|Shares Out. (in M):||37||P/E||0||0|
|Market Cap (in $M):||923||P/FCF||0||0|
|Net Debt (in $M):||-117||EBIT||0||0|
|Borrow Cost:||General Collateral|
Editas Medicine (EDIT - $25.24) is a lockup expiration short of a newly IPO’d biotech story stock with a $925m market cap. 28.8m shares come out of lockup on August 1st, which is 79% of the 36.6m shares outstanding.
The company aims to capitalize on the promise of “Genome Editing”, which has received significant press coverage in academic circles and a fair amount of popular media touting its potential as a future category of medicine that can turn on/off disease causing genes. For a more technical description, one can read up on the underlying technologies known as CRISPR/Cas9 and TALENs which are not owned by Editas.
Based in Cambridge, MA with a Harvard sheen, EDIT went public in February 2016 at $16. The pre-IPO backers were PE firms Flagship Ventures, Polaris Partners, Third Rock Ventures, and Partners Innovation Fund. There are well credentialed Founders and Scientific Advisors, and an accomplished Leadership Team. The CEO is Katrine Bosley, a Cornell biotech major who started on the investment side at Highland Capital and later worked in various business development and strategic roles at Biogen Idec and Adnexus Therapeutics, before becoming CEO at Avila Therapeutics which she successfully sold to Celgene in 2012. Afterward, she became an Entrepreneur-in-Residence at the Broad Institute which owns much of the IP and patents that Editas licenses. She is well regarded in the industry and has been named in lists of Top 10 Women in Biotech.
The company is a long way from commercialization and notes in its filings that, “We have not initiated clinical development of any product candidate and expect that it will be many years, if ever, before we have a product candidate ready for commercialization.” This is an unusual situation for a newly public biotech because most have at least one specific product or therapy that they are trying to bring to market through the various phases of clinical trials.
In this case they are spending heavily on R&D to try to come up with an idea that they can bring to market in the genome editing space. There will be a lot of dancing with potential partners to see whom they can team with on testing out potential ideas. Connected to any such ideas going live and into trials, there will be additional financings… likely dilutive. To give an idea of how mile-wide but inch-deep they are, see this slide from their investor presentation which indicates how grand yet non-specific they view their target market:
Though the company presentations exclude specifics, the closest thing we’ve heard so far on an actual potential “first product candidate” is using “CRISPR to cut out the genetic mutation that causes Leber’s Congenital Amaurosis, a rare retinal disease that leads to blindness”. I’m rooting for them to succeed, but it will be years of trials hence and on the other side of large financings, so I see no conflict with liking what they might be able to do for humanity while being short the lockup dynamics that pushed this to nearly a billion dollar market cap due to its limited IPO float of only 5.9m shares.
The timing on even incremental product success is beyond my initial catalyst of the overhang from lockup expiration next month that I’d expect to weigh on the stock into Autumn. The last reported cash on hand is $229m and they expect to burn approximately $70m in 2016 & $80m in 2017. So, 18 months from now, this would leave them with about a year of operating cash left if they haven’t announced any material partnerships and raised the associated funds. To their credit they are thinking big and spending some $10m per quarter on general & administrative expenses plus an additional $8-10m per quarter on R&D which will ramp up to $18-20m when they finally pick an idea.
The company has been reimbursing its licensors for expenses to defend patent rights from “interference and opposition proceedings involving patents licensed to the Company”. Such costs were $4.5m in Q1-2016 and $3.3m in Q1-2015, and EDIT remains vulnerable if the licensors lose these lawsuits.
An additional hurdle is the current lack of clarity on the legal & regulatory framework surrounding genome editing. Guidelines are still to-be-issued from the key regulatory bodies in the US and EU.
For these reasons, I see this as a $25 stock that has a much better chance of hitting $15 before it hits $30.
Aug 1 lockup expiry
Accelerating cash burn
Cost & delay beyond expectation from to-be-issued regulatory guidelines
Headline risk to a genome editing ‘silver bullet’ therapy
Partnership announcements risk