Picks & Shovels Play in Gene Therapy With Blue Sky Potential

As regular readers will know, I believe that our newfound ability to use genomics to cure disease will be totally transformative for the healthcare sector and it represents one of the most exciting sectors to invest in.

Investment capital targeting the space is breaking new records. Cell and gene therapy companies raised a total of $19.9 for developing over 1,800 therapies globally, of which approximately 700 are cell therapies. In the first half of 2021, cell and gene therapy companies have already raised $14.1 billion. This is on the back of the fact that sales of cell therapies are expected to grow from $1.1 billion in 2020 to over $10 billion by 2026.

This ability to edit and provide therapy via our genes is no longer science fiction. So far, 5 cell therapies have been approved in the USA. What the approved (CAR-T) cell therapies have in common is that they are all “first generation cell therapies” – they use viral vectors for the delivery of their payload into the cell.

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But now the field is evolving more and more towards the so-called “next-generation” cell therapies. Unless you’ve been hiding under a rock, you’ve probably heard of CRISPER. The company and its technology are in effect the first molecular scissors that can be used to edit DNA. But what you might not appreciate is that the key hurdle of unlocking CRISPER’s potential is actually getting these ‘editors’ to go where they need to go — inside of target cells. So a critical question for the success of CRISPR therapies today is:

How can companies like Crisper deliver their editing components designed to do their editing magic into a lot of cells cheaply, quickly, and reliably?

Crisper may be one of the leaders in the field right now, but it is clear from the wall of capital flowing into the sector that a vast number of biotech companies with a lot of different ideas and approaches have the capital and are looking to gain a foothold in this new space. Therefore, the ultimate list of winners in the field is by no means certain. So in order to benefit from this undoubtedly explosive growth trend in a less risky way, I have been looking at the ‘enablers’, i.e. the companies selling the ‘picks and shovels’ within the genomics sector. The fact is that the genomics process itself, which involves injecting DNA instructions into billions of cells, is still very complex, costly and can take many days.

But a company I hold in my personal portfolio has built machines that can complete the process within a day. ARK estimates that allogeneic cells and immunotherapies could create $250 billion in incremental revenues. I believe this company is a relatively de-risked way to gain exposure to this gigantic market. It makes its money by striking deals with a vast range of leading developers researching cell therapy drugs. These deals centre on selling its machines which then require the use of new disposables each year as research is carried out using these machines. What is exciting is that these deals include milestone payments on any drugs found using the machines as they progress through clinical trials, and then royalty payments once any medicines have been approved. So it’s a company with an almost incalculable level of hidden assets and a way to invest in cell therapy without taking a bet on a single drug. What makes the situation even more compelling as a buying opportunity is a recent (in my view unwarranted) large pullback in the share price.

Price data as of 27th January 2022.

Source: MSN Money (Figures refer to price data between 5th December 2019 - 27th January 2022)
Past performance is not indicative of future performance.

Business Description

MaxCyte is a company that you probably haven’t heard of. They make machines to deliver gene editors (and other things) into cells through a process called electroporation. This is a big deal — MaxCyte’s machines allow cell therapy companies to mass-produce cells that have been gene-edited outside of the body (ex vivo) for therapeutic use. At present, this is a de-risked way to capture the over $250 billion cell therapy revolution because you get the upside of cell therapy market growth while diversifying risk across a dozen, potentially hundreds, of therapies. Looking at the history of the biotech sector, the industry shifted from small molecules to antibodies and that since 2017 a new shift is taking place towards cell and gene therapies. I believe that MaxCyte is uniquely placed to benefit from this secular shift with a business model that allows the company to capture huge value (via milestone and royalty payments) from partner programs under development.

MaxCyte is listed both in the UK’s AIM market and more recently on Nasdaq. The company listed on Aim in 2016 and is founder-led. In July this year, Maxcyte raised $201.8 million when it listed its shares on Nasdaq. The level of success this company has had to date is remarkable: its patented machines have attracted the interest of all the big drug-makers: it counts 20 of the world’s top 25 pharma companies as clients (including all of the top 10). MaxCyte has become the go-to partner for biotech companies using non-viral cell engineering and this is based on its proprietary patented ‘flow electroporation’ technology.


Source: Company Presentation, 2021

Simply put, MaxCyte (MXCT) makes machines that let you put things inside of cells. The delivery strategy used is called "electroporation."

The process of putting things inside of cells is called “transfection.” There are several different ways to do this, but MaxCyte uses electroporation to create temporary holes in the cell membrane to allow stuff to pass through. The technique applies an electrical field to cells which opens up pores in the cell membrane. The openings allow the entry of macromolecules like DNA, RNA, and protein into the cytoplasm. This allows cells to uptake Cas9 mRNA (instructions to create the molecular scissors) and sgRNA (guides to tell the scissors where to go). Once the electrical field is removed, the membranes can reseal, trapping the editors inside. Electroporation is like steaming your face before a facial — it opens up your pores and allows skincare products to better absorb into your skin.

For commercial use, the most common delivery strategies for CRISPR used today are electroporation and viral vectors. Most strategies for non-viral delivery of genome editing tools rely on electroporation (at least for now). So really, for all intents and purposes, “non-viral” means electroporation. And MaxCyte does electroporation really well — reliably and at scale.

MaxCyte is like the Illumina of electroporation companies. If you want to manufacture clinical-level ex vivo gene therapy, you use electroporation to deliver gene editors. If you want to use electroporation, there’s a good chance you use MaxCyte.


Source: Health & Wealth Substack, 2021

Maxcyte is the Leader of the Non-Viral Delivery Space


Source: Company Presentation, 2021

Traditionally, viruses were used as a delivery mechanism of gene therapies. The trouble with viruses is they are expensive and slow mechanisms. Viral vectors are harder to scale, time-consuming, and costly. Analyst Emma Ulker describes the downsides of using viral vectors for immunotherapy:

“A single batch of lentivirus costs roughly US$500,000 to manufacture but is sufficient to treat only between 2-10 patients, and this contributes around 90% of the cost of goods of the treatment. Supply chain and manufacturing bottlenecks are another factor and wait time to enter supply chain is currently estimated at up to 2.5 years contributing to delays in launching clinical trials, adding to cash burn, and delaying treatments.”

So, electroporation is the clear winner when comparing the two methods for creating treatments like edited natural killer cells for cancer treatment. It’s much faster and more effective than viral vectors.

It’s now accepted that viral approaches cannot scale as efficiently as non-viral approaches. For instance, one of the main demand drivers for non-viral cell engineering has been the use of gene editing using the CRISPR technology. Due to its size, the Cas9 protein used for gene editing cannot be introduced using viral approaches. As an example, a single adeno-associated virus (AAV) only allows for 4.5 kilobase to be packaged within it, while the most commonly used Cas9 nuclease, spCas9, and a sgRNA are approximately 4.2kb. In addition, it is not possible to perform multiple edits using viral vectors, and whenever you see a reference to a gene editing technology it means that a non-viral delivery approach was used.

The table below shows how all companies holding gene editing technology patents use electroporation to get the molecules into the cell, most often with MaxCyte as their service provider.


Source: McKinsey, 2021

There are other reasons why the field is moving away from viral approaches in favour of non-viral approaches. One of the key reasons is cost, as large doses are difficult and expensive to manufacture and may cost up to $100k per patient. Another is the complexity as the combination of having a sterile product and a viral vector is not an easy task. Thirdly, viral vectors are difficult to manufacture at scale, which is extremely important in the commercial setting (for reference, look at what happened in November last year to bluebird bio). Last but not least, the sector has recently witnessed a shortage of viral vectors.

Therefore, more and more biotech companies are using non-viral approaches or a mix of both, and MaxCyte expects the balance to shift from 60% viral - 40% non-viral to 40% viral - 60% non-viral by 2026. The total addressable market for Maxcyte is therefore huge and growing fast:


Source: Nasdaq Prospectus, 2021

I hope I was able to demonstrate that MaxCyte is the service provider of choice for biotech companies that want to move forward their non-viral programs through the clinic (with Lonza being a distant second), and that its total addressable market is continuing to expand since more and more biotech companies that are currently using viral approaches are considering the use of non-viral approaches.

Layered and Scalable Business Model

As can be seen by the examples in the table above, many of the top gene-editing companies use MaxCyte. These include pioneers like CRISPR Therapeutics, Editas, and Caribou Bioscience, to name drop a few. MaxCyte is the gold standard in delivery systems for ex vivo treatments.

What is really attractive from an investment standpoint is that as the gene-editing market grows, the demand for effective transfection technologies like MaxCyte grows. I believe that by investing in Maxcyte, you get the upside of cell therapy market growth while diversifying risk across a dozen, potentially hundreds, of therapies.

The diagram below summarises the huge success the business has had to date in the industry. On the cell therapy side, they have 140+ partner programs, with 100+ being licensed for clinical use. On the drug discovery side, all of the top 10 global pharma companies use MaxCyte. This means that MaxCyte supports all stages of clinical development, from research to commercialisation. As most players use its technology, it is reasonable to expect increasing usage by existing partners together with new licences from new players to drive revenues and installed base higher as the industry expands. The fact that Maxcyte already has over 140 licencing partners means that the exposure to any one programme is small.


Source: Company Presentation, 2021

MaxCyte has a unique layered business model that virtually guarantees recurring earnings down the line. The company’s operations span two verticals:


Source: Company Presentation, 2021

In the drug discovery market, where the company partners with all of the top 10 and 20 of the top 25 pharmaceutical companies by 2020 revenues, the products (STx & ATx) are sold for $125k per instrument. Every time an experiment is done, there is a single-use disposable that MXCT charges anywhere from $200 to $1,500, depending on the number of cells that the customer wants to reprogramme. The instrument as well as disposable sales sport 90% gross margins.

In the cell therapy market, where the cells are used as drugs, MaxCyte maintains the rights to the instruments. The instruments (GTx) are leased to the partners at a cost of $150k per instrument per year preclinically and $250k per year per instrument in the clinical market. In addition, if customers want the right to use MXCT’s technology in the clinical setting, they need to sign a Strategic Platform License (“SPL”). As part of the SPL, milestones are negotiated for the clinical setting and royalty payments are negotiated for the commercial setting (either through a distinct royalty or a sales-based milestone payment).

I feel what is being missed in the market is the sheer size of the milestone payments due to Maxcyte just from existing partnerships. Milestone payments have the advantage that they ensure MaxCyte gets paid even if not all their partner products succeed. But as partner companies progress through clinical trial phases (all pre-commercial), the milestone payments from existing contracts due to Maxcyte are expected to be worth over $950 million (i.e. almost all of today’s market cap!). Once approved, Maxcyte is due ongoing royalty payments for the therapies that have successfully commercialised. Obviously, there is every prospect that a blockbuster gene therapy emerges from the large number of deals Maxcyte has in place. It is clear that both milestone and eventually royalty payments from these early-stage drug discovery deals (at 100% gross margins) are set to account for a larger percentage of revenues over time. On top of that, they are in the enviable position of having high recurring revenues (72%) and high gross margins (89%) today.

MaxCyte’s Competitive Advantages

The financial numbers achieved, and strong growth are a clear indicator of Maxcyte’s strong market position. MaxCyte has a number of important competitive advantages that mean it’s likely to continue to benefit from the growth of the gene therapy space.


Source: Company Interview, Twitter, 2021

Since its foundation in 1999, MaxCyte has developed, improved, and perfected its proprietary and patented flow electroporation technology that is at the centre of its product/service offering. Compared to the competition, it has the best product for non-viral cell engineering in the industry (in terms of cell viability and scalability), is the only one that provides biotech partners with a proven path towards commercialisation (having an all-important FDA Master File, a confidential document between MaxCyte and the FDA that its customers can refer to).

Recent Evidence from the Industry Citing Maxcyte’s superior technology

  • A recent study by GlaxoSmithkline cites Maxcyte’s technology as being far superior to their closest (but still very distant in terms of size) competitor Lonza. Maxcyte’s ExPert Flow Extrapolation technology produces a much higher balance of viable cells.


Source: PowerPoint Presentation (myeventflo.com), 2021

  • MaxCyte recently signed their 15th Strategic Platform License with Nkarta. Nkarta CEO echoes comments of other partners… “MaxCyte’s electroporation technology leads the field.”


Source: Maxcyte website, 2021

Huge Hidden Value in Deals Signed


Source: Company Investor Presentation, 2021

To date, MaxCyte has signed 14 Strategic Platform Licences (SPL’s). Outside of these SPLs, the company has signed over 70 additional license agreements with other (undisclosed) partners for the use of its technology. MaxCyte estimates that its instruments are currently used in between 40% and 55% of the approximately 40 active clinical cell therapy programs using non-viral delivery approaches in the USA.

Valuation Upside

Negative News in Sector Creates a Buying Opportunity

Maxcyte’s shares fell 15 per cent recently after the US Food and Drug Administration put on hold all the clinical trials being run by one of its partners, Allogene. The FDA wanted to carry out more investigations into an abnormality that had occurred with one patient in the trials. The delay could last up to six months. This news not only hit the shares of Maxcyte hard, but in fact those of all the companies in the sector.

I believe the recent pullback on this news represents a buying opportunity; Allogene’s programmes represent just a small proportion of the 140 cell therapy targets that MaxCyte is working on with 14 partners. At $11, about 30% of MaxCyte’s $1bn million market value is accounted for by cash on its balance sheet while at least 20% represents royalty payouts it is likely to receive over the coming years just from existing partnerships. That’s before the rest of its business has been accounted for.

Since 2015, revenues have grown at a 23% CAGR, with gross profit margins consistently around the 90% level. Investors should understand that the cumulative loss of about $45 million since 2015 can mainly be attributed to the $38,4 million investment in the companies’ biotech division CARMA. In January 2021, MaxCyte announced that it would not invest further into the biotech division so that the company can focus its full attention on supporting biotech companies in progressing their programs through the clinic. Importantly, this means that this cash-hungry drain on the business is eradicated.

Investors should also note that the main contributor to the revenue growth has been the increase in license agreements and corresponding license payments from biotech partners in addition to the partner progress from the preclinical phase to the clinic (leading to an increase in the license fee from $150k to $250k). It is very likely that new licences are announced in such a fast-growing sector and that at least some of the partner product programmes make it into the clinic (triggering a higher licence fee for Maxcyte). For FY 2020, milestone payments represented about 10% of MaxCyte’s revenues and since none of the partner programs are in the commercial setting, the company does not yet receive any royalty payments. These two revenue streams are significant drivers of value and very likely to rise as a proportion of the business in the years ahead.

At first sight, the valuation might look expensive at around 40 times FY 2021 revenues. Investors should realise however that much of these revenues are recurring (in the form of licence revenues, consumables, and disposables) and therefore highly certain in nature. Less than 10% of today’s revenues are related to milestone payments and they do not yet receive royalty payments since the first drug approval is expected for 2023. This means that two brand new revenue streams will form a much more significant part of Maxcyte’s top line in the next few years.

In my opinion, a company like MaxCyte with different revenue streams is best valued via a sum-of-the-parts valuation. The base business consists of a growing stream of product and license revenues with 90% gross margins. On top of that, the company has negotiated $950 million in milestone payments and a low-single-digit percentage royalty payment on future sales (both coming in at 100% gross margins). Meanwhile, the cash position is currently $250 million.

Revenues from instrument and disposable sales and license fees: The approximately $30m in FY 2021 license and product revenues and 90% gross margins could be valued at 10 times revenues for a valuation of about $300 million.

Milestone payments: The 14 SPLs together account for a potential of over $950 million in future milestone payments. (NB this huge number does not include the most recent SPLs negotiated with CELU and SANA). The discounted and risk-adjusted value of these milestones is worth another $250 million today.


Source: Company Investor Presentation, 2021

So, just the cash position, the base business, and milestone payments account for approximately 50% of MaxCyte’s market cap.

In addition, over the period 2015-2020, 72% of revenues have been recurring. This type of revenue profile gives a lot of certainty and is highly prized by investors. Meanwhile, the company has maintained close to 90% margins throughout the same period. Again these extremely high margins are a huge sign of earnings quality and pricing power for the business.

The wildcard in MaxCyte’s valuation and the upside potential comes from the future royalty payments the company will receive upon commercialisation of partner programs. As per today, the following SPL partner programs are in the clinic (i.e. advanced enough to being tested in patients):


Source: Company Announcements, 2021

The most advanced programs are CRSP CTX-001 program and ALLO’s ALLO-501A program. Analysts assign a 90% possibility of success for FDA approval to the first one and a 75% possibility of success for the second. CRSP is expected to file its BLA related to CTX-001 in 2022 and it could get FDA approved in 2023.

In order to illustrate the scalability of these potential future revenues, let’s take the example of just this one programme - the royalties related to CRISPR Therapeutics’ CTX-001 program that tackles both Sickle Cell Disease and Beta-Thalassemia, the partner programme that is the furthest advanced.

Using the sales estimates (in million $) from an analyst report and assuming a 2.5% royalty, 1.5% instrument sales and consumables, 85% gross profit margins, and a 20% tax level. This simple calculation illustrates how a single partner program (out of the more than 140 partner programs) can add $369 million in gross profits to Maxcyte over the next 15 years.

To corroborate this calculation, the recent transaction between CRSP and VRTX related to CTX-001 values the total program at $11 billion. Assuming that MaxCyte is entitled to about 4% of the economics (via royalty payments, instruments sales and consumables) gives this program a valuation of over $400 million for MaxCyte.

So a single program out of the 140 programs in the pipeline could account for over 35% of MaxCyte’s current market cap. With over 140 licenses in the pipeline and using overall success rates from this article, between 5 and 20 partner programs currently in the pipeline could reach the commercial stage. The upside potential is therefore mind boggling!

In terms of newsflow and share price catalyst, the approval of a partner programme would be a significant event since a number of elements underpinning MaxCyte’s valuation are linked with it. Approval of a partner program leads to (1) a decrease in the time to receiving royalties (2) an increase in the probability that other treatments in the pipeline using next-generation cell engineering will be approved (3) decreases the discount rate used by investors (e.g. from 10% to 5%) as royalty companies typically trade at a higher multiple than other types of companies (4) improvement in MaxCyte’s competitive positioning since it would validate the statement that MaxCyte offers a proven path towards commercialisation.

More Programmes to be Fast-tracked?


Source: Company Twitter, 2021

I feel this recent announcement regarding the FDA’s decision to fast-track this partner programme is significant. Why is the fast-track approval status important for Vor Biopharma and Maxcyte? Because it accelerates and derisks the probability of approval. I actually expect many of MaxCyte’s partner programmes to get fast-track status due to these treatments targeting the frontier of mostly previously untreatable conditions, with obvious implications for share price upside.

RISKS

Maxcyte has one of the strongest market positions I have ever come across but it’s important to note that this is a nascent industry with fast moving technological change and there are significant risks associated with that:

  • Clinical Development Risk: The most advanced partner programmes are still in early clinical stages. MaxCyte’s current valuation depends on the assumption that a portion of those programs will reach the commercial stage. They may not.

  • Nascent Industry: Investments in the industry have started to grow considerably since the first cell therapies were approved in 2017. There is a potential for clinical, manufacturing, or regulatory setbacks that could impact the industry and MaxCyte’s revenue growth.

  • Competition: MaxCyte is currently the market leader with its technology in terms of performance (cell viability, scalability, and FDA Master file). MaxCyte’s longer-term growth prospects and valuation could be impacted in case a competitor comes up with a viable alternative.

  • The biggest risk I see for MaxCyte is that there may be ways to bypass the need for ex vivo treatments entirely. If so, that would mean electroporation as a whole may be used less often for gene editing:

Industry leader Professor Doudna has talked about this new delivery method and its implications:

“We’ve been thinking about [CRISPR-engineered T cells] and wondering if there might be an alternative in the future. Wouldn’t it be great if you didn’t have to do all of this [ex vivo editing/expansion] and you had a way to provide a one-and-done injection or a pill that can be taken?”

If these innovative new delivery methods work inside the body, this is great news for future patients because it would reduce cost and increase accessibility to CRISPR treatments. The biggest concern is whether this can be done safely and effectively, without causing off-target editing mayhem.

ARK seems to think this is the case since they had a slide dedicated to how gene therapies could shift from ex vivo to in vivo editing:


Source: ARK Invest, Annual Report, 2021

However, I would counter that In Vivo is still at a very early stage of development and the early indications seem to show it’s useful in only a very limited range of therapies. Over the very long term, it may become the go-to approach or it may well remain an approach limited to the delivery of a small number of therapies.

Conclusion

The list of attractions of Maxcyte as an investment proposition is long: founder-led, quasi monopoly with enviable pricing power, patent protected tech leader in a fast-growing industry and a stellar record of results (long term record of 25% CAGR revenue growth, 90% gross margins and 72% recurring earnings). Not only does the business have this very solid base, but it also has the blue-sky potential of milestone payments and even royalties on any therapies that make it into clinic and commercialisation.

The cell therapy space is an exciting one and is potentially at a stage the antibody space was 20 years ago. Over the next couple of decades, cell therapies could become a substantial part of all approved therapies. Within this context, I believe Maxcyte is primed to continue to grow strongly and the value inherent in MaxCyte’s shares is under-recognised. As long as MaxCyte continues to be the go-to solution for cell transfection ex vivo, we should expect a growing number of cell therapies that leverage the company’s technology over time. The snowball effect will come as more licenses, partnerships, and commercialised therapies gain momentum.

At the same time, there is still a long-term risk to investing in MaxCyte. Gene therapies could shift away from ex vivo editing entirely. Does that mean electroporation has the potential to become obsolete for gene therapy in the future? Probably not, though there will likely be more competition.

In conclusion, with its best-in-class technology, FDA Master File, and excellent record of customer acquisition and retention, MaxCyte is the partner of choice for biotech companies working on next-generation cell therapies, indeed, valuable enough as a partner to have been able to agree milestones and low-single-digit royalties on each partner therapy that gets to the market. The cash position together with the base business with license revenues and milestone payments accounts for 50% of MaxCyte’s market cap. Royalty payments from a single out of the 140 partner programs in the pipeline could account for another 35% of MaxCyte’s current market cap. It’s clear that MaxCyte offers an extremely attractive risk/return profile for investors that want to get exposure to this space.

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This material is not investment research in accordance with the legal requirements designed to promote investment research independence and is also not subject to any prohibition on dealing ahead of the dissemination of investment research; and as such is considered to be a marketing communication.

This is not financial advice, please seek professional financial advice from a certified & regulated independent financial advisor.

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Past performance is not indicative of future results.

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