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On the heels of an earnings report that had Pharmacyclics, Inc. (NASDAQ:PCYC) raking in nearly $60 million during the company's fiscal second quarter - a quarter that ended with over $240 million in the PCYC bank account - shares spiked pretty significantly, surging by nearly twenty percent on Friday to close the day at the $23.23 mark. That's a monumental number for a stock that traded for just around a buck four years ago.

Back in those days, it was considered money when PCYC spiked to the north side of two dollars, let alone twenty, but there was little doubt that the company's future looked bright with a robust pipeline of cancer-fighting product candidates, most of which were at or near the Phase II stages of development.

Once shares soared past the five dollar level, however, I started to find it hard to justify such a move while the company still had nothing yet out of Phase II trials. At the time, in fact, nothing was even ALMOST out of Phase II.

Obviously, my skepticism turned out to be wrong.

Shares soared and remained in the high teens for quite some time before bursting higher and setting a new 52-week high on Friday. With no debt, a war chest that is more than full, and a high profile partnership already a done deal with a Johnson & Johnson (NYSE:JNJ) subsidiary (Janssen Biotech) - one that could be worth nearly a billion dollars before future royalties are even considered - all the makings for a continued run are well in place.

When you also consider that quite a few media outlets are still full of positive support for Pharmacyclics, it's hard not to imagine that this stock is going to keep moving higher, or at least sustain its current prices, as the pipeline develops from the Phase II stages.

That said, it's also worth taking note that this company is now trading with a market cap of closer to two billion than one - a very significant number for a pipeline whose most advanced products have still yet to commence Phase III trials. Respect is given, however, to the fact that Pharmacyclics expects Phase IIIs to start rolling out this year.

The Janssen partnership deal revolves around PCI-32765, PCYC's oral, first-in-class Bruton's Tyrosine Kinase (BTK) inhibitor that is being developed for the treatment of Non-Hodgkin's Lymphoma, Chronic Lymphocytic Leukemia and Multiple Myeloma, all of which are considered hematological malignancies.

In collaboration with Janssen, Pharmacyclics plans to initiate several Phase III trials over the next few years for PCI-32765, and should the product receive an FDA approval and reach the commercial stages, the two plan to share costs and revenues, although Janssen will take the lead in areas outside the United States.

Needless to say, this is a very significant deal for a Phase II company, and the share price shows it. Not many companies at these stages receive partnership deals on this scale. Pn the other hand,however, there is a long way between Phase II trials and an FDA approval, no matter how promising a product looks.

One point six billion?

Remember, at one point, that Geron (NASDAQ:GERN) was pushing a billion dollar market cap on the potential of its own pipeline of cancer-fighting drugs, and also for its status as a leader in the field of stem cell therapies. Geron was the first to receive an FDA go-ahead to conduct clinical trials based on embryonic stem cell therapy and shares soared on the potential of the company's treatment for spinal cord injuries (SCI). Geron, like Pharmacyclics, also had nothing past Phase II and the billion dollar market cap quickly evaporated as the company shut down its stem cell trials due to an overall lack of resources.

That said, Pharmacyclics will not have those problems thanks to the Janssen deal, but the point is that no matter how promising a situation looks in this sector, situations can - and do - quickly turn south.

High-profile partnerships can also disappear overnight. Take CellDex Therapeutics (NASDAQ:CLDX) - yet another Phase II company. Shares of CellDex were destroyed after Pfizer (NYSE:PFE) backed out of a partnership deal for its developmental brain cancer treatment. Even partnerships are fickle ordeals in this sector.

Pharmacyclics can also look at its own experiences as words of caution. Back in 2007, shares traded to the north side of nine bucks when Xcytrin was brought before the FDA for approval. Those prices were lost immediately after the FDA issued a non-approvable letter and shares lingered below two dollars for quite some time as a result.

Again, PCYC's current pipeline is a lot stronger than where the company was five years ago, but the point is that we've seen this story many times before; market caps of well over a billion dollars justified by a Phase II pipeline are hard to bite, and even harder to swallow.

These are the types of situations that shorts love; and there's quite a bit of time between now and approval for the big boys to play their games - to both the north and south sides of the argument.

Last week's run certainly came on positive developments, and Pharmacyclics is undoubtedly well-armed with a brimming war chest, but it's tough to believe that gains as significant as what we've already seen are still possible for this stock.

Enjoy the story and enjoy the potential, but there's nothing wrong with being a little wary of the situation before us.

Disclosure: No position.

Source: Pharmacyclics Is Flying, But There Are Reasons To Be Wary