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In early 2022, I thought it was a course in terms of NovoCure (NASDAQ:NOVO) stock. This comes after stocks endured a major boom-bust cycle during the pandemic, where revenue growth slowed but progress was made in the pipeline.
A summary
NovoCure is the developer of the so-called Optune therapy, which is based on TT fields, a low-intensity frequency method that acts on molecules in cancer cells. This is a completely different approach to treatment than more traditional alternatives such as surgery, radiation, or medication.
The company received FDA approval for glioblastoma brain cancer in 2011, and its European counterpart in 2014. This treatment segment was relatively small, but the company had high hopes of expanding these solutions to other fixed tumors.
Since the company began commercialization in 2015, its first-year revenue has totaled $33 million. Revenue increased to $83 million in 2016 and more than doubled again in 2017 to $177 million. Meanwhile, the company received FDA approval for the treatment of inoperable malignant pleural mesothelioma.
A $75 share in early 2020 gave the company an equity valuation of $8 billion and a similar company valuation of about 20 times sales as the company was on the verge of reaching profitability. This potential for the stock prompted me to take a position.
Shares rallied to $170 by early 2020 as the company saw decent commercial traction despite the pandemic hampering the potential for case growth as I took the opportunity to sell shares amid the rally. Shares even surpassed $200 in the summer of 2021, but fell back down to $80 by the end of the year when I resumed coverage after shares fell nearly two-thirds from their highs.
The 104 million shares valued equity at $8.3 billion as of early 2022 as the company had accumulated nearly $1 billion in net cash. The resulting $7.4 billion company valuation was roughly 14 times the revenue multiple with a revenue trend of around half a billion. The problem is that revenue growth came to a complete halt as the company posted some small operating losses here after previously being marginally profitable.
On a positive note, the company received further approvals as the company received breakthrough device designation from the FDA for NovoTTF-200 to treat liver cancer, as well as positive news on joint trials with Merck’s (MRK) pembrolizumab in non-small lung cancer .
While applauding the progress in the pipeline, I was a little wary as the resulting 14x sales multiple wasn’t cheap, losses were still being reported, growth had stalled, and the Optune treatment isn’t cheap (at $20,000 a month ). In addition, the treatment has a major impact on the quality of life, as it has to be worn 18 hours a day.
And now?
For most of the past year, shares have traded in a range of $60 to $100 as shares saw some heavy action earlier in the year. Shares essentially doubled overnight to the $120 mark in early January, but have since fallen back to the lower end of the range, down to $57 at the time of writing.
In February 2022, the company released its 2021 results, a year in which revenue grew just 8% to $535 million, but of course that didn’t come as a surprise. This came at a tremendous cost to the company, as the company reported an operating loss of $44 million on a GAAP basis, compared to an operating income of $30 million a year earlier, which was almost entirely due to higher R&D spending.
The problem is that fourth-quarter revenue was actually down year-on-year as a GAAP operating loss of $23 million was disappointing. The 2022 guidance was absolutely disappointing, as the company projected patient growth of 2-5% as the company didn’t quantify the revenue guidance, let alone the profit (or loss) prospects.
Shares rose in the first week of January this year when the company announced promising results in its pivotal LUNAR trial in non-small cell lung cancer as the trial met its primary overall survival endpoint. More details should be released soon as the preliminary news got investors very excited as shares essentially doubled overnight. In the days following this new announcement, shares fell from $120 towards the 1990s (when the company also released preliminary fourth quarter results) and has since slipped to $57.
Aside from the release of the 2022 preliminary results, there were few corporate events other than the full-year results release in February. Full year revenue of $538 million was up half a percent year over year as the lack of revenue growth essentially doubled GAAP operating losses to $90 million. Additionally, fourth-quarter revenue was down year-over-year, with losses mounting, which of course isn’t encouraging.
The underlying results weren’t too exciting, as the company reported a 4% decline in active patient counts to 3,430 patients by year-end, with prescriptions falling by a similar percentage. Some positive news arrived in early March, although reimbursement coverage in France is nice news but of course far from game-changing.
last thought
The truth is that the 2022 results offer little reason to be more bullish on the company amid flat sales and higher spending as the company posted losses again. The 105 million shares have fallen to $57 here, as the resulting $6 billion stock valuation actually includes around $1 billion in cash.
That means the company’s remaining valuation of $5 billion is less than 10 times revenue, as flat sales and reported losses make it difficult to be bullish on the company. On the other hand, the company spends tons of money on R&D (nearly 40% of sales) since the promise is here in the pipeline.
If the company does indeed win approval in non-minor lung cancer, the potentially addressable markets may not only increase, but increase by a couple of times as real economies of scale come into play as well.
Believing in the potential, a scenario where the company could easily become (very) profitable here, means I’m willing to give the company and NVCR stock the benefit of the doubt. After all, the potential is certainly there, but real execution and superiority over alternative treatment options needs to become a reality or be perceived as such by the patient market for the stocks to make a big comeback.
