Despite A 4x Rise, Editas Medicine May Continue To Trend Higher

EDIT: Editas Medicine logo
EDIT
Editas Medicine

Despite a stellar 4x rise since the March 23 lows of last year, at the current price of around $73 per share we believe Editas Medicine (NASDAQ: EDIT), a biotechnology company focused on developing treatments using gene editing technology, looks attractive and it can see more upside from the current levels. EDIT stock has rallied from $20 to $73, significantly outperforming  the S&P 500 which moved 71%, with resumption of economic activities as lockdowns are gradually lifted and vaccines are being approved in multiple countries. The outperformance of Editas can be attributed to the FDA nod to begin a phase I-II study evaluating EDIT-301 in treating sickle cell disease. This marks the company’s second program for clinical testing after EDIT-101, used for treating hereditary blindness. EDIT stock is also up 222% from levels seen in early 2019.

Much of this 222% rise since late 2018 can be attributed to expansion of the P/S multiple. Looking at fundamentals, total revenue has declined from $32 million in 2018 to $20 million in 2019. However, revenues are expected to jump sharply to $85 million in 2020, as the company has recognized $63 million of previously deferred revenue from the termination of its alliance with Allergan. The company’s share outstanding has also increased 47.2 million in 2018 to 57.4 million currently, implying its revenue per share (RPS) will likely grow from $0.68 in 2018 to $1.48 in 2020. Note that the company currently derives its revenues only from collaboration agreements with other pharmaceutical companies, and as such, the revenue stream remains volatile. Revenues will see a significant growth only when the company succeeds in securing the regulatory approvals for the drugs currently in clinical trials.  We believe that the stock could continue to trend higher from the current levels. Our dashboard, ‘What Factors Drove 222% Change in Editas Medicine Stock between 2018 and now?‘, has the underlying numbers.

So what’s the likely trigger and timing for further upside?

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The strong uptick in Editas stock is due to company-specific factors. The company recently finished dosing for its first group of patients in earlier-stage human trials under its flagship program, EDIT-101. The company also recently secured the U.S. FDA nod to commence clinical trials for EDIT-301. The company has multiple other pre-clinical drugs focused on genetic diseases. A single drug approval in this space would mean a significant growth in the company’s sales from the $20 million in 2019. For perspective, EDIT-101 alone has potential peak sales of $1 billion.

Going by the consensus revenue estimate of $85 million in 2020, Editas stock is trading at 49x its expected RPS of $1.48, which appears to be very high. However, looking at the P/S for Editas is not helpful given the company doesn’t have any marketable products yet, and it is more of a story of exciting products in the pipeline. However, any positive outcome related to the company’s programs in clinical trials will likely result in stock price growth.

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