Everybody knows someone whose life has been impacted by cancer. Each year hundreds of
billions of dollars are spent fighting the disease, yet millions of people still lose
their fight with cancer every year. New therapies are desperately needed if humans Want To Conquer
Cancer. Today we'll be buying shares of a little-known medical device company that
has created a brand new modality of therapy that could give patients who have the most aggressive
forms of cancer of Fighting Chance. My name is Brian Feraldi and my name is Brian Stoffel thank
you to commonstock for sponsoring this video as the time is recording I own shares of novocure
and I do not yet own shares of novocure a $7.4 billion dollar company trading under NVCR now
let's talk about the company's mission statement to extend survival in some of the most aggressive
forms of cancer by developing and commercializing our Innovative therapy now if they would have put
the period after the word cancer that would be a simple mission statement but beyond that it is
deaf definitely inspirational and as you'll see it is definitely optional not perfect but I can
get behind it so we've been fighting cancer for over a hundred years with three primary modalities
surgery radiation and chemotherapy novocure is commercializing a brand new modality of treatment
it calls TT Fields the science behind TT Fields is a little complex but here's the gist patience put
a device on their skin that creates an electric field that electric field then disrupts cell
division in cancerous tumors while leaving healthy cells to be perfectly intact now the important
thing to understand about this new technology is that it doesn't replace the older forms in fact in
most cases cancer patients are using this device alongside chemotherapy the company's data shows
that using TT Fields greatly extends survival in some of the most aggressive forms of cancer and
it does so without any systematic toxicity meaning that this is a cancer treatment that has very few
side effects now novocure has FDA approval for two indications the first is brain cancer AKA
glioblastoma multiforme which is one of the most aggressive forms of cancer out there the company
has data showing that using optude in conjunction with chemotherapy extends survival rates in some
cases significantly so how does NovaCure make money well it's a medical device maker that gets
usage-based Revenue every month that patients are using the device now getting doctors and patients
started on this device takes a lot of money so customer acquisition costs are currently very
high however once a customer gets started they're going to use this device for the rest of their
life regardless of what's happening in the economy so customer demand is extremely predictable and
because the device is usage based all of the company's revenue is recurring in nature next
let's turn to the moat we think the first mode that novocure has is high switching costs why
because there are no other devices that promise to do what Nova cures does in fact if a patient
isn't wearing it 24 hours a day it lessens their survival rate novocure also battens from patents
this company invented this technology more than 20 years ago and has patented the heck out of
it in fact novocure is the only company that is actively commercializing too much reading
Fields you throw those two very simple things together with the optionality then we'll get
to in a minute and we think the moat is definitely expanding around the business now the reason we're
interested in novocure has nothing to do with the financials which themselves look just okay
Revenue growth has only been about six percent for the last couple of years gross margin is a
very respectable 78.6 percent however the company is currently losing money and the losses have
been growing over the last couple years luckily on a free cash flow basis it is still positive
although like net income it has been shrinking they can handle that because the balance sheet
still has a net cash position of 400 million dollars but for right now Returns on Capital
are negative currency management the company was founded by Dr urum polti more than 20 years ago
he is still an active member of the board the current CEO is Asif donzinger who has been with
the company essentially since founding even though he himself is not listed as a co-founder when we
look at the company's Glassdoor ratings there are very few of them but the ones that are there
are mid to low range with 3.4 Stars we'd like to see that be higher on Insider ownership 6.2
percent of shares are owned by insiders that's worth about 450 million dollars now the only
reason we're interested in buying NovaCare stock today is because of the company's optionality
right now novocure has FDA approval for Just Two disease States glioblastoma AKA brain cancer and
mesothelioma both of these disease states are very small patient populations but that could change in
the next two years novocure is currently in Phase 3 trials with four different disease States Each
of which could massively increase this company's addressable Market opportunity this this picture
beautifully shows the potential embedded in this company right now if the company succeeds in
launching in pancreatic cancer brain metastases ovarian cancer and lung cancer its Market
opportunity in the U.S explodes by a factor of 14. so in a very real way buying novocure stock today
is a bet that the company will succeed in gaining FDA approval for at least one of those potential
indications when we look at the company's income statement we think that there's a lot of operating
leverage to be squeezed out in the future especially if there's FDA approval for those
conditions the addressable Market if all of those conditions got approved would be worth 42 billion
dollars in the U.S alone again that's if they gain acceptance and the or growth rate is almost
entirely organic in nature how is NovaCare done for investors so far the answer there is pretty
good this stock is up almost 300 since it came public more than five years ago easily exceeding
the returns of the s p 5 500 it has a mixed track record with beating wall Street's estimates only
doing so in two of the last four quarters and currently the company is not focused on returning
Capital to shareholders at all so it's not buying back stock ping bang debt or paying a dividend
let's talk about the risks for the company it's worth noting that competition is not a serious
risk as this is the only company doing what it does and it is complementary to current forms of
treating cancer beyond that a risk that's worth watching is disruption should a cure for cancer
come out this company's product would be rendered absolutely obsolete although that's an outcome
that we would be thrilled with beyond that the financials of this company are not difficult to
understand however navigating the clinical trials and understanding the science could be somewhat
difficult there's also outside forces to consider the thesis for this company rests on FDA approval
should the FDA become hard to work with or the company could not secure that regulatory approval
the thesis would essentially be busted and finally the valuation for this company is quite High which
we'll get to in just a minute sad the company do and it's its most recent quarter the answer there
is not all that great Revenue actually declined two percent missing wall Street's estimates and
earnings per share contracted by more than half although they beat the Wall Street's estimates
across the board we saw margins go down although we know that that's largely because NovaCare is
investing in that future optionality free cash flow is still positive but down as was net income
while the balance sheet has $400 million in net cash management does not issue guidance but Wall
Street is expecting a two percent drop in Revenue in the upcoming quarter and more weakness on the
bottom line it's a similar story for the full year with Wall Street expecting roughly flat Revenue
growth and bigger losses this year than last year now we're going to give you four different
things to watch moving forward but by far the most important is the pipeline and that means
FDA approval for treating the four different types of cancer that NovaCare has in stage 3
trials beyond that investors should keep an eye on all the usual stuff Revenue gross margin and
free cash flow we want to see Revenue eventually pick up gross margin stabilize eyes and free cash
flow continue to grow from here that would tell us that our thesis is on track as it is there is no
imminent threat to this company's technology so the moat is widening and the thesis is on track
for now we ran this company through our investing Frameworks for me this got us 77 which is in my
investable category and on my framework NovaCare got a seven two reasons for that lower score one
this is a company that relies on patents and I don't give a ton of credit for patents but also
this is a company that has a binary future if they gain FDA approval that's great if they don't it
could crater the stock so where is novocure on its growth cycle the answer is somewhere around
stage three although it doesn't perfectly match up with this but when we think through the company's
income statement today from evaluation perspective the company is currently optimized for revenue and
gross profit but its expenses are extremely high as it funds that late stage pipeline so none of
the other metrics really matter that means that the metrics that will primarily look at are the
price to sales and the price to gross profit ratio we can Peak it the others but know that
they're not that telling so let's do that Novak here's price to sales ratio is currently about
14 which shows just how much growth investors think this company has in it and gross profit
currently sits at about 430 million dollars if we take that and divide the market cap by it we get
a company trading for 17 times gross profit a very elevated number compared to the rest of the market
the final number we'll look at is free cash flow although keep in mind NovaCare is not optimized
for free cash flow at all that number currently sits at over 300 this is a meaningless metric
for now but hey it is something for investors should look at so that's it that's why we will
be buying shares of novocure for our portfolio which you can watch on common stock we'll be
posting all of these slides over on common stock and we'll leave a link in the video description
we would love to hear your comment and what you think of the investment today so head on over
to common stock by hitting the link below and leave a comment letting us know what you think
about this decision we'll be reading through the comments that you leave on common stock and we'll
be selecting the best one the best comment that we see c will be given a one hundred dollar prize
thanks to common stock we want to give a shout out to Benjamin 10 because he had the most insightful
comment from our previous buy decision of Tesla congratulations Benjamin common stock has paid
Benjamin 100 so if you want to be in the running to win 100 head on over to common stock leave a
comment and let us know your thoughts we hope that you enjoyed this video this is one of the most
speculative Investments that we're going to make but we think it's worth doing today Brian's out