Bad News may be Good for Long Term Investors - Analyzing the Key Risks of CRISPR Therapeutics AG (NASDAQ:CRSP)

By
Goran Damchevski
Published
March 10, 2022
NasdaqGM:CRSP
Source: Shutterstock

The two key moments we are going to review for CRISPR Therapeutics AG (NASDAQ:CRSP) are their latest annual report and the ruling of the U.S. Patent and Trademark Office. At the end of the day, the technology has a lot of value creation potential, but investors should know the downsides just as well.

The Ruling

The 2 Nobel laureates that claimed to be the first users of CRISPR-Cas9, failed to prove their case, and may have to source a license to use the technology from the Broad Institute. While this can have an effect on the profitability of the technology in the short term, their future potential has a lot of space to create treatments for patients and value for investors regardless.

Risk Factors

While the technology is very exciting and targeting some devastating diseases to patients (Oncology and Regenerative cell medicine for Diabetes), investors should also be aware of the risks.

In a nutshell, the biggest risk seems to be the time it would take to develop and push the treatments to market. Even after the stock dropped some 50%, investors should be prepared to wait an extended period of time before significant cash flows are materialized.

Now, onto some specifics. Here are the notable risk factors from CRSP's latest Annual Report:

  • "We will need to raise substantial additional funding, which will dilute our shareholders. If we are unable to raise capital when needed, we would be forced to delay, reduce or eliminate some of our product development programs or commercialization efforts." With a market cap of $4.8b, and $0 debt, additional funding can be secured. Shareholders might not mind if dilution is paced and comes after achieving important milestones.
  • "We have incurred significant operating losses since our inception and anticipate that we will incur continued losses for the foreseeable future." This indicates that the stock may be quite volatile for some time, and investors that are interested should be patient for a good entry.
  • "We are early in our development efforts. It will be many years before we or our collaborators commercialize a product candidate, if ever." This seems to be the key risk factor, assuming that the tech works out, it will likely be a slow bureaucratic process before patients can widely use it.

Finally, let's analyze the price and see what the market thinks of the stock.

Valuation

CRISPR is currently trading at a 12.7x P/E, which could be considered cheap. However, the company has irregular income, and it's hard to make a good relative assessment, since the core business is in the future.

See our latest analysis for CRISPR Therapeutics

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NasdaqGM:CRSP Price Based on Past Earnings March 10th 2022

A better approach might be to see what analysts are forecasting and derive an intrinsic value from there. 

This is what our valuation DCF model does, and for CRISPR we get the following. Analysts are projecting negative levered free cash flow up until the end of 2025, after that, the company should make enough income in order to generate positive free cash flows. At the end of our projection period (2031), we estimate that CRISPR will have around US$500m in levered free cash flows. 

This results in a present value of the company of $7.3 billion, or $95 per share - a potential 34% upside.

Note that a DCF is a broad model that has plenty of built-in assumptions, and analysts may widely disagree on the appropriate result. You can view the full model and details HERE.

The Final Word

There seems that it will be some time before the company starts growing revenues and generating positive cash flows. Because we cannot't immediately estimate the effects of the recent patent ruling, investors may benefit if they are patient and let this play out for a while before investing or averaging down.

Alternatively, the company seems to be trading at a discount, so investors can adopt a periodic investment strategy in order to alleviate some risk from short term volatility.

We don't want to rain on the parade too much, but we did also find 2 warning signs for CRISPR Therapeutics that you need to be mindful of.

You might be able to find a better investment than CRISPR Therapeutics. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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