Investment Thesis
The promising clinical results of CRISPR Therapeutics' (NASDAQ:CRSP) pipeline combined with their blockbuster potential provide an attractive investment proposition for investors wishing to establish a biotech position.
CRSP is one of the few companies holding a patent to use CRISPR. This disruptive gene-editing technology helped its discoverers win the 2020 Nobel Prize, one of which is Emmanuelle Charpentier, the cofounder of CRSP.
The Gene-Editing Landscape
The new CRISPR technology might be the grande finale of humanity's quest for absolute control over aging and illness. It is a crack on creation that was once unimaginable. The 1990s' Human Genome Project gave us an understanding of our gene's functions. It was a landmark achievement and fascinating discovery, but for a long time, biotech companies weren't able to use this information safely on humans.
A pivotal point came in September 2017, when the FDA approved the first gene-editing medicine in its history. The drug, Kymriah, developed by Novartis (NVS), is a custom-made drug for acute lymphoblastic leukemia. Its action mechanism relies on extracting and gene-editing the patient's T-Cells, programming them to attack cancer cells before inserting them back into the patient. Soon after Kymriah, the FDA approved Gilead's (GILD) Yescarta with a similar action mechanism targeting large B-cell lymphoma patients.
The price of Yescarta and Kymriah drew criticism from politicians and the public, given that the two life-saving drugs cost $373,000 and $475,000, respectively, excluding hospital costs and required examination and tests to prepare the patient for the therapy. Another drawback is the lethal side effects inherent in the mode of action. Both drugs can cause cytokine release syndrome as cells inside the body fight each other. The remission rate (success of treatment) is around 55% for both drugs pushing the Institute for Clinical and Economic Review "ICER" to vote both Yescarta and Kymriah as "intermediate long-term value for money."
Most of the costs of Kymriah and Yescarta are related to how the drugs are made. The custom-made drugs are prepared inside Gilead's and Novartis' labs. It requires thousands of steps, expensive equipment, and qualified personnel to conduct the gene-editing process, in addition to the logistics and storage of the medicine before sending it back to the hospital for injection.
Not all gene therapy technologies are custom-made like Yescarta and Kymriah. Luxturna is an in-vivo drug. Its high price is a marketing decision to compensate for capital costs accumulated in the development phase rather than the high per-unit marginal costs seen in Kymriah and Yescarta. The medicine targets a rare inherited eye disease called Leber congenital amaurosis. Because of the small number of patients, the economies of scale are absent, and the only way to compensate for the low number of patients is to increase the price to cover the development costs.
Still, Luxturna also doesn't heal blindness but improves the condition, and long-term durability is uncertain. This is why the ICER voted the drug as an " intermediate long-term value for money," similar to Yescarta and Kymriah.
Below is a list of gene therapies approved by the FDA and their prices.
Medicine | Manufacturer | Target Disease | Price |
Breyanzi | Bristol Myers (BMY) | Large B-cell lymphoma | $ 410,300 |
Kymriah | Novartis (NVS) | Acute lymphoblastic leukemia | $ 475,000 |
Luxturna | Spark Therapeutics (OTCQX:RHHBY) | Biallelic RPE65 Mutation | $ 850,000 |
Tecartus | Gilead (GILD) | Mantle cell lymphoma | $ 373,000 |
Yescarta | Gilead (GILD) | Large B-cell lymphoma | $ 373,000 |
Zolgensma | Novartis (NVS) | Spinal muscular atrophy | $ 2,125,000 |
Source: Data from Pharmaphorum. Table created by the author.
Novel Technology
Sometimes when I say I'm going to the bathroom, I'm really recoding her DNA. This little lady's protein bonds totally accepted the Cas9 snipping.
D'Vana Tendi
The CRISPR technology has the potential to make the above gene-editing technologies absolute. It is more effective and cheaper and is described as a biological "search and replace" tool. Using guide mRNA, the CRISPR medicine finds and targets a mutated gene, replaces or edits it, providing an efficient, affordable drug that is safe to use.
The Economics of Biotech
The value of biotech depends on two factors
- The intellectual property and know-how assets.
- The discounted cash flow of drug sales.
In 2019, Roche (OTCQX:RHHBY) bought Spark Therapeutics, the biotech behind Luxturna, for twice its share value at the time of sale, yielding a 100% return to investors. At that time (two years after the commercialization of Luxturna), Spark Therapeutics had about $39.5 million in TTM annual sales from Luxturna. This is a humble figure given that the company spent ~$500 million on developing the drug and more to commercialize it. Did Roche make a mistake? Probably not.
Luxturna was a proof of concept. The company chose to create a cure for Leber congenital amaurosis, knowing it was a rare disease but experimenting with it was more comfortable than any other illness. The delivery method behind Luxturna is the adeno-associated virus "AAV," a technology that uses a dormant virus to deliver a healthy gene to the retina.
Roche knew that Luxturna's technology could be replicated to other drugs, which is where it derived its value. Editas Medicine (EDIT) is walking the same path, focusing on Leber congenital amaurosis as well, where delivery, control, and experimentation are straightforward, making it easier to navigate through the FDA-approval process.
CRSP, on the other hand, is focusing on drugs that have a medium delivery complexity but a high financial reward, a strategy similar to large biotech such as Novartis, Pfizer (PFE), and Gilead. It might be worth noting that large biotechs tend to buy the intellectual property of drugs under development from early-stage companies and academic institutions after they've shown promising data, thus reducing the risk further. For example, Novartis bought the early-stage intellectual property of Kymriah from the University of Pennsylvania. This strategy for reducing risk is suitable for big pharma companies' investor base, who prefer balancing blockbuster drugs' returns and the risk of early-stage drug development.
CRSP is an early development company conducting original research in uncharted territory, focusing on potential blockbuster drugs that would yield high returns if successful. Below is a list of CRSP's pipeline.
Drug Name | Stage | Disease |
CTX001 | Clinical | B-thalassemia |
CTX001 | Clinical | Sickle cell disease |
CTX110 | Clinical | Anti-CD19 allogeneic CAR-T |
CTX120 | Clinical | Anti-BCMA allogeneic CAR-T |
CTX130 | Clinical | Anti-CD70 allogeneic CAR-T |
n/a | IND-Enabling | Type 1 diabetes mellitus |
n/a | Research | Glycogen storage disease la |
n/a | Research | Duchenne muscular dystrophy |
n/a | Research | Myotonic dystrophy type 1 |
n/a | Research | Cystic fibrosis |
Source: CRSP financial statements. Table created by the author.
Risks
Rapid technological change in the gene-editing field is the most significant risk for CRSP. Despite that,the company holds a patent in the most cutting-edge gene-editing technology, there are reports of a new technology called Cas12 that might be more effective than Cas9, the guide mRNA used by CRSP. From my understanding, the benefits of Cas12 over Cas9 are only marginal, but it still demonstrates the precarious nature of the industry's intellectual property arena.
Also, while the financial condition of CRSP is currently stable, there are risks associated with the uncertainty of the FDA approval process. If the experiments take longer than expected, the costs will rise, disappointing some investors and potentially causing a sharp sell-off. This scenario is not uncommon in the development-stage biotech industry, so please manage your exposure accordingly.
Summary
CRISPR Therapeutics is one of the few companies that hold a patent to CRISPR, a revolutionary technology in gene editing that has the potential to disrupt the biotech industry as we know it. CRISPR can become the mainstream method for gene-editing because it is less expensive and more effective.
CRSP's strategy is more aggressive than its closest competitor Editas Medicine, focusing on blockbuster drugs with medium delivery complexity but high potential financial return.
