NovoCure (NVCR) is a global oncology company with patented “Tumor Treating Fields” (“TTF”) technology. It has multiple programs in phase 2 and phase 3 of clinical trials which can potentially result in exponential revenue growth and Total Addressable Market (“TAM”) expansion. As a result, and due to improving market penetration, the stock more than doubled in 2020. In this report, we review NovoCure’s business model, competitive strengths, financial position and valuation, and then conclude with our opinion on investing from a risk-versus-reward standpoint.
Overview:
NovoCure is a global cancer treatment company possessing patented Tumor Treating Fields (“TTF”) technology for treating some of the most aggressive forms of cancer. The company’s TTF technology uses electric fields tuned at a certain frequency to restrict tumor spread through disarranging the tumor’s natural orientation. It is engaged in manufacturing, and commercializing TTF delivery systems, namely, Optune and Optune Lua (previously NovoTTF-100L). Optune is used for treating glioblastoma multiform (GBM, brain cancer) and Optune Lua is used for treating malignant pleural mesothelioma (MPM, a rare form of lung cancer). Besides these two products, the company has ongoing or completed clinical trials for utilizing TTF in brain metastases, pancreatic cancer, ovarian cancer, liver cancer, and non-small cell lung cancer.
Professor Yoram Palti (NovoCure’s founder) hypothesized that alternating electric fields in an intermediate frequency can disrupt cancer cell division and can cause cancer cells to die. He first tested that hypothesis and after seeing impressive results, founded NovoCure in 2000 inside his basement. The company went public in 2005 and since then it has turned itself into a global oncology company with more than 800 employees worldwide, 3 approved products, and 5 products in the late-stage pipeline.
The company markets its products through its 80+ salespeople globally who are responsible for contacting healthcare providers primarily consisting of neuro and radio oncologists to drive sales of the comapny’s products. Once the healthcare providers agree on prescribing NovoCure’s products, they must undergo certification training to become an eligible NovoCure Device Support Specialist. As of December 2019, NovoCure has trained more than 3,200 GBM prescribers globally and 36 MPM prescribers in the US.
The company has adopted a direct-to-patient distribution model (except in Japan) under which once a prescription order is received from a healthcare provider or certified prescriber, the company directly provides supplies, training, and support to the patients or their caregivers. It also assists them with insurance reimbursement. Unlike other countries, in Japan, the company’s contracts and all transactions are dealt directly with the hospitals.
NovoCure’s therapy has a hefty list price of $21,000 per month, however, this can be reimbursed to the patient subject to the insurance plan. NovoCure has partnered with the Medicare health insurance program in the US to provide coverage for Optune for newly diagnosed GBM patients. The company has also received national insurances from other countries in the active market that include Austria, Germany, Israel, Japan, Sweden, and Switzerland. The average expense for a patient per month out-of-pocket is $100.
Optune has a presence in multiple geographies. While Optune Lua (for the treatment of MPM) was marketed only in the USA, in November 2020, the company received CE Mark allowing it to market Optune Lua in European Union and Switzerland as well. In 2020, the company derived a substantial portion of its revenue from the US (69%) while 23% came from EMEA (largely Germany), 6% from Japan, and the remaining 2.5% from Greater China. It does business in the Greater China region through its license and collaboration agreement with Zia Labs under which it earns licensing fees and royalty. The number of active patients on the therapy are the primary driver of the company’s top-line. As of December 2020, it had 3,411 active patients while the average monthly revenue per active patient was approximately $14,000.
Expanding addressable market
The company currently operates in a very niche market with commercialized solutions only for the treatment of glioblastoma and MPM cancer. As per Persistence Market Research, the global malignant mesothelioma market is estimated to grow at a CAGR of 7.5% from $338M in 2017 to $604M in 2025. While global GBM market is estimated to grow at a CAGR of 7.4% to reach $1.64B by 2025 as per Market Research Future. This represents the company’s deep market penetration of nearly 30%. As per the company, its primary offering Optune has deep market penetration of 38% in the US, 33% in EMEA, and 30% in Japan, therefore, leaving limited upside potential through market share expansion. Having said that, the company has been investing aggressively with over 20% of its revenue in R&D and clinical trials in order to explore and test the use of TTFields technology in treating several types of cancers. These include liver cancer, non-small cell lung cancer, pancreatic cancer, ovarian cancer, among others. It already has five cancer programs in the final stage in the pipeline and more programs in phase 2 which if approved, would exponentially increase the market opportunity for NovoCure by enabling the company to address the needs of a much larger population.
Source: Company’s Corporate Presentation
Uniquely positioned with differentiated technology
The company has valuable, strong IP rights that help in restricting direct competition for its offerings. No direct competitor can use the same TTFields technology to treat cancer. While GBM can also be treated through radiation therapy, brain surgery, chemotherapy, and targeted drug therapy, TTFields technology is used after surgery or radiation therapy and additionally, the use of TTFields technology with a chemotherapy drug (TMZ) can lead to an improvement in the chances of survival for newly diagnosed GBM, thus making it a complementary or supplementary product rather than a substitute to existing traditional therapies. Optune combined with temozolomide (TMZ, cancer drug) was assigned Category 1 recommendation for the treatment of newly diagnosed GBM as per NCCN Guidelines in 2018. According to a company study, the combination of Optune with TMZ after surgery and radiation therapy can significantly increase the overall survival rate of the patients as compared to TMZ-only treatment. The combination (TTF + TMZ) has been approved by the FDA in the US and holds a CE mark for marketing in the EU, Japan, and other countries. As we can observe in the chart below, 43% of people were alive after 2 years out of those who were taking TTFields + TMZ treatment while only 31% of people were alive after 2 years out of those who were taking TMZ-only treatment.
Source: Company’s Corporate Presentation
Similarly, as per the clinical trials, the use of TTFields with Pemetrexed (chemotherapy) for treating non-small cell lung cancer is expected to increase the overall survival median to 13.8 months compared to 8.3 months with pemetrexed-only treatment. Similar results were found in ovarian, gastric, and other types of cancers when used with other standard therapies. The company’s TRIDENT study for treating GBM cancer using TTFields with radiation therapy is in the final stage of the clinical trial. The approval would make the company’s offering supplemental with radiation therapy.
We believe the company to be uniquely positioned in the industry with no direct competition and the patented technology offers a strong moat. Product placement and marketing have also taken place in such a way that TTFields therapy becomes supplemental with alternative cancer treatment therapies rather than competing with it directly. The company’s unique technologies are protected with over 185 issued patents or pending patent applications globally.
Increasing recognition of TTFields and broad product pipeline
The company’s current and upcoming offerings have remained focused on its patented TTFields technology, therefore, acceptance of the technology in the healthcare industry is essential for driving demand for the company’s solutions. Citation of TTFields therapy in scientific publications has increased from 348 in 2016 to 1,643 citations in 2020. This indicates the rising popularity and awareness of the technology in the healthcare industry. Moreover, NovoCure in partnership with American Association for Cancer Research (AACR) is offering 3 years of research grants program to promote research on TTFields.
While the company’s TTFields technology has been approved by FDA for 3 indications (for treating newly diagnosed and recurrent glioblastoma, and MPM cancer), the technology’s relevance is also being tested for multiple other types of cancers of brain, torso, and abdomen in several clinical trials. Studies for non-small cell lung cancer, pancreatic cancer, brain metastasis, and ovarian cancer are already in the last stage of clinical trials. Final data for all 4 of these cancers is anticipated to come in 2022 or 2023. Additionally, the company is conducting trials for treating gastric cancer in partnership with Zia Lab in China. NovoCure’s solutions also enable the patients to receive treatment remotely.
The company is also making efforts in improving its treatment for GBM cancer. In December 2020, the company started its phase 3 trials for Optune concurrent with radiation therapy (TRIDENT Trials) to increase the overall survival rate of the newly diagnosed GBM patients through inhibiting the DNA damage repair of cancer cells. As we can see below, the company’s product pipeline has multiple products underway which would be primary growth drivers ahead.
Source: Company’s Corporate Presentation
More revenue growth in the pipeline
The company has experienced a significant boost in its top-line since Optune was approved for newly diagnosed GBM in combination with TMZ in 2015. The revenue has grown at a 3-Year CAGR of 40.8% and a 5-Year CAGR of 71.7%. The growth has slowed in recent years on a comparative basis due to the law of large numbers coming into play as well as maturing position in the GBM market space with high market penetration.
We expect the top-line growth to stay strong in absolute terms but slower relative to its own history over the next 2 to 3 years as the company matures in the GBM space. We expect growth rates to jump once the company gets FDA approval and CE mark for the programs that are in the last stage of clinical trial and subsequently introduces TTFields therapies to treat respective cancers.
Benefiting from high operating leverage
Growing top-line has translated into profits due to the company’s high operating leverage. The operating cost as a percentage of revenue has declined steadily in the last few years. OPEX as a percentage of sales has come down from a whopping 183% in 2016 to 91% in 2017 and then eventually down to 67% in Q3 2020. The company delivered an Adjusted EBITDA margin of 28.1%, GAAP operating margin of 11.3%, and GAAP net income margin of 7% in Q3 2020. We expect more improvement to come as the company expands its top-line. Moreover, a wide moat with a strong IP portfolio will help to ensure sound profitability in long run.
Robust financial position
NovoCure ended the year 2020 with a strong liquidity position of $842.6M including cash, cash equivalent, and short-term investments. The company had no outstanding debt as of Q3 10-Q, however, in November 2020, it issued 0% convertible senior notes of $575M maturing in 2025. The company is also cash flow positive with cash from operations (“CFO”) of $45.7M and Free Cash Flow (“FCF”) of $36.5M in YTD 2020 (Q1-Q3). We believe the company is equipped with sufficient resources and a solid balance sheet to support incremental R&D, clinical trial costs, and capital expenditure required to experiment with TTFields applications in treating various other cancer types and broaden its product portfolio.
Valuation premium
NovoCure trades at a premium valuation with a Price-to-Sales ratio of 37.4 times. This is higher relative to the company’s historical multiples as well as peers’ multiples in the healthcare industry with a similar growth profile. Having said that, we believe the premium is justified given the company’s strong IP portfolio and growth opportunities from the product pipeline.
Source: Seeking Alpha
For a little more perspective on valuation, here is a look at the average rating and price target of the 9 Wall Street analysts covering NovoCure and reporting to Factset.
These analysts have continued to raise their price targets in recent months, and will likely continue to do so as the company’s expanding opportunities come to fruition.
Risks
New technology for cancer treatment: The introduction of newer, more disruptive technologies or therapy for treating cancer would lead to deterioration in the company’s financial outlook. Also, changes in existing standard therapies that could diminish the effectiveness of TTFields when used in combination can lead to a decreased value proposition for patients. Given the company’s reliance on TTFields, and despite the current pipeline, it is important that this technology is not disintermediated.
Conclusion
Increasing relevance and acceptance of TTFields technology for treating cancer is providing sustained above average top-line growth for NovoCure. Additionally, the company’s product pipeline looks solid. And while the NovoCure’s valuation has expanded considerably in recent quarters, we believe the risk-reward remains positive for long-term oriented investors, considering the growth. We do not currently own shares of NovoCure, but it is attractive and it ranks high on our current growth stock watchlist.