Shares of Revolution Medicines (RVMD -1.60%), a clinical-stage drugmaker, have gained 132% this year, easily outpacing the returns of leading pharmaceutical companies such as Eli Lilly (LLY -0.87%), Johnson & Johnson (JNJ -0.45%), and AbbVie (ABBV +0.04%). The question now is whether Revolution Medicines can keep the momentum going. Let's find out whether there is more upside ahead.
The valuation is a stumbling block
First, let's give credit where credit is due. Revolution Medicines is trying to revolutionize the oncology market, and it might just pull it off. The company is developing drugs that target cancer-driving proteins once considered "undruggable," offering the potential to precisely block the genetic errors that fuel tumors and create new treatment options for patients with hard-to-treat cancers.
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Revolution Medicines' clinical trial results have been outstanding so far, particularly for its leading candidate, daraxonrasib. To give one example, daraxonrasib beat the current standard of care, cytotoxic chemotherapy, in a head-to-head study in patients with metastatic pancreatic cancer. Daraxonrasib posted a median overall survival rate -- an important endpoint in cancer clinical trials -- of 13.2 months, versus 6.7 months with cytotoxic chemotherapy. This medicine appears destined for stardom. It should generate well over $1 billion in sales at its peak. Revolution Medicines has several other promising candidates in the pipeline.
NASDAQ: RVMD
Key Data Points
However, one problem with the stock is its valuation. The company is worth $39 billion despite having no products on the market and being consistently unprofitable. The market is pinning significant hopes on Revolution Medicines' oncology prospects, and this may be justified. However, at current levels, I wouldn't buy the stock, as a major clinical or regulatory setback, particularly with daraxonrasib, could sink the share price. The current valuation assumes near-perfect execution, and that makes the stock too risky.
Revolution Medicines may prove me wrong and beat the market from current levels. But I am more than comfortable passing up the chance, considering its risk-reward profile. If the stock dips significantly, I might consider it then.
