Summit Therapeutics Inc.

Moat: 1/5

Understandability: 3/5

Balance Sheet Health: 2/5

A biopharmaceutical company focused on the discovery, development, and commercialization of novel medicines to treat serious diseases, with a primary focus on cancer.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Summit Therapeutics, Inc. (SMMT) is a clinical-stage biopharmaceutical company focused on developing innovative cancer treatments, primarily in the area of precision oncology and anti-infectives. The company’s lead product candidate, ivonescimab (SMMT-101), is being developed in multiple clinical trials, including a global Phase III study, in non-small cell lung cancer (NSCLC), as well as other indications. Summit also has early-stage programs focused on other cancer-related targets and infectious diseases.

Business Overview:

  • Core Focus: Summit Therapeutics is focused on oncology, particularly in the development of next-generation therapeutic antibodies to enhance immune response against cancer and also on anti-infective drugs for multi-drug resistant bacterial infections.
  • Revenue Streams: As a pre-revenue company, Summit currently has no revenue from product sales, and operations are heavily reliant on revenue from collaborations and licensing agreements. Government funding and grants also play a role in their revenue.
  • Recent Pipeline Changes: SMMT’s recent licensing agreement with Akeso and their decision to discontinue work on ridinilazole and the disproportional focus on their lead drug, Ivonescimab, has dramatically shifted their short and long term trajectory and product pipeline.
  • Market Trends:
  • The pharmaceutical industry is characterized by intense competition. New drugs are protected by patents, but these patents expire over time, allowing competitors to enter and pressure market share.
  • There are a large number of competitors, with large pharmaceutical companies having a significant edge because of their R&D expenditure.
  • Consolidation in the pharma industry is common, and many smaller companies that do not have a pipeline of good enough products or funding to go through long clinical trials often get acquired.
  • The high cost and risk associated with clinical trials, plus the potential for regulatory hurdles, and pricing pressures are all risks for pharmaceutical companies.
  • The market for monoclonal antibodies, like the one SMMT is developing, is a growing market. This is because it has fewer side effects and has shown great efficacy.
  • Competitive Landscape: The company operates in an extremely competitive environment where established pharmaceutical companies are pursuing new drugs and trying to compete with each other. However, SMMT’s core product is targeted towards a type of lung cancer that is very difficult to treat, which can give them first-mover advantage. The company uses a network of collaboration and partnership to accelerate the development of drugs through various clinical trials which could help them be competitive. The company faces competition in the anti-cancer market and the anti-infectives market.
  • What Makes the Company Different: SMMT’s pipeline is primarily focused on novel medicines, with a specific focus on new targets in cancer that have a novel approach with potentially greater efficacy. Their licensing agreement with Akeso will provide an advantage because of the latter’s capabilities and the former’s focus on execution of the clinical trials.
  • Other Important Facts: The company’s business model relies heavily on its ability to achieve milestones and obtain regulatory approvals for the products they develop. The success of the company is heavily reliant on their lead drug. The company is currently undergoing multiple trials in several countries with its lead product candidate.

Financial Analysis:

SMMT is a pre-revenue company and it depends on external funding to operate and execute clinical trials. Their financial statements are structured to show all spending goes into research, clinical trials, etc. which are all expenses.

  • Revenue: As of the most recent report, SMMT reported revenue was 0 or negligible, with all revenue derived from licensing agreements that are of non-recurring nature.
  • Research and Development Expenses: For the six-months ending on June 30, 2023, SMMT spent $60.9 million on research and development expenses; for the year ending December 31st, 2022, the company spent $144.5 million, and for the year ending 2021, the company spent $122.3 million. These expenses are necessary to fund their clinical trials and other R&D efforts.
  • Operating Loss: For the six-months ending on June 30, 2023, operating loss was $66.5 million. For the year ending 2022, the operating loss was $191 million, and for 2021 the company reported an operating loss of 117.5 million. This is because they spend a lot on research and development while earning very little from revenues.
  • Net Loss: SMMT’s net loss for the six months ending June 30, 2023, was $67.3 million, as compared to a net loss of $171 million for year ending December 2022, and $123 million in 2021, showcasing increasing financial strains on the company.
  • Cash position: As of June 30, 2023, SMMT has $235.5 million in cash. The company did a recent offering of its shares to raise more funds.
  • Debt: The company has some long-term debt and other notes payable of 120 million dollars outstanding on the balance sheet.
  • Share Count: SMMT had 709 million shares outstanding as of its most recent quarter, with more equity issuance to take place through 2023-2024.
  • Dilution: SMMT is actively diluting its shares by issuing new stock. This is how it funds the company operations, and the company relies heavily on this method of funding, as the company cannot generate any substantial profits. For the nine months ending in September 2023, the basic and diluted loss per share came to be -0.13$.
  • Liquidity: As the company has high expenses relative to revenues and an unstable financial structure, it is unclear if the company can survive in the long-term. The frequent dilutions and lack of profits put severe financial strain on the company. Their cash burn is high, and without a commercial product, the future does seem uncertain.

Moat Rating: 1/5

SMMT does not have a moat. Here is the rationale:

  • Lack of Pricing Power: SMMT is a small player with no products in a highly competitive market with heavy price pressure because of competing pharmaceuticals, as well as generics. The company does not possess any unique assets, a strong brand, or other intangible assets that give it pricing power.
  • Low Switching Costs: There is no evidence of any switching costs to customers of their products, which are only available through clinical trials. If the products are ever approved, there will be many other alternatives and their customers can freely switch, given they are not locked into any long-term purchase agreements with SMMT.
  • Lack of Network Effects: There are no discernable network effects in the pharmaceuticals industry.
  • Lack of Cost Advantages: The company does not possess unique resources, location, scale or some proprietary method to create its products for less money than their competitors. In fact, SMMT’s expenses are very high due to the costly nature of clinical trials and drug development.
  • Industry Structure: The industry is one where there are tons of entrants, and companies often fail because of high risk of failure in clinical trials. The industry is susceptible to both disruptive technology and changing regulations. This limits the company’s ability to create sustained advantage.
  • Barriers to Entry/Exit: The barriers to entry are high in pharmaceuticals and that implies that it’s very hard to penetrate the market, which has benefits for current players. However, entry and exit can both be common. If SMMT fails to succeed with its lead product, then they will unlikely find a way to recover.
  • Overall SMMT operates in an industry where moats are hard to build, as there are a lot of competitors who are also developing novel medicines. SMMT also is a non-revenue company, so it doesn’t have any established presence or user base or any other advantages that can give a competitive edge. The company’s product pipeline is largely unproven and that is a risk as well. There are many companies developing similar medications and a significant percentage of them will not make it to commercialization.

Understandability: 3/5

SMMT’s business is not very difficult to understand.

  • The nature of the company’s business is relatively straightforward as it is based around pharmaceutical development.
  • It’s a non-revenue company that develops cancer treatments.
  • However, many of its internal operations are not very easy to understand. The clinical process to get a product approved is highly complicated and difficult to explain.
  • It is unclear how their collaborations with other companies affect the product development trajectory and profits.
  • The lack of detailed explanations, particularly around the finances and other parts of the company, make this a more than basic understanding and requires some effort from the investor to understand everything clearly.

Balance Sheet Health: 2 / 5

SMMT has an extremely unhealthy balance sheet. Here’s why:

  • Cash: Although the company has $235.5 million in cash, it burns through it quickly because of their R&D and operational expenses.
  • Debt: The company has long-term debt obligations that are more than their entire revenue.
  • Equity Dilution: The company routinely dilutes the share count to raise funds, which is why the shares outstanding has grown significantly in the last few years. This puts additional pressure on the earnings-per-share figures.
  • Lack of Revenue: The company has limited to no revenue and is in a pre-revenue stage. The company will likely require large amounts of funding for their clinical programs.
  • Operational Losses: SMMT’s operating losses are extremely high due to the heavy investment in clinical trials, R&D, and development expenses. Their operating losses are significantly higher than the company’s assets.

Given all this, it can be concluded that SMMT has a very weak financial position. Their liabilities are way more than their assets and they constantly seek more funding to meet the costs.

Recent Concerns and Management Stance:

  • Ridinilazole Discontinuation: During the first half of 2023, SMMT discontinued development of Ridinilazole, an oral antibiotic, with the company focusing instead on other assets. This may raise doubts about the company’s ability to succeed with its current offerings, and a possibility of the company lacking a full-fledged product pipeline. However, the management states that they were focusing on higher-potential products and this should result in more long-term gains.
  • Akeso Licensing Agreement: Although the licensing agreement provided cash and increased SMMT’s development efforts for Ivonescimab, the company’s reliance on a single drug may be problematic. This does increase the risk that the business faces, and creates a more streamlined and efficient product pipeline, but creates higher risks too. Management also has shown that their pipeline is still developing in the pre-clinical phase. The market may view these as a long term risk.
  • HARMONI-3 Trial Issues: The clinical trials for Harmoni-3 were facing delays in 2023, which would imply delays in revenue recognition and approval. Additionally, the company changed the primary end points in the trial, and this could significantly change how the success of the drug is evaluated by regulators. The management has consistently shown confidence in the trial results and that the modified primary end points would be in the company’s favor, and said that the data generated thus far is still significant for future regulatory approval.
  • 2023 Stock Offering: The company did multiple share offerings during 2023 to raise funds, this shows the company has an unstable financial state that it can’t overcome by its own means. This constant dilution has a negative effect on the stock and the returns for existing shareholders.

Overall, SMMT is a high-risk company, with a low moat and a weak financial position. Although the company is in a promising field, it is unable to generate revenue and faces a very high risk of failure. Investors should be wary of investing unless they are comfortable with highly volatile stocks in speculative industries. However, the company does focus on a promising area of cancer treatment and the company might succeed in its clinical trials and bring unique drugs to market, but the risks remain very high.