GRPH - Graphite Bio: Strong Cash Only Leverage After Halted Trial

Summary

• Graphite Bio halted its gene editing programs after a trial was halted for safety.
• They are restructuring and considering strategic alternatives.
• Their high cash balance is now the only redeeming factor.

Graphite Bio ( GRPH ) is trading at a negative enterprise value, that is to say, it has more cash than its market cap and debt combined. The market is, thus, putting no value to the company’s pipeline, which consists of CRISPR editing technology targeting a couple of rare diseases. The company has intellectual property in the form of two provisional patents covering methods of treatment, and 4 in-licensed issued patents from Stanford, Agilent and IDT. Here’s the pipeline:

Well, that’s not much of a pipeline, with just one asset in the clinic. This is nula-cel, which is targeting sickle cell disease. This is a gene-edited autologous stem cell-based therapy. SCD is a monogenic disease, meaning it occurs due to mutation in a single gene. Nula-cel aims to correct this mutation, “to decrease the production of sickle hemoglobin and restore the expression of adult hemoglobin, thereby potentially curing the disease.” It is currently running a phase 1/2 trial, which basically means, there’s no past clinical data, and there’s nothing much on which to base a judgment of the molecule. The company does not have a current corporate presentation on its website either, so it is difficult to begin research. There’s one from September, though.

In latest news, the phase 1/2 trial was begun in August, with the first of 15 total patients dosed. The company was supposed to provide initial proof-of-concept data in mid-2023. They were also planning to file an IND for GPH102 in beta-thalassemia by mid-2024. However, both plans are now in limbo following a voluntary clinical hold the company placed on the trial following complications in the first patient dosed. The complications possibly involve the drug, and the actual adverse event was prolonged pancytopenia requiring ongoing transfusion and growth factor support.

The company also noted the following:

The patient achieved study-defined neutrophil engraftment and has shown no evidence of myelodysplasia, a rare type of blood cancer. While the event did not meet study stopping requirements, based on evolving clinical data, Graphite Bio decided to voluntarily pause the study.

This clinical hold has had a devastating effect on the company and its stock, effectively damaging its future prospects and taking its business almost beyond salvage. By early February, the company had a major corporate restructuring in progress, with plans to reduce ~50% of the workforce of some 114 people. The effort was on to reduce their cash burn to sustain current cash reserves till 2026. Most importantly, the company decided to discontinue development of nula-cel for sickle cell disease and are looking at “strategic alternatives.”

A number of downgrades have followed this situation. Bank of America downgraded the company to underperform from neutral, and trimmed the price target to $2 from $3. Cowen’s Phil Nadeau said:

[GPH101’s] demise raises questions about Graphite's foundational gene editing platform and the steps necessary to bring any candidate into clinical development.

This comment is not specific to Graphite alone and applies to every single gene editing company. Almost every such company without exception has seen off-target adverse effects of their therapies. On top of that, the promised once-in-a-lifetime treatment effect does not materialize; despite the risks, patients are forced to take gene therapies multiple times, as we saw with certain eye disease companies.

Financials

GRPH has a market cap of $146mn and a cash balance of $291mn ($283.5mn according to some counts), with a debt of $7mn. There’s a large leverage between valuation and cash which is perhaps the only positive existing shareholders may hope for. The cash amount is strong enough, and debt-free, so the company can pivot to any field it may want to. If it chooses to go back to the drawing board, that will be an expensive, time-consuming, risky and possibly ultimately futile proposition. Instead, the company can very well reinvent itself as a more sober and traditional therapeutics. If it sticks to gene editing, though, the company has to spend considerable resources trying to figure out what went wrong. According to SVB analysts, some of the possibilities could be:

…the quality of the patients’ underlying bone marrow, the HDR platform itself, the gene correction approach and use of an AAV6 vector….

There’s not much use providing operational expense data and all that because the company’s shelving of pipeline programs and workforce will change everything. So we will have to go with the company statement where it says the idea is to make the cash last till 2026. Of course, if they take a do-or-die approach and invest in something expensive and cutting edge, that will lead to an altogether different cash situation. According to a release last week:

The company intends to continue research activities associated with its early-stage non-genotoxic conditioning program, with the goal of advancing toward potential development candidate(s').

Also, a “spokesperson confirmed to Endpoints News that the company will not pursue other uses of its platform.”

Bottomline

Existing shareholders can find some consolation in the huge cash balance here, and hope that management does something strikingly different and salvages the company, if not the gene therapy pipeline. If, however, the company sticks to old methods, and tries to find out what went wrong with its science, that may be a long drawn affair with no certain outcome. There is nothing for potential investors right now.

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