RVMD's FDA Win: Is the Stock Still a Buy After 134%?

Revolution Medicines (RVMD) has been one of the hottest biotech stocks this year, thanks to meaningful clinical and regulatory progress with its most important product, Rasonque. In August, the company earned U.S. approval for this medicine to treat certain patients with pancreatic cancer. Revolution Medicines had already gained significant market value by then. Before the approval, Duquesne Family Office, a single-family office led by billionaire Stanley Druckenmiller, increased its stake in Revolution Medicines by 26.5% during the second quarter. Was that a good move by the investment firm? Should investors purchase shares of the biotech after its amazing run this year?

Revolution Medicines' approval for Rasonque was a big deal. This medicine targets a cancer mechanism that, for decades, was considered 'undruggable.' However, the biotech cracked the code, proving in clinical trials that Rasonque's mechanism of action can succeed where many others had failed before. In a Phase 3 study, Rasonque was pitted against the standard of care, cytotoxic chemotherapy, in certain patients with pancreatic cancer.

Rasonque was the winner, achieving a median overall survival -- the most important endpoint in oncology clinical trials -- of 13.2 months versus 6.7 months for chemotherapy. Scientific breakthroughs don't always translate into commercial successes, but in this case, it should. Rasonque could become the standard of care in the indication it has already earned in the U.S. The medicine will cost about $478,000 per year for patients paying out of pocket.

Almost nobody pays the list price, of course. Between discounts, rebates, and insurance coverage, most patients won't pay anywhere near that much money. Still, Revolution Medicines is looking at a fairly attractive market, even though it has only earned approval for patients who have already received at least one prior systemic therapy and are ineligible for a treatment approach that combines two or more drugs. According to some estimates, there are 55,000 patients diagnosed with metastatic pancreatic cancer in the U.S. annually.

Revolution Medicines estimates that, historically, about 19,000 of those patients move on to receive second-line treatment. That's a useful benchmark for Rasonque's sales projections. The medicine should achieve significant penetration in this market, since it beat the standard of care in a head-to-head study. Assuming a roughly 30% net discount from its list price, which is within management's range, we are looking at a nearly $3 billion annual opportunity, a figure that could continue to grow as the U.S. population ages, since the average age of patients when they get a diagnosis of pancreatic cancer is about 70.

There is more good news. Rasonque is being tested in several other clinical trials. Revolution Medicines sees a much larger opportunity ahead, with ongoing studies for Rasonque as a potential first-line treatment for metastatic pancreatic cancer. Further, the medicine is also targeting certain patients with lung cancer, the leading cause of cancer death worldwide. And beyond Rasonque, Revolution Medicines has a couple of other products in its pipeline that could make significant progress over the next few years.

The company is no doubt innovative, but is the stock still worth buying at current levels? Revolution Medicines' market cap is about $40 billion as of writing. The company has lost market value since the Rasonque approval, likely partly due to some profit-taking. Assuming a 12% required rate of return and a forward price-to-sales ratio of 4 by 2031, Revolution Medicines would need to generate $17.62 billion in revenue in 2032 for its market cap to be justified today.

According to some estimates, Rasonque could generate $15.1 billion in revenue by 2034 from pancreatic cancer alone. That's not including potential indications elsewhere. Revolution Medicines could also launch other drugs in the meantime. Of course, the company may face clinical or regulatory setbacks. I'd like a more generous margin of safety, especially since we are talking about a company in the highly volatile biotech industry. Still, Revolution Medicines' stock looks much more attractive than it did a few months ago. I'd seriously consider buying if the market cap falls by another $5 billion or so.

Investors should note that the stock's 134% run this year already prices in a lot of good news. The FDA approval was a major catalyst, but the market may have overreacted. The valuation now leaves little room for error. Any clinical setback or slower-than-expected launch could lead to a sharp decline. Therefore, while the long-term potential is undeniable, the risk-reward is not as attractive at current levels.

Druckenmiller's increased stake is a vote of confidence, but it's important to remember that his firm may have a different time horizon and risk tolerance than retail investors. The stock could still deliver strong returns over the long term, but investors should be prepared for volatility. A disciplined approach, such as waiting for a pullback or scaling in gradually, could be wise.