2023-07-28 17:01:08 ET
Summary
- Vertex is a $90bn market cap Pharma giant with a monopolistic control of the cystic fibrosis industry.
- CRISPR Therapeutics is an obscure - to some - Swiss Pharma focused on gene therapy, leveraging Nobel Prize winning technology.
- The two companies are close to securing approval for a first ever gene therapy - exa-cel, indicated for beta thalassemia, and sickle cell disease.
- The gene editing aspect means the therapy offers a permanent cure - the initial patient population implies a market opportunity of $80bn.
- Vertex stock has been steadily growing and ex-cel has been driving the company valuation to a premium price. By contrast, CRISPR Therapeutics stock remains very cheap. In this post I try to explain this anomaly, and reiterate my "Buy" verdict on the company. I'd make Vertex a "Hold" for now.
Investment Overview - Vertex & CRISPR Therapeutics Fruitful Collaboration Brings Historic Exa-Cel Approval Into Play
Switzerland based CRISPR Therapeutics ( CRSP ) and Boston, Massachusetts based Vertex ( VRTX ) have been collaborating together since signing an initial agreement in 2015, with Vertex paying CRISPR $75m upfront and making a $30m equity investment in the company.
In 2017, the two parties agreed to move forward with the development of certain product candidates, including exa-cel, an ex-vivo, autologous therapy utilising CRISPR's Nobel Prize winning CRISPR/Cas9 gene editing technology to treat and potentially "functionally cure" patients with transfusion dependent beta thalassemia ("TDT") and Sickle Cell Disease ("SCD").
In 2021, Vertex paid a further $900m to CRISPR Therapeutics, and pledged a further $200m payment upon receipt of a "first marketing approval of the initial product candidate from the FDA or the European Commission", in order to secure a 60/40 share of net profits from sales of exa-cel, amended from the original 50/50 split.
Vertex has a franchise of drugs targeting the respiratory disease Cystic Fibrosis, that has enabled the company to grow revenues from $580m in 2014, to $8.9bn last year, and to turn a net loss of $739m in 2014, into net profits of $2.7bn, $2.3bn, and $3.3bn, across the past three years 2019-2022. Since the beginning of 2017, Vertex' share price has risen by >370%, from $74, to $350 ( at the time of writing).
CRISPR Therapeutics completed its initial public offering in 2016, raising $56m at a price of $14 per share, and today its shares trade at $55, which translates to a 245% gain - not far behind that realised by Vertex. Unlike Vertex, CRISPR Therapeutics has never commercialised a drug product, but hopes are now high that exa-cel will provide a historic first approval for a CRISPR/Cas9 drug.
Vertex has completed its regulatory submission for exa-cel in both TDT and SCD to the FDA, and the FDA has accepted the Biologics License Application ("BLA"), and set a Prescription Drug User Fee Act ("PDUFA") date - when the FDA announces whether it will approve a drug for commercial use, or provides reasons why it has decided not to, via a Complete Response Letter ("CRL") - of December 8 for Exa-Cel in SCD - thanks to Vertex' use of a Priority Review Voucher - and March 30, 2024 for TDT.
Marketing Authorisations Applications have also been submitted - in December last year and January this year - to the European Medicines Agency ("EMA") and the Medicines and Healthcare products Regulatory Agency ("MHRA") and in the EU, exa-cel has been granted Orphan Drug Designation from the European Commission, as well as Priority Medicines (PRIME) designation from the EMA. In the US, the drug has been granted Regenerative Medicine Advanced Therapy (RMAT), Fast Track, Orphan Drug, and Rare Pediatric Disease designations from the FDA for both TDT and SCD.
The Phase 3 data Vertex and CRISPR Therapeutics has obtained in both TDT and SCD is very strong, with 24 of 27 TDT patients remaining transfusion independent for 12 consecutive months while maintaining healthy levels of hemoglobin, and 16 of 17 SCD patients experiencing no vaso-occlusive crises (a painful and potentially fatal side effect of the disease) for 12 consecutive months. As such, it is hard to see the FDA or EMA rejecting Vertex' license applications, and by mid-2024, the first exa-cel revenues ought to have begun rolling in.
Vertex & CRISPR Therapeutics Contrasting Share Price Performance
Vertex vs CRISPR Therapeutics - 12m SP performance (TradingView)
Above we can see the respective share price performance of Vertex and CRISPR Therapeutics, and we can see that Vertex stock has had a strong past 12 months, with shares climbing >20% in value and outperforming the S&P 500. On the other hand, CRISPR Therapeutics stock - even despite a strong spike in May - is down 30% year-on-year.
This strikes me as an odd turn of events. Yes, Vertex is the larger, revenue generating company, but its market cap valuation is arguably somewhat on the high side, at >$90bn, which is 9x forecast revenues for 2023 of ~$9.625bn, and >22x likely profits after tax of just over $4bn. Within the Big Pharma industry, price to sales ("P/S) ratios typically average ~5x, and price to earnings ratios typically average ~19x.
CRISPR Therapeutics, on the other hand, has a current market cap of $4.3bn. Granted, the company has no commercial assets, but the company has provided most of the scientific input into the development of exa-cel, a pioneering therapy that is likely only six months away from being approved, and offering a permanent cure for patients with TDT and SCD.
In June 2021, shortly after Vertex had made its $900m follow-on investment, CRISPR Therapeutics stock reached a high of $155 per share, valuing the company at >$12bn, or nearly 3x more than it is valued today. With exa-cel now very nearly a commercial reality, rather than a pipeline product with potential, as it was in 2021, surely CRISPR stock ought to be trading higher today than it was two years ago?
Exa-cel Market Opportunity Supports Higher Valuation For CRISPR Therapeutics
In my last post for Seeking Alpha on CRISPR Therapeutics I discussed the market opportunity around exa-cel.
Neither Vertex nor CRISPR has provided guidance on how it plans to price exa-cel, if approved - Vertex might do so when the company announces its Q2 2023 earnings on August 1 - but the Institute for Clinical and Economic Review has completed research which suggests an appropriate price range of $1.35bn - $2.05bn.
Vertex has identified an initial pool of 32k patients who would both benefit from treatment with exa-cel, and be capable of undergoing the busulfan based conditioning regimen that patients must have before their cells can be extracted, to be engineered ex-vivo - 25k in SCD, and 7k in TDT.
In my last note to establish the patient population I multiplied this figure of 32k by 30%, reducing the population to ~9.6k, based on a survey conducted by Vertex of SCD and TDT patients which indicated that "more than a quarter strongly believe genetic therapy is the right choice for them", however once the product is live and Vertex - which has a current cash position of >$10bn - invests some of that into educational programs, I'd expect that figure to rise substantially so this time I will use a figure of 24k/75%.
This time, I am also going to ignore the threat posed by Bluebird Bio ( BBIO ), whose lovo-cel therapy is also up for approval, with a PDUFA date of December 20. Bluebird uses a lentiviral vector to modify genes as opposed to exa-cel's use of CRISPR/Cas9, and it's pivotal study data is arguably as good as exa-cels', however the company's financial resources are very limited compared to Vertex, and I'd also note that as stated in its BLA submission press release , three of 50 patients in Bluebird's pivotal study suffered fatalities - two from leukemia and one from cardiac arrest.
Whilst this might not be attributable to the therapy, and there was one patient death in the Vertex/CRISPR Therapeutics pivotal study, attributed to COVID, the focus on safety in the event of either drug being approved will be intense, and again, with its greater resources and experience I would expect physicians to prefer exa-cel over lovo-cel. Lovo-cel can be a commercial success for Bluebird, but on a much smaller scale than exa-cel, in my view, at least based on currently available study data, and the respective marketing strengths.
Let's therefore take the figure of 24k, multiply it by $1.675m - the midpoint of ICER's price guidance - and we get a figure of ~$40bn. Multiply that by 40% and we arrive at $16bn - an estimated market opportunity for CRISPR. With patients being "functionally cured" and no longer suffering from VOCs, exa-cel ought to be a "one and done" therapy, meaning the patient pool will shrink, but if we spread out the market opportunity over 10 years, that is still $1.6bn of revenues per annum CRISPR Therapeutics could potentially earn. Multiply that figure by five - a putative average price to sales ratio of commercial stage pharma companies - and we get to a valuation of ~$8bn. Using this logic, we can make the argument that CRISPR Therapeutics shares have >75% upside potential.
Vertex Stock Is Not Substantially More De-risked Than CRISPR Therapeutics Stock
As mentioned earlier, Vertex, thanks to its virtual monopolistic control of the Cystic Fibrosis ("CF") market, has delivered excellent gains for shareholders. The one criticism that has been levelled at the company in recent years is that it lacks a promising pipeline of opportunities outside of CF.
Exe-cel is one of Vertex' responses to that accusation, although it is not the only one. Vertex' stated ambition is to launch five new products in different disease markets in the next five years. Exa-cel in SCD/TDT represents two of the five.
The acute pain therapy VX-548 is another, with Phase 3 studies in bunionectomy and abdominoplasty surgery underway. Vertex rates this as a "multi-billion dollar opportunity", although currently available non-opioid pain therapeutics such as Pacira Biosciences Exparel are driving ~$500-$600m revenues per annum.
A fourth product launch is expected in CF, with a Vanzacaftor triplet therapy in Phase 3 studies expected to complete this year. Although it will likely drive multi-billions of revenues, it will most likely be taking market share away from Vertex other CF targeting drugs, so the net gains may be minimal. Finally, speaking at the Goldman Sachs ( GS ) Healthcare Conference in June, Vertex CE Reshma Kewalramani told the audience:
And for the fifth one, it’s a bit of dealer’s choice. You can think about 548 in neuropathic pain, the type 1 diabetes program, AATD, the inaxaplin program in kidney disease as some examples for what that – what could round out those 5 and 5.
Vertex - pipeline and products (Q1 2023 earnings presentation)
As we can see above, Vertex now has a relatively robust pipeline, although if we look at the next 3-5 year horizon, I would argue that exa-cel is its most important non-CF candidate.
The size and penetrability of the non-opioid pain markets are uncertain, and Vertex still needs to deliver positive Phase 3 results and make its regulatory submissions, while the same is true of its APOL1-mediated kidney disease ("AMKD") candidate - and kidney disease is a notoriously tricky field of development - if you don't believe, look at the share price performance of four kidney focused companies - Akebia Therapeutics ( AKBA ), Fibrogen ( FGEN ), Angion Biomedica (delisted), Ardelyx ( ARDX ).
Type 1 diabetes is an attractive target and a market opportunity of 2.5m patients in the US and Europe, Vertex believes, but the company is looking at an allogeneic therapy (when a donor's cells are engineered ex-vivo and then introduced to a patient) and to date, no allogeneic therapy has been approved amid ongoing concerns about durability and safety. In contrast, multiple autologous therapies have been approved - exa-cel is an autologous therapy.
In summary, then, we can make a persuasive case that it is exa-cel that is driving Vertex' valuation upwards, given the company's shares are trading at a slight premium based on revenues generated from CF compared to other large Pharmas. If it's driving Vertex' valuation - a $90bn market cap company - why is it not sending CRISPR Therapeutics' stock soaring?
Some Possible Explanations As To Why Exa-cel Drives Vertex' Share Price but not CRISPR Therapeutics
Lack of awareness - although the market is an effective voting machine in the short term and weighing machine in the long run, to paraphrase Benjamin Graham, it may be that the wider market is unaware of the role that CRISPR Therapeutics is playing in Vertex' fancy new hemoglobinopathy drug.
The kind of investors who make bets on a large, successful US Pharma like Vertex may not be aware of the obscure, Swiss based biotech CRISPR Therapeutics, and may not even know that it stands to earn a 40% share of all profits from exa-cel. If hedge funds and investment banks ignore CRISPR Therapeutics stock, it is unlikely that retail investors alone can lift the stock price. Biotech money may flood into a company like CRISPR Therapeutics, but major institutions may not yet recognise the opportunity in play.
Doubts About Profitability - make no mistake, Vertex is a very profitable company. Only a very few Pharma companies can match or exceed its net profit margin of >35% in 2022 - the COVID vaccine developers BioNTech ( BNTX ) and Moderna ( MRNA ) are the only two Pharmaceutical companies with valuations >$1bn to have bettered that in 2022, that I am aware of.
That - and a cash position of >$10bn - certainly helps make the case for investing in Vertex - and its elevated share price likely reflects that - but in CRISPR Therapeutics' case, the company burns through substantial amounts of cash and makes heavy losses, which is obviously less attractive.
Last year, the company posted a net loss of $650m, although thanks to the Vertex investment, the company did turn a profit of $377m in FY21. Additionally, CRISPR is required to shoulder less than half of the costs of marketing and selling exa-cel, if approved, and with Vertex' reputation for driving high profit margins, CRISPR Therapeutics ought to, over time, turn a traditional weakness into a strength.
Doubts About Exa-Cel's market appeal - it is true that the preconditioning regime required prior to treatment is unpleasant, dangerous for many, and rules out the majority of the ~450k patients with SCD and TDT globally. As I pointed out in my last note, available therapies such as Adakveo, which costs ~$7k per annum, and Oxbryta, which costs ~11k per annum, are used to treat TDT and SDC, and substantially reduce the number of VOC's and transfusion required by patients.
Neither drug eliminates them, however, as exa-cel has shown it can do, and over a lifetime, Vertex believes caring for a patient with SCD costs $4m, which makes paying $1.7m for a functional cure a superior option, especially when we consider that patients using Adakveo and Oxbryta will continue to experience VOCs. The median age of death for an SCD patient is 45 years - making the strongest case of all for treatment with a therapy than can offer a permanent cure.
Doubts About Durability & Safety of Exa-Cel - this may be a legitimate concern - with CRISPR/Cas9 representing a new approach to gene therapy, can we really state with confidence at this time that the drug offers a permanent cure, or that there are no long-term safety implications?
In theory at least, CRISPR/Cas9 works in a similar fashion to the way that cells are modified with approved CAR-T cell therapies such as Bristol Myers Squibb's ( BMY ) Abecma of Breyanzi, or Gilead Sciences ( GILD ), and these therapies drove >$2bn of revenues last year. CRISPR/Cas9 is as much about getting the gene editing tools to the cell targets as it is about revolutionary editing itself.
Safety-wise, then, Exa-Cel may be comparable to other approved ex-vivo therapies, although durability is harder to prove as there is e.g. 5-year or 10-year data available.
Doubts About CRISPR's Potential Outside Of Exa-Cel - besides exa-cel, CRISPR Therapeutics' next-most advanced therapy is an allogeneic cell therapy, CTX-110. As mentioned, allogeneic cell therapy is strongly out of favour with the market currently owing to doubts about durability, although in its initial clinical study, in patients with large B-cell Lymphoma, an overall response rate of 67% was observed, with a complete response ("CR") rate of 41%, and three patients have maintained that CR for longer than 24 months.
Realistically, an approval for any one of CRISPR's four wholly-owned allogeneic, oncology targeting therapies (two targeting CD19, and two targeting DC70) is years away, if it happens at all, and the remainder of the company's pipeline is preclinical, except a Type 1 diabetes program, being developed in collaboration with Viacyte - also a partner of Vertex' in the same indication. If investors are genuinely excited about Vertex' T1D programs, then surely they can be excited about CRISPR's, too?
Doubts About Patent Disputes - according to CRISPR's 2022 10K submission (annual report):
Third parties may seek to claim intellectual property rights that encompass or overlap with intellectual property that we own or license from them or others. Legal proceedings may be initiated to determine the scope and ownership of these rights, and could result in our loss of rights, including injunctions or other equitable relief that could effectively block our ability to further develop and commercialize our product candidates.
Specifically, the Broad Institute and Massachusetts Institute of Technology and, in some instances, the President and Fellows of Harvard College, which we refer to individually and collectively as the “Broad” owns a patent family that includes issued patents in the United States and Europe that claim certain aspects of CRISPR/Cas9 systems to edit DNA in eukaryotic cells, including human cells.
The Broad Institute has been contesting who owns patents related to CRISPR technology with the "CVC Group" - the University of California, University of Vienna, and Dr. Emmanuelle Charpentier, who won the Nobel Prize for her work with CRISPR, alongside Jenifer Doudna - for many years, and secured a notable win in 2022 when the patent office ruled in its favour.
As I have suggested in previous posts, however, the litigations and disputes are so complex, with so many avenues of appeal, that is hard - although not impossible - to see it impacting on CRISPR Therapeutics rights to profits from Exa-Cel.
Concluding Thoughts - Vertex' Premium Valuation Is Dependent on Exa-Cel While CRISPR Therapeutics' Discounted Valuation Should Benefit From Exa-Cel
Taking all of the above arguments into account, my argument would be that Vertex' premium valuation can only be maintained if Exa-Cel is approved, and achieves blockbuster sales within its first 2-3 years on the market, and longer term, ~$4 - $5bn in annual revenues. Vertex' monopoly within the CF market means it's latest CF therapy may not significantly increase its revenue generating potential, as there are only a few thousand patients that Vertex does not already treat.
I have more reservations about Vertex' other near-term approval shots than I do about Exa-Cel, which I believe can deliver the required revenues over the next 3-5 years, maintaining, and perhaps augmenting Vertex' valuation. It should be noted however that Vertex does not pay a dividend, so buying shares at a premium price adds an additional layer of risk.
Turning to CRISPR Therapeutics, having been over the market opportunity again with a slightly more optimistic assessment of patient numbers, I also think the company can be hopeful of driving blockbuster sales, even with a 40% share of profits. I'd concede that there are several risks in play, such as long-term durability, cheaper therapies, and a pipeline that is otherwise years away from a second approval shot, but come December, CRISPR ought to be celebrating a historic win, and a potentially momentous step forward for the gene therapy industry.
As such, I'll continue to hold my CRISPR Therapeutics stock, imagining a scenario in which the company reports $250m - $500m of exa-cel revenues in FY24, and net losses narrow, or perhaps the company even drives a small profit, owing to the additional $200m payment expected from Vertex on approval of the therapy.
Looking further ahead, if CRISPR Therapeutics and Vertex can find ways of making preconditioning less onerous - and they are already working on it - or even find a way of delivering CRISPR in vivo, then the addressable patient population increases to >400k, and we could be contemplating double digit billion revenues long term. Furthermore, both company's Type 1 Diabetes programs excite me - perhaps more so than CRISPR Therapeutics oncology programs, although it should also be noted that autologous therapies have been taking some small steps forward with regards to durability - overcome that hurdle, and the market will have to rethink the way it values these assets.
My basic thesis is that - if Vertex stock is buoyant partly based on the promise of exa-cel, then so too should CRISPR Therapeutics stock, given its market cap is 20x smaller than Vertex'.
The fact that the company's shares are not rising rapidly to fill the valuation vacuum strikes me as a buying opportunity, although perhaps it will take a full approval - and it is likely the FDA will arrange an Advisory Committee meeting to discuss approval given this is the first CRISPR based therapy to make it this far - or even a couple of years of positive revenue data - before the market catches on to the scale of the opportunity in play.
For further details see:
Vertex & CRISPR Therapeutics - Partners On Exa-Cel - But Unequally Valued