CRISPR Stocks: How to Invest in a Medical Miracle

A new gene-editing tool called CRISPR could help treat, erase or cure some of mankind's worst genetic diseases and defects, including blindness, Huntington's Disease, Duchenne muscular dystrophy and some forms of cancer. With the nearly limitless potential to do real good in the world, the biotech industry is taking notice of the corresponding commercial possibilities.

And now, there are CRISPR stocks that allow you to own a piece of the action.

[See: 9 Biotech Stock Funds to Buy.]

But should you invest?

Before you rush to your broker and buy all the CRISPR stocks you can get your hands on, it's important to understand how this breakthrough emerged and what the landscape looks like today.

Brief background. In 2012, Dr. Jennifer Doudna of the University of California-Berkeley and Emmanuelle Charpentier of Umeå University in Sweden discovered what is known as the CRISPR-Cas9 genome editing technique. It was a monumental discovery: The technique is arguably the most effective way for the human race to "hack" nature.

CRISPR gene-editing essentially allows you to edit the DNA of living organisms as easily as you can make edits in a word processor. By no means is it the first technique for editing genes, but it appears to be the simplest and most effective, and its affordability and ease of use has democratized gene editing.

The potential applications are mind-blowing: The CRISPR-Cas9 system could be used to treat and in some cases cure literally hundreds of diseases, and its potency as a drug discovery tool is arguably even more powerful.

While there are a few larger pharmaceutical companies dabbling with this remarkable method, none of them are CRISPR specialists, and only a small percentage of their market value can be chalked up to their involvement with the technology.

As far as pure plays go, there are only three CRISPR stocks to buy that have direct access to the patents on the breakthrough gene-editing method.

Editas Medicine (ticker: EDIT). Editas was co-founded by Feng Zhang of the Broad Institute, the same scientist who discovered how to use CRISPR-Cas9 technology in eukaryotic cells (and thus, humans). Despite filing patents for this discovery seven months after UC-Berkeley did on behalf of Doudna and Charpentier, Broad was awarded a patent first.

This industry is all about intellectual property (IP), and with access to the Broad Institute's IP, Editas instantly became a legitimate company.

"Editas had one of the more successful IPOs of gene therapy companies in the last couple of years, gaining 130 percent after the first month of trading," says Vic Patel, founder of Forex Training Group, referring to the February 2016 IPO.

EDIT stock has come back down to earth since then as euphoria surrounding its highly anticipated IPO subsided and the reality of an extended legal battle set in. Editas has raised money from Bill Gates, Google Ventures and others.

Most importantly, Editas has a partnership with Juno Therapeutics (JUNO), where Juno is researching therapies to treat cancer. Editas is eligible for roughly $700 million in milestone payments through 2020, and if any drugs are approved, EDIT will be eligible to receive royalties.

Currently, however, the company is wildly unprofitable, with trailing losses of $110.5 million on $5.9 million of revenue. At its current valuation, shares trade for more than 100 times sales.

Intellia Therapeutics (NTLA). Just because Editas got a recent legal win doesn't mean it's the only legitimate pure-play CRISPR stock to buy out there.

Doudna, the co-inventor of the CRISPR-Cas9 system along with Charpentier, didn't stick to the lab after she made her big discovery. She became one of the founding members of Intellia Therapeutics, bringing her Berkeley IP to the company with her.

[See: Artificial Intelligence Stocks: 10 Companies Betting on AI.]

Legal cases surrounding the dispute between Broad Institute and UC-Berkeley will likely swirl for years, but in the end the Berkeley patents are still highly likely to be very valuable. You wouldn't find companies like Regeneron Pharmaceuticals (REGN) and Novartis (NVS) signing partnership agreements with Intellia – one of which included a $75 million upfront payment – otherwise.

The big money for NTLA shareholders will flow in if and when successful drugs are developed as a part of the agreements.

Intellia, too, is unprofitable, losing $37.6 million on $20.9 million in revenue over the trailing 12 months.

"From a biotech stock perspective, I don't think it's unprecedented to have really innovative companies not be turning a profit for a while. I think that should be expected," says Dr. Michelle Hoffman, senior vice president at Back Bay Life Science Advisors, a global life sciences financial advisory.

Crispr Therapeutics AG (CRSP). The last of the pure-play CRISPR stocks was co-founded by – guess who? – the third and final person involved with the CRISPR-Cas9 discovery and patents. Doudna's co-discoverer Charpentier also decided to try to make a few bucks off her brilliance, and is doing so by licensing her IP to Crispr Therapeutics.

Crispr Therapeutics has strategic collaborations with Vertex Pharmaceuticals (VRTX) and Bayer AG to develop treatments for "diseases with high unmet need," according to its website.

The company has nine programs in its pipeline, including products addressing cystic fibrosis, Duchenne muscular dystrophy, hemophilia, sickle cell disease and beta-thalassemia, a blood disorder. All but the last two programs are still in the research phase, and no product is close to being ready for human testing.

Like its peers, CRSP is nowhere near profitability, losing $36.2 million on sales of $7.4 million in the trailing 12 months. Which, again, is not very unusual for a company of this type at this stage.

"With a biotechnology company, you're making a long bet," Hoffman says. "Obviously there's a lot of risk, but if you look at companies like Vertex, Genentech and Amgen (AMGN) – they went public and took years to become profitable."

Early in the game. While the commercial potential has investors everywhere licking their chops, investors should also recognize the relatively high degree of risk in the three small-cap names of Editas Medicine, Intellia Therapeutics and Crispr Therapeutics AG.

"Gene editing technology is still in the R&D phase. Investing in any of these stocks is a pure speculative play; it'll be five years before anyone emerges as a winner," Patel says, recommending investors buy a basket of CRISPR stocks if they want to participate in the industry's returns.

Owning some of the larger companies partnering with these upstart biotech pioneers can provide some lower-risk exposure to the area, but nothing CRISPR-related will likely move the needle for years.

[See: 7 of the Best Health Care Stocks to Buy for 2017.]

Ironically, CRISPR and technologies like it will almost certainly play a major role in the evolution of mankind – but the financial future of CRISPR-based companies depends largely on external circumstances like legal rulings.