Why Summit Therapeutics Rallied Double Digits Today on Another Down day for the Markets

Shares of lung cancer-focused biotech Summit Therapeutics (NASDAQ: SMMT) rallied 16.6% at its highs of the day before settling into a 10.4% gain on Thursday as of 3:54 p.m. EDT, even though the broader markets were down significantly on the day at that time, including the SPDR S&P Biotech ETF (NYSEMKT: XBI), which was down 4.4%.

The interesting news for Summit was that two insiders exercised warrants on Summit's stock yesterday, which most interpreted as being highly bullish. However, it could actually mean the opposite.

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Exercising well ahead of expiration: Positive or negative?

Yesterday, on April 9, Summit's Co-CEOs Bob Duggan and Maky Zanganeh each exercised warrants equating to nearly 4 million shares of Summit, at a strike price of $1.58. What is notable is that the Co-CEOs exercised these warrants, forcing them to buy $6.3 million worth of shares, about four and a half years before the warrants' expiration in December of 2029.

A warrant is similar to a call option that gives someone the right, but not the obligation, to buy a stock at a pre-determined price sometime in the future. What is interesting here is that these two executives thought it necessary to pony up $6.3 million to exercise that option early even though they'd be able to buy the stock at the same price much later.

Now, the market and sell-side analysts applauded the move. Cantor Fitzgerald analyst Eric Schmidt wrote in a note on the transaction, "In our view, there is only one reason to exercise these warrants early. Bob thinks SMMT shares will go higher."

While I don't pretend to know more about the intricacies of Summit's stock or its valuation than this sell-side analyst, one could more easily draw the opposite conclusion.

After all, if the executives thought the stock was going higher, they could have just as easily held on to the options they had. The difference is if each wanted to sell a portion of their stock, they would now be able to do so more easily. While the Securities and Exchange Commission (SEC) disclosures only noted the acquisition of stock and no sales, sales could still be forthcoming.

Why the executives may want more flexibility

Summit is still conducting phase III studies for its lead lung cancer drug ivonescimab, but the drug has already shown extremely positive results in prior trials published last year when Summit's stock skyrocketed 584%.

So, why would executives be somewhat uncertain about the future? Well, Summit conducted its main ivonescimab studies in conjunction with partner Akeso (OTC: AKES.F), a Chinese company.

While President Trump eased back from reciprocal tariffs on most other countries on Wednesday, the administration actually raised the tariff rate on China to 145%. The singling out of China could lead to increased tensions between the two countries.

While one wouldn't think a collaboration between two biotechs trying to cure lung cancer would be threatened, tensions between the U.S. and China have already spiraled in more unpredictable ways than most would have expected at the beginning of the year.

Therefore, while analysts see the warrant exercise as bullish, this investor doesn't. That has nothing to do with Summit's prospects with regard to ivonescimab, which still remain quite favorable. Rather, the caution is entirely due to these outside issues adding risks to Summit that weren't there before April 2 "Liberation Day."

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Summit Therapeutics. The Motley Fool recommends SPDR Series Trust-SPDR S&P Biotech ETF. The Motley Fool has a disclosure policy.