Revolution Medicines Has a $40 Billion Market Cap and Generates No Revenue. Here's Why That's Not Absurd.

Most clinical-stage biotechs are small-cap companies. That makes sense. Not only can it take years -- sometimes over a decade -- to develop novel medicines, but it is also a very risky endeavor. Companies that don't have a single product on the market and generate little to no revenue are very risky. However, several clinical-stage drugmakers have impressive market values compared to their peers. Take Revolution Medicines (NASDAQ: RVMD), a biotech focused on developing cancer therapies. Its current market cap is about $40 billion. That may seem absurd, but there is a good reason Revolution Medicines is worth what it is.

Image source: Getty Images.

Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia. Continue »

Revolution's enormous market potential

Cancer is one of the leading causes of death, and there are still many forms of the disease for which there is a need for new treatment options. Even within market niches with plenty of options, there is always room for improvement. Given all that, it's not surprising that oncology is by far the largest area in the pharmaceutical industry in terms of annual sales. Medicines that dominate the cancer market make billions, sometimes tens of billions, in revenue every year. Revolution Medicines is looking to tap into this large opportunity. It isn't the only one: Many smaller drugmakers are actively developing cancer drugs. The difference is that Revolution Medicines' leading candidates look incredibly promising.

Consider the company's daraxonrasib, which is being developed to treat pancreatic cancer and lung cancer. Recent clinical trial results highlight why the market is valuing Revolution Medicines so highly. In a phase 3 study in previously treated patients with metastatic pancreatic cancer, where daraxonrasib was pitted against the current standard of care, cytotoxic chemotherapy, the medicine posted a median overall survival rate of 13.2 months, versus 6.7 months for those who received chemotherapy. Daraxonrasib also showed a reasonable safety profile throughout the study.

This trial provided strong evidence that daraxonrasib could become a new standard of care in metastatic pancreatic cancer. And, according to some analysts, this could be an opportunity worth over $10 billion. We haven't even factored in other potential indications for daraxonrasib yet, including non-small cell lung cancer (NSCLC), one of the leading causes of cancer death. This could be an even larger -- albeit more competitive -- area for Revolution Medicines to break into with its leading candidate. Further, the company boasts other promising pipeline products. Revolution Medicines is developing zoldonrasib across pancreatic cancer and NSCLC. Zoldonrasib has already posted solid results in clinical trials.

Is it too late to buy the stock?

Revolution Medicines' secret lies in its pioneering work in a new class of medicines, RAS(ON) inhibitors, that aim to treat RAS-addicted cancers, which account for 30% of new diagnoses, according to the company. They depend heavily on a broken "growth switch" in cells (the RAS protein) being stuck on, so they keep growing and dividing uncontrollably. While therapies for this category of cancers existed, they typically did not address the root driver of the diseases. Revolution Medicines' approach does that, and now, the company could dominate this area for the next decade or so and reap immense financial benefits in the process.

What's more, with recent phase 3 clinical trial results, Revolution Medicines should launch daraxonrasib within a year, and the medicine promises to be a smashing success. However, Revolution Medicines has already soared by about 409% over the past year. And although its market cap isn't as absurd as some might think, given its status as a clinical-stage biotech, it is still quite high. Even with a strong launch trajectory for daraxonrasib, it will take some time for Revolution Medicines' sales to reach levels that justify its current valuation. And in the meantime, the company still faces the risk of clinical or regulatory setbacks that could sink its share price. So, Revolution Medicines' shares look too expensive at current levels, and investors should probably wait for a pullback before initiating a position.

Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.