GRPH - Graphite Bio: Searching For Direction

2023-05-26 01:55:00 ET

Summary

• Gene editing concern Graphite Bio has suffered some setbacks since we first looked at the company in the Spring of 2022.
• However, the stock has moved higher since we last visited with Graphite and the company continues to sit on a large cash hoard.
• Is more upside to come or time to fade the rally? An updated investment analysis follows in the paragraphs below.

Hunger is by far the best spice ." - Mokokoma Mokhonoana

It has been almost exactly one year since we took our first look at Graphite Bio ( GRPH ) . Despite the shares selling for less than the net cash on the company's balance sheet at the time, we concluded that article on this small developmental company in the following way:

This is much too early stage of a company for consideration for a large stake. So despite the stock trades substantially under its cash balance, it is hard to see a way to play this name given the putrid current sentiment on the biotech sector, other than a small 'watch item' position for patient investors ."

Given it has been 12 months since our initial look at Graphite Bio, it seems a good time to circle back on this name. An updated analysis follows below:

Company Overview:

This gene editing concern is headquartered in South San Francisco. The company is focused on utilizing high efficiency targeted gene integration to develop a new class of therapies to potentially cure a wide range of serious and life-threatening diseases. The stock has risen some since we last highlighted it and currently trades near three bucks a share and sports an approximate market capitalization of $170 million.

Management believes it has a better approach to gene editing as its platform drives cells to use their own DNA repair mechanism more efficiently by taking a template of DNA and copying it into the targeted gene after it's been cut. In theory, this should reduce adverse effects from therapy as Graphite's platform will deliver precision gene editing by correcting mutations, replacing disease-causing genes with normal ones, or inserting genes into predetermined safe locations.

Recent Developments:

Unfortunately, not much has gone right on the development side since we first took a look at this company. When we initially looked at Graphite, the company had one clinical staged asset in its pipeline dubbed GPH101. As described in that article GPH101:

Is a gene-edited autologous (from the same individual) hematopoietic (blood-forming) stem cell candidate designed to fix the single mutation in the human beta-globin gene that characterizes Sickel Cell Disease or SCD and restore normal adult hemoglobin expression ".

In August of last year, the company dosed the first patient within a Phase 1/2 trial evaluating GPH1011 as a potential treatment for SCD. GPH1011 also goes by the name nulabeglogene autogedtemcel or nula-cel for short. Unfortunately, in early January of this year, the company paused this trial as that first patient suffered a serious adverse event that was likely caused by nula-cell.

This triggered a whole series of negative actions for the company. Obviously, the proof-of-concept data from this trial will not be out mid-year as originally planned. Management has said that it no longer projects that it will file an investigational new drug on IND application for its next candidate GPH102, which targeting beta-thalassemia by mid-2024 as planned either.

The leadership announced seven weeks later that it was slashing half its workforce, discontinuing development of GPH1011 altogether and will explore ' strategic alternatives '. This leaves the company will no candidates in clinical stage development but will greatly reduce quarterly cash burn.

Analyst Commentary & Balance Sheet:

The analyst community is universally negative on the company's prospects. Over the past three months, eight analyst firms including BTIG and Morgan Stanley have reissued or downgraded the stock to a Hold, Sell or Neutral rating. None have a Buy rating on GRPH at the moment.

Approximately four percent of the outstanding float in currently held short. There has been no insider activity in the stock since April of last year. The biggest positive attribute of the company continues to be its balance sheet, where the company ended the first quarter with just north of $280 million in cash and marketable securities. The company had a net loss of $24.6 for 1Q2023.

Verdict:

Despite the litany of bad news on the corporate and development front, the stock has hung there pretty well given it is only down 10% on the year and up over 25% over the past year. One could make the case if the company liquidated itself, sold off whatever assets it could and return its cash balance to shareholders, the equity is undervalued.

However, that is most unlikely. Therefore, until management can articulate a direction forward; there seems no reason to hold the stock despite its market capitalization currently being under its net cash value.

The sea is endless when you are in a rowboat ." - Adolfo Bioy Casares

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