You may have noticed Vertex Pharmaceuticals (NASDAQ:VRTX) just inked a $105 million deal with gene editing pioneer CRISPR Therapeutics with a potential value of $2.6 billion. Since its humble beginnings in 1989 Vertex has posted an annual loss in all but one year of its existence, so it might strike you as a bit odd that it can commit to a deal of this size.
Such is the beauty of biotech licensing deals. In this case Vertex is getting its hands on some exciting technology, spending very little up front. It's main source of revenue, cystic fibrosis therapies Kalydeco and Orkambi simply improve the function of a single protein rendered dysfunctional by specific genetic mutations. You don't need much imagination to see how a drug that "edits" those mutations would be a potential game-changer.
Although CRISPR Therapeutics was founded by an inventor of the technology, it's hardly the only company using it. Let's take at the current gene editing landscape to see if this deal makes sense for Vertex.
What Vertex shelled out upfront was just $75 million in cash and a $30 million dollar equity stake in the privately held company. What it received was rights to jointly use the company's CRISPR-Cas9 gene editing technology to discover and develop treatments with defect correcting potential at specific gene targets known to cause or contribute to particular diseases.
In other words, CRISPR didn't sell Vertex any specific compounds, what it sold was simply rights to use its technology to discover them. If one shows potential, Vertex will then pay for its development, and if extremely lucky commercialization -- with the exception of blood diseases in which case the two would share expenses and sales equally.
In return CRISPR stands to receive milestone payments whenever a candidate jumps through regulatory hoops, like beginning clinical trials. Should a candidate ever hit pharmacy shelves, Vertex will also pay an undisclosed percentage of sales to CRISPR as royalties.
These sorts of deals work out well for both parties. The licenser, in this instance Vertex, gains a business interest in a potential competitor for a mere $105 million. As licensees, cash strapped biotech start-ups like CRISPR get lots of help with the expensive stuff. They might give up a large slice of potential profits, but without capital to fund development those profits are unlikely to materialize in the first place.
While this collaboration will most likely begin searching for candidates in cystic fibrosis and sickle cell disease, Vertex can develop up to six compounds discovered with CRISPR's gene editing technology. Potential milestone payments for each candidate max out at $420 million, bringing us to the eye-popping potential of $2.6 billion for the collaboration as a whole. Plus potential royalties.
This deal's lack of specific compounds is highly unusual. Larger companies typically wait for a discovery platform to produce drug candidates that look promising enough to advance through expensive clinical trials, then structure deals around their development.
There's no shortage of biotech start-ups with proprietary drug discovery platforms, even in the gene editing field. Sangamo Biosciences (NASDAQ:SGMO) has been using zinc finger DNA-binding proteins to turn genes on or off for years. In fact, its first candidate, SB-728-T for the treatment of HIV, entered clinical trials back in 2008. Seven years later, it's still the company's "lead" program. It's still in phase 2, and Sangamo has yet to produce a profit.
The technology that Vertex bought into is easier to work with than zinc finger proteins. In fact the underlying technology is so adaptable that a slew of start-ups are based on CRISPR-Cas9 gene editing, including CRISPR Therapeutics, Editas, Caribou Biosciences, and Intellia. As you can imagine, the intellectual property battle over CRISPR-Cas9 technology is more complex than its underlying science.
Vertex isn't the only major player excited by the ability to edit diseases out of a person's genome. Earlier this year GlaxoSmithKline and Celgene led a round of venture capital funding that bolstered CRISPR's coffers with $64 million. Novartis has a hand in both Intellia and Caribou,, and Juno Therapeutics has a deal with Editas similar to Vertex's deal with CRISPR Therapeutics. Clearly, a bunch of players (GlaxoSmithKline, Celgene, Novartis, Juno Therapeutics) are excited about the possibilities.
The potential benefits of an effective gene editing platform are boundless, but no matter how good CRISPR's technology platform may be, the general odds associated with any drug development are discouraging. Roughly one in twenty drug candidates that enter clinical testing eventually win approval, and this collaboration doesn't have anything in pre-clinical testing. It's extremely unlikely Vertex will end up discovering, then fully developing six compounds from the company's proprietary platform.
Even though you don't have to worry about Vertex suddenly shelling out billions to CRISPR in milestone payments, there is plenty to be concerned about. In the years ahead you'll want to keep an eye on the patent situation. Hopefully Vertex avoids funneling large sums into programs based on CRISPR-Cas9 technology, until someone knows who actually owns it.
Cory Renauer has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Celgene. The Motley Fool recommends Juno Therapeutics and Vertex Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.