Is Summit Therapeutics a Millionaire Maker?

The pharmaceutical industry is often about hitting home runs. Big pharmaceutical companies start small, and then a blockbuster product catapults them into the spotlight. Summit Therapeutics (NASDAQ: SMMT) has soared 1,000% over the past year on progress in developing a drug that could rival Merck's Keytruda, a product used to treat various cancers with over $25 billion in sales last year.

Those who got in early have gotten rich. Is Summit Therapeutics still a potential millionaire maker?

Or have investors gotten too far ahead of themselves?

This promising oncology drug could be a big deal

Summit Therapeutics is a biopharmaceutical company developing oncology drugs to treat various cancers. The company has not yet had any sales of its products. Its first potential drug, ivonescimab, is in phase 3 clinical testing. Ivonescimab works similarly to Merck's pembrolizumab by making cancer cells more vulnerable to the body's natural immune defenses and chemical treatments like chemotherapy.

Summit is collaborating with another biopharmaceutical company, Akeso, on a phase 3 clinical trial in China, and the companies recently announced encouraging data stating that ivonescimab reduced the risk of tumor progression in patients by 49% compared to pembrolizumab.

Merck sells pembrolizumab under the brand name Keytruda, and it is currently among the world's top-selling drugs, with approximately $25 billion in sales last year. A competitive alternative to Keytruda could generate billions of dollars in revenue and change Summit's trajectory as a company.

Optimism in the C-suite

It's generally risky to invest in unproven drug companies, especially when they're not yet generating revenue and so much rides on getting one product to market. Developing pharmaceutical products is a long and rigorous process that often leaves investors waiting months or longer between updates. As investors wait for drug trial results, they might turn to other sources to see if they can figure out how a company is doing. One such source is insider stock purchases and sales.

Many corporate executives regularly buy or sell stock using pre-determined programs, often tied to their compensation plans. However, it can raise eyebrows when a high-ranking employee makes an unscheduled transaction. At the end of March this year, Summit Therapeutics CEO and President Maky Zanganeh purchased over 110,000 shares on the public market through her revocable trust at an average price of $3.72.

An old saying goes, insiders sell stock for many reasons, but generally buy for only one: They believe the stock is going up. The stock trades at over $20 today.

Now, we have no idea why Zanganeh bought shares, and blindly following someone else's stock moves would be unwise, since everyone is in a different situation, but optimism from a CEO can be encouraging to other investors.

Is Summit Therapeutics a millionaire maker?

Anyone who bought a year ago is probably happy right now. Of course, the millionaire-making question is whether the stock can deliver life-changing returns for those buying in today.

Summit Therapeutics could burst onto the scene with ivonescimab. Several billions dollars in annual revenue would make it a stellar success, and the company could continue to do tremendous things if it could eventually commercialize other products. However, the stock's market cap is now over $16 billion as I write, which is pricing in a lot of success, considering the company's first drug hasn't even made it to market yet. Additionally, the joint venture between Summit Therapeutics and Akeso means Summit would only sell the drug in the United States, Canada, Europe, and Japan.

Merck trades at a price-to-sales ratio of 4.6. If we give that same ratio to Summit, ivonescimab would need roughly $3.5 billion in annual sales to justify the stock's current value -- and that could be years away.

As exciting as the positive results of ivonescimab's trial in China are, the stock is arguably over its skis and more likely to destroy wealth than make you rich. Investors should look for opportunities elsewhere. However, it would be worth revisiting the stock once ivonescimab receives FDA approval.

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

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Merck and Summit Therapeutics. The Motley Fool has a disclosure policy.