This company does not generate revenue and its market capitalization is over $20 billion. Here’s why that assessment might not be so ridiculous.

If a company shows a lot of potential, investors are often willing to pay a premium and take on some risk in exchange for owning a piece of the business. And in some cases, those valuations can seem extreme, especially when you consider the risk that investors are taking on.

A biotech company that may be the ultimate example right now is Summit Therapeutics (NASDAQ: SMMT). Its market cap eclipsed $23 billion last week and is up more than 1,100% this year. And what’s amazing is that the business has done this while not generating any revenue for the past 12 months.

It all comes down to a very promising drug in its portfolio. Here’s why.

Summit’s drug candidate recently outperformed Keytruda

Keytruda has been one of the most successful drugs ever in healthcare. It treats a variety of cancers and generated $25 billion in sales last year for Merck. Having such a product can be a game-changer for a company, and Summit investors are optimistic that their company could indeed have it with ivonescimab.

On September 8, Summit announced that in a phase 3 clinical trial, ivonescimab was more effective as a treatment for advanced non-small cell lung cancer than Keytruda. It reduced the risk of death or disease progression by up to 49% compared to the main cancer drug. Median progression-free survival for patients receiving ivonescimab was 11.14 months, compared to just 5.82 months with Keytruda.

Are investors reading too much into these results?

There is a lot of excitement surrounding the results of these recent studies, and rightly so, as a potentially effective cancer drug can lead to significant increases in a company’s future revenue. Merck is a massive healthcare company with a market cap of around $300 billion and trading at nearly 5 times its trailing earnings. Imagine if ivonescimab can generate $20 billion in sales — at that kind of multiple, Summit’s market cap could top $100 billion.

There is, however, much more risk with Summit than with Merck. While Merck is relying heavily on Keytruda for its growth, it is not the only drug in its portfolio. And Merck is also posting solid profits. With Summit, there is much more uncertainty and investors would have to take significantly more risk.

One thing to consider is that the recent results of ivonescimab were based on a Chinese population as study participants. Ideally, the clinical trial would involve a more diverse population. And unless the drug can prove to be effective in a wider and more diverse population, there will still be questions about how successful it can be in the long term.

The story continues

While Summit has potential, the drug is not yet approved for use in the US, and there is no guarantee that it will be, although that likelihood seems high given the incredible results so far.

Should you buy Summit Therapeutics stock today?

Summit has great potential to grow in value going forward, but that will largely depend on how successful ivonescimab is and how much revenue it brings to the business. And while its clinical results are encouraging, investors should be careful when comparing it to Keytruda.

Earlier this year, Keytruda won approval for its 40th indication. It has been effective in treating many types of cancer, and while ivonescimab may be more effective than Keytruda for one type of cancer, investors should not assume that will be the case on a much broader scale.

With Summit at such a large market cap, there’s also a massive risk that if there were any negative news about ivonescimab, Summit’s stock could fall sharply. While I don’t deny that there could still be plenty of upside for Summit if ivonescimab continues to post strong results in clinical trials, there’s simply too much optimism in healthcare stocks right now to make it worth buying for most investors, especially those who don’t feel comfortable taking a lot of risk.

Should you invest $1,000 in Summit Therapeutics right now?

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David Jagielski has no position in any of the listed stocks. The Motley Fool has positions in and recommends Merck and Summit Therapeutics. The Motley Fool has a disclosure policy.

This company does not generate revenue and its market capitalization is over $20 billion. Here’s why that assessment might not be so ridiculous. was originally published by The Motley Fool