CRSP - Crispr Therapeutics: The Party Is Over (Rating Downgrade)

2023-11-27 16:30:28 ET

Summary

• CRISPR Therapeutics has outperformed the S&P 500 significantly since my September update, as investors joined the bandwagon anticipating its commercial approval.
• The company received approval for its gene-editing therapy in the UK. Similarly, the US FDA is expected to give its approval in early December.
• Much of its pipeline remains in the early stages. Even its exa-cel adoption may be slow due to high costs and narrow market scope.
• The competitive landscape is evolving, and Crispr is not expected to reach free cash flow profitability until 2027.
• I argue why the 100% surge through its highs last week presents an opportune moment for early dip buyers to take profits and wait patiently for another opportunity.

I presented a technical analysis piece on CRISPR Therapeutics AG ( CRSP ) stock in early September. I argued why I had demonstrated that investors could consider leveraging CRSP's inherent volatility to their advantage, avoiding buying on over-optimism and capitalizing on possible peak pessimism.

As a result, I'm not surprised that CRSP has outperformed the S&P 500 ( SP500 ) since my upgrade in September, delivering a gain of almost 42% against the S&P 500's 2.4% uptick. Observant investors should recall that Crispr and Vertex Pharmaceuticals ( VRTX ) received approval from the UK health authorities for its groundbreaking gene-editing therapy, Casgevy. As a result, it marked the " first-ever approval of a gene-editing treatment for use on humans," leading to a spike in interest in leading pure-play gene-editing companies like Crispr.

I believe Crispr investors are familiar with its fascinating technology as it's slated for potential US FDA approval in early December. In early November 2023, an FDA advisory panel seemed optimistic about Crispr's therapy, as " a clinical trial showed that over 90% of treated individuals experienced no pain crises for 12 months after the treatment." While safety concerns were raised during the panel's discussion, positive commentary suggests that "several panelists" stressed that "the benefits of the therapy appeared to outweigh its risks."

As a result, the signs likely point to a groundbreaking approval by the US FDA for its sickle cell disease or SCD therapy in early December. FDA Regulatory action for the beta-thalassemia therapy is expected to occur in March 2024. Goldman Sachs ( GS ) analysts project " peak global sales of $3.9B" between Vertex and Crispr. Vertex and Crispr have a revenue-sharing arrangement, with Crispr earmarked to receive a 40% share.

However, it remains to be seen how fast the adoption rate for its exa-cel therapy could transpire, given its " expected high price tag (potentially exceeding $1 million)" for reimbursement. RBC expects "a slow uptake," indicating that "it may take a considerable time to significantly impact the revenue and stock prices of Crispr Therapeutics and Vertex."

CRSP bulls may argue that the company's technology could broaden to other indications, leading to broader scalability and helping sustain its business model. However, the field is highly competitive, with much of Crispr's pipeline still in the early stages. Furthermore, gene-editing competitors are also working on in vivo therapies, which could garner lots of investor interest compared to exa-cel's ex vivo process. In vivo processes are noted for their simplicity and convenience, although they run higher potential risks due to unintended gene edits. In other words, the competitive landscape continually evolves between Crispr and its peers, suggesting a "no economic moat" rating remains appropriate.

CRSP's recent surge led to a best-in-class "A" momentum grade, as seen above. Therefore, it's reasonable to assume investors have already piled into CRSP, as they anticipate the possible approval by the US FDA of its groundbreaking therapy for commercial use.

However, Crispr remains far from profitability, with analysts' estimates suggesting negative free cash flow or FCF through FY2027, corroborated by CRSP's relatively poor "D+" profitability grade.

Furthermore, CRSP's price action indicated a bull trap (false upside breakout) last week. It suggests astute investors had already loaded at its bottom in the third week of October 2023 at the $38 level. Always remember that the market is forward-looking, and investors must anticipate shifts in sentiment. These intelligent investors were likely confident about a UK approval for Casgevy, buying CRSP's peak pessimism three weeks before the announcement.

With less than two weeks before the US FDA's regulatory action, CRSP has already surged more than 100% through last week's highs, as seen in its spike.

As a result, investors are likely looking for late buyers to chase a potential further surge over the next two weeks, "trapping" these investors before taking profits.

A "sell the news" possibility is looking increasingly likely, suggesting dip buyers who bought CRSP's October lows should consider taking profits and move back to the sidelines for another opportunity on this no-moat operator.

Rating: Downgraded to Sell.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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