The shares have experienced a pullback in the past couple of weeks.
No stock has unlimited upside potential. When a company’s shares rise significantly during a short period, it makes sense to wonder whether it’s still worth investing in, even if it boasts solid fundamentals: Overvalued stocks are much less likely to generate strong returns.
That brings us to Summit Therapeutics (SMMT 1.50%), a drugmaker whose shares have skyrocketed by almost 700% since the year started (although that’s down from a gain of as much as a 1,100%). The biotech is clearly doing something right, but have latecomers already missed the boat?
The upside could be limited
Valuing clinical-stage biotechs is complicated, but Summit Therapeutics isn’t your average unprofitable drugmaker with no product on the market, although it fits the rest of the description. Summit’s leading candidate, ivonescimab, has delivered solid results in clinical trials and has already been approved in China to treat some forms of cancer. Summit entered into an agreement with ivonescimab’s original creator, China-based Akeso Biopharma, which granted Summit the right to commercialize it in Canada, the U.S., the Caribbean, Central and South America, Europe, Africa, the Middle East, and Japan.
Commercialization in China doesn’t matter to the U.S. Food and Drug Administration (FDA); the agency will want studies supporting approval. But it matters for valuation purposes: Most clinical-stage biotechs have candidates with limited testing in clinical trials, which have never been approved anywhere and have no data from real-world use. Summit Therapeutics is in a better position than most of its peers, especially considering ivonescimab’s latest phase 3 results.
In a late-stage trial, the medicine performed better than Merck‘s Keytruda in treating non-small cell lung cancer (NSCLC) patients with PD-L1 protein overexpression. This was the first time a medicine surpassed Keytruda — one of the world’s best-selling drugs — in a head-to-head study in NSCLC.
The comparison with Keytruda gives us a benchmark to estimate, however imperfectly, how much ivonescimab could generate in peak sales. Between NSCLC (arguably Keytruda’s most important market) and the numerous other indications Summit will seek for ivonescimab, let’s assume it could generate as much as half of Keytruda’s peak sales. Keytruda is projected to hit a little more than $30 billion in sales in 2028 before running into a patent cliff. But even if Summit achieves peak sales of $15 billion, that will take years, perhaps even more than a decade.
Summit has started enrolling patients for late-stage studies for ivonescimab in NSCLC that will support regulatory applications to the FDA. It could be two years (or more) before the biotech launches the medicine in the U.S. for a single indication
Furthermore, we have to factor in potential risks, including the possibilities that Summit will encounter unexpected regulatory setbacks, and/or some of its clinical trials will yield negative results. With a $15 billion market cap — an incredibly rare valuation for a clinical-stage biotech — a lot would have to go right for the company to meet the market’s expectations.
Mind your risk tolerance
One prediction I can make about Summit Therapeutics is that the stock will likely be volatile from here on out. That isn’t just based on the fact that clinical-stage biotech stocks have a habit of taking investors on roller-coaster rides. Beyond that, Summit has gotten a little ahead of itself, in my view.
However, ivonescimab does look promising, which is why the market’s (over)reaction isn’t entirely unjustified. So, even though it won’t be a smooth ride, I think investors with a slight appetite for risk should strongly consider initiating a position. Considering the data already produced, ivonescimab could become one of the more successful drugs on the market, and help Summit Therapeutics deliver strong returns to patient investors.
