Investors tend to move away from somewhat speculative stocks when the economic going gets rough. That partly explains why shares of Editas Medicine (EDIT 1.92%) have underperformed the broader market lately. After all, the gene-editing specialist currently has no approved products, generates little revenue, and is consistently unprofitable.
Still, relatively small clinical-stage biotechs can sometimes deliver excellent returns provided they deliver solid clinical and regulatory progress. Can Editas Medicine pull that off?
Commercialization is far away
Editas Medicine's most advanced candidate is EDIT-301, which targets sickle cell disease and beta-thalassemia. These rare blood-related disorders are attractive targets as they have been hard to treat and causes extreme hardships to patients. For instance, people with beta-thalassemia typically require regular blood transfusions.
On June 9, Editas Medicine delivered positive results from early-stage trials of EDIT-301 in treating sickle cell disease. But here's the problem: EDIT-301 still has a long way to go. So even in the best-case (and unrealistic) scenario, it would be a couple of years before it makes it to the market. Further, its rivals have made tremendous progress lately in developing treatments for sickle cell disease and beta-thalassemia.
Assuming EDIT-301 eventually does win regulatory approval, it will almost certainly arrive in a market where it faces competition from at least two other gene-editing therapies -- Zynteglo and exa-cel. The former was developed by Bluebird Bio and earned Food and Drug Administration (FDA) approval in August 2022. The latter is the product of a collaboration between Vertex Pharmaceuticals and CRISPR Therapeutics, and is currently being considered for approval by regulators in the U.S. and Europe.
These therapies will have early-mover advantages over EDIT-301. Ultimately, what will matter most, though, is the safety and efficacy of the various treatments -- and there is limited data so far for EDIT-301.
Funding could be an issue
Editas Medicine ended the first quarter with $401.8 million in cash and equivalents, down from the $437.4 million it had at the end of 2022. In its quarterly update, the company said it expects its cash balance will be sufficient to fund its operations until 2025. That's great, but as we have seen, it is unlikely that Editas will have even one product on the market by then.
So, the biotech will need to seek more funds. On June 14, the gene-editing specialist announced it would raise $125 million by offering 12.5 million new shares at $10 each. Issuing new shares is often necessary for small-cap clinical-stage biotechs even though it dilutes previous shareholders. There could be more rounds of dilutive financing ahead for Editas Medicine.
The potential is massive, but so is the risk
Editas Medicine trades for just $8 per share, and the company's market capitalization is $657 million. The stock could deliver outsized returns at these levels if everything goes its way -- that is, if EDIT-301 registers solid clinical and regulatory wins and ends up generating decent sales. The company also has other candidates, some of which it is developing in collaboration with biotech giant Bristol Myers Squibb.
Partnering with a larger drugmaker could help Editas Medicine acquire additional funds without issuing new shares. Still, its prospects hinge on everything going perfectly, which investors shouldn't bet on considering the difficulties of developing new therapies -- not to mention Editas' track record.
Last year, the small biotech decided to pause enrollment in a clinical trial for EDIT-101, which it was testing as a potential treatment for the eye disease Leber congenital amaurosis 10 (LCA10). Results from a proof-of-concept study revealed that EDIT-101 was likely to work only for a small percentage of the already-small population of LCA10 patients. Editas decided to delay this program until it could find a deep-pocketed partner to help with funding it, which it has yet to do.
With all that going on, it is hard to make a case for investing in Editas Medicine's shares right now. Investors should consider other promising biotech stocks instead.
