Did you know that Summit Therapeutics (SMMT 2.21%) is one of the few publicly traded companies that has a market cap of more than $10 billion, but no revenue? With that kind of a valuation and nothing to fall back on, it grabs your attention. After all, there surely must be something extraordinary about the business for investors to be willing to pay such a significant premium for it.
In fact, Summit's stock has been falling of late, which means that its valuation was even higher earlier this year. At one point, its market cap was north of $27 billion.
The healthcare company does have a promising asset in its portfolio, ivonescimab, but it isn't approved yet. Investors are clearly bullish on the company's potential to be a big player in healthcare down the road. And if they're right, the stock could potentially double or triple in value.
With Summit Therapeutics now trading near its 52-week low of $15.55, is it a stock worth taking a chance on today?
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Why is there so much hype around ivonescimab?
Last year, a study showed that ivonescimab outperformed Merck's blockbuster drug Keytruda when treating patients with advanced non-small cell lung cancer. Comparing the two, ivonescimab reduced the risk of death or disease progression by 49%; it wasn't a small outperformance by any stretch. Keytruda is one of the most iconic cancer drugs ever, and for ivonescimab to perform so well made Summit's stock an instant hit with retail investors who believed it could be the next big pharma stock.
The problem is that most of the company's drug trials take place in China, where the participants may not be as diverse as in the U.S., and that could make it difficult to convince the U.S. Food and Drug Administration to approve it. Summit is undergoing global studies for ivonescimab; while they are phase 3 trials, they're still early on and in the recruiting stages. Until there's convincing data about ivonescimab that puts to rest concerns about the diversity of Summit's trial subjects, the stock may find it difficult to build up a rally anytime soon.
The big question about Summit's stock
Summit's key drug, ivonescimab, is incredibly promising, and if approved, it may generate billions of dollars in revenue for the company. Investors have assigned the stock an enormous valuation, which effectively prices in that approval. However, there's no guarantee that will happen. If it doesn't, then Summit's recent decline may pale in comparison to the huge sell-off that may be looming.
The key question today is how much the stock should truly be worth, given the uncertainty and risk around ivonescimab. That's difficult to answer, but I believe it's still overvalued given the risk. If you look at the company's pipeline, it's full of trials involving ivonescimab. Summit's success heavily hinges on the drug.
NASDAQ: SMMT
Key Data Points
There's no rush to buy shares of Summit right now
Summit's shares are trading near their 52-week low, but they're by no means a screaming buy. This was simply an egregiously overpriced stock that's now just heavily overpriced. At around $13 billion in market cap, there's still a fair bit of bullishness and optimism priced into the valuation.
The way I see it, if ivonescimab obtains approval, the stock could instantly surge in value. And in the long run, it could end up going far higher, if the drug truly is better than (or even as good as) Keytruda; the sky could be the limit for Summit Therapeutics. But if ivonescimab falls short of expectations, the stock could plummet. That's why I think a wait-and-see approach makes the most sense here.
