CRISPR THERAPEUTICS –A (LOSS) LEADER IN BIOTECH WHEN THIS SECTOR TURNS, THIS WILL BE ONE OF THE FIRST TO MOVE

CRISPR Therapeutics (CRSP – NASDAQ) is a poster-kid for the broken-down momentum trade, and the broken biotech trade.

Source: Stockcharts.com

CRSP began its ascent in March 2020 and ran up over 7x in the next year. 

Well what goes up… since that peak, CRSP is down 68%!

I’m not going to mince words – this is a HORRIBLE looking chart!  It is one that I can’t bring myself to touch – at least not yet.

But it has my attention for two reasons.

One is that CRSP is different than the other COVID-driven momentum plays that have crashed and burned.

This isn’t a pandemic thesis. Not a Peloton (PTON – NASDAQ) that depends on at-home spin classes, a Telodoc (TDOC – NASDAQ) that requires growth in online doctor’s appointments, or a Fastly (FLSY – NASDAQ) that needs ever growing demand for work-from-home bandwidth.

CRSP has nothing to do with stay-at-home, work-from-home, eat-at-home or anything-else-at-home. 

CRSP is a gene-editing company. They use a new and extremely promising gene editing technique called CRISPR (same name as the company took) to knock out and replace human genes and in the process cure diseases.

Modern medicine does not cure disease. Drugs and therapies are designed to mitigate symptoms, to stop progression. Rarely is a disease cured in a way that it never comes back and requires no further treatment.

Until CRISPR. By changing the genes that cause disease CRISPR can get rid of them for good.

It is revolutionary. No question about it.

This brings me to the second reason I am following this a bit more closely. Biotech is as much unloved as oil was 18 months ago. Many many biotechs are trading below cash right now.

When that turns–and cycles are forever as a friend of mine says–CRSP will be a leader, a Tier 1 turnaround that attracts capital first.

CRSP holds patents and licenses to the technology. 

I wrote about CRSP in on Vertex Pharmaceuticals (VRTX – NASDAQ).

At that time, CRSP was a $120 stock while Vertex wallowed at its 52-week low – $180 per share. My argument was simple – CRSP is WAY too expensive – so why not take the cheaper route. Buy Vertex.

That has worked well. Vertex is up 20% since I wrote that piece while CRSP is down 40%.

But now the tables have turned.

A ROUND TRIP AND THEN SOME

What drove the CRSP share price to its towering heights? A massive inflow of money to genomics and tech funds, notably to ARK Genomics Revolution ETF (ARKG – NASDAQ). It is no coincidence that the ARKG has a very similar chart to CRSP.

Source: Stockcharts.com

As ARKG and the other ARK ETFs have unwound, so has CRSP.

Where we sit today, CRSP is actually cheaper now than it was before COVID hit.

But wait you say – that CRSP chart I gave clearly shows a lower price before COVID. Today the stock is at a little under $70. Back then it was $50-$60.

True. But that misses on what has happened to the balance sheet in the interim.

CRSP ended 2019 with $943mm of cash and no debt. There were 61 million shares outstanding, giving CRSP a market cap of $3.66 billion.

Today CRSP still has no debt but has added significantly to its cash coffers – ballooning to $2.475 billion. There are 76 million shares outstanding, giving CRSP a market cap of $5.1 billion at $67.

That cash hoard is ~$1.5 billion bigger than it was 2-years ago. Ex-cash the stock is lower now than it was 2 years ago.

THE TECH MOVES FORWARD

There is more to this than cash. Over the last two years CRSP has made notable progress moving its genomics therapies forward. 

In fact, two-years ago it looked like an approved CRISPR drug was still years away. Today CRSP can boast that they are likely less than a year from submitting their first drug candidate – CTX001 – for regulatory approval.

CTX001 is targeting sickle cell disease (SCD) and beta thalassemia (TBT). Both are painful blood disorders that send patients into medical crisis that require hospitalizations and blood transfusions.

CRSP owns the rights to CTX001 with Vertex in a 40/60 split. It was a 50/50 venture, but VRTX took on an extra 10% ownership of CTX001 last June (more on that in a second).

VRTX did that just before the release of some early results from the Phase 1 trial targeting SCD and BT.

Those results backed up their enthusiasm. 

There were 22 patients treated: 15 with TBT and 7 with SCD. All were considered “severe” going into the trial.

Amazingly, in follow-ups of 4 to 26 months none of these patients experienced crisis or required a transfusion.

These are tremendous results.

Keep in mind this isn’t a daily pill or weekly injection to help alleviate symptoms. This is a one-time treatment to change the gene that causes the disease. This is a cure.

CTX001 could be a blockbuster drug once approved. BofA Global Research forecasts peak sales at $2B in 2030.

That 10% stake VRTX took back in April. They paid $1.1 billion for it ($900 million upfront, another $200 million once approved).

The math on that is telling you Vertex believes the drug is worth $11 billion.

That means CRSP’s stake is worth $4.5 billion. Or more than the company is valued at right now.

TWO BIG WORRIES

CRISPR technology presents a huge opportunity.  It offers something that no existing drug does: it cures the disease. 

But CRISPR is brand new, it was discovered less than 10 years ago, and is not without risk.

The biggest risk is that CRISPR technology is really altering our genes.

CRISPR promises that it can change genes to eliminate diseases caused by them. The flip-side of that is that a change to the wrong gene could lead to unintended consequences.

Changing the wrong gene is called off-target editing. It is the worry with all gene editing, not just CRISPR.  An off-target edit theoretically could cause a mutation and that mutation could lead to some kind of cancer.

It is a risk. Because CRISPR is so new we just don’t know how much of one. But companies like CRISPR Therapeutics are working on minimizing the risk by developing better transportation methods to get to the right gene all the time.

The other risk for a CRSP investor has nothing to do with the tech. It is the stock – and who holds it.

CRSP is held widely by momentum funds – specifically the ARK funds managed by Cathie Wood.

CRSP is a top-ten holding in the ARK Genomics Revolution ETF and a top 15 holding the flagship ARK Innovation ETF (ARKK – NASDAQ).

Together these two funds hold almost $600 million of CRSP stock. Remember that CRSP has a market cap of a little over $5 billion. These funds own A LOT of CRSP.

The ARK ETFs have been clobbered over the past couple of months. No question that outflows are putting downward pressure on the stocks they hold – like CRSP. If they keep going down, expect more pressure.

BUY AND HODL

HODL – hold on for dear life. It is an acronym made popular by crypto investors. It means to hold onto a position even as it moves wildly and tries to buck you off. It seems appropriate here.

The combination of market volatility and the large ARK weighting means in the short term the wild swings are likely to continue.

In the long-run, CRSP sure seems to have a bright future.

In addition to CTX001 CRSP has put forward two cancer treatment programs – CTX110 and CTX120 – both in Phase I trials.

These programs are allogeneic CAR-T therapies – this means that they use T-cells from a healthy donor, modify the T-cells using CRISPR tech, and then inject them into the cancer patient to fight the disease.

The T-cell modifications are made to better target the T-cells against that particular cancer and to hide them from the patients own immune system. Think of it like programming an army of cells to attack the enemy.

CRSP gave us early data on these two programs in October. Wells Fargo said that the data “compared well with approved autologous CAR-T products”. BofA Global Markets has described the program as “offering significant upside”.

In addition, CRSP has a partnership with ViaCyte (private) to develop a gene edited cell therapy that would potentially cure type-one diabetes. 

They have another partnership with Capsida Therapeutics (private) to tackle ALS and Friedreich’s ataxia. 

Their partnership with Vertex also encompasses 3 other indications: cystic fibrosis, Duchenne muscular dystrophy and type 1 myotonic dystrophy.

There are endless opportunities for the platform.

IGNORE THE NOISE

If you decide to buy CRSP, you need to make a conscious decision to put it away and forget about it.

The day-to-day fluctuations will drive you mad. No doubt a day will come where the stock tumbles 10% on no news.  If you watch it too closely you will get spooked out.

Far better to ignore the volatility and focus on the prize.

You still need to watch the news – if there is bad data like an off-target edit then you have to re-evaluate – but otherwise the day-to-day movements are noise.

Because make no mistake, CRSP could fall further.

Biotech is in a dreadful bear market.  Forced selling by ARK and other biotech focused funds could drag CRSP down even further.

But biotech can also turn around as quickly as it falls. If you blink you will miss it.

No one said buying into a revolutionary technology would be easy. The best you can hope for is to time your bet to the low-end, not the high. That is where we are here.