Summary
- This disruptive medtech player in oncology is up >7x since I started covering it on Seeking Alpha in 2016.
- The recent pullback in the stock has offered an attractive opportunity to enter a long position.
- Recent deal with Merck to test TTFields in combination with Keytruda as a first line therapy in advanced non-small cell lung cancer has opened up a large market.
- In this report, I provide my assessment of the revenue opportunities across various cancer indications.
- I expect the stock to trade at $600/share or above by 2025, thus offering an attractive investment opportunity with a wide moat.
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Brief investment pitch
This disruptive medtech player in oncology is up >7x since I started covering it on Seeking Alpha in 2016 (when it was trading at $7.76/share). I wrote the title in my initiation article as 'NovoCure's TTFields Therapy Could Become The Standard Adjunct Therapy In Various Solid Tumors'. Over the past 4 years, the company has shown significant pipeline progress in making my title closer to reality.
I took advantage of the recent pullback in the stock off 52-week high to re-enter a long core position. My key interest is the recently announced Merck (NYSE:MRK) deal to develop TTFields with Keytruda as a first line treatment in advanced non-small cell lung cancer. Early preclinical data has shown a synergy between the two therapies, and the combination had statistically significant benefit compared to Keytruda or control alone. I consider the current market cap for NovoCure as significantly undervalued considering the global NSCLC revenue opportunity and am targeting at least a double on the investment within 2-3 year timeframe. Partnership with Zai Lab to commercialize TTFields in Greater China has opened up another large revenue opportunity. Additional indications like GBM, pancreatic cancer, liver cancer and ovarian cancer (in late-stage clinical trials) will further add to the future revenue. I expect the stock to reach $600/share by 2025.
Background
NovoCure (NASDAQ:NVCR) was founded in 2000 and is based in Jersey. Its U.S. operations are based in Portsmouth, NH, and European operations are based in Switzerland and Germany. The company is in the medical technology sector. Its proprietary platform, Tumor Treating Fields, or TTFields, uses electric fields which are fine-tuned to specific frequencies to disrupt the division of solid tumor cells. TTFields disrupt the mitotic spindle, breaking tubulin and cause tumor cell death. In addition, it is also shown to inhibit DNA damage repair, induce autophagy, reduce cell migration and induce immunogenic cell death, thus having a wide efficacy across a broad range of solid tumor types as well as brain metastases.
Optune showed excellent efficacy in glioblastoma, a deadly form of brain cancer and revenue is growing rapidly
Optune is a commercially available, FDA-approved version of TTFields for treating newly diagnosed as well a recurrent glioblastoma, GBM, one of the most deadly forms of cancer. Optune is also approved to treat GBM in the EU and Japan and licensed to Zai Lab for Greater China. Optune is used as a portable external device with an electric field generator, transducer arrays, rechargeable batteries and accessories. The company uses a direct-to-home delivery model where a representative delivers the device at a patient's home after receiving the prescription, trains the patient and the family in using the device and its maintenance, and provides 24/7 support.
In pivotal clinical study, Optune extended the overall survival by five months in newly diagnosed GBM (in combination with temozolomide) (20.9 months vs. 16 months for temozolomide alone). The progression-free survival, PFS, was increased to 6.7 months for the combination compared to 4 months for temozolomide alone. Even better results were shown when Optune was used by patients 90% of the time where median survival was 24.9 months, thus extending the survival by almost 50% from the best medical therapy. Even higher survival was seen (25.2 months) when Optune was used with higher energy levels. Based on these remarkable results, Optune has found a place as a standard of care therapy in newly diagnosed GBM, which affects approximately 10,000 new patients every year in the U.S. and an equal number in the EU.
At an estimated annual incidence of 3 new cases per 100K population, the estimated target market is approximately 27,500 new cases in the U.S., E.U. and Japan. At an estimated annual price of $120,000 per year, this is an estimated $6.6 billion revenue opportunity in the above territories (each patient use = approx. 2 years). In addition, the target market in China is approximately 42,000 new cases per year. Under its current deal with Zai Lab, NovoCure will receive royalties ranging from 10% to mid-teens on Optune sales. At a conservative 10% royalty rate, this indication is a $10 billion/year revenue opportunity in China for NovoCure. Considering the current market cap of $6.3 billion, just the newly diagnosed GBM indication makes the current market cap look undervalued.
