Revolution Medicines Just Hit a Major Milestone. Is the Stock a Buy?

Revolution Medicines (NASDAQ:RVMD) has been on a tear over the past year, with the company's shares climbing by 340%, as of writing. As is often the case with clinical-stage biotechs, the company's run has been driven by impressive clinical progress. And the good news is that Revolution Medicines recently earned approval for its first product. What does this new milestone mean for investors? Is the stock still a buy after its amazing run over the past 12 months? Let's try to answer those questions.

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Not just another cancer drug

The oncology market is intensely competitive and typically dominated by the largest and most prominent pharmaceutical companies. It's not easy for smaller drugmakers to make waves in this area. But Revolution Medicines has managed to do so. The company recently earned approval for RASONQUE, an oral tablet for the treatment of certain patients with pancreatic adenocarcinoma, the most common form of pancreatic cancer. But why is this approval considered a breakthrough? Here is the reason. Revolution Medicines is targeting RAS-addicted cancers.

RAS is a family of proteins that help regulate cell growth and division. It can be useful to think of these proteins as a molecular switch that can be turned on or off. But mutations can sometimes cause RAS to drive uncontrolled cancer cell growth by keeping the RAS switch permanently on. Previous medicines have targeted only specific, narrow RAS mutations, but Revolution Medicines' big success with RASONQUE is that it targets a much broader range of mutations than previous medicines. The medicine has shown just how potent a treatment it can be in clinical trials.

In a phase 3 study, it led to a median overall survival of 13.2 months in patients with pancreatic cancer, versus 6.7 months for patients on chemotherapy, which is the standard of care in this setting. So, RASONQUE could become the new standard of care in its narrow indication.

Is the best yet to come?

According to researchers, RAS mutations are among the most common mutations in cancer. So, Revolution Medicines' breakthrough opens a world of possibilities beyond the narrow indication it has already received for RASONQUE. The company is testing the medicine across other potential niches, including non-small cell lung cancer, one of the leading causes of cancer death worldwide. Further, Revolution Medicines is developing several other medicines.

The question, then, isn't whether Revolution Medicines is an innovative biotech company. The question is whether the stock has significant upside left after its amazing run over the past 12 months. There are some reasons to believe it does. Revolution Medicines priced RASONQUE at $39,800 for a 30-day supply, which is significantly higher than the monthly price for Keytruda, the world's best-selling cancer medicine (or individual drug brand in any area, for that matter). Could RASONQUE eventually exceed Keytruda's peak sales?

Maybe not. Keytruda may have a lower list price, but it has earned dozens of approvals across many different types of cancer. Still, analysts are excited about RASONQUE's prospects. According to some, it could generate $15.1 billion in revenue for pancreatic cancer by 2034 and $20.8 billion at its peak. And we also have to factor in the potential of Revolution Medicines' other pipeline candidates, although early stage programs are considerably riskier at this point. However, Revolution Medicines' current market cap is about $43 billion.

That's a huge number for a biotech that just earned its first approval. This valuation reflects RASONQUE's potential and Revolution Medicines' revolutionary approach to treating RAS-addicted cancers. Still, RASONQUE's success seems already baked into the stock price, meaning there may not be that much upside from here on out. Let's assume Revolution Medicines generates $20 billion in sales by 2034 across RASONQUE and other products.

Suppose, also, that Revolution Medicines has a price-to-sales ratio of 4 by then, a fairly reasonable number in the biotech industry. The company's market cap could rise to $80 billion by then, representing a compound annual growth rate of 8.1%. That's not bad, but a lot could go wrong, including clinical trial failures for earlier candidates or, for that matter, for RASONQUE in other indications. It's also possible that RASONQUE will exceed expectations, and that Revolution Medicines will launch newer products while avoiding clinical trial failures.

But in my view, there is little room for error for the biotech, which makes it a fairly risky stock to buy. Revolution Medicines would, however, be an attractive stock to pick up on the dip.

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.