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Is bluebird bio a Buy?

By Jim Crumly - Jul 7, 2019 at 12:13PM

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Will this bluebird ever bring happiness to its shareholders?

Gene therapy stocks attracted frenzied attention from investors in 2017 and early 2018, and with good reason. New technologies to manipulate the very software of life hold the promise of curing diseases with a single treatment. Many of these stocks have cooled off, though, as the reality of the challenges ahead for these companies has set in.

Clinical-stage company bluebird bio (BLUE 3.80%) stands out as being one of a small number of gene therapy stocks that's on the verge of launching a commercial product to cure a rare and deadly disease, but the stock has gone virtually nowhere recently, with shares selling 28% below their price at the start of 2018 despite breakthrough progress in the interim. Is the stock about to take flight, or will shareholders fail to profit from the company's success?

Making drugs from a patient's own body

The technology behind Bluebird's most imminent money-making therapies rely on taking cells from the patient, replacing a defective gene that is causing disease with a healthy version, and returning the cells to the patient. This ex vivo process is what powers Bluebird's first approved therapy: Zynteglo for transfusion-dependent beta-thalassemia (TDT).

Bluebird in flight.

Image source: Getty Images.

TDT is a severe genetic blood disease caused by a mutation in a gene that's required for the production of healthy red blood cells. Patients with TDT have a lifelong dependence on red blood cell transfusions and often develop iron overload that then requires additional treatments.

Zynteglo is based on Bluebird's LentiGlobin process, in which blood stem cells, found in bone marrow, are removed from the patient and the defective gene replaced using a virus to deliver the healthy gene. The patient is given chemotherapy to destroy the remaining defective stem cells, and then the repaired stem cells are transplanted into the patient. The stem cells with now-healthy DNA then produce healthy red blood cells, and the patient is cured with a single treatment. Eight out of 10 patients in one pivotal trial achieved transfusion independence and none of those have needed a transfusion again, up to 45 months later.

Zynteglo got conditional marketing approval from European regulators a month ago, a monumental accomplishment in personalized medicine that barely moved the stock price. There are as many as 2,750 patients in the four European countries where Bluebird will initially launch Zynteglo with a price tag of almost $2 million. Why haven't investors been snapping up the shares? There are at least four reasons that Wall Street isn't ready to party yet.

4 reasons investors aren't celebrating the company's success

First, the way Bluebird plans to price the product will spread the cash flow out over years. As if it weren't enough to pioneer a game-changing biotechnology for curing disease, Bluebird is in the position of pioneering a payment system for one-time cures. The company plans to charge about $1.8 million spread out in five annual payments. The charge for the first treatment is $356,000 up front, and the other four payments are conditional on continued success for the patient.

The price seems reasonable, given that treatments for rare diseases have been priced around $300,000 to $600,000 per year and continue for the life of the patient. And sharing the risk of success with the payer is a growing trend for expensive therapies. But for investors, the delay and the risk lower the value of those future cash flows.

Second, there is a tremendous amount of infrastructure that Bluebird has to put in place to launch Zynteglo across Europe, and that means the roll-out will go slowly. The treatment can't be done at just any medical center; qualified treatment centers need to be set up where the staff have specialized skills and disease expertise, along with transplant accreditation. Bluebird plans to start with two treatment centers in Germany where the addressable market is only 80 to 100 patients and grow from there as the company gains experience. Full European expansion won't be complete until 2021.

Patient getting a transfusion.

Image source: Getty Images.

Third, Bluebird had a bit of bad news when it reported the European approval. A month earlier the company said it would begin treating patients in Germany in the second half of this year, but a need to make changes to the manufacturing process and "tighten drug specifications" means that first treatments will be delayed into 2020. A few months may not be much in the grander scheme of things, but the news just illustrates how much groundbreaking the company needs to do. A tricky manufacturing process and a complex supply chain probably means that this delay won't be the last setback we'll see.

Fourth, whereas test results look very good so far, patient numbers are small, so we don't really know what the final success rate will be, and that will have a direct impact on sales because of risk sharing. In one trial for a second TDT genotype that's an important part of the company's expansion plans, success was only 50% in eight patients. And Europe's approval is conditional on further positive results from ongoing trials, so there is a chance for a stumble. Bluebird says it will apply for U.S. approval in 2020, so that is another hurdle that must be cleared.

Zynteglo is only the beginning

Despite the challenges for Bluebird in the near term, the company has plenty of opportunity ahead of it. Zynteglo will have a long runway of label expansion and geographic growth, but investors are even more excited about Bluebird's LentiGlobin therapy for sickle cell disease (SCD).

Whereas there are about 1,400 to 1,500 patients with TDT in the U.S., sickle cell disease, a severe blood disorder that shortens average lifespan to about 44 years, afflicts about 110,000 people in this country. Bluebird's treatment involves modifying the patient's blood stem cells to replace mutated genes that are responsible for producing abnormal sickle hemoglobin with genes that produce healthy red blood cells.

Last month, Bluebird reported results from a group of 13 patients treated for SCD, and the results were very positive. The proportion of healthy hemoglobin has been steadily increasing in the patients, and whereas the patients were experiencing an average of 5.3 serious incidences of vaso-occlusive crisis or acute chest syndrome per year before treatment, no such incidents have occurred after the LentiGlobin treatment in any of the patients.

Bluebird expects filing and approval for LentiGlobin for SCD in 2022, and in the meantime could have a 2020 approval for bb2121, a CAR-T treatment for multiple myeloma that the company is partnering with Celgene (CELG) to develop, and a 2021 approval for a therapy for rare disease CALD, or cerebral adrenoleukodystrophy.

Even longer term, Bluebird has four therapies in clinical testing and six preclinical programs that it's disclosed. It also has a gene editing platform that it added through an acquisition in 2014 that it intends to use for future in vivo therapies.

Patience required. Lots of it.

Bluebird has a pipeline with multiple potential blockbuster therapies and is on the verge of its first commercial launch. Data from clinical trials have served to confirm the safety and efficacy of Bluebird's platform, and the technological risk of the company's therapies have come down significantly since the stock was selling for $233 in March of last year, 82% above what investors pay for it today.

The complexity of Bluebird's manufacturing and delivery infrastructure creates risks of a different sort, though, and that's what's holding the share price back. It burned through $154 million in cash last quarter, and while it has plenty on hand and could easily raise more, it won't be until 2021 at the earliest that the company is cash flow positive. And along the way, there is plenty that can go wrong and create further delay.

The value is there, though, and investors who have the patience should consider the stock. Shares will probably start moving higher before the company is profitable, and I think it's highly likely the stock price will top its all-time high in the next two years or so, unless the company gets bought out. For investors willing to wait, bluebird bio is a buy.

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