On Monday, shares of healthcare company NovoCure (NVCR +1.66%) nosedived by a staggering 38%. That was because the company's ovarian cancer treatment failed to demonstrate that it could improve patient survival rates. As a result of the decline, the stock hit a new 52-week low. In fact, it hasn't traded around these levels since late 2017. It's a monstrous sell-off for the company.
Is this just the beginning of the decline, or should investors consider buying the stock at a significantly reduced price?
Why investors might remain bearish
The big concern with the business right now is that a lot of the hopes investors may have centered around the company's tumor treating fields (TTF) devices in being able to treat difficult types of cancers. That can be a lofty goal and while the upside may be significant, so is the risk of failure.
NASDAQ: NVCR
Key Data Points
The company's TTF therapy for non-small cell lung cancer technically met expectations in June as data showed it extended the median survival, but it was by a relatively modest three months when used with standard therapies. With immune checkpoint inhibitors, the survival rate improved by eight months. Those are positive results, but whether they are significant enough to justify the costs is debatable. NovoCure rents out its Optune device (which is used to treat glioblastoma) to patients at a price of $21,000 per month. With such steep costs to consider, it may not be easy to convince patients to use the therapy, even if it obtains approval.
Next year, the company plans to release late-stage trial data for its treatments on brain metastasis and pancreatic cancer. While NovoCure has achieved some success with its TTF therapies, I don't see a lot of reasons to remain too optimistic about its other trials.
Investors should brace for the downgrades
The consensus analyst price target for NovoCure's stock is just over $52 as of Aug. 29. That suggests an upside for the stock of more than 180%. But that number will most likely change as analysts revise their targets.
Investment bank H.C. Wainwright was the first out of the gate this week to significantly slash its price target for the stock in light of the recent developments, from $85 to just $25. The positive is that the new price target is still higher than where the stock closed on Monday. However, H.C. Wainwright also had one of the most bullish forecasts to begin with.
More downgrades will likely be coming for NovoCure's stock in the days and weeks ahead. As that happens, there could be more downward pressure on its valuation.
The business is getting riskier
If NovoCure can't obtain approval for another treatment, it could spell trouble for the business down the road. The company has struggled with profitability and plunking down more money on trials and testing without getting any results will only exacerbate the issue.
NVCR Net Income (Quarterly) data by YCharts.
The company's operating cash flow has also been negative for three straight quarters. And what's also troubling is that the company's growth rate hasn't been all that great, either. Last quarter, for the period ending June 30, sales of $126.1 million were down 11% year over year. And in 2022, the company's top line was flat when compared to the previous year.
NovoCure needs a growth catalyst, and there isn't a big one out there right now. Its TTF therapy for non-small cell lung cancer may obtain approval, but given its cost and modest improvement in patient survival, I'm not optimistic that will result in a surge in revenue.
Investors are better off dumping the stock
Monday was a bad day for NovoCure's stock, but I wouldn't be surprised if it was just the start of a deeper, more prolonged free fall for the company's valuation. This is a risky healthcare stock to be investing in and the outlook is more concerning than ever. Rather than go on what may end up being a potential roller-coaster ride, investors should simply avoid the stock. Unless there's positive data from one of its late-stage trials next year, there just isn't a reason to be bullish on the business right now.
