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Novocure (NASDAQ: NVCR) could either be a big win or a deep dip for investors. In this clip from “3 Minute Stocks Updates” on Motley Fool Live, recorded on March 2, Motley Fool contributor Brian Feroldi discusses the reasons why this medical device stock could go either way, and alerts investors who want to take the risk to brace for volatility.
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Brian Feroldi: Let’s shift to Novocure, ticker symbol N-V-C-R. This is a medical device company that is focused on cancer. It’s treating tumors, cancers with the device that you wear currently on your head. Novocure, previously, was in hypergrowth mode, but those days are over for now. In the fourth quarter, revenue dropped 7% to $133 million. What is up with that? Well, in the year-ago period, the company had a backlog of Medicare payments that it received $11 million for on back payments. That did not repeat this quarter. If you exclude that, the company would have reported growth, albeit very, very slow growth. Active patients, the number of users of Novocure’s technology, only grew 5% during the period to 3,587. Prescriptions received for the devices only grew 1% so the company seems to have really tapped out its current market opportunity. Now, gross margin actually declined a little bit to 78%. That’s, in part, due to sales increasing in China where it has a partner program and gross margin is not yet as high as it is in its more developed market, plus the company is spending very, very heavily on its late-stage pipeline. I’ll show you a slide on that in a minute. But you add all of that together, declining revenue, compressing margins, higher spending, net loss for the company was $26 million or $0.25 per share with $937 million in cash. The loss is easily fundable up to now. Now, investors should expect more of the same financially in 2022. Management is guiding for about 2% to 5% growth in active patients. Financials will follow that, so why the heck should we not dump this company right now? Well, with Novocure, the story is all about the pipeline. This is what Novocure’s current pipeline looks out and in this year. In 2022, we have a Phase II readout on gastric cancer. We have a Phase II readout on GBM, that’s brain cancer, that’s a current indication. We have a Phase III pivotal study in brain metastases and, this is the big one, data readout from their lunar study on non-small cell lung cancer. The lung cancer market is at least 20 times bigger than their current market and indications are 20 times bigger. As a reminder, in the company’s Phase II trial, the results were so encouraging that the study participants said that it will be unethical for there to be a placebo group. They move forward this study by one year in order to get to these results quickly. The odds that investors are going to like what they see out of that study are favorable. Because of that, this company is going to trade like a biotech stock. The financials really don’t matter. It’s all going to be about the clinical results from those four studies with the big focus on non-small cell lung cancer. Expect more volatility and, if the results are good, this stock could double in a day. If they’re bad, look out below. I mean, that’s just the situation that the company is in right now. If you look out to 2023 and 2024, pancreatic cancer, ovarian cancer, brain metastases are all market indications in late-stage studies. That is our story for this company right now. If the company can successfully enter any of those indications, the market opportunity just explodes higher, but brace yourself for volatility.
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Brian Feroldi owns Novocure. The Motley Fool owns and recommends Novocure. The Motley Fool has a disclosure policy.
