With genetic engineering, we will be able to increase the complexity of our DNA, and improve the human race. But it will be a slow process, because one will have to wait about 18 years to see the effect of changes to the genetic code. - Stephen Hawking
CRISPR Therapeutics AG (CRSP) has zoomed from about $24 levels in January 2018 to $73.09 as of June 25, 2020, and that’s a massive appreciation of about 300% in a space of 30 months. It is an efficiently managed and profitable gene-editing company that looks all set to go places once the COVID-19 disruption is contained.
I’m bullish on biotech and innovative technologies within the healthcare sector and have been tweeting and reporting about relevant stocks and ETFs in The Lead-Lag Report from as early as February 2020.
Image Source: Twitter
Though I am bullish on CRSP as a long-term pick, now is not the right time or price to invest in it. COVID-19 cases have started spinning out of control, and while we may not experience another lockdown, the surge in cases can disrupt the company’s operations. Before spelling out the strategy to be followed, here are a few facts:
In its Q1 2020 filing with the SEC, the company has listed the following COVID-19-specific risks to its operations:
1. The company’s clinical trials for products developed for the treatment of hemoglobinopathies and immuno-oncology-based treatment have been impacted. According to the company, COVID-19 disruption will continue to impact these trials adversely in future too, due to a variety of reasons, including: (A) ICU beds that are required for trials have been diverted for treating the virus-infected; (B) Investigators did/may not want to expose candidates to COVID-19, and (C) Shortage of staff at the trial location.
2. Some of the suppliers of the company (e.g., materials, drugs, quality testing, and samples) have paused their operations.
3. Most of the company’s staff was in WFH mode as of late April 2020.
These factors have impacted the company’s operations as of late April 2020, and even though many facilities had reopened in May 2020, some or many may now again be impacted by the virus resurgence. The point is that as long as the COVID-19 disruption continues, CRSP’s trials and operations will continue to be impacted, upsetting its pipeline. No medical research organization is sure how and by when the virus will be contained.
Rewards of Investing in CRSP (at the right price)
The global gene therapy market is estimated to grow at an annualized rate of 40% in the next 10 years. In money terms, it is expected to be worth $10 billion by 2030.
Image Source: Roots Analysis
As per Roots Analysis, a research firm, the gene-editing market is likely to witness a small decline during the COVID-19 disruption. Once the virus is contained, or when there is clarity on virus containment, the gene-editing market will get back on its growth path.
As of Q1 2020, CRSP has $889.7 million cash and equivalents in its books. This accumulated cash is not because of past operational profits, but because the company has issued stock in the last 3 years.
Image Source: Seeking Alpha
Between 2018 and 2020, the company has issued $1.15 billion worth of stock and now looks very richly valued. Here are a few numbers:
1. CRSP’s TTM P/E (GAAP) is a whopping 95.41 as compared to the sector median of 33.93.
2. Its TTM EV/EBITDA is a massive 131.30 as compared to the sector median of 17.70.
3. The Forward Price/Sales is way too high at 247.50 versus the sector median of 7.71.
Slice or dice it any which way, CRSP is a very expensive stock.
CRSP is an exciting stock with a bright future. Analysts such as Oppenheimer, Jefferies, Chardan Capital, and Canaccord Genuity have assigned it a buy rating, and many independent analysts are bullish on the stock.
I too am bullish about its growth prospects but am not putting out a buy call at this price because the stock is extremely expensive.
Q2 2020, as discussed above, is likely to be adversely impacted, and there is no clarity on when the COVID-19 disruption will end. The company’s product pipeline is likely to slow down as well.
Considering all positives and negatives, I would rely more on price action than news. The stock hit a low of about $33 in March 2020 and is priced at $73.09 as of June 25, 2020. I would start accumulating the stock in small quantities after it retraces 50% of its rise from its March lows, or approximately $53. I would buy small parcels at this price and keep adding on dips.
If suddenly there is clarity on when the virus disruption is going to end, or if its severity (in terms of morbidity) has greatly reduced, I would buy this stock at whatever rate it is available on that day.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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