CRSP - bluebird bio: More Share Dilution Likely

Summary

• The implications of upcoming payor decisions and profitability dynamics for BLUE's therapies will have industry-wide ramifications as peers prepare to follow suit with their newly-developed therapies targeting rare-genetic diseases.
• Despite the high price of BLUE's therapies, I don't see a significant commercial opportunity in its target markets.
• The company's balance sheet is weak, and management will likely raise more equity to fund its commercial operations. Investors should expect more share dilution.

Investment Thesis

bluebird bio (BLUE) was founded with the goal of making gene therapy a safe and reliable treatment for patients. The company produces LentiGlobin, a gene therapy product for patients with blood disorders like sickle cell anemia and beta-thalassemia. Lentiglobuin contains a healthy gene injected into a patient's body to replace the unhealthy gene that causes the disorder, and it has been approved in the united states and Europe. Despite its many accomplishments, the company faces significant challenges that could decrease investor returns in the future. Our rating-downgrade mirrors BLUE's break from its conservative equity-raising initiatives after the departure of its former CFO. I believe that last week's $120 million equity funding is the first of many to come.

The following sections provide an overview of these factors, including a discussion of BLUE's business model and risks, and provide recommendations on how investors can position themselves to mitigate these challenges while gaining exposure to the genomic revolution.

Product Portfolio

The FDA removed its hold on BLUE cancer gene therapy lovo-cel last month, ending a one-year suspension that followed positive results from a preliminary analysis at the American Society of Hematology annual meeting a year prior. The company is in the process of filing a Marketing Authorization Application ((MAA)) to the FDA for the new medicine, which is slated to launch in 2024, as stated by BLUE's CEO, Andrew Obenshain, earlier this month during the JPMorgan Annual Health Conference.

Lovo-cel is an autologous (made from patient's cells) gene therapy that is designed to treat patients with Sickle Cell Disease "SCD," a genetic disorder that causes the bone marrow to form abnormally shaped blood cells that can result in a range of painful and potentially life-threatening complications.

After failing to negotiate a pricing agreement with European healthcare payors (private and public), BLUE ceased operations in the continent on October 2021, confining its market to the US, which has a 20,000 patient base. This modest patient base is still its largest commercial opportunity. Besides Europe, markets with high SCD prevalence include the Middle East, Africa, and Southeast Asia, which account for the majority of the global SCD population. However, a lack of awareness and access to healthcare services makes any direct sales attempts problematic.

Moreover, the lovo-cel program will likely face stiff competition from fellow US biotech preparing to launch their SCD cell therapies while BLUE plans to launch its SCD drug, including CRISPR Therapeutics ( CRSP ) and Vertex Pharmaceuticals ( VRTX ). Whether BLUE has what it takes for this upcoming battle is yet to be seen. Still, it surely will be an interesting one, with BLUE armed with a legacy technology competing with the 2020 Nobel-prize-winning genetic engineering method, CRISPR. Production costs, safety, and efficacy will be the primary gating factors for both methods.

We can discuss this in more detail after lovo-cel and its competitor's drugs gain FDA approval. For now, let's talk about BLUE's newly-approved therapies. About 1400 patients with transfusion-dependent beta-thalassemia reside in the US for whom no FDA-approved therapies are available. A bone marrow or stem cell transplant is the only curative treatment for these patients. However, for many patients, this option is not available because they do not have a matched donor, or ineligible for a transplant due to other health conditions, or are just not the right candidate for the procedure. In these patients, ZYNTEGLO can offer a potential alternative as it is one of the few available treatments for patients who are not candidates for bone marrow transplantation (besides the handful of active clinical trials). Similar to lovo-cel, the drug is autologous (made of the patient's stem cells) and intended to reduce the severity of symptoms and improve the quality of life in patients with transfusion-dependent beta-thalassemia. However, at $3 million per injection, it is clearly out of scope for many healthcare insurance companies to provide coverage for these patients. Even those who qualify for financial assistance can have their coverage denied if they cannot pay the exorbitant out-of-pocket cost for chemo therapy required before the ZYNTEGLO injection, not to mention the 20% co-insurance pay. One patient began treatment in Q4, whose revenue would be recorded in Q1 2023, in line with the company's revenue recognition policy where sales are recorded at the time of ZYNTEGLO injection. The company is awaiting benefits verification from forty other patients. However, I DON'T believe the 1300 patient pool is enough to create a viable market for this drug.

There are about thirty patients with CALD in the US. CALD is a rare neurologic disease in which the myelin sheath of the central nervous system is damaged, affecting motor control, coordination, and cognitive functions. This eventually leads to paralysis and loss of brain function over time. There are currently no approved treatments for this disease which can sometimes lead to fatal complications. BLUE gained FDA approval for SKYSONA in September of last year, but I am not aware of any patient being treated yet. The company is still establishing commercial operations and partnerships with treatment centers to deliver this drug to patients. Finding and boarding these thirty patients won't be easy, and I don't see significant commercial opportunities despite the drug's hefty price.

Balance Sheet

BLUE has no competitive moat in a market with entrenched incumbents like Novartis (NVS), Roche (RHHBY), and Bristol-Myers Squibb (BMY). The use of lentiviral vectors has become commonplace among drug developers, and the once-industry pioneer, which has been in operation for more than three decades, has yet to be able to compete effectively or capitalize on its early advantage. Furthermore, it faces strong competition from new market entrants, including Intellia Therapeutics (NTLA), Editas Medicine (EDIT), and Beam (BEAM), which plan to launch their SCD products ( OTQ923/HIX763 , Beam-101 , EDIT-301 ), at some point in the future.

With the sale of its priority review vouchers now complete, BLUE has about $280 million in cash ($182 million as of December 2022). This cash balance is weighed against $270 - $300 million of pro forma cash burn expected for FY 2023. Thus, the company needs more cash to make it through beyond this year.

The recent equity raise is a break from the company's conservative approach to equity raising adopted by the previous CEO. Management now looks to build a new investor base of retail and institutional investors necessary to fund its operations beyond 2024. This capital raise is the first of many, and dilution risk is significant from here on.

How I Might Wrong

It wasn't until BLUE announced its fresh equity offering did our prior sell play pay up. The market seems more bullish on BLUE than I am. One should consider opportunities in its target market; the low-hanging fruit in B-Thal and CALD and the 20000-strong patient base in the SCD space. In nominal terms, BLUE's total addressable market is $34 billion (assuming management prices lovo-cel at $1.5 million.) Our primary hypothesis relies on the assumption of the commercial failure of BLUE's products, but management might surprise us.

Balance sheet problems are also a primary consideration in my bullish thesis. However, with the right partnerships, BLUE can bring its product into the market with minimal cash burn, giving it enough leeway to monetize its approved products and combat balance sheet concerns, albeit at the expense of profitability. All in all, I think a contrarian view is warranted on this stock; a 33% sell-off from its current price seems reasonable at this point.

Summary

BLUE's $120 million equity raise is one of many yet to come as the Massachusetts-based cell-therapy biotech continues its efforts to fix its balance sheet while venturing into expensive commercialization initiatives for its newly-approved therapies. Despite the high price of its drug portfolio, I don't believe there is a significant market opportunity in its target markets, characterized by low incident rates. Another hurdle that BLIUE is yet to overcome is the high uncertainty regarding reimbursement and payor coverage guidelines and decisions.

Although BLUE is no longer the technology leader in the gene therapy space, the implications of upcoming payor decisions and profitability dynamics will have industry-wide ramifications as many other firms prepare to follow suit in securing reimbursement for their novel therapies while shareholders watch to assess return on capital invested in developing drugs targeting market niches with tiny patient population and incident rates in the rare genetic disease space.

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