NVCR - NovoCure: TTFields' Ovarian Trial Short-Circuits (Rating Downgrade)

2023-08-29 05:44:30 ET

Summary

• NovoCure's Tumor Treating Fields technology faces clinical doubt following a failed phase 3 ovarian cancer trial.
• Despite a strong liquidity position and manageable debt, NVCR lags the S&P 500 by 70%, indicating potential growth challenges.
• Given current challenges and uncertainties, the investment recommendation for NovoCure is downgraded to "Sell".

Introduction

NovoCure ( NVCR ) is a healthcare firm specializing in cancer treatments. They've developed a unique technology called Tumor Treating Fields (TTFields) that employs electric fields to target and kill cancer cells. Their main aim is to expand the use of their FDA-sanctioned devices, Optune and Optune Lua, which treat glioblastoma [GBM] and malignant pleural mesothelioma (MPM) respectively.

In a recent analysis , I discussed NovoCure's prominence in the oncology field, especially with its TTFields technology. Although TTFields showed potential, its impact in the NSCLC market seemed less predictable due to the LUNAR data. I also expressed concerns about its integration into treatment plans, potential side effects, and the unpredictability of FDA approvals. Financially, NovoCure faced challenges with declining revenues, despite future promising trials. Consequently, I shifted my recommendation from "Buy" to "Hold", advising investors to approach with caution.

Recent Developments: On Monday, NovoCure stock dropped ~37% after its Tumor Treating Fields failed to meet the Phase 3 trial's primary goal in ovarian cancer.

The following article discusses NovoCure's recent struggles with its Tumor Treating Fields technology, highlighting financial results and a failed phase 3 ovarian cancer trial.

Q2 Earnings Report

Let's first review their most recent financial report. For Q2 2023 ending on June 30, NovoCure recorded a net revenue of $126.1 million, an 11% decrease from 2022, largely attributed to a $13.4 million dip in U.S. claim collections. U.S., Germany, and Japan were the main contributors. Revenue from the partnership with Zai Lab in Greater China was $6.8 million, and the gross margin was 73%. The company's R&D costs fell by 3% to $55.4 million, while sales and marketing expenses surged by 31%. General and administrative expenses rose by 29%. The net quarterly loss was $57.4 million with a cash balance of $940.8 million. There was a 13% uptick in prescriptions, and 3,571 patients were actively undergoing therapy.

Cash Runway & Liquidity

Turning to NovoCure's balance sheet , as of June 30, 2023, the combined value of 'cash and cash equivalents', 'short-term investments', and 'investments' is $940.8M ($156.978M in cash and $783.837M in short-term investments). Over the recent six-month period, the company has seen a net cash used in operating activities amounting to $39.5M. This indicates a monthly cash burn of approximately $6.6M. By dividing the $940.8M in assets by this monthly cash burn, it can be estimated that the company has a cash runway of about 142 months or almost 12 years. It's essential to note, however, that these values and estimates are based on past data and may not be indicative of future performance. Moreover, declining revenue, unforeseen expenses, and/or debt payments could significantly reduce their cash runway.

On the topic of liquidity, NovoCure has a significant amount of liquid assets on hand, bolstering its financial health. Furthermore, the company has a long-term debt of $567.2M. Based on the strong liquidity position and its current debt level, it seems plausible for NovoCure to secure additional financing if required, although such decisions would likely take into account other business factors. These observations and/or estimates are my own and might vary from other analyses.

Valuation, Growth, & Momentum

According to Seeking Alpha data, NovoCure demonstrates a moderate capital structure with an enterprise value of $2.82B. Valuation is challenging due to negative earnings and substantial Price/Book and EV/Sales ratios. Despite showing a Revenue 3 Year CAGR of 7.46%, its recent year-on-year revenue decline of -6.89% indicates potential growth challenges, especially given recent clinical setbacks. The stock has suffered significant momentum, underperforming the S&P 500 by over 70% in the past year.

Chasing Shadows: NovoCure's Delicate Dance with Data

NovoCure announced that its phase 3 trial, ENGOT-ov50 / GOG-3029 / INNOVATE-3, which evaluated Tumor Treating Fields (TTFields) combined with paclitaxel for platinum-resistant ovarian cancer patients, did not meet its primary objective of overall survival. The minor increase in survival duration for those on TTFields therapy compared to paclitaxel alone was not significant. An encouraging sign was noted for patients who had only one prior therapy line, hinting at possible benefits for them.

The current data suggests that NovoCure faces a challenging path towards regulatory approval. The minuscule difference in median overall survival between the two groups is hardly a strong endorsement of TTFields' efficacy. While the potential benefit observed in the subgroup that underwent just one prior line of therapy might offer some hope, in my opinion, this result is likely to slender to sway regulatory sentiment and might even have arisen by chance. If NovoCure were to lean heavily on this subgroup data for regulatory submission, they risk facing skepticism. Refining their research focus or investigating the subgroup further might be a wiser strategy, rather than rushing to regulatory bodies with the existing data. The company should be cautious; leveraging thin evidence might not only jeopardize this submission but could impact the perceived value of TTFields in broader applications. All in all, it seems NovoCure will have to move on from ovarian cancer.

My Analysis & Recommendation

NovoCure's journey in the oncology space, particularly with its Tumor Treating Fields technology, has been both intriguing and tumultuous. The stock's fluctuating performance - from under $20/share in late 2017 when I first recommended a "Buy", to soaring past $200/share, and then landing back in the same starting bracket - showcases the volatile nature of biotech stocks and the unpredictability of cancer therapeutics.

In the upcoming months, while NovoCure expects promising readouts for brain metastases from non-small cell lung cancer and pancreatic cancer, investors should keep their expectations grounded. The past performance of TTFields in recent trials, specifically the failure to meet its primary objective in ovarian cancer, adds a layer of skepticism around its broad applicability. While the setback doesn't negate TTFields' potential, it certainly raises reasonable doubts about its capabilities.

Given the company's liquidity and the manageable debt situation, NovoCure is far from being in dire straits. However, the negative momentum it has faced, lagging behind the S&P 500 by a staggering 70% in the last year, calls for investor caution. Furthermore, GBM-related revenue appears to be at its apex already and any momentum to the downside could place pressure on the company's financials.

In light of these observations and the existing challenges ahead for NovoCure, I am downgrading my recommendation to "Sell". The past successes of a stock should not overshadow the present challenges and future uncertainties. Investors, especially those looking for stable growth, might want to reconsider their positions in NovoCure and closely monitor the forthcoming data readouts. The biotech world is fraught with both monumental successes and unexpected downturns; as always, diligence and prudence should be at the forefront of every investment decision.

Risks to Thesis

When the facts change, I change my mind.

Potential risks that may contradict my final investment recommendation on NovoCure include:

• Overlooked Market Potential: I may have overlooked potential markets or niches where TTFields technology could be more successful.

• Underestimated Product Evolution: NovoCure might modify or enhance TTFields based on trial feedback, improving efficacy and market acceptance.

• Bias: I may have biases stemming from past stock performance, overshadowing the company's intrinsic value or potential pivot strategies.

• Regulatory Environment: FDA decisions can be unpredictable. They might see potential where I've seen pitfalls.

• Overemphasis on Negative Trials: Failure in one trial doesn't equate to the failure of the entire technology. NovoCure may succeed in upcoming trials.

• Mistaken Opinion on Financial Health: While I've highlighted decreasing revenues and cash burn, the company's solid liquidity and manageable debt might offer more resilience than projected.

• Global Expansion: NovoCure's partnership with Zai Lab in Greater China and other international collaborations may yield better-than-expected outcomes.

• Innovation and Partnerships: NovoCure could enter strategic alliances or develop new innovative therapies, altering its growth trajectory.

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