It can be exciting to buy a stock that has been red hot and to jump on the bandwagon -- but doing so can come with significant risks. At some point, there's a danger that the stock's rally could dissipate, and at that point, a sell-off may ensue. In other cases, however, there may still be plenty of room for a stock to rise higher, especially if its value still isn't all that expensive.
Where Summit Therapeutics (SMMT 0.81%) falls on that spectrum is a big question mark right now. It has been among the hottest healthcare stocks to own over the past 12 months, as its valuation has skyrocketed more than 500%. Investors have generated massive returns from the company.
But which category does the stock fall into? Is it in danger of hitting a peak soon, or could this still be just the beginning of an even greater rally ahead?
Why are investors so excited about Summit Therapeutics?
Summit is an intriguing stock because its valuation centers largely around the hopes of a promising cancer drug, ivonescimab. Data from a phase 3 clinical trial last year showed that the drug outperformed Keytruda, a top cancer treatment from Merck, in treating advanced non-small cell lung cancer. For patients who used ivonescimab, the median progression-free survival was 11.14 months -- drastically higher than the median for those who took Keytruda (5.82 months).
The results are incredibly exciting, but there's a big catch -- the trial data was based solely on Chinese patients. Regulators will want to see the effectiveness of a drug on a diverse mix of patients. That means that while these results are encouraging, there will likely need to be more diverse data before regulators are convinced that the drug is the real deal. Ivonescimab is currently involved in many phase 3 trials, the bulk of which are based in China.
Where could the stock go from here?
Today, Summit's market capitalization is nearly $18 billion. That's a hefty valuation for a company that doesn't generate any consistent revenue and doesn't have any approved products in its portfolio. Companies in similar situations often trade at just a fraction of Summit's price, given the risk and uncertainty involved with them.
But in this case, investors appear to be pricing in approval of the drug already, and that can be risky. The stock is more expensive than more established healthcare companies of a similar size, including testing company Quest Diagnostics ($17.3 billion) and COVID-19 vaccine maker Moderna ($15.9 billion).
Summit is a stock that could potentially rise higher, should it release promising trial data for ivonescimab that reinforces its earlier results and involves a broader mix of patients. But if that isn't the case, the sell-off could be extreme given its incredibly inflated valuation.
Summit's stock isn't suitable for most investors
Summit's stock could take off even further or crash drastically, depending on future clinical data for ivonescimab and what regulators say about it. While its recent phase 3 data was encouraging, it by no means guarantees that approval is coming. The danger is that the stock is trading as though that approval is a sure thing. At its current valuation, there is considerable risk that the stock may crash if ivonescimab doesn't end up obtaining approval.
As a result, this has become a largely speculative stock to own. It may be near its peak, and that's why I'd avoid investing in it at this point -- there's simply too much risk. Summit can go in vastly different directions, and it's arguably too early rather than too late to invest in it. Given the massive downside risk, I wouldn't invest in the stock unless the company actually obtains approval for ivonescimab. Buying it before then involves taking on a huge gamble.
