It’s easier to invest confidently when you know both the pros and the cons in full.
Summit Therapeutics (SMMT 7.20%) is an exciting stock for many investors as its shares are up by 158% in the last three months alone. But, as wise investors know, recent price action is in no way a substitute for doing due diligence. And, given that this company doesn’t yet have any revenue, the need to do some research and cover your bases is especially important.
So with the spirit of delving a bit deeper in mind, let’s look at three things that you definitely need to know if you plan on investing in this biotech today.
1. Its collaborator does a lot of the heavy lifting
Unlike most biotechs, Summit licenses its programs from a Chinese company called Akesobio, which is its collaborator. Akesobio is already established, having a few commercialized products, and a large pipeline. So far, Summit has opted to pick the most advanced programs from Akesobio, and then run late-stage clinical trials in the U.S. so that it satisfies U.S regulators.
Both of its lead programs are testing a biologic called ivonescimab for its applicability in treating certain subsets of non-small cell lung cancer (NSCLC). It owns the rights to commercialize ivonescimab in most of the world, with the notable exceptions of China and Australia.
One major upshot of this arrangement is that Summit doesn’t need to worry about spending as much on research and development (R&D) compared to most other biotechs. Nor does it need to take on the risks to its stock value implied by the potential for early-stage clinical programs to fail to produce the positive data they need to proceed to late-stage development and beyond.
The other side of the same coin is that it can probably easily license any of the other company’s proven winners, run a relatively low-risk, late-stage clinical trial for regulators in the U.S., and then proceed to commercialization thereafter. So it can actually reduce its exposure to many of the typical biotech stock risks.
There is, however, a risk that one of Akesobio’s late-stage programs strikes out, which would probably also spell doom for any of Summit’s parallel programs. The relationship with Akesobio is thus foundational to the investment thesis for buying this stock. Overall, the collaboration is a big point in Summit’s favor.
2. The stock is heavily shorted
As of Sept. 13, 17.8% of Summit’s floating shares were held short, which is something that investors who might hold the stock need to know. It’s a signal that compared to the typical biotech stock, there is a larger-than-average contingent of investors who are pessimistic about this stock’s future value. Why might that be?
The most direct reason could be that they do not believe its clinical programs will deliver on the endpoints defined in their late-stage trials, perhaps on the basis of analyzing Akesobio’s prior results. In keeping with that, such an investor would probably also believe that regulators at the Food and Drug Administration (FDA) will not be convinced by whatever data Summit presents to them if it makes a bid for the approval of its candidate after the clinical trials conclude.
There’s always a chance that the short-sellers are correct. They wouldn’t be risking their money if they weren’t convinced that the odds of the stock declining were in their favor. But don’t let that dissuade you from buying the stock if the investment thesis makes sense to you. After all, the majority of investors are holding its shares long in anticipation of the price rising, not falling.
3. It has a big payment due within 12 months
The last thing you need to know if you buy Summit Therapeutics right now is that its balance sheet is going to look a lot different in one year.
Its current debt liability is $100 million. It won’t have trouble making the payment as it has more than $325.4 million in cash, equivalents, and short-term investments. But it’ll probably need to liquidate some of those investments to pay down the borrowing, as it only has $28.4 million in cash and equivalents.
Furthermore, its trailing-12-month operating expenses are $143.7 million. That means within the next year, between its expenses and dispatching its debt, it could be short on capital.
Given its licensing-based business model, there is a moderate risk that it may struggle to borrow funds at an attractive interest rate, as lenders may not be appeased by the value of its existing assets and the future prospects of its programs in progress. It may thus find that the most efficient way of raising more capital is to issue more shares of its stock, which would dilute the value for investors who buy it today.
However, if the company can hold out until after one of its ongoing clinical trials wraps up and reports (hopefully) favorable data, it might be able to time its share issuance with the bump in its stock price gained from publishing the good news so as to soften the impact to shareholders. So, its financial situation in the near term is not a dealbreaker for buying the stock.