EFTA01100261.pdf

Editas Medicine] February 29. 2016 Morgan Stanley MORGAN STANLEY RESEARCH MORGAN STANLEY & CO. LLC February 29, 2016 Matthew Harrison Editas Medicine David N Lebowitz, MPH. CFA '1212 761-8055 Starting A Gene Editing Revolution '1212 761-0324 Cyrus Amoozegar, M.D., Ph.D. .1212 761-6009 Industry View Stock Rating Price Target In-Line Equal-weight $28.00 Editas Medicine ( EDIT.O, EDIT US ) We initiate at EW with a $28 PT; Despite our LT optimism for the Biotechnology / United States of America Stock Rating Equal-weight promise of gene editing, two near-term headwinds are likely to keep Industry View In-Line EDIT range bound - IP uncertainty and a lack of clinical catalysts until Price target $28.00 2017. Over the long term, however, we see Editas as the premier Shr price, close (Feb 26, 2016) 527.49 Mkt cap, curr (mm) 5133 gene editing company. 52-Week Range $2940.12,57 We initiate at EW with a $28 PT: Editas is using a new technology called Fiscal Year Ending 12/14 12/15e 12/16e 12/17e CRISPR/Cas9 to edit (replace/remove) bad genes with good genes and achieve ModeiWare EPS (S) (4.79) (233) (1.16) (L81) a therapeutic benefit in patients with genetic diseases. This approach differs Prior ModelWare EPS (1) from the more commonly known gene therapy in that it can accurately remove P/E NM NM NM NM and replace genes instead of inserting a new gene sequence without specificity Consensus EPS ($)1 Div yld (%) as happens in gene therapy. Thus, the potential of CRISPR is broad with Unkst oihemiie noted, all metrics am based on Mogan sanity mocloWaie frarnenork -6,000 genetic diseases of which less than 5% have treatments. At odds with - ContanT.os data ,s pronle:l by Thomson Rauuns E clm ems a - Montan Staab, R{,{.I0.4 mimamt our positive long-term view of Editas and CRISPR technology are two QUARTERLY MODELWARE EPS (S) headwinds which we see as keeping EDIT in check: (1) Over the course of the 2015e 2015e 2016e 2016e next 1-2 years Editas and its academic parters are going to engage in a Quarter 2014 Prior Current Prior Current substantive IP battle over CRISPR technology versus other companies, namely, Q1 (1.00) (0.70)a (0.21) Intellia and Crispr Therapeutics, which is likely to limit stock appreciation; and Q2 (1.00) (0.68)a (0.24) Q3 (1.36) (0.69)a (0.29) (2) initial clinical data is unlikely to be available until late 2017 at the earliest, (1.89) (0.26) Q4 (0.41) limiting any significant derisking events for the platform. • Macron Sun by Research estmaiet a • ActualCompany /opened data CRISPR is a compelling technology and we see Editas as best positioned to realize its potential: We have high hopes that the potential for CRISPR can be translated into clinical benefit across a wide variety of diseases. Key to our optimism is that CRISPR has been used in many labs across many academic institutions with strickingly similar outcomes, suggesting that many of the key technical hurdles in small systems are understood. We believe Editas has a strong analytic process dedicated to addressing each of the main components of development. Thus, we ultimately see Editas as being successful in delivering therapeutic candidates. Importantly, for the lead clinical program in Leber's disease, we see it as the right first target given that it is relatively easier to deliver therapy to the photoreceptors, and the closed system of the eye limits potential safety risks. IP a key area of debate over the next 1-2 years: Editas, along with its Morgan Stanley does and seeks to do business with academic partners from whom it licensed its foundational IP, is currently companies covered in Morgan Stanley Research. As a result investors should be aware that the firm may have a conflict engaged in a interference proceeding to determine which claims, if any, from of interest that could affect the objectivity of Morgan its IP can stand versus the competing party (University of California and its Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their licensees). This proceeding is likely to play out over the course of the next 1-2 investment decision. years. While we expect the outcome is likely to be one which requires both For analyst certification and other important disclosures, sides to share IP, there are tail scenarios which could lead Editas to have no refer to the Disclosure Section, located at the end of this freedom to operate. report. EFTA01100261  Editas Medicine] February 29. 2016 Morgan Stanley MORGAN STANLEY RESEARCH Lack of near-term clinical data and IP dispute likely to keep EDIT range bound: Despite our positive view of CRISPR, we see the lack of near-term derisking clinical data as limiting potential upside to EDIT in the near-term. Further, while we expect the outcome of the IP dispute to be some sort of cross licensing agreement similar to what we have seen with antibodies, the tail scenarios present sizable risk and thus are likely to also limit upside. 2 EFTA01100262  Editas MedicineI February 29. 2016 Morgan Stanley MORGAN STANLEY RESEARCH Risk Reward Demonstration of safe administration in humans, IP resolution, and LCA10 success drive risk/reward Investment Thesis BO ■ We are Equal-weight Editas Medicine. The CRISPR 70 $7200(.210%1 gene editing platform has been derisked from an operational standpoint, and can be geared towards 00 numerous disease targets. Howe✓er, the delivery 50 and long-term safety of administering dinically relevant doses in humans needs to be proven. 40 ■ Editas has a systemic, modular approach that may allow for differentiation over competitors 30 $n t3 ■ The first disease being targeted (LCA10, an 20 inherited retinal dystrophy) lowers the initial risk of proving that gene editing can work in humans, as 10 the eye is immune privileged and provides a small, 0500(. 0 contained area in which sufficient quantities of Feb-14 144.14 F4045 Aug.15 Feb-115 /04.03 FS-17 vector can be delivered safely Ter Psi') • Oen StePis ■ Overall, we see significant long-term potential for Source: Thomson Reuters. Morgan Stanley Research Editas, but remain equal-weight while initial therapies are derisked in the dinic and the IP battle Price Target $28 Our PT is derived from a DCF that uses a 15% discount rate and a plays out over the next 1-2 years. 0% terminal growth rate beyond 2032E. Editas is able to develop and commercialize therapies that Key Value Drivers Bull $72 DCF receive widespread uptake. The LCA10 therapy launches in the ■ Resolution to IP interference proceedings US and EU in 2024E, treats and cures —80-90% of the addressable ■ Progressing the LCA10 program into the dinic LCA10 population, commands premium pricing and generates ■ Advancing current discovery stage programs into peak sales of -4130M in both the US (2026E) and EU (2027E). Editas is also able to realize -568, in sales by 2032E from additional the clinic such as for hematologic diseases and therapies in CAR-T applications, non-malignant hematology, DMD, genetic diseases of the lung & liver and CF. Potential Catalysts Base $28 The LCA10 therapy proves successful, but additional ■ Initiation of Phi LCA10 trial in 2017 DCF therapies obtain modest success. The LCA10 therapy launches ■ Interference proceedings in 2016/2017 in 2024E in the US and EU. and treats and cures —70-80% of the addressable LCA10 population to generate -585M in peak sales in ■ Entering additional therapies into the clink in both the US and EU (2028E). While Editas is able to develop 2017/2018 successful therapies for CAR-T, hematology, DMD, and CF, it achieves lower market share for total additional annual re✓enues of Risks to Achieving Price Target -438 by 2032E. ■ IP outcome that limits Editas' freedom to operate ■ Development risk associated with early nature of Bear $5 Pipeline programs fail. Editas is not able to commercialize any pipeline, and the timeline is long to initial data (first DCF (Cash/share) therapies. and the resulting valuation is cash / share. data in humans is expected from the LCA10 Phi study in 2017) ■ Competitors that could influence investor perception of the stock 3 EFTA01100263  Editas Medicine I February 29. 2016 Morgan Stanley MORGAN STANLEY RESEARCH Investment Case Summary & Conclusions We are initiating coverage of Editas with a 528 PT and an Equal-weight rating. Our rating is based on two near-term factors at odds with our longer term view of CRISPR as a platform: (1) Over the course of the next 1-2 years Editas and its academic parters are going to engage in a substantive IP battle over CRISPR technology versus other companies, namely, Intellia and Crispr Therapeutics which is likely to limit stock appreciation; and (2) initial clinical data is unlikely to be available until late 2017 at the earliest, limiting any significant derisking events for the platform. Thus, while we continue to view CRISPR as one of the more compelling next-generation technologies to address a wide variety of disease targets, we think the stock is likely to remain range bound ahead of clarity on both IP and clinical activity. Note: The authors of this material are not acting in the capacity of attorneys, nor do they hold themselves out as such. This material is not intended as either a legal opinion or legal advice. The information provided herein does not provide all possible outcomes or the probabilities of any outcomes. The result of any legal dispute or controversy is dependent on a variety of factors, including but not limited to, the parties' historical relationship, lows pertaining to the case, relative litigation talent trial location, jury composition, and judge composition. Investors should contact their legal advisor about any issue of law relating to the subject matter of this material. Key Investment Points 1. CRISPR is a compelling technology and we believe Editas is best suited to translate the technology into therapeutic benefit - We are positive about the potential for CRISPR to be translated into clinical benefit across a wide variety of diseases. Key to our optimism is that CRISPR has been used in many labs across many academic institutions with similar outcomes, suggesting that many of the key technical hurdles in small systems are understood. That said, there are still many key risks and challenges that need to be overcome including identifying efficient edits for each target, appropriate delivery to the tissue, expanding the platform's applicability across a range of different types and kinds of gene edits and various other engineering challenges. However, we believe Editas has a strong analytic process dedicated to addressing each of the main components of development. Thus, we ultimately see Editas as being successful in delivering therapeutic candidates. 2. IP battle will remain an overhang, but we continue to see cross licensing as the most probable outcome - The P in the CRISPR space is complicated, varied and nuanced. Thus, it is not surprising that various academic institutions believe they each have foundational P. Early in January 2016, foundational patents which Editas has licensed from Harvard, the Broad Institute and MIT were named in a patent interference proceeding with the University of California, University of Vienna, and Emanuel Charpentier. These patents are held by Caribou Biosciences and licensed to Intellia. Crispr Therapeutics also has rights to the same IP as Intellia though the second scientific founder, Dr. Doudna. The debate between the parties, which we discuss further in this report, is whether the initial discovery of CRISPR in prokaryotic cells is easily translated into mammalian cells (Broad was first to discover in the latter category while UoC in the former). Given the complexity of the P — 11 patents are named in the interference —we believe a plausible outcome is one where certain claims in Editas IP are narrowed (right now Editas is the only company with granted IP) and certain claims in the Caribou P are granted, but overall both parties would need rights to the other party, similar to the situation which developed from the foundational antibody IP. We assume modest royalties which generally cancel each other out. Nonetheless, the uncertainty created by this situation — including the fact that one outcome could be that Editas would have no freedom to operate if all its IP was overturned — is likely to keep EDIT range bound as the interference proceeds. 4 EFTA01100264  Editas Medicine] February 29. 2016 Morgan Stanley MORGAN STANLEY RESEARCH Exhibit 1: Indicative Timeline for IP Interference Proceedings Declaration of Interference 14 days Initial Papers 4-6 weeks Motions Lists I Call with APJ 6 weeks TP1 Motions 3 weeks 12 months -C TP2 Responsive Motions Cross-Examination 6 weeks TP3 Oppositions 6 weeks Cross-Examination TP4 Replies Period for Observations 3 months Motion to Exclude, Records Oral Argument 3 months Decisions on Motions Source. Company Dili Morgan Stank] ROttilth 3. Clinical data is the key upside driver, but is not due until late 2017 at the earliest- Editas and its CRISPR platform has the ability to target a wide variety of diseases with over 6,000 diseases caused by a genetic mutation and 95% having no approved therapy. Key targets include muscular dystrophy, cystic fibrosis, various malignant and non-malignant hematologic diseases and other liver direct targets. Thus, the universe of available diseases is large; however, all of these programs are currently in preclinical development and unlikely to move into the clinic in the near-term. The most advanced program is for a eye disease called Leber congenital amaurosis (LCA), which impacts a patient's retina and leads to blindness. This program is likely to enter clinical testing in 2017. Importantly, we view this as an appropriate target for an initial clinical program. Based on the literature -10-20% of the photoreceptors in the eye need to be edited to produce a therapeutic response (i.e., maintenance of some vision) and since the eye is a closed body, both delivery is likely achievable and off target toxicity is likely to be limited. Thus, we see the overall risk to be more modest with the LCA10 program. Despite our positive view of this program, the timeline is likely to limit stock appreciation given clinical data is unlikely until late 2017. 4.Business development has the potential to be a near-term upside driver - Editas has already completed one licensing deal with Juno in the CAR-T space. While we think that partnership can drive value for both companies, the timelines are not near-term. Further, we have seen other companies like Crispr Therapeutics strike partnership deals with Vertex and Bayer. Thus, there is clearly interest in CRISPR therapies by larger companies. Unlike Crispr Therapeutics, we believe Editas' management strategy is better suited to preserving shareholder value and would expect management to target deals where the assets are well defined (i.e., no open-ended target deals) and either the time to market or the basic knowledge in the therapeutic category (i.e., neurology) could be accelerated by the larger party. Thus, we do expect business development and expect it to be positive for EDIT, but the timing is hard to predict 5 EFTA01100265  Editas Medicine I February 29,2016 Morgan Stanley MORGAN STANLEY RESEARCH Exhibit 2: Correction of mRNA Expression in Exhibit 3: Editas Pipeline Cells from LCA10 Patients Program Target Gene Star Dotorery. SC over". Nude, • Normal MMutant Lebo Congenial Amurtosis tO CEP290 a 2015. nil „ I . 2017 Olitett ilt4 Meagre CuMiteinter Discern M Eye Geoe Edo% lareelleto Weal Maple Deccreary OMNI NoorMairant Hereleloge n M.Itple DriCevery 04••••• Gent% etteeeesolMescle MJIple Decoverf Gera& Damsel De Lung Maple Discovery aeons innesousnmesoi Maple Drecourf Ole MS 0 Source: Company Data. Morgan Stanley Research Conti'01 Guide Pair 1 Guide PaIr2 Source:Company DaIs Exhibit 4: Recent Gene Editing Deals bed Annourue,ntnt 1),,bon of f tertine C°Mbar awn Occur rot .is Royally per CellAberstot upfront Pseinn mfortomr murbortrer DI SA, mums SlOOPA• At eeruhr IV to address Wood foremmestt creceON owned SO/SO by Saw Allot say- *tureen.lAndens. and 1///1/201S 13001Ar ton/ OM MA NA and CeRlet thempean therontaA‘ rceutoolal neon deem ern lie yea. us ant, Ateurret 5394 neer o (Mee Moseys error focus on cystic 111SIOSM uelrotmometts el Sore Ea* end SAW merry Cute. homy, and wire tell Valet torpsnon lour wars 510501 54204A Vt. ID Venn venture KO% et thoyertuuct Awayc...blorytann claelownom rout to trestmorts additional (hunts olormied bIrVer" rn heed CAR1 art tat cancer 522M in reiteer trIPPOn Crter Are Arno tertat S/17/1015 (never. SRCOSA runnel on Morrom yrA coill•boraion teethe tale1 III MD hordes tncireenng CAAts ore Introor murk. 1/7/7015 Orreymrs Not Onflosed Nei dechsted Yes II)tiovarm atones onprol nemAtoporesrt %tern ten cowry slake in Welke Source Company Data. Morgan Stanley ROttalCh S.Given the early stage of development Editas is tough to value, but we think a unique approach is warranted - We value Editas using a two pronged approach. As is typical, we value the defined clinical programs - in this case LCA10 - and assign a value. However, separately, we also try to value the potential upside associated with the platform. Here our approach is unique as we take our revenue models for DMD, Cystic Fibrosis, CAR-T and non-malignant hematology and assume Editas could penetrate that market starting in 2025 and reach peak share of 30% of that market by 2030. We than assume a 10% probability of success as a way to gauge the potential of the platform across a wide variety of targets and diseases. 6 EFTA01100266  Editas Medicine I February 29. 2016 Morgan Stanley MORGAN STANLEY RESEARCH Exhibit 5: Bear to Bull Case Bridge for Editas Valuation A.:39 LCAIG 2$ 72 Oral Hale arse Ilu Sou r<* Ngorgan Stanley Reseagch Key Upcoming Catalysts The key upcoming catalysts for Editas include updates to the interference proceeding, updated preclinical data at the ASGCT conference in May and an IND filing on its first clinical candidate for LCA10. Obviously, general developments in the CRISPR space are likely to occur as well and could have an impact on Editas. Exhibit 6: Editas Catalyst Calendar Milestones Timing Updated preclinical data at ASGCT 2016 May 4-7, 2016 Potential new business development 2016 Potential interference proceedings and updates 2016/2017 Initiation of Phase I LCA10 study 2017 Additional therapies enter the clinic 2017/2018 End of Juno collaboration 2020 ou roe: Company Data. Morgan mangey lirnatth 7 EFTA01100267  Editas Medicine I February 29, 2016 Morgan Stanley MORGAN STANLEY RESEARCH Valuation Exhibit 7: DCF drives valuation ac Oct NO, 0.0 ae 001, On0 a.m 'on on nu ion inn ion isn a an out aon aro ant an (% on ma on n. M, to pn Sill II" Source: Company Data, Morgan Stanley Research Sum of Discounted CF ($3.4) $1,009 Net Cash $203 Equity Value $1,213 Equity Value Per Share $28 Discount Rate 15% Terminal Growth Rate 0% Time of Valuation 2016 Shares Outstanding (millions) 43 Our S28 price target includes -43.38 in peak (2032E) global revenue. We derive our price target from a discounted cash flows (DCF) analysis that uses a WACC of 15.0% and a terminal growth rate of 0%. Valuation Methodology: We prefer the use of a DCF analysis to value biotechnology companies. Given the defined patent life for each product, we believe a DCF fully captures both the upfront investment period as well as the long-term earnings power. While investors do look at biotechnology on a multiples basis (PIE), we prefer a DCF as it is more rigorous and requires more explicit assumptions about the long-term prospects of a company. Discount Rate: We use a 10% discount rate for all commercial companies, a 12.5% rate for companies with randomized Phil data and a 15% rate for all development stage companies. Given the stage of development we use a 15.0% discount rate for EDIT. Terminal Growth Rate: We model explicit revenues through 2032E with a 0% terminal growth rate Revenue: We model 5-25% penetration of the LCA10 market in the US and 3-17% in the EU starting in 2024. We assume $1M pricing in the US, increasing 1.5% annually. We assume a $900k price in the EU, increasing 1% annually. For other products we assume a blend of revenues from CAR-T, non-malignant hematology, DMD, and CF with the company capturing a small fraction of sales and having a 10% probability of success. Total estimated peak sales (2032) are -$3.38. Economics: Editas maintains worldwide commercial rights to many of its product candidates, except for their CAR-T program. We expect the company to retain global rights and launch their products themselves. COGS: We model COGS as a continuous 17%. Operating Expenses: We assume R&D of $25M in 2016E growing to -$80M in 2021E and -5250M in 2032E. R&D growth is expected to be aggressive in the next few years to account for the simultaneous development of several products. We assume SG&A of -$25M in 2016E, growing to -556M in 2021E and -$210M by 2032E, assuming product launches starting in 2024E. Key Risks To Our Price Target Include: (1) Lack of freedom to operate driven by losses int he interference proceeding around CRIS PR IP; (2) Inability to deliver CRSIPR candidates to the correct tissue or inability to achieve high editing efficiency; (3) Lack of efficacy with initial clinical data or unknown safety. 8 EFTA01100268  Editas Medicine] February 29. 2016 Morgan Stanley MORGAN STANLEY RESEARCH Debate 1- What is CRISPR/Cas9? Overview: CRISPR is a new technology that may not be familiar to many investors. While the new wave of genetherapy companies - where a gene sequence is inserted into a viral carrier (typically lenti or AAV) and then incorporated into the body's genes - has educated investors on that technique, many have heard about CRISPR, but do not know all of the details. CRISPR is a protein-RNA complex where guide RNAs locate a specific gene sequence and then allow cas9 nucleases to "edit" that sequence.It is a precise way to edit a specific gene sequence, potentially curing the patient of the disease caused by the genetic defect. Significant academic success has been made with the CRISPR/Cas9 system, though all the work has been completed in animal models. The first in-human testing is to be completed by Editas and its competing commercial entities. Street's take: Overall, we believe consensus recognizes that CRISPR is a significant new technology that could have a large impact on the treatment of genetic diseases. We believe most investors understand the significant potential of CRISPR and the debate centers around how effectively it can be implemented, if the technology is ready to be used in humans and if it is derisked enough yet for an equity investment As is to be expected, some investors see near-term potential while others would prefer to wait for greater clinical experience. Our take: We believe CRISPR is likely to play a major role in gene repair and modification long-term. While we are not entirely sure how long and what the path to clear therapeutic effect will involve, we do believe CRISPR as a technology is proven from a technical perspective and now needs to be translated into humans. Thus, we see great promise in the platform and believe CRISPR has the best chance to create durable, functional cures of many genetic diseases. Gene therapy vs Gene editing? Gene therapy differs from gene editing in both the approach and the possible results seen. Gene therapy generally involves the addition of a new gene to a genome. These new genes can be to replace a defective gene or to add a new gene. The original genes remain intact. Gene editing involves changing the genome, which can involve the addition, deletion, or substitution of components of the genome. CRISPR/Cas9 is not a genetherapy and is a gene editing platform. What is CRISPR/Cas9? CRISPR/Cas9 is a novel method of genetic engineering that uses guide RNA to edit DNA by allowing the enzyme Cas9 to cut and insert the desired genome sequences. The CRISPR/Cas system is formed from CRISPR arrays and CAS genes. CRISPR arrays are clustered, regularly interspaced short palindromic repeats found in certain prokaryotic genomes. CRISPR arrays involve sections of repeated base pair sequence separated by non-repeating spacer sequences. Both the repeated sequences and the spaces come in a large number of variations. Many CRISPR-genes also contain domains associated with DNA manipulation and many of the spacer sequences contained plasmid or phage-derived DNA. CAS, or CRISPR-associated genes, are almost always found adjacent to the repeat arrays. CAS genes come in a variety of subtypes. The CAS9 subtype gene encodes the RNA-guided endonuclease Cas9 which can cleave double stranded DNA. CRISPR RNA (crRNAs) guides with Cas9 proteins and can lead to cleavage of specific sites on DNA and the introduction of templates for gene insertion, as demonstrated in the illustration below. 9 EFTA01100269  Editas Medicine] February 29. 2016 Morgan Stanley MORGAN STANLEY RESEARCH CRISPR/Cas9 has the advantage of being cheaper, faster, and easier Exhibit 8: Illustration of Gene to use than other techniques. The system is easy to configure between Editing Using CRISPR/Cas9 species and allows for an increased precision of insertion. Overall the CRISPR/Cas9 system allows for greater control than usual gene DNA target augmentation from gene therapy. Cas9 The CRISPR/Cas9 technology has seen rapid uptake in a number of academic laboratory groups due to the relative low cost and ease of use. The technology was initially designed for prokaryotic cells but was later adapted to eukaryotic cells, and has since been demonstrated to work in Mammalian cells. A useful review of the history of CRISPR by gado RNA Lander can be found in Celt 164. January 14, 2016. Source: Company Data What other approaches are available for gene editing? Zinc finger nucleases — These are restriction enzymes designed to cleave specific target sequences on DNA. They involve a zinc finger DNA binding domain with site specificity and a DNA-cleavage domain for cutting the phosphodiester bone between nucleic acids in DNA strands. By taking advantage of a cell's intrinsic DNA repair mechanisms, zinc finger nucleases can be used for gene editing. Zinc finger nucleases are being commercialized by Sangamo Biosciences (not covered). Exhibit 9: Illustration of Gene Editing Using Zinc Finger Nucleases (Codon Identification) 5' -ACAAGGAGAGATTICAA TTGAAGAAGTGAAAGA11-3' 3' -1VTICCTCTCTAAAGIT AAA -5' Source: [tont. Physool.. 11 April 1010, 'Emerging gene editing strategies for Duchenne muscular dystrophy targeting stern cells: Carmen leflant. Department of Neurology. David Geffen School of Medicine. Unriersity of California Los Angeles Engineered meganucleases — Meganucleases are naturally occurring proteins that can recognize and cleave specific DNA sequences. They have a DNA recognition sequence that can be modified, thus allowing for engineered meganucleases that can target specific DNA sequences of genetic disorders. Exhibit 10: Illustration of Gene Editing Using Meganucleases Source: [tont. Physeal . 11 April 1014, "Emerging gene editing strategies for Duchenne muscular dystrophy targeting stern cells; Carmen Defiant. Department of Neurology. David Geffen School of Medicine. Un iwesity of California Los Angeles