NVCR - NovoCure: Ramifications Of Recent Management Change

Summary

• As NovoCure Limited delivers hope in seemingly hopeless situations, Tumor Treating Field is already launched for mesothelioma and glioblastoma multiforme.
• NovoCure Limited recently generated stellar data for the Phase 3 (LUNAR) trial for non-small cell lung cancer.
• Amid great fundamental improvements, there are substantial management promotions and changes that can impact this investment thesis.

I have already made up my mind, don't confuse me with facts. - Phillip Fisher (Warren Buffett's mentor).

Whenever there is a significant management change and/or an internal promotion, you should always re-evaluate your biotech investment thesis. As you can imagine, the management is like the pilot of your ship. If there are negative changes, you can expect some turbulence. While some turbulence can be easily overcome, others can signal upcoming catastrophes. Now, an internal leadership promotion is usually quite positive. As such, it often entails that the company is rewarding the management for recent success and/or gearing up the firm for tremendous upcoming growth.

As I shared in the latest article, NovoCure Limited ( NVCR ) is undergoing transformative fundamental improvements. Precisely speaking, the company recently posted extremely robust Phase 3 ((LUNAR)) data that positioned its Tumor Treating Field to capture a mega-blockbuster market. Nevertheless, the company is also undergoing a defining management transition. In this research, I'll feature a fundamental analysis of NovoCure while focusing on the latest management change.

Figure 1: NovoCure Limited Chart.

About The Company

As usual, I'll deliver a brief corporate overview for new investors. If you are familiar with the firm, I suggest that you skip to the subsequent section. I noted in the prior article ,

Headquartered in St. Helier, Jersey, NovoCure is a global oncology leader that dedicates its efforts to the innovation and commercialization of a novel cancer treatment dubbed Tumor Treating Fields (i.e., TTF). Notably, TTF is delivered by a device known as Optune which is portable and convenient for patients. As an uncanny method of attacking cancerous cells, TTF is highly efficacious 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 (i.e., GBM) as well as mesothelioma. To boost further growth, NovoCure is investigating TTF for other cancers such as non-small cell lung cancer (i.e., NSCLC), brain metastases, and pancreatic, ovarian, liver as well as gastric cancers.

Figure 2: Therapeutic pipeline .

Management Changes

On January 19, NovoCure Limited stated that the company is undergoing substantial organizational changes to prepare for future growth. As you know, management change can significantly affect the fundamentals of your stock. That being said, let us analyze the specific changes to see how that could affect NovoCure.

Accordingly, the Chief Commercial Officer (Pritesh Shah) will transition into a new role as Chief Growth Officer. Therefore, he'll have worldwide responsibilities for products, portfolio strategy, and brand management. Mr. Shah will establish a global framework for new launches, market access, and market intelligence. Moreover, he'll lead launches for new indications in the U.S.

That aside, the current Chief Science Officer (Uri Weinberg, M.D., Ph.D.) will take Mr. Shah's previous position. In that capacity, Dr. Weinberg would unlock the innovative potential of the company's technology platform, TTF. Concurrently, Moshe Giladi, Ph.D., will assume Dr. Weinberg's former role.

Like a "kink" that disrupts the puzzle pieces, NovoCure also disclosed that the Chief Medical Officer (Benaim) will leave the company. As a temporary replacement, Piet Hinoul (M.D., Ph.D.) becomes the new CMO and reports to Mr. Shah. While NovoCure conducts its "external" search for a permanent replacement, Dr. Benaim continues to help the leadership team in ensuring a smooth transition.

Positive Interpretation

As you can appreciate, promotion from within is a prudent practice employed by NovoCure. Phillip Fisher (one of Warren Buffett's two mentors) highly encourages this practice. First, it fosters loyalty. Second, the executives already have the expertise needed to take the company to a higher level of success.

Based on the aforesaid changes, you would anticipate that NovoCure is gearing up for the company's most robust growth phase. That is to say, TTF is already approved/launched for GBM and mesothelioma. The recent LUNAR study also positioned TTF for upcoming NSCLC approval, which is a huge market. The company simply needs to promote its leadership from within to handle the upcoming changes. Commenting on the aforesaid development, the CEO (Asaf Danziger) remarked,

We believe the successful readout of LUNAR marks the beginning of a transformational period for NovoCure, with multiple pivotal studies near completion and numerous future studies preparing for launch. Our leadership needs continue to evolve with our anticipated growth. We are committed to ensuring we have the optimal structure to support our employees, the business and the thousands of patients we believe we will soon have the opportunity to treat in a multi-indication future.

Negative Interpretations

Notably, you can bet that the success of a biotech company is highly dependent on management. That is to say, prudent management can right the ship when it is veered off course. Esteemed management can cut unfruitful drug development early on to conserve precious cash. Just as important, they can in-license new molecules and/or technology to strengthen the pipeline.

Amid the aforesaid management changes, I am cautiously optimistic. After all, I rarely see a stock performs well in the subsequent year. As you can imagine, there are various factors relating to management changes that affect the company. For instance, it would take time for the executives to adjust to their new roles. Sometimes, the executive would be a great match for their higher leadership position. Other times, it may not be working out due to overwhelming responsibilities.

What I'm most concerned with is when a company fires senior management. Of course, the firm typically softens the language of the press release. You'd likely read that the executive left to "pursue other opportunities." Another situation is when they procure external talent. Phillip Fischer stated that the management must be lacking for them to get outside talent. Again, it's much better when the company promotes from within for the reasons that I mentioned above.

Financial Assessment

Just as you would get an annual physical for your well-being, it's important to check the financial health of your stock. For instance, your health is affected by "blood flow" as your stock's viability is dependent on the "cash flow." With that in mind, I'll assess the 3Q2022 earnings report for the period that ended on September 30. Given that I already went into great detail about financials in the previous research, I'll briefly go over key metrics here. I previously shared,

NovoCure procured $131.0M in revenue compared to $133.6M for the same period a year prior. That aside, the R&D for the respective periods registered at $51.9M and $48.1M. Additionally, there were $26.5M ($0.25 per share) net losses compared to $13.1M ($0.13 per share) net declines for the same comparison. Regarding the balance sheet, there were $970.3M in cash, equivalents, and investments. On top of the $131M quarterly revenue and against the $125.8M quarterly OpEx, there should be adequate capital to fund operations indefinitely without worrying about a cashflow constraint.

Potential Risks

Since investment research is an imperfect science, there are always risks associated with your stock regardless of its fundamental strengths. More importantly, the risks are "growth-cycle dependent." At this point in its life cycle, the most important concern is if NovoCure can gain FDA approval for TTF's use in NSCLC next year. That aside, there is the risk that PANNOVA-3 and INNOVATE-3 won't post strong data. Additionally, the recent management change can signal unforeseen and hidden problems.

Conclusion

In all, I maintained my buy recommendation on NovoCure Limited but I reduce the stars rating from 5/5 to 4.8/5. NovoCure is a special investment because of its revolutionary technological breakthrough in treating cancer. TTF is already successfully launched for the deadly cancers: mesothelioma and GBM. Riding extremely strong LUNAR data, you can expect NovoCure to gain another label for TTF in treating NSCLC. As the NSCLC market will nearly double to $48.0B in 2031, NovoCure would capture lucrative profits. Going forward, you can anticipate NovoCure to update their two other clinical studies (INNOVATE-3 for ovarian cancer and PANNOVA-3 for pancreatic cancer) in the next earning report. With the current trajectory, revenue should also be nearly halfway toward $1B.

Now, you can argue that the recent management is readying NovoCure for the huge upcoming growth. Except for the CMO, they were mostly "promotions from within" which is highly positive. If so, NovoCure would become a giant biotech of the future. Else, the company would give up most of the grounds that it gained over the years. As Father Time will reveal how this event unfolds, my intuition tells me to be cautiously optimistic.

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