Investors looking for stocks with explosive growth potential would do well to take a gander at the biotech industry. Clinical and regulatory wins can fuel excellent stock market performances for companies in the sector in a relatively short period, say a year. But short-term gains alone aren't enough to make a company in any industry a buy, at least for investors focused on the long term.
With that in mind, let's look at two biotechs that have crushed the market this year: CRISPR Therapeutics (CRSP 0.34%) and Krystal Biotech (KRYS 0.77%). Both companies could see even more gains in the coming months, but is that enough to make them solid long-term picks? Let's find out.
1. CRISPR Therapeutics
Shares of CRISPR Therapeutics are up by a cool 43% since the year started, and most of these gains are due to the company's leading pipeline program, exa-cel. Together with its partner Vertex Pharmaceuticals, the gene-editing specialist completed regulatory submissions for exa-cel in the U.S. and Europe, developments which helped lift its stock price.
Exa-cel targets transfusion-dependent beta-thalassemia (TDT) and sickle cell disease (SCD), two blood-related diseases requiring new treatment options. Exa-cel is a gene-editing therapy that could command a price of around $2 million per treatment course. That makes the market opportunity available to CRISPR Therapeutics and Vertex Pharmaceuticals enormous.
The two entities initially intend to focus on 32,000 patients, a number that could rise substantially down the road. In other words, this space could be worth upwards of $64 billion. Regulatory approvals are never a certainty, but in all likelihood, there is still some upside left for CRISPR Therapeutics if its crown jewel does earn the green light.
Even if it doesn't at first, it eventually will, given the solid results it delivered in clinical trials. Here's just one example -- exa-cel eliminated the need for blood transfusions in 24 out of 27 patients in a study for at least 12 consecutive months. These are patients who would normally be condemned to take regular blood transfusions for their entire lives, with all the associated costs and the risks.
That brings us to an equally important point about CRISPR Therapeutics. Developing therapies for SCD and TDT has proved extremely challenging, but the biotech has succeeded where many have failed. That could only be the beginning. CRISPR Therapeutics' gene-editing platform could lead to many more key approvals. The company is going after several more challenging targets. For instance, it is seeking to treat type 1 diabetes.
It's also worth noting that CRISPR Therapeutics has already benefited from its collaboration with Vertex by selling 50% of the rights to exa-cel. CRISPR Therapeutics ended the first quarter with $1.9 billion in cash and equivalents. Although it isn't profitable yet (few clinical-stage biotechs are), its excellent cash balance and the revenue it should generate from exa-cel starting next year should allow it to push its pipeline programs forward without having to resort to dilutive methods of financing.
CRISPR may see its shares continue to rise in the next 12 months if the approval and launch of exa-cel go as smoothly as the biotech expects. And just as important, the company could handsomely reward investors who get in now thanks to its promising approach to treating challenging illnesses.
2. Krystal Biotech
Krystal Biotech's stock soared in the first half of the year, and its shares are currently up by 61% since 2023 started. The company owes that to the approval from the U.S. Food and Drug Administration (FDA) for Vyjuvek, a gene therapy that treats a rare skin disease called dystrophic epidermolysis bullosa (DEB). DEB makes patients' skins brittle and highly prone to injuries.
This was an important milestone for Krystal Biotech and the patients suffering from this illness in the U.S. Before the approval, the biotech had no products on the market, and Vyjuvek became the first FDA-sanctioned treatment for DEB that addresses the disease at the genetic level. There could be more upside for Krystal Biotech as it is awaiting approval for Vyjuvek in Europe.
The therapy could earn the thumbs-up in the region by early 2024, thereby sending Krystal Biotech's stock even higher. However, while the company is on an impressive run of form, that alone doesn't make its shares a buy. To decide that, let's look at two things: Vyjuvek's market opportunity and Krystal Biotech's pipeline.
Turning to the first item, it is worth noting that DEB is an exceedingly rare illness. The company estimates that there are 9,000 DEB patients worldwide. Krystal Biotech thinks there is a $750 million annual global market opportunity. Krystal Biotech's market capitalization is currently at $3.5 billion, or a little under five times Vyjuvek's estimated opportunity. But Krystal Biotech won't generate this much in sales in the next year, or probably not even by 2025.
Turning to Krystal Biotech's pipeline, its most advanced candidate is in a phase 1/2 trial. So it shouldn't hit the market anytime soon. Krystal Biotech ended the first quarter with $355.5 million in cash and equivalents, although since then, it raised an additional $160 million in gross proceeds in a private equity placement.
So what's the verdict on Krystal Biotech? In my view, the stock looks a little overvalued already. The company looks promising, but given the small opportunity it is looking at with Vyjuvek and the fact that none of its other products will earn approval anytime soon, the stock looks risky right now. Those comfortable with the risk may consider opening a small position, but there may be better biotech stocks to consider.
