness.
Figure 3: Mechanism of TTF.
Robust LUNAR data
On January 5th, NovoCure released excellent data for its phase 3 study (LUNAR). A pivotal, open-label, randomized study, LUNAR is evaluating the efficacy and safety of TTF in combination with standard therapies (either docetaxel or immune checkpoint inhibitors) in patients affected by fatal stage 4 NSCLC.
Figure 4: LUNAR study.
Keep in mind that the patient’s cancer is already progressing during or after treatment with a platinum-based therapy. Despite the bleak prognosis of the cancer, TTF showed a clinically/statistically significant improvement in overall survival. In fact, patients with the TTF combination showed superior OS improvement compared to standard therapies alone. At the same time, the treatment showed an excellent safety profile. The Executive Chairman (William Doyle) commented enthusiastically on the development:
We are pleased about the positive results of the LUNAR study. Prior to LUNAR, the last Phase 3 study that resulted in a significant improvement in OS in platinum-resistant late-stage non-small cell lung cancer was six years ago, underscoring the difficulty in treating this disease. We are also excited about the outstanding performance of the TTFields along with immunotherapy, which has the potential to meaningfully extend patient survival beyond what has previously been possible…
Effects of LUNAR
Going forward, NovoCure will publish the full LUNAR results at a future medical conference. You can expect the results to be extremely robust. Based on the excellent data, the company expected to submit an application for approval to the FDA in the second half of this year. Around the same time, the company also submits the application in Europe.
In addition to the GB and Mesothelioma indications, NovoCure is now in an excellent position with LUNAR results. That means NovoCure may now receive another approval for NSCLC. More approval leading to additional label extension is a great way to drive blockbuster sales. That being said, the strong data is solid evidence that TTF is here to stay. Most importantly, it signals that TTF has the potential to become the leading cancer treatment of the future.
Figure 5: Stages of NSCLC.
Estimated NSCLC market
According to the Institute for Clinical and Economic Review (ICER) and the National Institutes of Health (NIH), 85% of new lung cancer cases in the US are NSCLC. Growing at 13.9% CAGR, you can expect this market to reach $76.3 billion in 2030. Of that number, 46,000 patients would receive second-line treatment for stage 4 NSCLC each year.
Given such stats, TTF can certainly look forward to skyrocketing revenue growth from the upcoming approval/launch. However, it won’t be that drastic since the display isn’t the first line. Now, if NovoCure starts pushing TTF like GBM into first-line indication, you can enjoy blockbuster sales.
Just as you would receive an annual well-being check-up, it is important to review the financial health of your stock. For example, your health is affected by “blood flow” since the viability of your stock depends on “cash flow.” With that in mind, I will review the Q3 2022 earnings report for the period ended September 30th. Since I already went into great detail about financial indicators in the previous study, I will briefly go into the most important indicators here.
As follows, NovoCure generated revenue of US$131.0 million compared to US$133.6 million in the same period last year. Apart from that, R&D for the respective periods was $51.9M and $48.1M. Additionally, there were net losses of $26.5 million ($0.25 per share) compared to a net decrease of $13.1 million ($0.13 per share) for the same comparison. In terms of the balance sheet, there was $970.3 million in cash, equivalents and investments. In addition to quarterly revenue of $131 million and quarterly operating expenses of $125.8 million, there should be enough capital to fund operations indefinitely without worrying about cash flow constraints.
Because investment research is an imperfect science, your stocks, regardless of their fundamental strengths, always come with risks. More importantly, the risks are “growth cycle dependent.” At this point in its life cycle, the key concern is whether NovoCure can receive FDA approval for the use of TTF in NSCLC next year. That being said, there is a risk that PANNOVA-3 and INNOVATE-3 will not release strong data.
Every few decades you see leaps and bounds in medical innovation. Now you can experience medical history with NovoCure technology, which harnesses the power of electromagnetism with TTF to treat deadly cancers. Already approved for GBM and mesothelioma, you can expect another approval next year. In the next quarterly report you will likely be informed when NovoCure Limited will publish data for the other two studies (INNOVATE-3 and PANNOVA-3) in ovarian cancer and pancreatic cancer respectively. In addition, you can also expect the earnings to be halfway to blockbuster.