Up 860% in the last 12 months alone, Summit Therapeutics (NASDAQ: SMMT) is a skyrocketing stock that likely has more upside in store.
Nonetheless, rapid gains like that tend to imply some downside risk for new investors, and this biotech is no exception. So, let's uncover the hidden risk here and what you need to know about it.
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This company's fate isn't entirely in its own hands
Since it doesn't have any revenue yet, Summit's strategy is to license its pipeline assets from Akesobio, a larger biotech based in China. Its lead program and only clinical-stage candidate, an antibody called ivonescimab, is no exception.
Although ivonescimab is approved for treating non-small cell lung cancer (NSCLC) by China's National Medical Products Administration, the Food and Drug Administration (FDA) in the U.S., or any other regulatory agency, is yet to approve it.
Summit is thus performing a pair of phase 3 clinical trials in the U.S. testing the antibody for the same indications, hoping to generate a dataset that regulators at the FDA will find compelling enough to grant the approval for commercialization.
A third phase 3 trial is planned, and it's expected to start in 2025. So, there is a well-known risk (to biopharma investors, at least) of those clinical trials failing to replicate Akesobio's results or otherwise failing to impress regulators in the U.S.
But with no independently developed pipeline programs to its name, Summit is likely planning to continue to license additional programs from Akesobio rather than investing in early-stage research and development (R&D). That could be a sustainable and ultimately very profitable strategy, because the Chinese biotech is investigating ivonescimab for a slew of additional indications beyond NSCLC, including head and neck cancer, ovarian cancer, colorectal cancer, and several others. Success with those programs would thus expand ivonescimab's total addressable market without requiring much in the way of a commitment up front from Summit.
Alas, that's also the source of the stock's hidden risk, and it's a fierce one. If Akesobio fails in any of its ongoing or future clinical trials with ivonescimab, it will sharply dent the drug's addressable market -- and Summit's stock will be dented right along with it.
The fact that it hasn't yet signed on the dotted line to license any additional indications from Akesobio doesn't matter; there is every indication that for Summit, Akesobio's pipeline is the only game in town when it comes to near-term opportunities for growth.
Furthermore, unless ivonescimab is a cancer wonder drug of some kind (something that nobody should be betting on), stumbles in drug development are inevitable -- and, unfortunately, especially likely for applications in oncology.
Things could still turn out for the best
Don't rush to sell this company's stock on the basis of the significant risk waiting in the wings. In Summit's context, Akesobio's clinical setbacks could be good buying opportunities, provided the therapy aces clinical trials next time around, of course. From a financial standpoint, this is more than likely.
As of the third quarter, Summit has $487 million in cash, cash equivalents, and short-term investments. Its R&D expenses were only around $38 million. Even with the planned expansions of the ivonescimab clinical trials next year, this company will still have enough cash to continue pursuing its licensing-based strategy for quite some time before it will need to consider raising more capital.
Therefore, as its near-term needs for capital are minimal, damage to its share price is not an impediment, since it likely won't be issuing more shares anytime soon to keep the lights on.
In other words, as long as Akesobio has more clinical trials ongoing and in the works, Summit can likely weather a few failures of its partner, even if it's a little painful for shareholders. That calculation will change if ivonescimab whiffs on most of its clinical trial objectives, of course.
For now, it isn't worth avoiding Summit's stock. While it does face considerable risks, some of which are out of its hands, it also has the benefit of being somewhat shielded from the very high risks of burning money on early-stage clinical trials. Still, one thing is clear: To know where Summit Therapeutics' stock is going, keep your eyes on Akesobio.
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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Summit Therapeutics. The Motley Fool has a disclosure policy.
