SMMT: Earthquake in the pharma industry

Summit is cooking a new blockbuster drug. Scientists are exhilarated, outsiders are baffled and insiders a betting big.

Sep 17, 2024

Disclaimer: The information contained in this article is not and should not be construed as investment advice. This is my investing journey and I simply share what I do and why I do that for educational and entertainment purposes.

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TLDR Summary

Summit SMMT 0.00%↑ is challenging Merck’s Keytruda (pembrolizumab), which is currently the largest blockbuster drug with $25bn in annual sales. The new compound is called ivonescimab and it dominated pembrolizumab in its latest phase III trial. Summit’s stock is up 1,000% this year and 135% since the trial results were published.
It’s now valued at an eyewatering $21bn, by far the largest clinical stage pre-revenue biotech company in the US. At first glance, this has to come to earth again. It will take a few more years for the drug to be commercially launched in the US and experts are cautioning on data quality as the trial was conducted in a single region with an entirely Chinese patient population.
It’s curious however how little attention this gets. This is a big moment and if successful, this drug has the potential to become bigger than Ozempic or Mounjaro, the superstar weight loss drugs that everyone is talking about. In my perception, there is not much activity on social media and to the extent there is, people are attempting to short the stock rather than betting on its momentum.
Also, insiders are remarkably bullish. As usual in such a situation, the company used the opportunity to raise money. $235m to be precise. The curious thing is however that they did not sell the freshly minted shares in the open market. Instead, it happened as a private placement from insiders and certain other institutional investors. I can see this company being sold to Big Pharma in the near-term. CEO Duggan has a great track record on past exits.
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What happened?

For background, Merck’s Keytruda (pembrolizumab) is the No. 1 drug globally by revenue across all indications, raking in more than $25bn in revenues last year. This accounts for 28% of the entire global oncology drugs market.

Keytruda is used for various forms of cancer, with lung cancer being a primary indication. It accounted for 47% of Merck’s pharmaceutical revenues in 2023 and 42% of their total revenues. Merck’s current market cap is $300bn by the way.

On September 8, Summit announced data from the primary analysis for the Phase III HARMONi-2 trial. In this study, they pitted ivonescimab directly against pembrolizumab and it beat the incumbent handily.

11 months of progression-free survival (PFS) vs. 6 months,
50% objective response rate (ORR) vs. 39%, i.e. the share of patients with shrinking or disappearing cancer during the trial and
90% disease control rate (DCR) vs. 71% , i.e. share of patients without disease progression

The research community was very impressed with these results. According to several witnesses, people ‘broke out in applause’ when they saw this data.

Before this announcement, Summit stock had already been up 350% YtD. And after the announcement, it ran another 140%. With a market cap of $21bn, Summit is now the 9th largest biotech company in the US.

And they take the No. 1 spot of all pre-revenue biotechnology stocks by a mile. Runner-up RVMD 0.00%↑ trades at a valuation of $7bn.

Insiders

Summit is led by venture capitalist Robert Duggan. He joined the company as a director in 2019 and became CEO in 2020. He is perhaps best known for his involvements at Computer Motion and Pharmacyclics.

Computer Motion was founded in 1989 with Duggan as a founding shareholder. They pioneered the development of robotic-assisted surgical systems and were acquired by Intuitive Surgical in 2003. The combined entity is valued at $175bn today.

Pharmacyclics was a publicly listed clinical stage biotech company focused on the development of cancer therapies. Duggan got involved with them in 2008 as a large investor, chairman and CEO. At that time, the share price was under $10. They developed Imbruvica (ibrutinib) which is used to treat leukemia. The drug was approved in 2013 and Abbvie ABBV 0.00%↑ bought them in 2015 for $261 per share or $21bn in total.

He obviously didn’t hit homeruns like this all the time, but I consider the existence of these as an indication that this man should be taken seriously.

When a clinical-stage biotech company releases positive results, they typically use the momentum to raise money from outside shareholders. Summit did this as well. On September 12, they raised $235m by selling 10.35m shares at $22.70 per share, the closing price the day before.

The big difference to most other cases was however that they did not place these shares in the open market. Instead, the money came as a private placement from insiders (incl. Duggan himself) and some other institutional investors. A huge vote of confidence.

The science

Pembrolizumab is a so called monoclonal antibody, which means it is a protein that is a) made from clones of a single white blood cell (‘monoclonal’) and b) the purpose of which is to identify and neutralize antigens. Antigens are molecules that exist on the surface of intruders such as bacteria, viruses or cancer cells.

The monoclonal origin is important for research and therapeutic use because it ensures consistency in the results, a higher effectiveness and fewer side effects. Rather then burning the entire forest down, you simply take out infested trees. A monoclonal antibody targets only one specific type of antigen. You can typically see in the name of a compound whether it is a monoclonal antibody due to their -mab ending.

The research and commercialization of monoclonal antibodies had its breakthrough in the 1980s and 1990s and it was central to the formation of the biotech industry at that time. Over time, they became more and more powerful and some new drugs were game changers to previous approaches.

Pembrolizumab’s introduction in 2014 was such a step change. Previously, cancer treatment was built on chemotherapy and so called targeted therapies that aimed to slow cancer growth directly, for example by damaging its DNA. In contrast, pembrolizumab triggered the body’s immune system to recognize and attack cancer cells. This proved to be a highly effective, less toxic and longer lasting solution for patients. It accelerated an overall shift towards the development of immunotherapies and pembrolizumab was quickly approved for several other cancer types.

In contrast to pembrolizumab, ivonescimab is a so called bispecific antibody. It’s engineered to target not just one antigen, but two different ones simultaneously. Therefore, it has the potential to be more effective because it can harm the cancer's ability to grow and spread in two different ways.

In layman’s terms, pembrolizumab breaks the cancer’s right leg while ivonescimab breaks both legs. The former may be sufficient to prevent it from walking further, but the latter is more likely to fully accomplish the task. I believe some scientific background is important to understand this situation, but I don’t want to make it too technical. If you want to read about this further, check out Summit’s IR website here. The two targets I talked about are called PD-1 and VEGF.

At this point, it appears that Summit has really found a novel approach here which has the potential to generate huge value going forward. I am however wondering to what extent Merck can copy this methodology and come up with a similar compound and trial set-up. Opining on Summit’s value means opining on how defensible the lead is that they have created.

What’s the trade?

I typically don’t discuss my investment and trading decisions in detail because I want to avoid that someone might follow a decision without fully mentally owning it. But if you are interested, I did provide a template a while ago how I approach situations like this. I typically use the elevated volatility from such events to acquire shares at discount through short strangles.