NVCR

Publicly traded companies mentioned herein: Celgene (CELG), Novocure Ltd (NVCR)

Highlights

Novocure (NVCR) is an oncology-focused medical device company. Its Optune device - which uses Tumor treating Fields (TTFields) - is approved in the US, EMEA, and Japan for the treatment of adults with glioblastoma (GBM). At $21, the presenter is long the stock and sees a favorable risk/ reward setup based on the market opportunity for the company in GBM alone (+35%); however, if NVCR’s Phase III trials in brain metastases and non-small cell lung cancer (NSCLC) are successful, the stock could double and in his opinion Novocure would be an attractive M&A target.  

• The presenter briefly described NVCR’s history, noting that the stock came public in 2015, saw some initial momentum (trading up into the $20s from the mid-teens), but “was left for dead” when it traded down to $6-7 on fears that long-term data would not prove out the theory that TTFields actually disrupted metaphase (cell division / the tumor’s ability to grow).

  • Because the company is focused on treating oncology using a medical device, not a drug, the [limited] analyst coverage is split between device and biotech analysts.

  • A participant asked about the controversy and skepticism of Optune’s mechanism of action when NVCR came public, and the presenter explained that the Phase III trial had no placebo because it was “unethical” to have patients who were/are only likely to live for 2-3 years wear fake devices.

• In April 2017, “everything changed” because Novocure released five-year survival data for patients that had worn Optune. The median overall survival benefit was shown to be 4.9 months longer than the standard of care [chemo plus temozolomide (Temodar)].

  • The device is worn on the patient’s head for ~18 hours per day, and has a portable battery pack (or can be plugged in). The side effect profile is benign.

  • The presenter characterized the results as “revolutionary” because the last time an advancement in care for GBM was made was a decade ago (when Temodar became the standard of care).

• Based on the presenter’s survey work, oncologists who treat GBM at the major academic centers specializing in this cancer are very excited about the data and intend to use the device more frequently. Patient growth continues to grow, and while “nobody knows exactly why the low-intensity alternating electric fields work, it’s clear that the treatment option is becoming accepted”.

  • The results of his diligence/survey work suggest that oncologists who have 10% of their GBM patients using Optune today intend to increase use to 50% of patients over the next two-to-three years.

    • When Optune’s mechanism of action wasn’t well understood by oncologists, and the data presented was “just good enough for approval, but not unbelievable”, the treatment option was presented to patients as “an alternative”. Today, the presenter said that oncologists are saying, “There is an obligation to let patients know about the data here, and that it suggests Optune can help them live longer”.

• At $21, NVCR is trading at 8x the 2018 consensus sales estimate ($240mm). This is consistent with the multiples seen for growth-oriented med tech companies; however, the presenter’s model has NVCR generating closer to $300mm in sales in 2018. And, Optune is not yet covered by Medicare. A favorable Medicare coverage determination will be a major catalyst for the company in late 2017 or early 2018, and GBM alone could drive 30% upside for the stock, holding the multiple constant.

In the presenter’s opinion, NVCR has built a potentially scalable platform to treat many kinds of solid tumors, not just GBM. The device can relatively easily be placed on different parts of the body to treat NSCLC, ovarian cancer, pancreatic cancer, and mesothelioma:

Source: Company presentation

With readouts expected later in 2017, and additional data in 2019, there are multiple potential catalysts for shareholders to look forward to and the stock could rise to $40 if Optune becomes the standard of care. However, there are risks to the thesis.

• Management has had a difficult time explaining the revenue story since Optune’s launch. This is because revenue is recognized via a mix of accrual and cash accounting. And, some payers are not covering the device. Thus, revenue estimates on the street vary widely (some are cash-based, some are accrual-based) and it is possible that the company could miss in any upcoming quarter. If there’s a bad print, the stock could decline to the mid-teens, which would be a buying opportunity, in his opinion.

• Optune is somewhat expensive, at $18,000/ month. However, the long-term data are good and patients experience/ quality of life is good. Thus, the presenter thinks Medicare and other insurers will cover the device (with Medicare, there would be no cost to the patient; and, in the interim, NVCR is giving patients the device whenever possible).

The presenter noted that Celgene announced a Phase Ib study that will pair Optune with a combination of temozolomide and marizomib. This is the first time a large cap pharma/ biotech has looked to partner with Novocure, and is a signal of interest in TTFields technology.

• With the controversy behind the company, Celgene as a partner, and mounting data and familiarity with Optune (the device is in 300 centers around the U.S. and is expanding globally), the presenter believes NVCR will ultimately become a target for a larger oncology-focused pharma/ biotech company. But, he does not expect this to be a catalyst until there are more approved indications.