The biotech bear market from February 2021 through October 2023 created some dramatically underpriced stocks. There is free money lying on the sidewalk, just waiting for you to pick it up.
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Biotech Focus: New Recommendation
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CRISPR is an acronym for Clustered Regularly Interspaced Short Palindromic Repeats. They are DNA sequences found in the genomes of bacteria. These sequences are derived from DNA fragments of killed agents that had previously infected the bacteria. They are used to detect and destroy DNA from similar agents during subsequent infections, providing acquired immunity.
Cas9, an acronym for CRISPR-associated protein 9, is an enzyme that uses CRISPR sequences as a guide to recognize and open up specific strands of DNA that are complementary to the CRISPR sequence. CRISPR sequences and Cas9 enzymes together (CRISPR-Cas9) can be used to edit (correct) genetic mutations that cause diseases in humans, animals, and plants. This technology can develop targeted new drugs to treat genetic diseases. It won the Nobel Prize in Chemistry in 2020 for Emmanuelle Charpentier and Jennifer Doudna.
Because CRISPR-Cas9 was a new way to edit DNA, there was a rush to patent it. Doudna and her UC Berkeley collaborators applied for a patent, but so did a group at the Broad Institute, affiliated with MIT and Harvard. Feng Zhang at the Broad Institute had shown that CRISPR-Cas9 could edit genes in cultured human cells a few months after Doudna and Charpentier published their method. Broad got the patent and Berkeley filed suit. They lost the first patent infringement case in the US Patent and Trade Office. Berkeley appealed to the Patent Trial and Appeal Board, which decided in favor of the Broad Institute in 2017. Berkeley appealed again, but in September 2018 the US Court of Appeals also decided in favor of the Broad Institute's patent.
Early in the court fight, Doudna and Feng Zhang cofounded Editas Medicine (EDIT). Although she quit in June 2014, the suite of patents stayed with Editas in the form of exclusive licenses executed in December 2014 from the Broad Institute, MIT, and Harvard. Collectively, they hold about ten times as many genetic editing patents as Berkeley. And Editas has added new patents to its intellectual property (IP) portfolio every year. As the exclusive holder of the foundational patents for CRISPR genetic editing technology, Editas will collect royalties – LARGE royalties – from every gene editing drug approved. They'll pay about half of those royalties to the patent owners.
Already, Juno Therapeutics (now owned by Bristol Meyers Squibb) signed a license deal worth up to $737 million to fight cancer and autoimmune diseases. Juno has opted into 13 different programs across 11 gene targets to date. Two programs are currently in IND-enabling studies and four are in late-stage discovery. Yesterday, they announced a two-year extension to their strategic research collaboration.
Allergan paid Editas $90 million for eye diseases, a small market. On November 16, Vertex Pharmaceuticals [VRTX - partnered with CRISPR Therapeutics AG (CRSP)] got UK approval for a CRISPR-Cas9 treatment for sickle cell disease. On December 8, they got FDA approval, followed by the European Medicines Agency's Committee for Medicinal Products for Human Use on December 15.
It’s the first CRISPR-based therapy regulatory approval ever and shot CRSP up 84% to a $4 billion market cap. Editas only has a $466 million market cap (just above its $427.1 million in cash), but VRTX had to get a license from Editas before they could sell the drug. They signed a non-exclusive licensing agreement with Vertex a few days after they got approval in December covering only ex vivo therapies targeting the gene for sickle cell disease. (Ex vivo means cells are taken out of the patient, edited, and then injected back into the patient.)
Editas' 8-K says Vertex will pay $50 million upfront, plus an additional $50 million contingent payment, plus annual sales-related licensing fees between $10 million and $40 million through 2034. Editas said this deal extends their cash runway through 2026. In total, the company probably will get around $500 million in licensing fees at a 100% gross profit margin for licensing just one gene to one company for only ex vivo therapy for just two diseases. If Vertex wants to sell a drug based on another gene, or this drug for another disease, or develop an in vivo therapy, it will have to pay more, thank you very much. All the many other companies bringing CRISPR-based therapies to market are faced with the same requirement as Vertex.
My first gene editing recommendation, Graphite Bio, crashed and burned when their Phase 1 safety trial failed. No doubt there will be other clinical failures, but there also will be many successes. No matter who wins, Editas gets paid.
Editas has a three-pronged strategic plan:
1. Strengthen and focus their R&D to build an in vivo - in the body – editing pipeline
2. Increase their business development activities to monetize their IP
3. Drive their internal sickle cell program, EDIT-301, through the clinic to FDA approval
The near-term important one for the stock is the EDIT-301 data updates midyear and yearend. Editas Medicine doesn’t need EDIT-301 to be successful, because they will get billions of dollars in intellectual property licensing fees and royalties from their patents over the next decade. But EDIT-301 clinical progress would be a major bluebird:
“VOE” is a Vaso-Occlusive Episode that always requires an immediate trip to the ER.
Editas lost 23¢ a share in the December quarter, much less than the consensus estimate for a loss of 52¢ and 2022's fourth quarter loss of 88¢. Collaboration and other R&D revenues hit $60 million versus $6.5 million in the 2022 quarter due to payments received from Vertex.
At the same time, R&D expenses increased 34% year-over-year to $69.6 million because that is where they book sublicense payments to the Broad Institute. In 2023 they did a strategic reorganization to trim ongoing costs. There were some R&D savings, and general and administrative expenses were down 20% from last year's period to $14.5 million.
The March quarter is expected to show revenues up 18.3% from last year to $11.63 million with a 65¢ loss per share. They haven't set a conference call date yet.
Editas lost $153 million last year and will lose about that much for at least the next three years. DO NOT BUY THIS STOCK IF YOU DON'T WANT TO HOLD IT FOR MORE THAN FIVE YEARS. I expect it to increase steadily as more and more deals are signed, but the really big royalty flows will be after 2030.
Editas has plenty of cash to fund their drug development programs, additional CRISPR-Cas9 research, and patents. Subtracting its cash from its market value means Wall Street values EDIT-301 and its IP at just $38.9 million. That's ridiculously undervalued.
The stock closed today at a $466 million market cap. CRISPR Therapeutics closed today at $4.744 billion, 10 times higher. Jennifer Doudna also cofounded Intellia Therapeutics (NTLA), another gene editing biotech, which closed today at $2.2476 billion. Both will be paying royalties to EDIT for any gene editing therapy they bring to market. I want you to Buy EDIT for a double in 12 months and a long-term hold to much higher prices.
The Fed
Wednesday, the Fed held rates steady, to no one's surprise, and said: “In recent months, there has been a lack of further progress towards the committee’s 2% inflation objective,” also to no one's surprise. But Chairman Powell added: “It is unlikely the next policy move will be a hike,” and that apparently was a surprise to some – but not you, I hope. I've said: “High – but not higher – for longer” so many times we're all tired of it, but it is right on. The next shocker for the many bears is that US companies can report good earnings even in this interest rate environment.
Even as the Fed raised the Fed funds rate 11 times, the economy kept growing, companies kept hiring, and unemployment stayed under 4% for 26 straight months — the longest streak since the 1960s.
Wednesday's JOLTS report showed US jobs openings slid in March to 8.5 million vacancies, down from 8.8 million in February, and the fewest since February 2021 - more than three years. But even though job openings are down sharply from the March 2022 peak of 12.2 million, they remain at a high level. Before 2021, they'd never exceeded 8 million — a level they have now beaten for 37 straight months.
The number of Americans quitting their jobs fell to the lowest level since January 2021 — a sign of diminishing confidence in their ability to find something better. Hires declined 281,000 to 5.5 million, but layoffs also fell. It was a mixed report, punctuated by this morning's weaker-than-expected payroll number.
Anticipating the weak payroll data, the revised Business Employment Dynamics jobs data from the Bureau of Labor Statistics is squarely in recessionary territory:
h/t @DiMartinoBooth
And construction job openings imploded from 456,000 to 274,000. The 182,000 monthly drop is the biggest ever.
h/t @MichaelKantro
Beginning June 1, the Fed will slow the pace of Treasurys rolling off its balance sheet on a monthly basis to $25 billion from $60 billion. That is a back-handed acknowledgment that Treasury Secretary Yellen's massive bond sales are disrupting the money markets.
Market Outlook
Thanks to Thursday's rally, the S&P 500 added 0.3% since last Thursday and added more today after Apple's beat. The Index is up 6.2% year-to-date. The Index could reach an important interim top around 5900 in late November. There are two historical precedents for bull market tops in election years. In November 1968 , the incumbent Democrat Vice President Hubert Humphrey lost to Republican Richard Nixon. The S&P 500 declined 35% in the next 18 months. In November 1980 , the incumbent Democrat President Jimmy Carter lost to Republican Ronald Reagan. The Index declined 28% in the next 21 months.
The Nasdaq Composite gained 1.5% as Big Tech reported good earnings. It is only up 5.5% for the year, though. The SPDR S&P Biotech Exchange-Traded Fund (XBI) won the week, climbing 7.4%. It is still down 1.1% year-to-date.
The small-cap Russell 2000 booked a respectable 1.8% but also is down in 2024, down 0.5%. Of all 13 bull markets since WWII, this is the worst 18-month performance for the small-caps.
h/t @SethCL
The fractal dimension is waffling a bit, but still in an ongoing consolidation. As I've said, unless there is a big, sudden drop, this will go on a while.
The Atlanta Fed's GDPNow model initial estimate for June quarter growth was a very strong 3.9%, but they trimmed that to 3.3% yesterday. The Blue Chips are near 3% too. Right now, it looks like another strong quarter, but I expect the forecast to weaken steadily over the next three months.
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Biotech Moonshots Portfolio Update
This was a very good week for the portfolio as it surged 12.6%. There's enough clinical and other data coming to drive our performance much higher in 2024. Let's dig in...
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