The recent Federal Reserve rate cuts have ignited a surge in the stock market, and certain companies are experiencing more significant gains than others. Among these is Wave Life Sciences (WVE), a small pharmaceutical company whose stock rose by 9% the day after the central bank reduced interest rates by 50 basis points. While the rate cuts have undoubtedly contributed to the company’s bullish outlook, there’s more to the story than just monetary policy. The collective wisdom of Wall Street analysts suggests an impressive 85% upside potential for Wave’s stock, making it a compelling investment prospect. This article will dissect the progress Wave has made in its DMD treatment, delve into its financial situation, and outline the key factors to watch for in the near future.
Wave Life Sciences has four drugs currently in development, but the primary focus here is on WVE-N531. This drug is specifically designed to treat Duchenne Muscular Dystrophy (DMD), a debilitating condition primarily affecting young boys. WVE-N531 is currently undergoing Phase 2 clinical trials under the scrutiny of the Food and Drug Administration (FDA). DMD is characterized by a deficiency in dystrophin production, a vital protein for muscle function. A promising strategy to increase dystrophin production is through “exon skipping.” These drugs essentially bypass malfunctioning sections of the genetic code (exons) that lead to low dystrophin levels, enabling the body to produce more of this crucial protein. Wave’s WVE-N531 aims to skip over exon 53, a specific region within the dystrophin gene. In preclinical trials, WVE-N531 achieved a remarkable exon skipping level of 53%, a figure Wave touts as “industry-leading.” Although the company doesn’t explicitly disclose the corresponding increase in dystrophin production, there is a strong correlation between exon skipping and dystrophin levels. This suggests that WVE-N531 could potentially lead the industry in terms of dystrophin production as well.
From a business perspective, the market size for this treatment presents a significant challenge. Different individuals are affected by malfunctions in different exons. As WVE-N531 is specifically designed to target exon 53, it currently caters to a limited 8% to 10% of DMD patients. In the United States and Europe, this translates to a patient population of approximately 2,300 individuals. Despite this relatively small market, the potential revenue generated could be substantial. According to Wave, exon-skipping treatments collectively brought in $1 billion in revenue in 2023. Those affected by exon 53 represent roughly a quarter of the total patient population within the five largest exon groups, implying a current market potential of around $250 million for WVE-N531. The DMD market is projected to continue growing significantly, with estimates ranging from a 10% to 39% annual expansion.
Over the past few years, investing in Wave Life Sciences hasn’t yielded impressive returns. The company’s stock has delivered a cumulative total return of just 5% over the past three years. Similar to many small players in the pharmaceutical industry, Wave currently lacks any approved medications. However, the company has managed to generate some noteworthy revenue. In each of the last six quarters, Wave has generated at least $12 million in revenue, primarily through “collaborations” with large pharmaceutical companies such as Takeda (TAK) and GSK (GSK). Although Wave’s revenue generation is modest, it’s a significant boost considering the company spends between $30 million and $40 million per quarter on research and development. Currently, Wave holds $154 million in cash and equivalents on its balance sheet. However, this cash reserve might last a little over a year, given that the company has burned through $130 million in cash from operations over the past twelve months. To sustain its operations, Wave will likely need to issue more stock, which will dilute existing shareholders.
Wave recently received positive news regarding WVE-N531. The FDA granted the drug the Rare Pediatric Disease Designation. This designation, if the drug is approved, entitles Wave to receive a Priority Review Voucher (PRV). A PRV expedites the review process for a future drug, reducing the time by four months. Interestingly, PRVs can be sold to other companies, and recent data shows that they are currently fetching an average price of $100 million. Thus, selling the PRV could bring in significant revenue if WVE-N531 is approved. Alternatively, Wave could utilize the PRV to accelerate the review of its own future treatments.
Investors will be closely watching Wave’s upcoming results for WVE-N531, which are scheduled for release in the third quarter. These results will include data on changes in dystrophin levels. A significant increase in dystrophin levels, exceeding the 5.7% to 5.9% improvement observed with the already approved treatment Viltepso, could significantly strengthen the bullish case for Wave Life Sciences.
