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THIS STOCK IS A “FREE” WAY TO PLAY CRISPR
There are not many diseases that we cure. Medicines are designed to mitigate symptoms, to stop progression. Rarely is a disease completely cured.
Until CRISPR, which is a gene editing technology. Yes, scientists can now add, remove, or alter your DNA. CRISPR is short for “clustered regularly interspaced short palindromic repeats”—which is not important to me or you. What is important—very important—is that it offers the promise to CURE disease.
While biotech stocks have had a terrible year, CRISPR stocks have done OK; it’s the hot new sub-niche in biotech.
The Big News in 2021 was what Intellia Therapeutics (NTLA – NSADAQ) announced in the spring.
Intellia and their partner Regeneron announced positive data from their lead gene-editing candidate: NTLA-2001.
What made the data so special is that this was the first-time patients have had their DNA successfully edited in their own body using CRISPR technology, to cure a disease.
It is revolutionary. No question about it.
Intellia targeted patients afflicted with ATTR amyloidosis. This is a disease where a mutated gene causes the liver to produce a mis-folded protein.
The misfolded proteins move to other organs where they wreak havoc on the heart, lungs, and kidney.
But if Intellia’s results hold up, patients will never have to worry about misfolded proteins and the ugly effects on their body ever again.
How CRISPR Works
The details of CRISPR are complicated but the basics are actually very simple.
CRISPR is a gene editing technology. It can be used to make edits to your DNA.
It works like this. An RNA molecule (called a messenger RNA) is used carry a small scissor-like protein (called Cas 9a).
A second RNA molecule (called a guide RNA) is used to guide the scissor protein to the right spot in the cell’s DNA.
Once there, the Cas 9a scissors make a cut in the DNA strand.
The result is to cut out (often called “knock-out”) the mutated gene and (in some cases) replace it with a new gene.
CRISPR has been used in human trials in the past (there are no approved products yet), but Intellia is the first one to make the cut inside the human body. Up until Intellia, trials focused on taking cells out of the body,
modifying them with CRISPR, and then putting them back in.
Intellia took it a step further. They delivered their therapy right to the liver. A far simpler process and one that opens up a wider range of applications!
CRISPR STOCKS ARE Not Cheap
So CRISPR could be a game-changer. But here is the problem. CRISPR may turn into a revolution in therapy. It may result in oodles of diseases being cured. But holy-geez are the stocks ever expensive!
Crispr Therapeutics (CRSP – NASDAQ) and Intellia both sport market capitalizations in the $10 billion range. BEAM Therapeutics (BEAM – NASDAQ), which has a slightly different and potentially even more productive tweak on CRISPR, has a capitalization of $6 billion – and the company does not even have a drug in a human trial yet!!
Needless to say, this is too rich for my blood.
If CRISPR is a revolution, it is going to have to correct before I am willing to dip my toe in.
But there is a way to play CRISPR that is not nearly as expensive.
A CHEAPER WAY TO PLAY CRISPR??
Vertex Pharmaceuticals (VRTX – NASDAQ) is not the typical nano-cap/micro-cap name that I usually focus on.
Vertex is borderline big pharma. It sports a market capitalization of over $50 billion and cash of over $6 billion. While not quite the size of Abbvie (ABBV – NYSE – $189 billion) or Merck (MRK – NYSE – $184 billion), it is not too far off.
Vertex earns its market cap by being the leader in cystic fibrosis.
Cystic fibrosis is caused by mutations in a gene called the cystic fibrosis transmembrane conductance regulator (CFTR) gene. The mutation causes the body to produce a faulty version of a particular protein – called the CFTR protein.
The CFTR protein helps the body make mucous. The faulty version makes mucous that is thick and sticky. It clogs up the lungs, digestive system and other organs and causes all kinds of bad outcomes.
There are a bunch of different flavors of the mutation and Vertex has a portfolio of drug combinations that target these flavors:
Source: Vertex Investor Presentation
Vertex’s breakthrough came in 2012 when a drug called ivacaftor (goes by the marketing name Kalydeco) was approved. Subsequent products are combinations of ivacaftor and other drugs that tailor the therapy to a particular flavor of mutation.
All in, Vertex generated $6.2 billion of revenue from its combined cystic fibrosis franchise in 2020. Of that, $3.8 billion came from the two most recently approved products, Trikafta and Kaftrio. Revenue from these products is expected to top $5 billion this year.
These products should drive revenue for years to come – their patent expiry (always a big concern when evaluating a drug company) remain years away.
Source: Bloomberg
MAYBE IT’S A FREE WAY TO PLAY CRISPR?
The share price of Vertex is easily covered by the cystic fibrosis platform. The stock might even be cheap on that alone!
That means you aren’t paying much for the pipeline of product candidates.
Vertex has a big pipeline: There is a next-gen cystic fibrosis combo in phase 3. A phase 2 program targets acute pain. A second phase 2 program targets kidney disease. There is a phase 1/2 program that is going after the big market of type A diabetes.
On top of that Vertex owns stakes in multiple public and private companies.
But what really interests me is their collaboration with CRISPR Therapeutics.
The partnership with CRSP began in 2015. The two companies said they would target two diseases: sickle cell disease and transfusion-dependent β-thalassemia (TBT). Later they would tackle cystic fibrosis.
Since then, the partnership has expanded to two more diseases: Duchenne muscular dystrophy and type 1 myotonic dystrophy.
That means there are 5 diseases that Vertex and CRSP are jointly targeting. The terms are a 50/50 split of the profits – though this has changed recently with sickle cell – more on that shortly.
The first of the targets for Vertex and CRISPR to go after are sickle cell and TBT.
Sickle cell and TBT are similar. Both are natural targets for a CRISPR edited therapy. The reason? They are the result of a single gene mutation.
Getting a bit into the science, the mutation is to the beta-hemoglobin gene, which is responsible for producing red blood cells. The mutation leads to crescent-shaped, or “sickled”, red blood cells.
The shape comes with all sorts of problems, the biggest of which is that it makes them sticky, which causes them to clog in arteries and not deliver blood.
The result: patients with sickle cell disease have periods of extreme pain, caused by lack of oxygen, and over time that damages their lungs, heart and kidney.
How CRISPR Cures Sickle Cell Disease
There are a few ways CRISPR can “fix” this.
Some companies are attempting a “knock-in” approach – essentially cutting out the mutated gene and replacing it with a normal copy.
CRISPR/Vertex are using a bit different approach. One that is also simpler.
Scientists have long noticed that infants and people with certain genetics don’t really have the symptoms of sickle cell. When they dug into it, what was in common were high levels of something called fetal hemoglobin.
Fetal hemoglobin is a blood protein that delivers oxygen to the fetus during pregnancy. Most of us lose the ability to produce it as we age. But some of us don’t. And infants still have it.
It isn’t that surprising that a disease caused by lack of oxygen might be stopped by more cells that deliver oxygen.
CRISPR and Vertex are taking advantage of this. They are simply knocking out the gene in stem cells that prevents fetal hemoglobin from being produced by most adults. The patients then produce fetal hemoglobin, which delivers oxygen to the organs and does an end-run on the disease.
Good in Theory, Good in Practice… So Far
The results so far are nothing short of outstanding.
CRISPR and Vertex reported interim phase 1 results in June. 22 patients, 15 with TBT and 7 with sickle cell disease had their stem cells dosed with the drug CTX-001, which knocked out the gene that prevented fetal hemoglobin from being produced.
All 22 patients were considered “severe” going into the trial.
In follow-ups of 4 to 26 months none of these patients experienced crisis or required a transfusion.
In other words, at least so far, these patients are CURED. They don’t have to take daily pills. They don’t have to go back for a booster or infusion every month. Sickle cell disease and TBT are horrible diseases that are now effectively being treated with a “one-time functional cure”, as the press release put it.
What’s the Market?
There are 100,000 patients in the United States with sickle cell disease. Bank of America estimates that new therapies targeting those patients could deliver $7 billion of annual revenue for the group as a whole.
Peak sales estimates for CTX-001 (which is admittedly a guess-estimate given we are talking 2028 or later) hover around the $3 billion range.
Vertex themselves clearly believes in the therapy and maybe gives us the biggest reason to be bullish.
In April Vertex bought an additional 10% interest in CTX-001 (increasing the split to 60/40) in return for $900 million. This effectively values CTX-001 at $9 billion and the Vertex stake at $5.4 billion.
Caveats (there’s always SOME…)
First and foremost: this is a crowded field.
The CRISPR/Vertex combo has a head start – they will likely be the first to market if all goes well. That usually bodes well for adoption.
But because sickle cell and TBT are low-hanging fruit for CRISPR and gene editing, it is no surprise that it is the target of many companies. In addition to the list below (which is about a year old) I know of two other companies that have since announced they are tackling sickle cell and/or TBT with gene editing targets.
Source: Bank of America
The second big unknown comes from the CRISPR process itself. This is a very new technology (remember it was only discovered 10 years ago) and there is much we don’t know.
In particular, there is something called off-target edits. CRISPR edits genes, and while the process is designed to look for a specific sequence of genes to edit, there are times when it goes off track.
Most off-target edits don’t amount to much – the cell repairs itself or dies off. But there is a worry that some off-target edits could cause mutations of their own, and lead to any one of a number of bad results.
Finally, the domination in cystic fibrosis can work both ways. Vertex is far and away the leader – at ~50% market share.
But Vertex is vulnerable if competition rears up in the market.
This is just what Morgan Stanley highlighted in a note last week. The note was largely responsible for the drop in the stock.
Morgan Stanley highlighted an Abbvie treatment currently in trials. While they admitted that competition from Abbvie was “unlikely” as the “bar is high”, they still argued that Vertex’s reliance on cystic fibrosis could mean that even “the specter of competition” could drag the stock.
That is certainly one way to look at it. But stocks “climb the wall of worry” and Vertex certainly hasn’t participated in the broader rally this year.
Vertex is not expensive. It trades at 15x earnings, 12x EBITDA and generates plenty of free cash. Revenue grew by 50% last year, and is expected to grow by 18% this year.
We will get more data from CTX-001 early next year and if all goes well an approval shortly after. After that the market will start looking ahead to what CRSP and Vertex can do with cystic fibrosis.
The stock chart itself is NOT compelling—to me it looks like it’s going lower. But Vertex could get a lift from
- more good news
- or a sector rotation into biotech
- CRISPR stocks get super sexy
Until then, I’m just watching. But this stock has some positive fundamentals as well as some very promising near term potential.
