Is NovoCure a Buy?

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Billions of dollars have been spent on research and development in the battle against cancer. Unfortunately, cancer still claims more than half a million lives in the U.S. alone each year.

Novocure (NASDAQ: NVCR) is on a mission to give patients with cancer a fighting chance. This innovative medical-device company is harnessing the power of physics to approach cancer treatment from a unique perspective.

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The company discovered that electric fields can be manipulated to inhibit cell division in cancerous tumorous. Novocure calls this new method of treatment tumor treating fields, or TTFields for short, and is pushing hard to convince healthcare providers to add this new weapon to their arsenals. Its early success at winning over skeptics has led to explosive revenue growth, and its share price has soared.

Is Novocure a buy today, or is it too late to get in?

The technology

Nearly two decades ago, Novocure's founder discovered that electric fields could be used to inhibit division in certain types of cells. The company also figured out that tuning an electric field to a specific frequency would disrupt division in certain types of cells without having any impact on other types of cells (Novocure's Bill Doyle explained this process in great detail during a Ted Talk).

A key benefit of this technology is that TTFields could be fine-tuned to disrupt cell division in cancerous tumors while leaving nearby healthy cell alone. This allows TTField therapy to be administered with minimal side effects.

Novocure took its knowledge of TTFields and created a portable electric field generator called Optune, which won FDA approval to treat recurrent glioblastoma in 2011. Glioblastoma is an especially aggressive form of brain cancer that has a very low, five-year survival rate. Thankfully, Novocure showed last year that using Optune in combination with current standard-of-care treatments led to improved survival rates.

The opportunity

Novocure has launched Optune in the U.S., Europe, and Japan. The company's business model is to bill for Optune on a monthly basis. That's why a key metric for investors to watch is the number of active users that are on Optune at any given time.

Demand for Optune has grown steadily as providers, payers, and patients became more comfortable with the technology. In turn, Novocure's revenue has soared.

Metric 2015 2016 2017 2018*
Active patients 605 1,091 1,834 2,252*
Revenue $33.1 million $82.9 million $177 million $178 million*

Glioblastoma is a rare form of cancer, so the company's current market opportunity for Optune is limited. However, the company believes that TTFields could also be useful in treating a wide variety of solid-tumor cancers down the road. Management is investing aggressively in R&D in an effort to capitalize on that potential.

How big could the company's total addressable market grow if TTFields are shown to be effective in other types of cancer? Here's an overview of Optune's label expansion potential:

Indication Status Potential Annual Patient Population in Target Markets
Glioblastoma Approved 14,000
Mesothelioma Pending approval 13,000
Brain Metastases Phase 3 trial end 2020 258,000
Lung cancer Phase 3 trial ends 2021 659,000
Pancreatic cancer Phase 3 trial ends 2022 223,000

These numbers are enormous when compared to the company's current active patient count of just 2,252. If Novocure can win approval in any of these indications, then its upside potential is truly massive.

Digging into the financials

Novocure has operated at a loss since its founding. The company is still losing money today, even with its considerable revenue growth. A key reason why is that the company has been plowing money into growing its commercial team and funding its late-stage R&D programs. If any of those clinical trials result in label expansion claims, that will prove to be money well spent.

Novocure's net loss for all of 2018 should come in right around $60 million or so. Funding that loss won't be a problem because the company had more than $226 million in cash in the bank as of the end of September.

Market watchers predict that the company's net loss will shrink considerably in 2019. If that happens, the company shouldn't have to tap investors for additional capital anytime soon.

Is NovoCure a buy?

For NovoCure to be a successful investment from here, it must be able to win label expansion claims into other types of cancer. Since regulatory success is never guaranteed, this isn't a good stock for risk-averse investors to buy.

Personally, I think the odds of Optune winning label expansion claims are quite good given that the company has already shown clinical success in treating brain cancer, and Optune's side effects are so minimal. That's why I decided to become a shareholder.

If you have a strong stomach for risk and want a stock that could turn into a home run, NovoCure might be for you.

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Brian Feroldi owns shares of NovoCure. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.