There's more than one way to value early-stage biotech stocks, but none of them are very satisfying. That's largely because nobody can agree on how likely it is these companies' drugs in development will ever make a sale. Analysts use results from human experiments to gauge the odds, but CRISPR Therapeutics AG (CRSP 0.48%), a $2.8 billion company, doesn't have any yet.
GW Pharmaceuticals (GWPH +0.00%) has a product to sell, and impressive clinical trial results, but a lot more success is baked into its price than it can reasonably be expected to deliver. Here's why you might want to avoid these stocks until their prices come back to earth.
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CRISPR Therapeutics AG: In trouble, before it begins
The gene-editing method this company is named after is a terrific way to cut DNA at exact sites implicated in diseases. Investors hoping this company will churn out one blockbuster drug after another have driven its market cap up to around $2.8 billion, even though it hasn't given one of its experimental drugs to a person yet.
CRISPR has approved clinical-trial applications in hand for its first drug to enter the human-testing stage and could dose its first patient before the end of the year. CTX001 disrupts a gene we all have that shuts down the production of fetal hemoglobin shortly after birth. Beta-thalassemia and sickle cell disease are caused by problems with a gene that codes for regular hemoglobin, and CRISPR thinks it can fix the problem by allowing fetal hemoglobin production to resume.
CTX001 needs to show signs that boosting fetal hemoglobin can reduce dependence on blood transfusions better than another drug that's much further ahead. One of CRISPR's potential rivals, bluebird bio (BLUE +0.00%), has years of fairly successful data for LentiGlobin, a cellular therapy that simply inserts a functional copy of the faulty gene these patients inherited into their own stem cells.
CTX001 is a complex cellular therapy that might have trouble competing with a simple oral treatment. Global Blood Therapeutics (GBT +0.00%) recently proved its lead candidate, voxelotor, significantly boosts circulating hemoglobin, and the company will rush an application to the FDA as soon as possible.
CRISPR's next candidate in line trains immune cells to find and attack cancer cells with a certain protein on their surface. Similar treatments are already available, but new batches must be made specifically for each person. CTX110 is intended as an off-the-shelf solution, but investors need to realize that it's just one of 94 experimental therapies in development directed against the same target, and 65 are already in clinical trials.
If the first clinical-trial data CRISPR produces doesn't strongly suggest its candidates can compete in these crowded spaces, the stock has a long way to fall.
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GW Pharmaceuticals: It's tougher to sell than you'd think
The general public is becoming increasingly comfortable with the idea of medical marijuana, but marijuana-based medicines haven't been big sellers. Synthetic versions of marijuana's main psychoactive component, delta-9-tetrahydrocannabinol (THC), have been available for years to promote weight gain for anorexic HIV patients and relieve chemotherapy-induced nausea and vomiting for cancer patients, but aren't very popular, even among their target audience.
GW Pharmaceuticals markets in the EU a marijuana-derived drug, Sativex, that reduces spasms associated with multiple sclerosis. In 2017, the company recorded just $8.2 million in Sativex sales and only $14.5 million in total revenue. Despite a terrible track record for cannabis-based drugs in the past, investors convinced this company's new lead drug, Epidiolex, will become a blockbuster have driven the company's market cap up to $3.9 billion at recent prices.
The treatment deserves recognition as the first drug derived from marijuana to earn an approval from the Food and Drug Administration, but it's still up to the Drug Enforcement Administration to apply controlled-substance scheduling. Placing the drug under Schedule 1, the same category as the plant it's extracted from, would doom Epidiolex -- and the stock as well. Investors are hoping the drug will receive favorable scheduling that won't pile extra burdens on patients trying to access it.
Epidiolex did significantly reduce seizure frequency for patients with two forms of severe epilepsy, but there are probably fewer than 40,000 of these patients in the U.S. Doctors could prescribe the treatment to hundreds of thousands of people with other forms of drug-resistant epilepsy, but that doesn't necessarily mean their insurers will help them pay for it.
Epidiolex is purified cannabidiol (CBD), which is a non-psychoactive component of cannabis resin. The drug probably won't launch until the fall, but CBD oils, capsules, and tinctures are already a multibillion-dollar-per-year business in the U.S. With a fuzzy level of market exclusivity, selling this drug is going to be an uphill battle. If investors catch hints that the drug might not live up to high expectations next year, the stock could get hammered.
