All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies. - Warren Buffett
If you look at a fruitful marriage, chances are that the house is filled with joy and laughter. In bioscience investment, the pursuit of happiness also comes from partnership and acquisition. And, there is an aplenty of partnership to drive the common goal of delivering hopes for patients while reaping profits for shareholders. That being said, the most transcending situation occurs when a partner doubled down its initial commitment. In my view, there has to be something like an invaluable technology platform that enticed the partner. Consequently, I believe that this situation usually leads to an outright acquisition.
The prime example of the aforesaid phenomenon is the union between Vertex Pharmaceuticals (VRTX) and CRISPR Therapeutics (CRSP). Due to the partnership expansion, CRISPR shares appreciated 15% today and thereby procured a 119% profits for my Core Portfolio Alpha. Nonetheless, the best is yet to come. In this research, I'll present a fundamental analysis of CRISPR while focusing on partnership expansion.
Figure 1: Crispr stock chart (Source: StockCharts)
About The Company
As usual, I'll deliver a brief corporate overview for new investors. If you are familiar with the firm, I suggest that you skip to the subsequent section. Based in Switzerland, CRISPR Therapeutics is focused on the development and commercialization of gene-based therapies to serve the unmet needs in blood disorders, immuno/oncology conditions, and regenerative medicines. On the shoulders of its stellar gene-editing platform dubbed CRISPR/Cas9, CRISPR set out to make history. In a two-pronged approach, the firm is nourishing a highly promising portfolio of gene-editing medicines and CAR-T therapeutics.
As it galvanizes the next-generation gene-editing medicines, CRISPR attracted the attention of Vertex. In unison, the partners are developing up to six CRISPR/Cas9-based molecules. Nevertheless, CTX-001 is simply the first prodigy child in this harmonious union. But there is much more to come, as shown in the deep pipeline below.
Figure 2: Therapeutic pipeline (Source: CRISPR)
Expanding Vertex Collaboration
Shifting gears, let's look at CRISPR's incoming fortune through the Vertex partnership expansion. Regarding pharmaceutical partnership, I notice that most relationship simply remains stagnant. A more promising situation occurs when the couples deepen their existing collaborative terms. If the development proves fruitful, the large company would make further commitment to take the small partner under its wings. Under the aforementioned dynamics, the relationship between CRISPR and Vertex is flourishing.
On June 06, 2019, Vertex announced its upcoming conquest into gene-editing as the company seeks to innovate novel medicines for the orphan diseases coined Duchenne Muscular Dystrophy (DMD) and Myotonic Dystrophy Type 1 (DM1). Of note, investment into orphan disease strategic because an orphan drug can be reimbursed on an average of $140,000 annually. The reimbursement is warranted to encourage the innovation process. After all, pharmaceutical innovation is a lengthy process that is fraught with a high rate of failure.
As it is committed to bringing hopes to patients suffering from orphan diseases, Vertex deepens its relationship with CRISPR while concurrently bought out the private gene-editing company, Exonics Therapeutics. It seems to me that Vertex just "doubled down" on CRISPR and orphan drugs. Consequently, the deal signaled an incoming tide of fortune for CRISPR shareholders.
Accordingly, Vertex committed $175M in upfront payment for the worldwide exclusive rights to the intellectual property and expert knowledge of CRISPR/Cas9 for DMD and DM1 gene-editing. That aside, CRISPR is able to receive up to $1B future payments based on certain milestone achievements for the aforementioned programs. There is also a tiered royalty on future sales of any medicine that arises out of this collaboration.
At the filing of Investigational New Drug Application ("IND"), CRISPR has the option to cancel the milestone and royalties payments for a better deal. In other words, the company can choose to co-develop and co-commercialize DM1 products globally. It seems to me that CRISPR can earn more from product sales in co-commercialization. Hence, that's something that the management will seriously consider.
Furthermore, CRISPR also enjoys highly favorable terms for the research, development, manufacturing, and commercialization cost. For instance, Vertex will take care of all expenses for both DMD and DM1 programs. The only exception is that CRISPR will absorb the costs only for certain RNA research related to DM1.
As I reflect on the Vertex deal, I believe that either CRISPR CEO (Dr. Samarth Kulkarni) is an excellent negotiator or CRISPR/Cas9 is too invaluable to pass. After all, the deal is highly favorable for CRISPR. In my view, the more favorable a deal for the smaller company the more valuable its technology platform. Commenting on the partnership, Dr. Kulkarni remarked:
This agreement with Vertex reflects the strong collaboration we have built together in other programs and underscores Vertex's commitment to gene editing. We continue to make significant advancements in enabling in vivo approaches for gene editing and are excited about the possibility of developing potentially curative therapies for DMD and DM1 together with Vertex.
Just as you would get an annual physical for your well-being, it's important to check up on the financial health of your stock. For instance, your health is affected by "blood flow" as your stock's viability is dependent on the "cash flow." With that in mind, I'll analyze the 1Q2019 earnings report for the period that ended on March 31. As follow, CRISPR procured $0.3M revenues compared to $1.4M for the same quarter a year prior. The revenues came from the Vertex and Casebia collaboration.
That aside, the research and development (R&D) expense for the said periods registered at $33.8M and $19.5M, thus underlying a 73.3% year-over-year (YOY) increase. The higher spending is attributed to investments into the hemoglobinopathies and immune/oncology programs and the CRISPR/Cas9 research platform. As a rule of thumb, an R&D increase for a bioscience stock can be viewed positively: the capital invested today can translate into blockbuster profits in the future. After all, you have to plant a tree today in order to enjoy its fruits.
Additionally, there was $48.4 ($0.93 per share) net loss versus the $28.3M ($0.62 per share) decline for the same YOY comparison. I'm not surprised by the decline because CRISPR committed more money into R&D. You should not be concerned because more money was committed to developing blockbuster medicines.
Figure 3: Key financial metrics (Source: CRISPR)
Regarding the balance sheet, there were $437.5M in cash and equivalents, thus underlying a 4.2% decrease from $456.6M last year. The cash positions are comparable as well as robust. Based on the $48.5M quarterly operating expense (OpEx) rate, there should be adequate resources to fund operations into 2021 prior to the need for additional financing. In a nutshell, I doubt that dilution is coming anytime soon. And yet, the company might execute a public offering if the shares will trade higher.
On the subject of dilution, I noted that investors usually shy away from a public offering. Contrarily, I prefer a young bioscience company to raise capital this way rather than incurring substantial bank debts. Short-term bank debts can be recalled anytime that can prompt a company to file a Chapter 11. The key to a public offering is to execute it when the shares are trading high.
Though I do not mind a public offering, it's important for you to determine if you are holding a "serial diluter." A firm that uses dilution as a "cash cow" will render your investment essentially worthless. As the shares outstanding increased from 45.8M to 52.0M for CRISPR, my rough arithmetics yield the 11.9% dilution. At this rate, CRISPR easily cleared my 30% dilution cutoff for a profitable investment. As a young company, it's a strong testament to CRISPR's strength that it does not resort to much dilution.
As investment research is an imperfect science, there are always risks associated with a stock regardless of its fundamental strength. At this point in its life cycle, the main concern for CRISPR is if the company can generate positive data for its medicines. I ascribed the 30% chances of clinical failure for CTX-001 in the Phase 1/2 study investigating sickle cell disease ("SCD"). Moreover, there odds of a negative clinical binary for CTX-001 in beta-thalassemia is 40%. There is also a risk that its CAR-Ts might not deliver good results. In case of a failure, it's quite likely that CRISPR shares will tumble over 50% and vice versa. The other risk is that CRISPR might continue to grow too aggressive that it'll encounter the cash flow constraint. However, that is an insignificant concern because of the strong cash position.
In all, I maintain a strong buy recommendation on CRISPR with the five out of five stars rating. As the reigning champion of gene-editing in its own weight class, CRISPR therapeutics is brewing stellar medicines. I referred to CRISPR/Cas9 as the best gene-editing platform because Sangamo Therapeutics (SGMO) posted subpar data for the other gene-editing platform Zinc Finger Nuclease. With CRISPR/Cas9, the company enticed the pharmaceutical King, Vertex. In a bold move, Vertex doubled down on CRISPR for the development of a gene-editing medicine for DMD and DM1.
As there is more progress, Vertex will likely acquire CRISPR. That aside, the organic pipeline development is on track. CTX-001 is poised to cut into the $12.6B hemoglobinopathies market, as estimated by Grandview research. Despite periodic negative news flow about gene-editing, the future for gene-based medicine is brighter than ever. Don't let "Mr. Market" scared you out of this volatile yet highly profitable sector.
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