NVCR - NovoCure: Uncertain Regulatory Path And Slowing Growth

2023-07-28 10:46:23 ET

Summary

• NovoCure reported a decrease in total net revenues for Q2 2023, primarily due to reduced U.S. claim collections.
• Research and development costs decreased, while sales and marketing expenses and general and administrative costs increased.
• The Phase 3 LUNAR clinical trial showed promising results for TTFields therapy in non-small cell lung cancer, but financial challenges remain for NovoCure.

Introduction

NovoCure (NVCR) is a prominent oncology-focused healthcare company. Their proprietary Tumor Treating Fields (TTFields) technology utilizes electric fields to destroy cancer cells. Their primary goal is to broaden the application of their FDA-approved devices, Optune and Optune Lua, which are used in treating glioblastoma ((GBM)) and malignant pleural mesothelioma (MPM), respectively.

My most recent analysis of NovoCure highlighted its potential and challenges. Although its TTFields technology showed promise for NSCLC treatment, uncertainties in efficacy, possible side effects, and an unpredictable FDA process urged caution. Financially, declining revenues and rising costs signaled potential difficulties. Future trials offered growth prospects, leading to my recommendation shift from "Buy" to "Hold". Since this rating downgrade, NovoCure's stock has declined by 25%.

Recent developments: NovoCure reported Q2 earnings, driving its stock 15% lower.

Financial Performance

For Q2 ending June 30, 2023, NovoCure reported total net revenues of $126.1 million, marking an 11% decrease from 2022, primarily due to a $13.4 million reduction in U.S. claim collections. The U.S., Germany, and Japan contributed $87.0 million, $15.7 million, and $7.9 million, respectively, with other markets providing $8.7 million. Partnership revenue from Greater China via Zai Lab totaled $6.8 million. The quarterly gross margin stood at 73%.

Research and development costs were $55.4 million, decreasing by 3% due to lower trial-related expenses. Sales and marketing expenses grew by 31% to $58.5 million due to investments in geographic expansion and pre-launch TTFields therapy awareness activities. General and administrative costs increased by 29% to $40.8 million due to personnel and project cost escalations associated with growth.

The net loss for the quarter was $57.4 million with a loss per share of $0.54, and an adjusted EBITDA of $(27.2) million. Cash and equivalents were $940.8 million.

Operationally, Q2 saw a 13% increase in prescriptions to 1,556. The number of active patients on therapy was 3,571.

Growth Initiatives

During the earnings call , NovoCure's management discussed the results of the Phase 3 LUNAR clinical trial, presented at the American Society of Clinical Oncology Annual Meeting. The trial evaluated TTFields therapy in conjunction with standard-of-care therapies for stage 4 metastatic non-small cell lung cancer. The results showed a significant improvement in overall survival from 9.9 to 13.2 months. In addition to meeting primary survival endpoints, the trial also demonstrated 18.5 months median overall survival for patients treated with TTFields and immune checkpoint inhibitors. Management expressed confidence in TTFields therapy becoming a standard part of second-line treatment for stage 4 non-small cell lung cancer.

There were also discussions regarding the upcoming Phase 3 LUNAR 2 trial. This trial will study the first-line use of TTFields concomitant with pembrolizumab and platinum-based chemotherapy for patients with metastatic non-small cell lung cancer. The company is preparing for the trial, designed to enroll 734 patients and has a 21-month follow-up period after the last patient enrolment. The primary endpoints will be overall survival and progression-free survival.

Management also highlighted its plans for FDA PMA submission later this year and conducting additional analyses to supplement the LUNAR results. These additional analyses will further clarify many key aspects of the trial, including in-and-out of field progression patterns and patient survival as a function of usage and TPS score.

My Analysis & Recommendation

To sum up, Q2 earnings from NovoCure reveals considerable challenges ahead for the firm. Despite optimistic results from the Phase 3 LUNAR clinical study, their financial standing underscores the uphill battle they are confronting. The principal contributors to the 11% slump in overall net revenues are the diminished U.S. claim collections, along with increasing sales, marketing, and general administrative expenses, which appear to have sparked a significant drop in the stock price.

An uptick in R&D costs can be justified by the company's robust pipeline, yet the continuous swelling of sales and marketing expenses, particularly in the face of declining revenues, casts doubts over the firm's profitability path. This situation aligns with my previous evaluation and might be a factor in the recent investor bearishness, as evidenced by the 15% dip in the stock.

However, NovoCure's capacity to combat these adversities, showcased by their encouraging clinical advancements and dedication to future growth, must not be overlooked. The positives of the LUNAR trial highlights the potential of TTFields in enhancing cancer survival rates, and the upcoming LUNAR 2 trial could be instrumental in making TTFields therapy a primary treatment method for lung cancer, marking a considerable achievement for NovoCure.

Although the financial results are disconcerting, the prospective expansion driven by ongoing and future trials is noteworthy. Consequently, in light of their recent earnings, I advise maintaining a "Hold" stance on NovoCure. Yet, currently, NovoCure doesn't fit the mold of a "growth" stock, and investors' skepticism regarding the future of TTFields beyond glioblastoma appears well-founded.

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