Can Gene Editing Concerns Bounce Back?

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Includes: ABBV, CRSP, EDIT
by: Bret Jensen
Summary

Thanks to a large rally on Friday, the biotech sector managed to be flat in the week just concluded.

Two big stories this week were gene editing concerns were hit hard and AbbVie is seeing significant erosion of Humira sales overseas as biosimilars garner market share.

We take a look at both of these events in the paragraphs below.

"It's best to have a small boat of friends where everyone rows than an ark of friends where no one does. At least you're getting somewhere." - Ron Baratono

The markets rose on Friday on news the five-week old government shutdown was coming to a close, at least for three weeks that is. Flight delays at LGA and other major airports were a major factor in getting the government reopened again in my opinion.

Despite the rise in equities Friday, they did little in the holiday shortened trading week. The small-cap Russell 2000 ended the week Friday almost exactly where it began in trading on Tuesday. The high beta biotech sector ended up in the same position even after a nice rally on Friday.

The FDA was little impacted by the shutdown, but it is now back to fully operational status. This is a good thing as we have just over a dozen PDUFA dates scheduled between now and the end of the first quarter. For a complete list, here is a good piece that covers that.

One sub-sector of the biotech space that was hit hard last week were the "gene editing" concerns. CRISPR Therapeutics (CRSP) sold off after Citigroup cut the name to a Sell on Tuesday.

Also hit hard during the week was the stock of gene editing brethren Editas Medicine (EDIT). The same day Citi cut CRISPR, it was announced that Editas' CEO was leaving the company.

Analyst commentary was a bit mixed on these two names. Chardan Capital reiterated its Buy rating on both Editas and CRISPR, and Cowen reiterated its Buy rating on the former as well. However, JPMorgan maintained its Hold rating on Editas, and as mentioned, Citi downgraded CRISPR to sell. I would expect more commentary on both names to come out from analysts in the coming week.

Gene editing has great promise and could be the next "big thing". However, like stem cell research and immunotherapy before it, progress on this front will most likely be much slower than originally envisioned by investors. In my opinion, it will be years before we see any meaningful commercialization in this area. That said, I have been in and out of Editas over the past 18 months and probably will initiate a new small position in the name on Monday using a Buy-Write option order now the stock is back near 52-week lows once again.

Drug giant AbbVie (ABBV) was also in the news this week. The stock declined some six percent in trading on Friday after reporting Q4 results that came in a bit light.

Humira, the biggest selling drug of all-time, is running into some significant problems in Europe and overseas as biosimilars hit the market. Humira sales grew only one percent year-over-year to $4.9 billion during the quarter. The U.S. saw just over a nine percent rise in revenues (a good portion driven by price increases). However, internationally Humira sales declined 17.5% due to new biosimilar competition. AbbVie now faces biosimilar competition in markets that represent 75% of Humira's international sales. Management is projecting it will lose 30% of international sales to this competition in FY2019. Given how fast these biosimilars are taking market share, this might prove to be low.

Humira has patent protection in the U.S. until 2023, but with Humira generating approximately 60% of overall sales for AbbVie, the firm is going to be hard pressed to replace that revenue. The company recently wrote off most of its investment in Rova-T after disappointing trial results.

The company projected that would it see sales of $5.1 billion from its hematological oncology drugs, $3.3 billion from its hepatitis C business and $200 million from its endometriosis pain medication Orilissa in 2019. AbbVie also believes its compounds risankizumab and upadacitinib will be approved this year and could develop into blockbusters.

Source: Investor Presentation

AbbVie now sports a 5.3% dividend yield and also recently added $5 billion to a stock buyback authorization plan. With yesterday's decline, the stock sells for 10 times earnings. The company also believes it can continue to produce double-digit earnings growth (above), which I think investors need to take with a grain of salt given Q4 numbers.

Expect AbbVie to remain under pressure due to an unclear future, and this could develop into a "battleground stock" despite a high yield and low valuation. I also would not be surprised if the company looks to make additional acquisitions in the future to shore up its pipeline as it deals with the inevitable fall off in Humira sales.

And those are a couple of quick takes from Biotech Land on the week.

"Only dogs know and respect their masters. This is a rare characteristic of men who secretly envy their masters and wish their downfall." - Bangambiki Habyarimana, Book of Wisdom

Bret Jensen is the Founder and author of articles on The Biotech Forum, The Busted IPO Forum, and The Insiders Forum. To receive these articles as published on Seeking Alpha, just click the appropriate link and hit the orange follow button.

Disclosure: I am/we are long ABBV. 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.