As reported by Fierce Biotech on Nov. 22, gene-therapy star CRISPR Therapeutics (CRSP 0.34%) laid off 10% of its employees shortly after reporting its Q3 earnings earlier in the month. Given that the company and its collaborator Vertex Pharmaceuticals will hear back on Dec. 8 from the Food and Drug Administration (FDA) regarding the approval of exa-cel, their candidate to treat or cure sickle cell disease (SCD), the move is apt to rustle some feathers among shareholders.
Why would the business scale down its workforce now of all times, right before it might have a larger-than-ever need for staff? As it turns out, there's more of a rationale for what management is doing than you might think at first. So let's dive in and analyze whether there are any critical underlying issues.
Why proceed with layoffs now?
CRISPR's gene therapy exa-cel is already approved in the U.K. The odds for it getting approval in the U.S. look optimistic, based on recent discussions with regulators. Typically, a biotech stock sees its share price soar upon getting an approval for its first medicine, as that provides its first real chance to generate recurring revenue from sales.
But the announcement of layoffs in the run-up to a big catalyst for the stock is indeed a concerning signal, as it might suggest that management is concerned about the company's ability to pay for its near-term expenses.
In CRISPR Therapeutics' case, any concerns about it keeping the lights on are overblown. It has cash, equivalents, and short-term investments of more than $1.7 billion. That's plenty of dough in comparison to its trailing-12-month operating expenses of $511 million. And its collaboration revenue was worth $170 million over the last 12 months, which isn't anything to sneeze at. So what's the impetus for trimming staff?
In short, launching exa-cel is likely to be quite capital-intensive in a way that comparing liquid holdings and operating expense figures can't capture. Competitors like Bluebird Bio are building qualified treatment centers to intake, treat, and monitor their gene-therapy patients, and Vertex and CRISPR Therapeutics are looking to build as many as 75 of their own centers across the U.S. and E.U. Those aren't cheap to build or maintain, as they're staffed by skilled healthcare workers.
Plus, the manufacturing costs of gene therapies using the modality pursued by both CRISPR Therapeutics and Bluebird tend to be very high. To make matters even more complicated, there's also a solid chance that profits will take longer to roll in than investors expect.
Revenue may take a while to ramp up, but don't jump ship
Given the time needed to build treatment centers, recruit patients, treat those patients, and then collect payment from them or their insurers, it's no wonder that CRISPR Therapeutics may need a few quarters to make exa-cel into a commercial success. But shareholders should probably not be too worried about that, or about the fact that the company is reducing its headcount to conserve its spending. Management is acting to ensure that it has enough resources on hand to address the expected expenses in the near future, as well as any unexpected hiccups.
For example, if the FDA requests additional clinical trials or other work to address concerns about exa-cel's safety or efficacy, it'll cost at least a few million dollars. Now, CRISPR Therapeutics won't need to lean on debt financing as heavily as it might have otherwise. And despite the headcount reduction, it hasn't mentioned cutting or pausing any of its research and development (R&D) programs or collaborations. So its future earnings potential isn't negatively impacted.
Nonetheless, buying the stock is still somewhat riskier than investing in a biotech that's commercializing its first medicine would be normally. Though the upside is significant, as the company's potentially curative gene therapy for SCD will be a scientific and medical achievement of historical importance, it's clear that regulators will be watching like a hawk for any sign of trouble.
If you're a shareholder already, you've probably come to terms with that. And if you're thinking about buying the stock, it's getting a bit late to try to capture the near-term upside. Either way, there's no need to worry about CRISPR Therapeutics' layoffs or its spending. Assuming it can get regulators to give it the green light, the next phase of the company's life is likely to be a profitable one.
