Other than running out of money, what economic risk do Intellia Therapeutics, (NTLA 3.70%) CRISPR Therapeutics, (CRSP 0.34%) Bluebird Bio, (BLUE 1.13%) and a bunch of other cutting-edge gene-editing biotechs have in common? There are a bunch of valid answers to that question, but here's a big clue regarding the one I'm thinking of: Gilead Sciences (GILD 0.23%) infamously fell victim to this risk, much to its detriment.
Still stumped? Let's take a walk down memory lane and explore how creating an extremely effective medicine can result in disaster for investors even as it massively improves patients' lives.
Great medical breakthroughs can cause problems for investors
Gilead's treatment for hepatitis C, called Sovaldi, launched in 2013 to widespread acclaim, thanks to its ability to permanently cure as many as 95% of the patients who took it for just three months. Its stock more than doubled that year, and tens of thousands of patients flocked to start treatment to cure their chronic condition. In 2014, the company raked in more than $10 billion in sales, and it soon launched an even more effective therapy called Harvoni in 2015. But by the end of 2016, sales of both medicines were crashing, and the stock fell by 31%. Neither management nor Wall Street analysts had any expectations of a rebound.
In short, Gilead cured so many patients in its addressable market that it actually shrank the market for hepatitis C therapies permanently. That's a wonderful humanitarian accomplishment, and the company is one of the leaders in the fight to eradicate the virus entirely. But for gene therapy companies pursuing curative treatments for hereditary diseases, the risk is the same. Without a sound pricing strategy and acknowledgement by management that curative medicines have a finite growth potential, it's entirely possible that a company will be a bad investment even as it does great things for the world. And that risk is higher for investors who start their positions after the medicines have been approved for sale.
Who's at risk and why?
Of the popular gene-editing stocks, CRISPR Therapeutics, and Bluebird Bio are the most exposed to this risk at the moment. However, in the future, Intellia could be at greater risk. Bluebird's therapy called lovo-cel for sickle cell disease (SCD) appears to be curative for most patients, and it could get approved for sale before the end of the year. Likewise, its cell therapy that's currently marketed under the name Zynteglo, which treats beta thalassemia, also appears to be curative or near-curative for most patients.
CRISPR Therapeutics is looking to compete in both of the same markets, and its candidate is also a functional cure for both; it'll hear back from regulators for the two indications toward the end of this year and in the first half of next year. Each patient treated by one company is a patient that the other will likely never have a chance to treat, nor will there be the opportunity for ongoing treatment to generate recurring revenue.
Intellia's early-stage pipeline candidates are all at high risk in the long term. Much as with Bluebird and CRISPR Therapeutics, its therapies intended for rare hereditary conditions like transthyretin amyloidosis (ATTR) will be treating small patient populations to begin with, assuming they ever get approved for sale. The more effective their distribution and treatment networks and their commercial organizations are, the faster they'll cure their market away.
Avert the risk by investing smartly
The good news is that as an investor, you can still capture the growth that these companies will experience by commercializing groundbreaking curative medicines, but you need to plan ahead. Consider the following chart:
SPY Total Return Level data by YCharts.
As the above chart shows, people who invested in Gilead well before its curative hepatitis C medicines were part of its portfolio ended up making out like bandits, beating the market over the long term. But those who waited to invest until after sales were rolling in fared much worse. The lesson here is to invest in advance of these medicines having their shot at approval in order to capture the most value possible from growing sales, so the inevitable decline, which is difficult to predict, doesn't hurt as much.
That implies it's too late to invest in Bluebird Bio, and also that the window to invest in CRISPR Therapeutics for maximum gain is closing. Of course, it's possible that regulators will nix the company's attempts at commercialization, so investing early entails a risk. Going for even earlier-stage biotech stocks, like Intellia, is also quite risky, as its clinical trials could easily fail. Still, if you plan on investing in gene-editing stocks anytime soon, just remember that the risks don't end once there's a product on the market.
