When investing in small-cap biotech companies, the most important process is to identify a favorable risk/reward ratio. Companies that offer only small incremental improvements of existing treatments and therapies will often leave investors wringing their hands hoping for favorable trial results, which all too often leads to detrimental inflection points and dilution of current shareholders to raise capital. It's my belief that small cap biotech investing should focus on transformative improvements in medicine. As treating disease evolves, the new frontier isn't a new chemical formulation, but custom individualized therapies that focus on treating the root cause of the disease, not treating symptoms of the disease.
One such advancement is CRISPR/Cas9. An over-simplification of this technology boils down to a natural evolutionary process that has been occurring in bacterial cells for millions of years. When a virus attacks a bacterial cell, it injects its own DNA into that of the bacteria, which tricks the bacteria into replicating millions and millions of new viruses, which then break out and continue the process of infecting new bacteria. However, bacteria have evolved a defense mechanism to identify the foreign DNA sequence and remove it from the cell.
Biologists Jennifer Doudna of UC Berkley and Emmanuella Charpentier of Umeå University in Sweden were able to identify this process and replicate it in 2012. CRISPR technology allows scientists to precisely "cut and paste" DNA into cells in a quick and cost-effective manner. This discovery holds the potential to dramatically change the way many genetic diseases are treated by simply changing the genetic mutation. The MIT Technology Review called CRISPR/Cas9 "the biggest biotech discovery of the century."
Currently, there are 2 publicly traded CRISPR companies Intellia Therapeutics (NASDAQ:NTLA) and Editas (NASDAQ:EDIT) and a third, CRISPR Therapeutics (NASDAQ:CRSP), planning an IPO in the near future. Big Pharma and the agriculture industry have rushed to partner with these companies. In the past 18 months, Novartis (NYSE:NVS), Regeneron (NASDAQ:REGN), Juno (NASDAQ:JUNO), Vertex (NASDAQ:VRTX), Bayer, DuPont (NYSE:DD), and Monsanto (NYSE:MON) are just some of the companies to sign partnership deals in this new field. These partnerships will be key in advancing CRISPR to trials and obtaining regulatory approval for treatments. In assessing the companies, it's my opinion that Intellia Therapeutics has the best partnerships as well as the most attractive risk/reward ratio.
Intellia has an exclusive license from Caribou Biosciences (Jennifer Doudna) to utilize CRISPR technology for the discovery, development, and commercialization of human gene and cell therapies. The company has an excellent management team, strong partnerships with Novartis and Regeneron, and a robust cash balance of $300 million.
In late 2014, Novartis signed a 5 year partnership with Intellia focused on chimeric antigen receptor T cells (CAR-T), and hematopoietic stem cells, or HSCs. Novartis committed $63 million upfront for a 20% stake in the company, as well as funding R&D costs and up to $230 million in milestones. CRISPR holds particular value for CAR-T therapy due to its ease of use in precisely modify T-cells removed from patients. While Novartis reorganized their Cell & Gene Therapy division and cut 120 positions related to their CAR-T program, the company has made it clear nothing has changed in their development of CTL109 and that CRISPR remains an integral part of their program. In a press release in early October where the company announced a new research team called Chemical Biology and Therapeutics (NYSE:CBT) based in Basel, Switzerland, where the company is headquartered, and Cambridge, MA, home to the Novartis Institutes for BioMedical Research (NIBR) campus, they said:
This team will combine two existing teams and focus on harnessing the power of chemical biology and other cutting-edge technologies such as CRISPR, DNA-encoded libraries, and targeted protein degradation to discover new drug targets.
In December 2015, Novartis announced a $600 million expansion of NIBR campus in Cambridge, MA, where Intellia is headquartered. This gives Intellia access to state of the art facilities to help Novartis develop their CAR-T and Hematopoietic Stem Cells program.
The second partnership Intellia signed was with Regeneron in April 2016. Under the deal, Regeneron paid Intellia $75 million upfront with the commitment to invest another $50 million in Intellia's next equity financing. Under the 6 year agreement, Regeneron has the exclusive right to choose 10 targets to discover and develop based on Intellia's CRISPR technology. The 2 companies will focus primarily on editing genes in the liver, but Regeneron can select up to 5 non-liver targets. The deal involves up to $320 million in milestones, but perhaps more importantly it gives Intellia access to Regeneron's state of the art Genetics Center to develop their own proprietary programs. In a recent company presentation, CEO, Nessan Berminham talked about the attractive financial terms, but really highlighted the benefits of being able to collaborate with a cutting edge company like Regeneron and accessing their research facilities to advance their own research.
Will the technology work?
It's clear CRISPR is a game-changing technology that allows for efficient and cost-effective DNA editing, but being able to translate that to real world applications hasn't been proven yet. However, Intellia recently announced encouraging preclinical data for treating Transthyretin Amyloidosis, which is a genetic disease that causes a slow build-up of abnormal deposits of a protein called amyloid (amyloidosis) in the body's organs and tissues, often causing peripheral neuropathy and eventually death. Through a single injection into the tail vein of a mouse, Intellia's lipid nanoparticle delivery of CRISPR/Cas9 components successfully edited up to approximately 60 percent at the transthyretin (TTR) target site after a single intravenous administration. This resulted in an associated 80% decrease in serum TTR protein levels. This data shows the potential effectiveness of CRISPR applications to treat genetic diseases.
I would be remiss not to mention the contentious legal battle taking place over CRISPR patents. Doudna and Charpentier are widely credited with the discovery of CRISPR. In March 2013, the duo filed a patent detailing the exact process and their ability to replicate the process across DNA sequences of their choosing. In October 2013, biologist Feng Zhang of the Broad Institute and the Massachusetts Institute of Technology filed for the same patent but was initially denied due to the pending patent of Doudna and Charpentier. However, Zhang was able to show his lab notes claiming his knowledge pre-dated the Doudna and Charpentier patent application date and paid a $70 fee for an expedited review and was granted the patent. Doudna and Charpentier along with UC Berkley have filed a patent dispute claiming Zhang's CRISPR patents should be revoked because they were first to discover and replicate the exact CRISPR process. To add another wrinkle to the legal dispute, Zhang claims Doudna and Charpentier's application only showed the technology worked in test tube studies and his work was the first to show CRISPR technology could work in cells with a nucleus (i.e. human cells). This legal battle will likely continue for years and will be studied by patent lawyers for decades to come.
As this technology evolves, it's likely that the underlying patent will become less important as each company develops their own intellectual property as they progress program through the clinic and into trials. Investors worried about which side will emerge victorious can invest in both Intellia and Editas, as both are solid companies, with attractive risk/rewards, working in a revolutionary field.
Intellia has the management and partnerships to emerge as the leading CRISPR company, in my opinion. If Doudna and Charpentier eventually win the patent battle and Intellia makes strides in CAR-T, liver targets, and their own proprietary programs targeting Alpha-1 Antitrypsin Deficiency, Hepatitis B Virus and Inborn Errors of Metabolism, the sky is the limit for the stock price. Looking at the downside is where Intellia really makes for an attractive spec investment. At its current trading price below $14/share, the company has a market cap under $500 million. Given the fact that the company holds $300 million in cash, the enterprise value stands below $200 million. Over 60% of its current value is held in cash.
In the latest 10-Q, management estimates even without hitting any milestones or receiving any new partnerships, the company has cash on hand to sustain itself through mid-2019. This means, investors have at least 2+ years without having to worry about shareholder dilution through an equity raise. Also with Novartis and Regeneron providing collaboration revenue and access to state of the art facilities, the company stands to make tremendous strides over the next 12-18 months. At current prices around $13.50-$15/share, downside should be extremely limited over the next 6-12 months due to its impressive cash balance and partnerships.
Of the 5 analysts covering the stock, 4 have strong buy ratings and 1 has a buy rating. The consensus price target is $34.20/share, or 250% higher than current levels. If the technology proves effective in human trials, Intellia will revolutionize how nearly all diseases are treated and could become a multi-billion dollar company. While still a spec investment at this point, the risk/reward ratio is incredibly favorable at current levels.
Disclosure: I am/we are long NTLA, EDIT.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.