WVE - Wave Life Sciences: Less Certainty On Clinical Programs (Rating Downgrade)

2023-06-21 10:00:50 ET

Summary

• Recent developments have created some uncertainties for Wave Life Sciences in its clinical programs.
• The discontinuation of the WVE-004 program corroborates a revised rating of hold on the company in my view.
• Investors should watch for updates on the GSK collaboration and the SELECT-HD trial, which have the potential to attract investment.
• Net-net, revised to hold from buy.

Investment Summary

In January, I had identified a set of potential event-driven catalysts to Wave Life Sciences Ltd.'s (WVE) equity stock, centered around its clinical programs and collaborations. Unfortunately, these haven't materialized as one would have hoped. It's not that there have been any failures. There just hasn't been the sustained momentum that earned WVE a buy rating in the last publication. Specifically, that momentum involved the firm's various "WVE–" clinical assets, including WVE–003, WVE–004, and WVE–006, each investigating potential solutions for complex disease segments. Then there was its 4-year research collaboration with GSK ( GSK ). This is set to tie GSK's human genetics arm with WVE's PRISM platform, leveraging the former's extensive customer networks if the assets convert to market.

However, recent developments have made me less constructive in the medium-term for WVE. With many selective opportunities in the broad healthcare spectrum now catching a strong bid, it is time to allocate the capital to more rewarding securities, that have the ideal economic characteristics in place, or with more visibility on the catalysts to change market value. In that vein, I've revised my rating on WVE to hold.

Figure 1. WVE equity performance in 2023

Recent developments impacting thesis

The updates discussed here could aptly be labelled as "setbacks" and "step-forwards" in my view. There isn't indication things have changed course too far, albeit for the decision of WVE to pull its WVE–004 program from further development. There is, however, less visibility on potential catalysts from this. Still, there are positives worthy of discussion as well.

1. GSK collaboration

The partnership between WVE and GSK has started strongly according to management , with both teams collaborating to advance the initial targets. GSK's substantial investments in genetic discovery and its expertise in respiratory medicine development and commercialization make it an ideal partner for WVE's innovative AATD program. This was covered at lengths in the last publication, which I would strongly urge you to read.

Already through the GSK deal, WVE received the $170mm in upfront cash and equity payment during the quarter. Further, let us not overlook the potential $225mm and $300mm tied into the deal for further development and sales targets tied to various milestones as well.

These milestone payments, including those related to the clinical development of WVE-006, have the potential to further strengthen the market's view of WVE in view of its other clinical programs. The $170mm is a welcomed addition to the balance sheet, and support from GSK as the company's "banker" to get these clinical programs off the ground and running is also a contending factor. I would opine this is one reason why the selloff following the company's WVE–004 updates (discussed below) have been quite shallow, an indication of the market's view with GSK tied into the mix.

2. Discontinuation of WVE–004 program

In May, WVE announced findings from its Phase 1b/2a FOCUS-C9 study, evaluating the efficacy of WVE-004 as a treatment for C9orf72-associated amyotrophic lateral sclerosis ("ALS"), and fronto-temporal dementia ("FTD"). The study involved testing dual 10mg doses of either WVE-004 or a placebo, administered either every 12 weeks or every 4 weeks. The same was performed under a single 20mg dose cohort:

• The results showed that all doses of WVE-004 were well-tolerated and did not cause any significant adverse events, with only mild side effects reported in the data. There were no notable changes in cerebrospinal fluid ("CSF") protein levels or white blood cell count.
• However, after 24 weeks, the study did not demonstrate any clinical benefit of WVE-004, and the reduction in poly((GP)) levels did not lead to any improvement in outcomes.
• Consequently, in the same announcement, WVE made the decision to discontinue the development of WVE-004 , explaining this was due to the absence of predictable biomarkers from the results.
• Additionally, WVE-004 did not show any superiority over the placebo in treating FTP, with the outcome measures used

Thankfully, the price response to the company's move has been muted thus far, but there's no saying it will price in over time.

3. WVE–003 advancing forward, despite headwinds above

Despite the above, WVE is still progressing with its Phase 1b/2a SELECT-HD study, evaluating WVE-003 in Huntington's disease. It plans to share the data in H2 FY'23. I would encourage you to read the deep dive I performed into Huntington's disease ("HD"), WVE–003's pharmacology, and the market opportunity, in the last publication.

As a reminder, from the last analysis: "HD is an autosomal dominant, progressive, neurodegenerative disorder. It's a tremendously complex condition, characterized by uncontrolled hyperkinetic movements [dyskinesia, chorea] and cognitive decline". Hence, any breakthrough here would be earth-changing.

Readouts from the SELECT-HD studies have held up well to date, and this is an area to keep a very close eye on for sure. Any breakthrough in HD would serve as a critical change to the standard of care and position WVE at the forefront of genetic medicines in this domain. However, that is a long way to go just yet.

Furthermore, the company is potentially advancing its WVE-N531 program into Phase 2 after the results from its proof-of-concept work. The compound is looking at a potential treatment for Duchenne muscular dystrophy ("DMD"). WVE also intends to initiate clinical trials in Alpha-1 antitrypsin deficiency using WVE-006 in H2 this year as well.

Market generated data

For insights into the market's positioning, price and market studies provide invaluable evidence. As shown in Figure 2, all buying action has been unsupported on volume in 2023. The 2x attempted reversals saw volume immediately dry on both occasions, such that all buying was done on low and receding volume. That's hardly evidence of bullish sentiment. Au contraire, it suggests that intelligent investors were selling these short-term rallies in my view.

Figure 2. WVE 2023 price evolution

Looking at the trend itself, there has been a bearish signal activated in the break of the price line through WVE's daily cloud. The lagging line has also slipped through, demonstrating the continuation in a longer-term downtrend. If one had thought the recent "double-bottom" observed from April through May was supportive of stronger hands entering the market, I would think again as these directional indicators are indicating the opposite. This is a neutral setup in my view.

Figure 3. Break through base of cloud (daily)

With the absence of earnings data, market data is also critical in guiding price visibility down the line, aggregating the expectations of all the market's participants in WVE into a set of market prices that change on a daily basis. Over the long-run, however, these expectations (and therefore prices) gravitate towards a perception of value that is accepted by most investors.

This is where point and figure charts come in so handy. These charts exemplify market trends by removing the short-term noise of time and intra-trend volatility, showing directional moves instead. The formulae prescribing the price targets are a reasonable representation, therefore, of the market's expectations of a company (as judged by the gradual mobility of its stock price). At a certain price level, investors can use backward induction to ascertain what the market's expectations are, given a set of stipulations (discount rate, growth rates, etc.).

WVE has downside targets to $3.65 following the latest downturn and this tells me to expect potential downsides going forward. This isn't a name I would advocate for anyone to short. I do not short small-cap stocks– one sure way to blow an account up.

Instead, this is a name to be watched intently from the sidelines until it gets all of its bits together. For early-stage life sciences, it takes time to get all of the wheels moving together, but tremendous gains can still be made in the meantime due to the event-driven nature. So I'd be looking to the SELECT-HD and GSK elements as the critical facts driving WVE's equity performance for the time being.

Figure 4. Downsides to $3.65

Discussion

Findings presented in this analysis corroborate a revision of rating down from a buy to hold in my view. Given the company's equity performance hinges on its clinical programs and the GSK collaboration, in my view (for the time being, anyway) any disruption to these factors creates a degree of uncertainty. This is somewhat amplified by the fact we have a lack of fundamental or economic business data to work with in this instance and are moving with or against event-driven catalysts instead.

In that vein, a neutral stance is warranted in my view, supported objectively by findings in the quant system . That WVE is rated hold using this composite is telling as well, as it quantifies in detail the points I've raised thus far. I would urge investors to watch intently from the sidelines and pay close attention to any and all updates concerning the GSK collaboration and the SELECT-HD trial. These have the potential to see WVE attract investment in my view, and to date have shown promise on the momentum front. Net-net, revised to hold.

Figure 5. WVE quant grading factors

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