Novocure

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Novocure is a global oncology company pioneering a unique cancer treatment technology called Tumor Treating Fields (TTFields).

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

TTFields uses electric fields to disrupt cancer cell division, and has shown promise in specific cancers, particularly glioblastoma (GBM).

Business Overview

Novocure operates primarily in the U.S., Japan, Germany, and Israel. Their revenue comes almost entirely from sales of Optune, a device that delivers TTFields therapy for GBM and Mesothelioma.

The key differentiator for Novocure is their proprietary TTFields technology. Rather than relying on traditional approaches like chemotherapy or radiation, this therapy targets a fundamental aspect of cancer cells by using electric fields that cause cell death.

  • Geographic Focus: Primarily in developed economies, reflecting their focus on countries with robust healthcare systems.
  • Customer Base: Primarily hospitals and cancer treatment centers that administer Optune therapy to patients.
  • Products: The sole commercial product is Optune (and Optune Lua for mesothelioma), a medical device that generates TTFields.
  • Revenue Model: Primarily from sales of the Optune device and its related accessories.
  • Market: Primarily targeting two cancers - GBM and mesothelioma.
  • Cancer treatment landscape: Oncology is a large and competitive market. However, there’s a growing demand for innovative therapies that have less side effects compared to traditional treatments. This presents an opportunity for novel technologies like TTFields.
  • Innovation in treatments: There’s a shift from general treatment to more personalized and targeted treatments.
  • Price sensitivity: Many cancer treatments come with high prices, making cost-effectiveness important.
  • Regulation: Medical device and pharmaceutical industries are heavily regulated, and the regulatory pathway to approvals is difficult.

What Makes Novocure Different

  • Unique Technology: The TTFields platform has shown efficacy in a few cancers. This provides a point of difference in the market.
  • Non-toxic Therapy: TTFields is generally well-tolerated, especially as compared to chemotherapy. This makes it an attractive treatment for patients seeking fewer side effects.
  • Focus: Novocure is entirely dedicated to TTFields, which might enable them to push and improve this technology more than companies with broader portfolios.

Financial Analysis

Income Statement

  • Revenue: The company generates revenue primarily from sales of its Optune devices and accessories, used in the treatment of GBM and Mesothelioma. Revenue grew by 33.6% in 2022 to $594 million and increased by 20% in 2023 to $711.4 million. The majority of their revenues come from the U.S., with some coming from international markets. Revenue is primarily derived from sales to healthcare providers using their Tumor Treating Fields technology.
  • Cost of Revenues: The company’s cost of revenues has increased from $118.8 million in 2021 to $145.5 million in 2022, and $214.7 million in 2023. The company indicates that a large portion of these costs come from their contract manufacturers.
  • Gross Profit: Their gross profit was $471.6 million in 2022 and $499.1 in 2023.
  • Operating Expenses: Research and development expenses were $223.9 million in 2022, increasing to $234.5 million in 2023, as a result of expansion of clinical programs and research development. Sales and marketing expenses were $222.6 million in 2022, increasing to $275.2 million in 2023, primarily to support increased market access and commercialization efforts. Finally, general and administrative expenses were $88.1 million in 2022 and $95.1 million in 2023.
  • Operating Loss: Because the bulk of revenues have to pay for operating expenses, the operating loss was $62.9 million in 2022 and $106.2 million in 2023. This is from a GAAP measure and not a non-GAAP measure.
  • Net Loss: Net loss has gone from -$102.2 million in 2022 to -$182.5 in 2023.

Balance Sheet

  • Cash Position: The company has a strong cash position of $994 million in 2023, however it is down from the almost $1.2 billion it had in 2022 and the over $1 billion it had in 2021. This is still significant, and should give it a good runway, however, it can be seen that the net loss is eroding that cash position.
  • Inventory: Inventory also decreased to $20 million in 2023.
  • Debt: The company has $504.8 million of long-term debt, mostly in the form of convertible senior notes, due in 2025, 2027, and 2028. The company has been issuing more debt to have more capital.
  • Equity: Novocure has shareholder equity of $1.1 billion in 2023, a decrease from $1.3 billion in 2022.

Key Financial Ratios

  • Return on invested capital (ROIC): the ROIC is still negative.
  • Profitability: The company isn’t profitable. As their net loss widened in 2023, as well as ROIC being negative, it’s indicative of a non-profitable business.
  • Leverage: The debt is a decent portion of their enterprise value and their debt-to-equity ratio is 0.5. A further increase in debt is concerning given the profitability of the company.

Moat

Novocure’s moat is not strong and it’s very dependent on its research and the ability to treat more cancer indications. Currently their sales are focused on a narrow section of cancer types, and there is no real way of knowing when their patents will expire and when alternatives will emerge.

  • Patents: Their primary moat is protected by intellectual property in the form of patents of TTFields technology which do have expiration dates, this means that the barrier to entry could disappear in time. They have the ability to expand into new products and indications, such as solid tumors or brain metastases, which provides them a long run way for patent development and protection.
  • First to Market: Novocure has a first-to-market advantage, but this isn’t necessarily sustainable in the competitive pharma/med device field.
  • Brand: Their brand isn’t strong yet, mostly due to the lack of mass acceptance, and the lack of broad use in multiple cancer types.

Therefore, the moat gets a rating of 2/5.

Legitimate Risks

  • Regulatory approvals: Approval for new products and indications face regulatory hurdles.
  • Competition: The oncology market is competitive, with traditional and innovative therapies challenging adoption of TTFields therapy.
  • Clinical data: The results of clinical trials will be essential in the uptake of the treatment, and any shortcomings in trial results could significantly impact the business.
  • Financial sustainability: A continuous need for funding, given the large negative net income and lack of profitability.
  • Alternative treatments: An alternative treatment that works better than the TTFields technology can significantly harm the business.
  • Limited customer base: The business relies on a few select cancers and healthcare institutions to buy their products. This is a risk since adoption is slow.
  • Heavy R&D costs: The company is constantly spending heavily on clinical trials and product research, which might not yield great results.
  • M&A: A larger company could acquire and bring competition to the company.

Despite these risks, Novocure has showed a significant ability to have positive trial results in a few cancer types and has had good momentum in terms of adoption of its products. The core technology is unique and is not a copy of other treatments. The reliance on very few customers also brings some resilience into the business.

Understandability

The idea of TTFields is easy to grasp and the core business is easily understandable, but the financial aspect is very complicated. The technology itself and the details of the clinical trials is also something most normal people won’t be able to understand. Therefore, the understandability gets a rating of 3/5.

Balance Sheet Health

A good cash position provides a good cushion for continued research, but the consistent lack of profits, and increase of debt is worrying and it could erode value. Therefore the balance sheet gets a rating of 3/5.

Recent Concerns, Controversies and Problems

  • In the latest earnings calls, the company has highlighted positive results from its clinical trials, including for mesothelioma and NSCLC, that show good progress. The commercial market for these is, however, still a question mark and may depend on new FDA approvals.
  • The debt and equity are being balanced, but this reliance on debt to fund its operations is worrying.
  • The company has been losing money continuously. That trend is also projected to continue according to management. However, some positives are the growth in revenue, and management claims that future projections show profits in a few years.

The general consensus seems to be that if there are further positive clinical trial results, this can lead to revenue growth and profitability. In the meantime, though, there is an issue of a continuous reliance on debt and cash burn which may worry most investors.