On June 15, Editas Medicine (EDIT +3.88%) saw its shares collapse by 15% after announcing it would be issuing new stock to raise approximately $125 million. The biotech will almost certainly use the funds to continue advancing gene-therapy candidates through its pipeline. And if the stock offering's underwriters are tempted, it could raise an additional $18.8 million.
So is the dip in its shares an opportunity for investors to load up on a growth stock that could one day succeed with its moonshots? Or is it a trap for those chasing a bargain?
NASDAQ: EDIT
Key Data Points
The situation is looking a bit dire
To answer the question, it's important to understand the context of the latest share issuance. As a pre-revenue biotech, Editas has two drug development programs in clinical trials, both of which are early-stage; thus, they're at least a handful of years away from being approved for sale, if they ever are. One program aims to treat sickle cell disease (SCD), and the other is seeking an indication for transfusion-dependent beta thalassemia (TDT).
The trouble is, competitors are way ahead in developing gene therapies for those two conditions. Bluebird Bio has an SCD therapy in phase 3 trials, and its TDT therapy was approved for sale under the trade name Zynteglo in 2022. CRISPR Therapeutics also has a pair of programs for the same illnesses; each is currently awaiting a verdict from regulators and could be approved in the coming quarters.
So if Editas can manage to get its projects out the door, it'll almost certainly struggle to gain market share unless it has some sort of strong competitive advantage -- and there isn't any evidence of that just yet.
But there's no certainty that it will survive that long, even with the money it just secured. Its trailing-12-month operating expenses were $245.6 million. As of the first quarter, it had cash, equivalents, and short-term investments of $401.7 million.
If we assume that the underwriters of Editas' share issuance exercise their option to buy additional shares, the raise will have gross proceeds of $143.8 million, which will bring its total hoard of liquid capital to approximately $545.5 million, or enough for 2.2 years of its operations at their current intensity. That simply won't be enough time to commercialize anything it has cooking before running out of money.
While it could technically stop work on its pre-clinical programs to conserve resources, or perhaps sell off some of its assets, both of those paths would potentially sabotage the business's chances of growth for years afterward.
Editas isn't quite at the end of the line, however. It only has $28.8 million in long-term debt and capital lease obligations, so it can probably borrow more money if necessary. Still, if it can't show off strong mid-stage or late-stage results from its clinical trials, lenders will be loath to write a loan to a company without much chance of being able to repay the money.
Not yet cheap enough to be called a bargain
At the moment, Editas' prospects look quite bearish, and its options for changing that appear to be limited. But could a rock-bottom valuation make it worth buying on the dip?
Nope. Its valuation remains in the stratosphere. Its price-to-sales (P/S) multiple is absurdly high, at 33.4. For reference, the biotech industry's average P/S multiple is 5.4. In other words, there's no bargain to be found here -- only a stock for which investors have had high hopes.
Therefore, at the moment, there is no good reason to buy shares of Editas, even if they're a bit cheaper than before. Given the company's finite cash runway, it doesn't make sense to invest.
