The genomics and biotech industries have faced challenges this year as interest rates increase and profits remain to be seen. While CRISPR Therapeutics, Twist Bioscience and Exact Sciences have all seen their shares lose a considerable amount of value, some hedge funds are warming to their low valuations.
- CRISPR Therapeutics sees earnings drop as operating costs rise
- Higher interest rates threaten to make new adequate financing for genomic companies harder to source
- The ARK Genomic Revolution, holding both Exact Sciences and CRISPR Therapeutics, plummets this year
High-growth genomic stocks such as Exact Sciences [EXAS], CRISPR Therapeutics [CRSP] and Twist Bioscience [TWST] have all lost favour with investors as recession fears have continued to mount throughout the year.
The genomics market, which was the source of much excitement during the coronavirus pandemic, has since lost its spark as investors have turned towards safer bets. The three genomics companies are all relatively early-stage operations with high development costs that have yet to turn a profit. Investors are increasingly opting to avoid exposure to risky assets characterised by these factors, given the turmoil facing markets this year and the uncertainty lurking ahead.
The CRISPR Therapeutics share price has slumped 33.1% so far this year but has still been the leader of the pack. Exact Sciences has plummeted 47.4% this year, while Twist Bioscience has dwindled by 59.8% amid a market wary of the risk the companies present.
CRISPR Therapeutics underperforms in Q3
Last week, CRISPR Therapeutics reported a disappointing set of third-quarter results. It posted a loss of $2.24 per share compared to a loss of $1.67 the year before as it saw costs continue to rise. Research and development costs rose to $116.6m in the third quarter from $83.5m the year before, driven by growing labour costs and increasing development activities.
Despite a considerable decrease in its cash pile, the company held $1.97bn at the end of September — down from $2.38bn from the start of the year.
Exact Sciences reported a strong third quarter and has seen its share price rise nearly 10% in the last week. Total revenue for the quarter rose 14.7% year-over-year to $523m, pushed higher by disease screening revenue growth of 29%.
The group kept its costs in check with total operating expenses growing 4.8% year-on-year for the quarter, a lower increase than that of total revenue growth for the period. As a result, the group was able to reduce its net loss for the quarter to $148.8m from $166.9m the year before.
Higher interest rates increase financing challenges
One of the main challenges facing the biotech and genomics industry is an individual company’s ability to secure future funding. Over the last few years, high-growth firms have been blessed by record-low interest rates, easing the costly financing needed for genomics research and development programmes.
However, with central banks continuously raising interest rates in a battle against mounting inflation, this lending is becoming harder to secure, much more expensive and riskier.
While investors were once hopeful that the Covid-19 pandemic would encourage innovations in the life sciences and, in turn, rally share prices for the industry, they have had to make big corrections.
However, some hedge funds believe that stocks have fallen so low that they now undervalue companies relative to their sizeable cash reserves and potential to develop pharmaceuticals. Michele Gesualdi of Infinity Investment Partners said: “This is the worst correction [in the biotech sector] I have seen in my 22-year career, according to the Financial Times.
Funds in Focus: ARK Genomic Revolution ETF
These recent challenges have pushed Cathie Wood’s ARK Genomic Revolution ETF [ARKG] down 47.5% since the beginning of the year. Exact Sciences is the largest holding of the fund, with a weighting of 8.54% as of 9 November. The fund is also the largest holder of Exact Sciences stock. CRISPR Therapeutics is eighth on the list at a weighting of 3.63% and Twist Bioscience is number 11 with a 3.46% weighting.
The fund performed exceptionally well during the pandemic and, at its peak, has grown over 300% in less than a year. However, a few months of poor trading has brought the fund back down.
The Global X Genomics and Biotechnology ETF [GNOM], which has CRISPR Therapeutics as its 11th largest holding at 3.96%, has dropped by 36.1% so far this year. Its holdings have faced substantial challenges within the genomics and biotech space over the course of the last few months.