Cancer is a brutal disease and one of the leading causes of death in the developed world. Worldwide, the disease struck more than 17 million people in 2018 with that figure expected to mushroom.
One company that is doing its part in the fight against cancer is NovoCure Ltd (NASDAQ: NVCR).
Founded in 2000, NovoCure has developed a cancer therapy called tumour treating fields, which inhibits tumour growth and may causes cancer cells to die.
In this article, I take a look at the medical research behind its technology and whether NovoCure is a potential multi-bagger.
Technology behind Novocure
Novocure was founded 20 years ago by Professor Yoram Palti who believed that he could use electric fields to destroy cancer cells.
I don’t want to go too deep into the technicalities but to appreciate Novocure, it is important to understand the basics behind its technology.
In short, cellular proteins in cancer cells need to position themselves in a particular way during cell division in order for cells to divide. Tumour treating fields use alternating electric fields specifically tuned to target cancer cells, disorientating the position of the cell proteins and disrupting cell division.
It is equally important that tumour treating fields also do not stimulate or heat tissues and has minimal damage to healthy cells, with the only side effect being mild to moderate skin irritation.
From theory to practice
Novocure has done an excellent job of turning Professor Palti’s theory into real-life clinical practice. Today, tumour treating fields is approved in certain countries for the treatment of adults with glioblastoma and in the US for mesothelioma. These are two of the most difficult forms of cancer types to treat.
For instance, life expectancy for newly-diagnosed Glioblastoma, the most common type of brain cancer in adults is typically less than two years.
Today, there is a growing body of research that shows that tumour treating fields therapy can extend the life expectancy of patients when it is used together with other therapies.
The chart from Novocure’s investor presentation shows the survival rate of patients with and without tumour treating fields (Optune) treatment.
Source: Novocure investor presentation 2020
Out of the cohort of 450 patients, 388 received a survival benefit from the use of tumour treating fields. The 5-year survival rate was 13% in the cohort that used tumour treating fields combined with chemotherapy (TMZ or Temozolomide) compared to just 5% in the cohort that used chemotherapy alone.
In fact, the efficacy and minimal side effect of Tumour treating fields as a therapy has led to the National Comprehensive Cancer Network promoting it to a category 1 recommendation for newly diagnosed Glioblastomas,
Growing the number of indications
Tumour treating fields as a therapy could potentially be used on a wide variety of other cancer types. As mentioned earlier, it is FDA approved for (1) recurrent and (2) newly diagnosed glioblastoma and received FDA-approval for (3) Mesothelioma last year.
On top of that, it is undergoing phase III trials for four other indications, namely (1) brain metastasis, (2) non-small cell lung cancer, (3) pancreatic cancer and (4) ovarian cancer. This could significantly increase the company’s addressable market opportunity.
It is also in Phase II trials for liver cancer and preclinical trials for a host of other cancer types. The charts below summarise where the company is at in terms of commercialising its product for the other indications.
Source: Nocovure Investor relations website
Source; Novocure Investor relations website
In its 2019 annual shareholder letter, CEO Asaf Danziger and executive chairman Bill Doyle, reiterated their commitment to innovation saying,
“We are increasing investments in engineering efforts intended both to improve time on therapy and to maximize the energy delivered to patients’ tumours. Specifically, our teams are working to design and develop improvements to our transducer arrays and to our transducer array layout mapping software intended to increase Tumor Treating Fields intensity and, as a result, survival.
We believe innovation has the potential to improve patient outcomes and to extend our intellectual property protection into the future as we invent enhancements to our products. Our commitment to innovation resulted in 33 new patent applications in 2019, alone.”
From an investors point of view
From a medical standpoint, Novocure’s Tumour Treating Fields technology looks very promising.
But as investors, we also want to see that the company has the finances to continue funding its research and can drive adoption to grow its revenue.
There are two things I want to see in a promising company like Novocure- (1) a solid balance sheet so that it does not need to raise too much capital to fund its growth and (2) at least some signs that the company is turning its FDA-approval into meaningful revenue growth.
Novocure has both.
The chart below illustrates its net revenues from 2016 to the first quarter of 2020.
Source: Novocure investor presentation 2020
Novocure has also partnered with a Chinese company, Zai, to launch its Tumour treating fields in China. The partnership is already starting to bear fruit with US$2 million in net revenue recorded in greater China in the first quarter of 2020, a 100% increase in from Q4 of 2019.
It is worth noting that Novocure turned operationally and free cash flow positive in 2019. Novocure also has a robust balance sheet with around US$332 million in cash, cash equivalents, short-term investments and restricted cash and no debt.
Market opportunity
According to Novocure’s S-1 in 2015, Tumour treating fields is broadly applicable to a variety of solid tumours with an annual incidence of 1.1 million people in the United States alone.
Novocure charges around US$21,000 per month for Optune, its tumour treating fields device that is used to treat glioblastomas. Supposing that Novocure sells its other tumour treating fields products at a similar price range, Novocure will have a market opportunity of US$277 billion ($21,000 x 12 months x 1.1million patients) in the United States alone.
That’s of course assuming that Tumour Treating Fields therapy can be FDA-approved for the whole range of applications.
Valuation
At the time of writing, Novocure had a market cap of US$6.3 billion. On the surface, that seems expensive if you use traditional metrics to value the company. Novocure only had US$351 million in net revenues and US$262 million in gross profits in 2019.
Based on current share prices, it trades at 17.9 times 2019’s sales and 24 times gross profit. Those numbers are hard to stomach and would certainly be deemed expensive for most companies.
However, Novocure, to me, is not like most companies.
In the most recent quarter, revenue grew 39% from a year ago. The growth figure could start to accelerate as its core markets mature and Tumour treating fields gains FDA-approval for other indications.
It is also worth remembering that based on my calculations it has a US$277 billion market opportunity. If it can penetrate just 5% of that, its current US$6.7 billion market cap will be a steal.
Final words
Novocure has all the makings of an excellent company. Its technology can potentially be used in a wide array of different indications and is already generating positive free cash flow.
It has a solid track record of growing revenue. Gaining FDA-approval for other use cases could potentially be a catalyst for much greater things for the company. With all that said, it does look like Novocure has all the ingredients for success.
That said, I do acknowledge that as with any biotech firm, there are risks. The risks that it cannot get FDA-approval for other indications or adoption of its product is slower than expected can hinder growth and can lead to other companies catching up with it.
The technology is also very new and widespread adoption will depend on how quickly Novocure can push clinicians to recommend it as a form of treatment.
But despite these risks, to me, the probability and magnitude of the upside outweigh the risk. With its market cap still small compared to its total addressable market opportunity, I think if it can execute and fulfil its vast potential, Novocure could easily become a multi-bagger based on today’s price.
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