In this article, we provide our brief investment thesis for Intellia Therapeutics (NASDAQ: NTLA), a company in the field of CRISPR/Cas9 gene editing technology, (that has been mentioned as the discovery of the century). The company launched its IPO earlier this year and the common stock is trading at 52-week lows. We have Buy rating on Intellia's common stock with price target (fair value using risk-adjusted NPV/ discounted cash flow method) = $32.53.
Figure 1: Intellia common stock price chart (source: nasdaq.com)
- Stock rating = Buy
- Stock price target (fair value estimate) = $32.53
- Current stock price = $12.35
- 52-week stock price range = $12.27 to $30.40
- Market cap = $444 million
- Average daily share volume = 281,713
- Cash/cash equivalents = $300.7 million (end of Q2 2016)
- Long-term debt = nil
- Short interest = 5.4%
- Short interest, days to cover = 6
What is CRISPR?
CRISPR stands for Clustered Regularly Interspaced Short Palindromic Repeats. CRISPR is a part of the acquired immune system that protects bacteria and other organisms against attacks by viruses. CRISPRs are regions in a bacterial genome that incorporate a new spacer when a previously unseen virus affects the bacteria. This CRISPR sequence is used to form short mRNAs that attack a matching sequence in the virus and destroy it.
Figure 2: A brief description of CRISPR in bacteria (Source)
History of CRISPR/Cas9 gene editing:
Broad Institute at Harvard/MIT has an excellent article that describes the history of CRISPR going back to 1993 (link). Dr. Jennifer Doudna (from University of Berkley) and colleagues (Dr. Charpentier from University of Vienna) published a paper in the Science journal in 2012 describing CRISPR/Cas9 as a gene editing tool. Zhang (Broad Institute) claims to have first used the technique to perform genomic editing in eurkaryotic cells in 2013.
Figure 3: A brief history of CRISPR/Cas9 gene editing (link for source).
(click to enlarge)
Figure 4: Key scientists involved in developing CRISPR/Cas9 gene editing (source)
Figure 5: Some key research papers published in CRISPR/Cas9 gene editing field (source: the Economist).
How CRISPR works in the lab?
In the lab, scientists design and synthesize RNA sequences (guided RNAs) that match a particular DNA sequence. Once injected into the body, these RNA sequences are guided to the target DNA. Certain enzymes like Cas9 nuclease (attached to the guided RNA) then cleave the desired part of the DNA sequence (for example, knocking off a harmful gene on the DNA).
Figure 6: Using CRISPR/Cas9 for gene knockdown or gene editing. (Source)
Compared to the earlier gene editing techniques like zinc finger nucleases (Sangamo (NASDAQ:SGMO)) and TALEN (Cellectis (NASDAQ:CLLS), bluebird bio (NASDAQ:BLUE)), CRISPR is highly selective and precise. It requires simpler tools, thus allowing easy scaling and manufacturing, has broad applicability, has high potential for single curative treatment, and has the potential to target disorders caused by multiple genes by targeting multiple DNA sites simultaneously.
CRISPR/Cas9 technology has won several awards, for example, Science Magazine's Breakthrough technology of the year (2015).
Potential applications of CRISPR:
The first commercial application of the technology started from the food processing industry where it was used to protect bacteria (for example, in yogurt manufacturing) from harmful viruses.
Duchenne Muscular Dystrophy: Three different team of scientists at Harvard Stem Cell/Broad Institute, University of North Carolina and University of Texas Southwestern reported success in knocking out the harmful exons of the dystrophin gene in mice (that is believed to be beneficial in treatment of Duchenne Muscular Dystrophy, DMD) (Source). Private company, CRISPR Therapeutics has announced collaborations with Vertex Pharmaceuticals (NASDAQ:VRTX) and Anagenesis Biotechnologies to use CRISPR/Cas9 in DMD (source).
Malaria: CRISPR/Cas9 can be used to make Anopheles Stephensi mosquitoes (that harbor Plasmodium) and transmit it to humans through bites (causing malaria) resistant to Plasmodium. Through a process called gene drive, this can be used to make the whole wild mosquito population resistant to Plasmodium, thus stopping transmission of malaria to humans (source).
Sickle cell disease: Scientists at St. Jude Children's Hospital reported success in gene editing of the faulty gene that caused sickle cell disease this year. The scientists performed the gene editing in cells isolated from sickle cell patients (source). Link to the paper.
Leukemia: Scientists at a London Hospital used another gene editing technology called TALEN to genetically modify isolated T cells from a girl dying from leukemia with dramatic effect (source).
HIV: Scientists from Temple University reported success in eliminating HIV from cells isolated from human HIV patients using CRISPR/Cas9 (source).
Super-foods: Dupont (NYSE:DD) (using CRISPR/Cas9 technology licensed from Caribou Sciences) has grown genetically modified corn and mushrooms in greenhouses and expects them to be commercially available in 5 years (Source). CRISPR can be used to make genetically modified crops drought and insect resistant, and to increase their yield.
More planned applications:
- Monsanto (NYSE:MON) has announced that it has licensed CRISPR/Cas9 technology from the Broad Institute/Harvard for use in agricultural applications (source). CRISPR could thus be used to manufacture genomically-modified crops.
- Chinese scientists are expected to start the first human trial this year. They will attempt ex-vivo modification of non-small cell lung cancer (NSCLC) cells isolated from human patients to knock down the gene encoding for the PD-1 receptor using CRISPR/Cas9 technology. (Source).
- Scientists at the University of Pennsylvania received FDA approval for the first human trial of CRISPR/Cas9 in the U.S. earlier this year. They will attempt ex-vivo modification of cancer cells isolated from human patients (like multiple myeloma, melanoma and sarcoma). After genomic editing like gene knockdown or gene editing, these cancer cells will be infused back into the patient (source).
Intellia Therapeutics was formed in 2014 through a collaboration between Caribou Biosciences and Atlas Venture. Caribou Biosciences has the license to use the CRISPR/Cas9 technology from the labs of Dr. Jennifer Doudna at University of California, Berkley and Dr. Emmanuelle Charpentier at the University of Vienna. Both these scientists were awarded the Breakthrough Prize in Life Sciences in 2015 for being co-inventors of CRISPR/Cas9 technology and are widely rumored to be candidates for a Nobel Prize for the discovery.
Intellia's CRISPR technology:
Intellia's team has expertise with lipid nanoparticles technology, LNPs. The company's initial efforts on gene editing are using LNPs for delivery of Cas9 to the liver. In addition, the company is also evaluating viral vectors like adenovirus for RNA delivery. Currently, Cas9 protein is derived from Strep. Pyogenes bacteria, but other naturally occurring Cas9 proteins from other organisms are also being explored. The company is exploring three types of genomic editing: gene knockout, gene repair, and gene insertion.
Figure 7: Three type of genomic editing (using CRISPR/Cas9) being explored by Intellia Therapeutics (source)
In-vivo gene editing:
Figure 8: In-vivo (inside the living organism) gene editing using CRISPR/Cas9
Ex-vivo gene editing:
Figure 9: Ex-vivo (outside the living organism) gene editing using CRISPR/Cas9
Figure 10: Intellia Product developmental pipeline
Chronic hepatitis B infection:
Hepatitis B virus (HBV) is transmitted through blood-borne route, like sexual transmission or through blood products, infected needles, etc. It is 50-100 times easier to transmit through bloodborne infection than HIV. About 5 to 10% cases of acute infection progress to chronic infection. The disease affects about 248 million people worldwide and causes 60,000 deaths per year. In the US, about 700,000 to 1.4 million patients have chronic hepatitis B infection (CDC data). Estimated prevalence rate is 1.8% of the population and about 1.5% to 5% chronically infected patients decompensate each year.
Currently, chronic hepatitis B infection is treated by interferon and nucleoside analogues that control viral replication but do not eradicate the virus. The virus exists in the host nucleus in the form of cccDNA that acts as a template for viral replication. Currently, no treatments target cccDNA.
Intellia has examined the HBV genome from chronically infected patients and identified target sequences in the cccDNA that can be targeted using gene knockdown approach by CRISPR/Cas9. According to published studies, CRISPR/Cas9 mediated cuts can significantly reduce cccDNA levels. It is also possible to develop a universal therapy using this approach that can be used against all viral genotypes.
Figure 11: Published studies of CRISPR/Cas9 to target HBV DNA (source).
Arrowhead Pharma (NASDAQ:ARWR) is conducting a phase 2b trial of ARC-520, a siRNA (inverse mRNA) based product candidate in chronic HBV. The therapy is given as monthly injections and showed more than 90% reduction in HBV surface antigen in early studies.
Alnylam (NASDAQ:ALNY) announced initiation of a phase I/II clinical trial of its siRNA therapeutic in chronic HBV infection in July 2016.
Transthyretin Amyloidosis, TTRA:
The problem: Transthyretin is a protein produced in the liver and is encoded by the TTR gene. The protein carries retinol (vitamin A) and thyroxine (thyroid hormone) all over the body. Certain genetic mutations can cause TTR protein to aggregate and accumulate in body tissues causing the TTRA. About 120 TTR mutations can cause this disease. The prevalence of the disease is about 1/100,000 Caucasians in the U.S. (from 10-Q) The disease is endemic in certain parts of the world, like parts of Portugal, Sweden, and Japan.
Typical onset of the disease is age 20 to 70 years, and it is fatal in 2-4 years. The disease is hereditary and patients present with either polyneuropathy (nerve dysfunction), or cardiomyopathy (cardiac dysfunction). Current treatment includes liver transplant and medical management of heart failure.
Intellia's solution: In a mouse model of TTRA, 64% gene editing was shown after single administration of CRISPR/Cas9 at 2 mg/kg dose and 70% reduction in serum TTR level.
Figure 12: Preclinical results of Intellia's gene editing technology in TTRA (source: S1 filing).
After successful animal studies, Intellia plans to conduct human trials testing safety and clinical efficacy of its CRISPR/Cas9 technology in TTRA. TTRA will be the first target in a collaboration deal between Intellia and Regeneron.
Intellia's TTRA program is a part of its collaboration deal with Regeneron (NASDAQ: REGN). Under this deal, Regeneron has received exclusive rights to select up to 10 therapeutics targets (including TTRA), which may include up to 5 non-liver targets. Intellia has reserved the rights to keep sentinel indications like chronic hepatitis B infection, inborn errors of metabolism, and alpha-1 antitrypsin deficiency, and can chose additional liver targets for its own development. Under this agreement, Intellia received $75 million of upfront payment for each target, $25 million in developmental milestone payments for each target, $110 million in regulatory milestone payments (each target), and $185 millions of sales milestone payments (each target). Intellia will also receive royalty payments ranging from high single to low-double digit percentage of net sales for each target.
Tafamidis (Pfizer) is a transthyretin kinetic stabilizer. The drug is approved in the EU for treatment of TTR-Familial amyloid polyneuropathy (FAP), but not in the US.
Alnylam is developing an investigational RNA interference (RNAi) product candidate for treatment of hereditary TTRA (with polyneuropathy) which is in a phase 3 trial (the phase 3 trial in TTRA with cardiomyopathy was stopped due to side effects). The therapy has Orphan Drug designation from FDA in this indication. In a phase 2 study, the therapy achieved mean pre-dose 80% reduction of serum TTR level at 24 months. About 50% reduction in the serum TTR is enough for disease stabilization. The drug has to be given IV every 3 weeks.
Ionis Pharma (NASDAQ:IONS) is using antisense technology for treatment of hereditary TTRA (with polyneuropathy). Its product candidate showed mean serum TTR level reduction of 76% compared to the baseline. The product has Orphan Drug and Fast Track designation from the FDA and is in a phase 3 trial. It is given as once a week injection. The trial had some safety issues (low platelet counts) earlier this year and was put on hold by FDA. GlaxoSmithKline (NYSE:GSK) dropped plans for a phase 3 trial in hereditary TTR-cardiomyopathy while the TTR-neuropathy trial is on-going.
Alpha-1 anti-trypsin deficiency
This is an inherited disorder caused by a mutation in both copies of SERPINA1 gene. Patients usually present with chronic obstructive pulmonary disease (COPD) and liver dysfunction. The prevalence of the disease in the U.S. is estimated at about 60,000 to 100,000 patients and about 125,000 in Europe (10-Q). It may also cause 1-2% of all COPD cases is the U.S. Currently, the disease is treated by replacement therapy by donor plasma proteins that are enriched for alpha-1 antitrypsin enzyme. Medical management for COPD like bronchodilators and anti-inflammatory drugs is also provided. Liver transplantation is performed for liver failure.
Knockout of SERPINA1 gene can be performed using CRISPR/Cas9 and has curative potential for AATD-related liver disease. Scientists at University of Massachusetts, Worcester have already done successful experiments in this indication using CRISPR (animal studies). For AATD with both liver and lung disease, the company is planning gene knockout and repair approach. Intellia owns all global rights in this indication.
Arrowhead Research has initiated a phase 2 trial of its RNAi therapy in AATD as of September 2016.
Alnylam plans to advance its RNAi therapy to clinical studies after successful preclinical data.
Applied Genetic Technologies (NASDAQ:AGTC) announced successful early clinical studies of its gene therapy in AATD this year.
Inborn errors of metabolism:
The incidence of inborn errors of metabolism is less than 1/100,000 live births. These include metabolic disorders like primary hyperoxaluria type I, argininosuccinase deficiency, ornithine transcarbamylase deficiency, phenylketonuria, and maple syrup urine disease.
Intellia's initial targets are IEMS originating in the liver and those with well-known genetic mutations. It owns all global rights in this indication.
Factor VII deficiency:
Factor VII deficiency (Alexander's disease) is a rare genetic disease that manifests as a bleeding disorder. It is caused by mutations in F7 gene and affects 1 in 300,000 to 500,000 people in the general population (10-Q). Currently, it is treated by recombinant factor VII infusions or infusion of prothrombin factor concentrates or fresh frozen plasma.
Figure 13: Intellia has shown successful in-vivo editing of the gene encoding for factor VII, using lipid nanoparticle delivery in mouse liver (from S-1).
Ex-vivo gene editing takes place outside a living organism (see figure above). Intellia has established a separate company called Extellia, which will focus on application of its gene editing technology in areas like immuno-oncology, autoimmune and inflammatory diseases. Stem cells from the blood are isolated from a patient, gene editing is done in the lab, and these stem cells are transfused back into the patient. The delivery of CRISPR/Cas9 hematopoietic stem cells to target tissues will be done by electropolation (low voltage electric current).
Figure 14: Preclinical data from Intellia showing 60-85% bi-allelic gene editing (ex-vivo delivery) while maintaining 70-80% viability 24-hours after delivery.
Novartis partnership: Intellia entered into a collaboration deal with Novartis (NYSE:NVS) to develop its CRISPR/Cas9 technology in CAR-T (chimeric-antigen receptor based) therapies (for immune-oncology) and hematopoietic stem cells (HSCs)-based therapies (for example, sickle cell disease, beta-thalassemia, etc.). Intellia also gained access to Novartis' technology to potentially generate a universal donor CAR-T cell or modify immune-checkpoint pathways like PD-1 using its gene editing technology.
Under this collaboration, Intellia will receive $10 million up-front payment, $40 million in technology access and research payments over 5 years, $230 million in various milestone payments, and mid-single digit percentage of net sales as royalties for each target developed by Novartis.
Novartis plans to submit Investigational New Drug Application (IND) for the HSC program under this collaboration in 2017 which will bring this program to the clinic.
Ex-vivo gene editing has advantages like modulating CAR-T cells to increase their persistence in the host after infusion, increase preciseness of CAR-T cells, and to knock-out genes encoding for proteins that cause CAR-T related toxic effects like cytokine release syndrome.
Intellia was formed by licensing CRISPR/Cas9 technology from Caribou Biosciences (which in turn uses the technology from Dr. Doudna). Various patents under this agreement extend till 2033.
The on-going patent fight between the various academic institutions claiming to be the first to invent CRISPR/Cas9 technology for gene editing is described below.
In April 2015, University of California and University of Vienna and Dr. Charpentier filed a request with the US Patent Office (PTO) to declare interference between their CRISPR/Cas9 patent application and certain patents issued to Broad Institute and Harvard University Massachusetts. While the first scientific paper describing CRISPR/Cas9 for gene editing was published by Dr. Jennifer Doudna in 2012, Dr. Zhang and colleagues claim to have first used the technology for gene editing in eukaryotic cells in 2013. Both Doudna/Charpentier and Zhang applied for a patent with USPTO in 2013, but Dr. Zhang (Broad/Harvard) was granted the patent first in 2014. The Universities of California and Vienna and Dr. Charpentier are described as the senior parties in this dispute, so Broad Institute/Harvard has the burden of proving their first invention of the technology for gene editing. The patent fight could take up to two years for the final decision and the decision can be appealed in the US Court of Appeals for the Federal Circuit.
This month, a Korean company, ToolGen was awarded a patent for CRISPR/Cas9 technology in Korea and plans to file for a patent in the U.S., thus adding more complexity to this patent dispute.
The Wall Street Journal published an excellent article on the on-going CRISPR patent dispute (link to the article). The article concludes that a company interested in developing its R&D pipeline in CRISPR/Cas9 gene editing space would be better off going ahead and developing its research programs since the risk of getting sued for patent infringement is low.
Other competitors in the gene editing space (comparison with TALEN and zinc finger nuclease gene editing):
CRISPR Therapeutics (founded by Dr. Charpentier/Univ. of Vienna) announced a joint venture with Bayer (OTCPK:BAYZF) worth $335 million and plans to raise another $90 million in an IPO this year (focus on sickle cell disease and thalassemia). Editas Medicine (NASDAQ:EDIT) which has licensed CRISPR/Cas9 technology from Dr. Zhang, Broad Institute/Harvard is already a public company (initial focus on genetic causes of blindness like congenital leber amaurosis). Editas also has a collaboration with Juno Therapeutics (NASDAQ:JUNO) for gene editing in CAR-T cells.
In addition, Cellectis and bluebird bio have access to TALEN, an earlier form of gene editing. TALENs (Transcription activator-like effector nucleases) are also nuclease enzymes that can be engineered to cut specific DNA sequences. Another older gene editing technology utilizes zinc finger nuclease (artificial enzymes that are created by fusing a zinc finger DNA binding domain to a DNA cleavage domain. Sangamo BioSciences (NASDAQ:SGMO) is developing the zinc finger gene editing technology for treatment of HIV/AIDS and hemophilia B.
CRISPR/Cas9 has advantages over TALEN and zinc finger nucleases since it is a simpler technique and is easier to manufacture and scale up. It is also believed to be more efficient at gene editing than the older gene editing techniques.
TALEN and zinc finger nucleases have the potential of being more flexible in targets and less off-site effects. However, CRISPR has shown higher efficiency and gene editing up to 70% vs. 33% with TALEN. The safety of CRISPR has also been increased by several next generation technologies described below.
CRISPR versus RNA interference technology:
RNA interference, another technology that won the Nobel Prize is another close competitor to CRISPR/Cas9 (RNAi is being used by Alnylam). RNAi technology can be used for gene knockout but CRISPR is the method of choice for gene editing and repair. CRISPR also has the potential of being one time creative therapy. CRISPR also has other advantages over RNAi i.e. for correcting gene mutations ex vivo, which has potential applications like immune-oncology, Duchenne's muscular dystrophy, cystic fibrosis, etc. DNA viruses like HIV can be targeted by CRISPR, but RNAi may still be a promising tool to target RNA viruses. The genomic editing by CRISPR, and the resulting change in phenotype is irreversible, unlike RNAi technology. CRISPR needs the gene sequence information unlike RNAI which needs information on the gene transcript only. CRISPR can target non-encoding regions of the genome, unlike RNAi.
Safety of CRISPR/Cas9 and potential for off-site mutagenesis:
Questions have been raised on the safety of CRISPR/Cas9 in humans since the technology could target similar appearing DNA sequences on off-target cells. This could increase chance of undesired mutations.
The field of CRISPR/Cas9 gene editing is still young, but next generation technology is already being used to address these issues. More recent developments like decreasing size of sgRNAs, single-stranded nickase mutants, and fusion between inactive Cas9 and Fok1 endonuclease has lowered the potential of off-site effects.
Zhang Lab at Broad/Harvard discovered the cpf1 nuclease. Using CRISPR/cpf1 technique, this nuclease causes a staggered cut in the target DNA compared to a blunt cut by Cas9 nuclease. In addition, cpf1 needs only a single RNA strand as guide compared to two strands required by Cas9. Using cpf1, it is possible to simplify the design and delivery of CRISPR gene editing tools. CRISPR/cpf1 is also easier and cheaper to synthesize. In addition, cpf1-induced gene editing is located away from target site, thus preserving the target site for further cleavage (if needed), unlike Cas9 which cleaves the target DNA.
Besides, ex vivo use of CRISPR/Cas9 has the potential to minimize chances of off-site mutagenesis. We have described ex vivo delivery of CRISPR/Cas9 above. Since the cells are isolated from a patient and gene editing is performed outside the patient's body (before transfusion back into the patient), ex vivo gene editing of hematopoietic stem cells or even adult pluripotent stem cells has the potential to minimize the chances of off-target effects.
We believe that CRISPR/Cas9 gene editing is a continuously evolving field and like CAR-T technology (where the current third generation technology has improved vs. first generation), next generation developments in this young field will address these issues.
IND-enabling studies in 1-2 programs of transthyretin amyloidosis, alpha-1 antitrypsin deficiency, chronic HBV infection or in-born errors of metabolism are expected to start in second half of 2017 or early 2018. Acceptance of IND will enable Intellia to start early clinical studies on these programs.
Novartis expects to file IND for hematopoietic stem cell program in 2018 which will enable early clinical studies.
Intellia has $300.7 million of cash reserves as of the end of second quarter, 2016. It has no long-term debt.
The institutional investors list in Intellia is stellar and prominent institutions like Fidelity, Orbimed Advisors and Baker Brothers have opened new stakes in this company as of 6/30/16.
Figure 14: Intellia, institutional holders (source: nasdaq.com).
Intellia has $300.7 millions of cash reserves as of the end of second quarter, 2016. It has no long-term debt.
Valuation of the common stock:
The best method to value Intellia's product pipeline is to estimate the net present value of future projected revenue and adjust it using probability of reaching the market (by enterprise discounted cash flow method). According to Milken Institute data, the probability of a therapy reaching the market after successful preclinical trials ranges between 1 to 10%. This increases to 30% after a successful phase 1 trial and 67% after a successful phase 2 trial.
Chronic hepatitis B:
We consider this as an extremely lucrative potential target for Intellia due to its wide prevalence and potential for a single treatment cure. Moreover, Intellia has done some preclinical work in this clinical indication which has been supported by successful preclinical experiments by other scientists as described above.
We identified target market for Intellia's gene editing therapy as chronic hepatitis B infected patients who are decompensated. We modeled the target market in the U.S., Europe and Japan as 1.8% of the population (chronic hepatitis B prevalence), and then 1.5% of these chronic HBV patients (those who decompensate per year). We input per patient cost of therapy = $100,000 (comparable cost of therapy for Gilead's chronic hepatitis C treatment regime is $84,00). This treatment cost is still very conservative compared to the cost of currently available gene therapies (for example, Glybera, a gene therapy for lipoprotein lipase deficiency is expected to be priced at $1 million/patient). Considering the high prevalence of chronic HBV, a lower price for the therapy will help to achieve higher market penetration for Intellia in this indication.
Intellia owns all rights worldwide in this indication. Starting with drug launch in 2020, we modeled peak 60% market share in 2024 and peak risk-adjusted sales = $1.6 billion (10% probability of reaching the market at this stage). We deducted royalties payable to Caribou Biosciences (4% of net sales/year). Intellia has advantages over inverse mRNA based therapies from ALNY and ARWR. It has the potential to have higher clinical efficacy and potential for single dose cure (compared to multiple injections for RNAi based therapies).
The risk-adjusted NPV for this indication was = $752 million (using free cash flow = 15.54% of revenue and cost of capital=15% till 2024, then decreased to 12%, and 10% over time). We didn't include a terminal NPV value. We calculated per share contribution from this indication= $19.72 (using diluted share count of 38 million).
Alpha-1 antitrypsin deficiency:
We expect this to be another lucrative clinical indication for Intellia. Using 10% probability of success, target 60K patients in the U.S. and 125K in the EU and Japan, per patient cost of $400K, we calculated peak, risk-adjusted revenue of $355 million from this indication in 2023 (peak 5% market share). Using DCF method and similar inputs as above, we calculated risk-adjusted NPV = $191 million and per share contribution = $5.01 from this indication.
Since Alnylam and Ionis have the first-mover lead advantage in this indication (although CRISPR has the potential to be a one-time curative therapy), we modeled peak 15% market share in this indication in the U.S. (total 2235 patients) and Europe and Japan (3500 patients). We calculated risk-adjusted NPV of $4.9 million (including milestone payments from Regeneron), using 10% probability of reaching the market (average for products in preclinical stage as per the Milken Institute data). Using the enterprise DCF method and cost of capital = 15% initially (then decreased to 12% and 10% over time), we calculated per share contribution from this indication = $0.13. We don't expect this indication to be a lead revenue driver for Intellia since other rival companies discussed above have the time lead. However, successful and safe early human studies in this indication are likely to provide further proof-of-concept for CRISPR/Cas9 gene editing and have significant effect on Intellia's valuation.
Valuation of likely milestone payments from Regeneron from remaining 9 targets:
Using probability of 10%, we calculated the NPV of future estimated milestone payments from this collaboration = $26 million and per share contribution = $0.69.
Contribution of non-operating assets (like cash) minus liabilities:
After accounting for cash reserves, deferred tax assets like operating loss carry-forwards and liabilities, we calculated contribution per share= $6.98.
Sum-of-parts valuation of common stock:
Using these indications, we calculated fair value/common share for Intellia = $32.53. This represents our first price target for Intellia's common stock.
Subscribers to Vasuda Healthcare Analytics, our premium investment research service on Seeking Alpha's marketplace can download the valuation models/ spreadsheets used in this article.
Intellia's common stock has traded as high as $30.40 in May this year. The stock price has since retraced and shares are now trading at below the IPO price of $18. One reason for the fall in the stock price could be the on-going patent dispute, recent news about side effects of Juno's CAR-T therapies (raising questions in investor minds about unseen future risks of therapies that have not been adequately tested in humans), and lack of any near-time significant catalysts. Insider selling after IPO lockup period expiration could also be a contributing factor. However, institutional investors are building up positions in this company and we believe that the company is attractively priced at present for long-term investors with a venture-capitalist like mind-set.
Risks in the investment:
This is a speculative investment for long-term investors looking for high reward potential. Intellia has not shown any evidence of efficacy or safety of its gene editing technology in human trials.
There is no guarantee that Intellia's clinical trials will be successful. It is possible that regulatory agencies might not approve the products, unexpected side effects might be seen in future, clinicians might not widely prescribe the products or insurers might not reimburse them. Competing products from other companies (like RNA interference technology) might gain significant market share in the planned clinical indications. The company may also need to raise more cash to fund its operations in future through equity and/or debt financing, which might put downwards pressure on the stock price.
Conclusion: We have Buy rating on Intellia Therapeutics with price target (fair value based on risk-adjusted, enterprise DCF method) of $32.53 for the common stock. However, this is an investment suited for long-term investors looking for at least 4-5 times return on their investment in 3-4 years (like a venture capitalist). I don't recommend this investment to short-term traders since the stock price may remain suppressed for next few months till we get news about IND-filings and initiation of human trials.
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Disclosure: This article represents my own opinion and is not an investment advice or solicitation to buy or sell any security. Investors should do their own research and consult their financial adviser before making any investment.
Disclosure: I am/we are long NTLA, EDIT, JUNO, SGMO, BLUE.
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.