If a company shows a lot of potential, investors are often willing to pay a premium and take on some risk in exchange for owning a piece of the business. And in some cases, those valuations can appear extreme, especially when you consider the risk that investors are taking on.
One biotech company which may be the ultimate example of that right now is Summit Therapeutics (SMMT +15.63%). Its market capitalization eclipsed $23 billion last week, and it has surged more than 1,100% this year. And what's astonishing is that the business has done that while generating no revenue in the trailing 12 months.
It all ties back to one very promising drug in its portfolio. Here's why.
NASDAQ: SMMT
Key Data Points
Summit's drug candidate recently outperformed Keytruda
Keytruda has been one of the most successful drugs ever in healthcare. It treats a variety of different cancers and generated $25 billion in sales last year for Merck. Having a product like that can be a game changer for a company, and Summit investors are optimistic that their company could indeed have that with ivonescimab.
On Sept. 8, Summit announced that in a phase 3 clinical trial, ivonescimab was more effective as a treatment for advanced non-small cell lung cancer than Keytruda. It reduced the risk of death or disease progression by as much as 49% when compared to the leading cancer drug. The median progression-free survival for patients who received ivonescimab was 11.14 months compared to just 5.82 months with Keytruda.
Are investors reading too much into these results?
There's a lot of excitement around these recent trial results, and rightfully so, as having a potentially effective cancer drug can lead to significant revenue growth for a company in the future. Merck is a massive healthcare company with a market capitalization of around $300 billion, and it trades at close to 5 times its trailing revenue. Imagine if ivonescimab can generate $20 billion in sales -- at that kind of a multiple, Summit's market cap could top $100 billion.
There is, however, a lot more risk with Summit than there is with Merck. While Merck relies heavily on Keytruda for its growth, that isn't the only drug in its portfolio. And Merck also posts consistent profits. With Summit, there's a lot more uncertainty, and investors would have to take on significantly more risk.
One thing to consider is that ivonescimab's recent results were based on a Chinese population as trial participants. Ideally, the clinical trial would involve a more diverse population set. And unless the drug can demonstrate that it is effective across a broader and more diverse population, there are still going to be question marks about how successful it may be in the long run.
While Summit does have potential, the drug still isn't approved for use in the U.S. and there isn't a guarantee it will be, even though that probability looks to be high given its incredible results so far.
Should you buy Summit Therapeutics stock today?
Summit has a lot of potential to soar higher in value in the future, but that's going to rely heavily on how successful ivonescimab is and how much revenue it brings in for the business. And while its clinical results are encouraging, investors should be careful when comparing it to Keytruda.
Earlier this year, Keytruda obtained approval for a 40th indication. It has been effective in treating many types of cancers, and while ivonescimab may be more effective than Keytruda for one type of cancer, investors shouldn't assume that will be the case on a much broader scale.
With Summit at such a large market cap, there is also massive risk here that should there be any negative news around ivonescimab, shares of Summit could fall heavily. While I don't deny there could still be a lot of upside for Summit should ivonescimab continue to post strong results in clinical trials, there's simply way too much optimism priced into the healthcare stock right now for it to be worth buying for most investors, especially those who aren't comfortable with taking on a lot of risk.
