After decades of research and development, gene therapy is rapidly emerging as one of the most exciting areas in biotechnology—and generating new hope for patients with certain rare and often deadly inherited diseases. Replacement gene therapy that uses neutered viruses to deliver healthy genes to the body is particularly promising, given its potential to cure a range of disorders with the administration of a single treatment.

The first regulatory approval for this technology could come as soon as January, if the Food and Drug Administration gives the go-ahead to Spark Therapeutics (ticker: ONCE) for its one-time treatment that targets a rare, inherited retinal condition leading to blindness.

Other approvals could follow, igniting even greater interest in the field—and in the shares of several biotech companies making impressive headway in clinical trials

The enthusiasm for these treatments was evident in April among neurologists attending an industry conference in Boston. The group broke into applause after viewing a video about the remarkable results of a small clinical trial of an AveXis (AVXS) treatment for infants with a particularly severe form of spinal muscular atrophy, or SMA. All nine children who were dosed for at least 20 months were still alive, compared with the 8% of untreated children who typically would be alive by this point without major breathing support. Moreover, patients in the trial were hitting milestones, such as sitting unaided, that rarely occur with SMA.
AveXis’ gene therapy probably has gotten the most attention, but other replacement-gene-therapy companies, including Spark Therapeutics, Regenxbio (RGNX), Audentes Therapeutics (BOLD), and Voyager Therapeutics (VYGR), also are making strides in pursuing treatments for various diseases, including hemophilia and Crigler-Najjar syndrome, which afflicts a handful of newborns each year in the U.S. Gene therapy treatments likewise are being developed to alleviate conditions without a direct genetic link, such as Parkinson’s disease and age-related wet macular degeneration.

“Gene therapy will be a paradigm shift in drug discovery,” says Rick Schottenfeld, chairman of the Schottenfeld Group, a New York–based investment manager that holds Regenxbio shares.

THE GOAL OF REPLACEMENT gene therapy is to replace faulty genes with normal ones, in the hope of producing significant benefits or even cures. The process involves packaging healthy genes into neutered viruses, usually relatively harmless adeno-associated viruses, which then act as vectors delivered in a single dose either into the bloodstream or the area where the disease is manifest. The neutered viruses are designed to attach to targeted cells and deliver the new genes into the nucleus of the cells, along with so-called promoters that help prompt the new genes to direct cells to make critical proteins that are otherwise lacking or ineffective.

The most attractive targets are monogenic diseases, such as SMA, which are caused by a mutation on a single gene that prevents production of a vital protein. Many of the diseases lack effective treatments.

Neurologists aren’t alone in cheering the promise of this therapy. On Wall Street, the combined market value of a group of replacement-gene-therapy companies tracked by Chardan, a New York investment bank, has risen more than 70% this year, to about $8.7 billion. Yet stocks such as Regenxbio, a leader in developing viral delivery mechanisms, could have considerably more upside, as could AveXis and Spark.

“From an investment point of view, there is tremendous promise over the next five to 10 years,” says Marshall Gordon, senior research analyst for health care at ClearBridge Investments. “We’re near the beginning of what could be a long line of clinical successes.”

Josh Schimmer, an analyst at Evercore ISI who began coverage of six gene therapy stocks last month, agrees. “There is a sea of unmet medical needs in gene-specific diseases that can be treated with gene therapy,” he says. “The power of this platform is potentially enormous and is just getting started.”

One positive for gene therapy, Schimmer says, is that the approval body within the FDA is the Center for Biologics Evaluation and Research, which has been more lenient than the agency’s larger Center for Drug Evaluation and Research in approving testing protocols and treatments.

For example, AveXis got the go-ahead to study approximately 20 patients in its pivotal Phase 3 SMA trial (the final treatment trial) without an untreated control group. The company has been talking to the FDA about the possibility of an accelerated approval of its treatment, which could put it on the market next year.

Another bullish development for the technology and the stocks is the growing interest of big drug companies such as Pfizer (PFE) in gene therapy, both to hedge the potential disruption of existing treatments for diseases like hemophilia and to take advantage of the commercial opportunity. That could lead to takeovers of some smaller gene therapy companies. Pfizer vowed to become a “leader” in gene therapy after its purchase last year of privately held Bamboo Therapeutics.

Yet investing in pure-play gene therapy stocks also carries considerable risk, as the companies anticipate varying degrees of success. They tend to have little or no current revenue and are burning through their cash, raised via equity offerings that could continue until treatments are commercialized. If the treatments don’t get to market, the stocks could fall sharply.

A big issue for the industry and investors will be gene therapy pricing. At a time when treatments for rare diseases that need to be dosed indefinitely can cost $400,000 annually or more, how should a potential one-time cure be priced? Gene therapy companies haven’t said yet how they plan to price treatments, and Wall Street analysts and investors have said price tags of anywhere from $1 million to $4 million per patient for serious diseases could be justified when there are no alternatives—or when less effective alternative treatments cost more over time.

The current treatment for spinal muscular atrophy, Biogen’s (BIIB) Spinraza, was approved by the FDA last year. It costs $750,000 for the first year’s treatment and $375,000 a year thereafter. AveXis’ treatment looks equal or superior to Spinraza based on an admittedly small trial, and its administration is superior: a one-hour, one-time intravenous infusion, versus an injection into the spinal column. A pay-for-performance model might develop, with annual payments based on continued success, but that raises issues of portability.

If a patient changes jobs and health insurers, will the new insurer be forced to pick up the annual payments agreed to by the former insurer?

“There has to be a conversation,” says Matthew Patterson, CEO of Audentes, which is working on treatments for several rare diseases. “The last thing that we want to see happen is to solve incredible scientific challenges and [fail to] figure out a way to get patients access to them.”

REPLACEMENT GENE THERAPY using modified viral vectors is just one of several such approaches now under development. So-called CAR T-cell cancer treatments, including a Novartis (NVS) treatment that won FDA approval this past summer, involve genetically re-engineering cells in the immune system to fight cancer. Crispr gene-editing technology has also generated headlines; it aims to edit out a serious disease-causing genetic mutation. Despite the excitement, however, most Crispr companies have yet to test their treatments in humans.

In initiating coverage of a range of biotech companies recently, Barclays analyst Gena Wang wrote that “while significant advances have been made in recent years, gene-editing technologies are still in their infancy, and we see several key challenges ahead before they are ready for prime time.” These include “safe delivery of the gene-editing therapies, and evidence of stable and long-lasting corrected cells,” she added.

Researchers have been refining replacement gene therapy using viral vectors for the past two decades. It is considered a safer technique than Crispr. The new genes aren’t designed to integrate with the patient’s DNA and thus aren’t passed on when cells divide. This differs from Crispr gene editing, in which new DNA often is inserted directly in a patient’s genes using a cut-and-paste method. Replacement gene therapy reduces the chances of a potentially harmful off-target genetic insertion that could lead to cancer. But there are risks, including a possible immune-system response to the vectors. One of the most serious incidents occurred in 1999, when an 18-year-old patient receiving experimental replacement gene therapy died from a severe immune response.

The therapy has advanced as better viral carriers have been developed to get the normal genes to targeted areas of the body, including the liver, eye, and central nervous system. That’s important because the greater the targeting success, the greater the production of missing or deficient proteins. Some diseases, such as hemophilia, can be treated effectively in patients with only a fraction of the normal protein levels. (The missing or defective blood-clotting proteins among hemophiliacs are known as Factors VIII and IX.)

STILL, MANY QUESTIONS REMAIN, including whether success in small clinical trials can be replicated in larger numbers of patients. Many investors are used to clinical trials that involve hundreds and even thousands of patients to demonstrate a drug’s effectiveness. By comparison, the initial AveXis trial enrolled just 15 infants with SMA.

“The thing about gene therapy is that because the results are so dramatic, you don’t need many patients to show a drug is working,” says Gbola Amusa, head of health-care research at Chardan. And with rare diseases, there are a limited number of patients to study.

Whether the treatments will prove effective over multiple years, or a lifetime, remains to be seen. Gene therapy has been effective for as long as seven years in humans, offering the hope of longevity. “The potential to cure disease is the Holy Grail of medicine,” says Amusa. “Traditional therapies often have a limited impact on patients. Gene therapy has the potential to turn a two-year life expectancy for an SMA 1 patient into 70 years.” (SMA 1 is a severe form of spinal muscular atrophy.)

If these treatments ultimately stop working, it might be difficult to re-treat patients with the same therapy because their bodies probably will have developed immunity to the viral vectors that initially delivered new genes. That means the viruses probably would be attacked by the patient’s immune system. Some companies are working on ways to address this issue, such as using different viral vectors.

A single dose of a gene therapy can involve trillions of viruses. Getting consistent manufacturing quality is a keen concern of drug regulators. The industry’s view is that manufacturing techniques are advancing and should be up to the job if treatments are approved.

Hemophilia is one of the biggest targets for gene therapy, as it afflicts about 20,000 people in the U.S. An estimated $5 billion to $10 billion is spent annually to treat the disease, much of it on replacement blood-clotting factor. BioMarin Pharmaceutical (BMRN), Spark, and Sangamo Therapeutics (SGMO), in partnership with Pfizer, are developing gene therapy treatments for hemophilia A, the most common form of the disease. Spark (also partnering with Pfizer), uniQure (QURE), and Sangamo are targeting hemophilia B.
Hemophiliacs generally need regular infusions of blood-clotting factor to control bleeding, which can run to $400,000 per patient annually. And even with the clotting factor, they can be subject to bleeds, including debilitating bleeding in joints. Many hemophiliacs, including children, probably wouldn’t be eligible for gene therapy, and others might feel little need to switch from currently effective therapies. Still, the gene therapy market could be large, especially if the treatments result in steady levels of the clotting factor for an extended period of time.
CHOOSING AMONG THE SHARES of companies developing replacement gene therapy is challenging, as each company has different strengths, and none has traditional financial metrics on which to be judged. Amusa, the Chardan analyst, favors Regenxbio, calling it “the best way to broadly play the emergence of vector-based gene therapy.” The company, based in Rockville, Md., is licensing viral vectors to about 10 partners, including AveXis and Audentes, and will get royalties estimated at about 10% if those treatments are commercialized. Regenxbio also has several internally developed treatments. The breadth of its initiatives makes it the closest thing to a gene therapy mutual fund.
Amusa has an aggressive $75 price target on Regenxbio, compared with its recent price of $29, based on its platform and what he views as multiple potential catalysts. These include AveXis’ SMA treatment and Regenxbio’s own treatment for age-related macular degeneration.
Shares have risen about 40% recently amid greater enthusiasm for the company’s internal drug candidates, including its treatment for macular degeneration, a potentially large market with more than a million patients in the U.S. Regenxbio’s treatment is designed to produce an antibody, a form of protein, that inhibits the formation of leaky blood vessels near the retina that harm vision. It is designed as a therapeutic agent, not a cure, and a replacement for current wet-macular-degeneration drugs like Eylea that need to be injected into the eye.
Regenxbio is due to report initial results for its macular degeneration trial by the end of 2017, and also trial results involving a gene therapy treatment for homozygous familial hypercholesterolemia, or HoFH, a rare inherited disease that leads to ultrahigh cholesterol levels and often results in the death of patients in their 30s and 40s. The company also plans to start a clinical trial in 2018 for a treatment for mucopolysaccharidosis type 1, or MPS 1, a rare metabolic disorder that usually leads to death by age 10.

“We want to be a leader in the development of gene therapy treatments through both internally developed candidates as well as our partnerships,” says Regenxbio chief executive Kenneth Mills. “By the middle of next year, we expect to have the broadest and deepest pipeline of product candidates in clinical development,” he adds.
AVEXIS HAS HAD A BIG RUN, with shares doubling this year to $97. Bullish investors expect the company to seek and possibly win accelerated approval for its SMA treatment based on its Phase 1 trial. AveXis is expected to announce later this year whether the FDA will consider accelerated approval. There are an estimated 300 to 400 babies born in the U.S. each year with SMA 1, the most common genetic cause of infant mortality.
The consensus is that the FDA will want to see results of a pivotal Phase 3 trial set to begin in the current quarter before weighing approval, probably in 2019 or 2020. One factor in favor of a delay is the availability of the Biogen drug. Still, the Street might be underestimating the potential for accelerated approval, given the impressive early-stage trial results and evidence of regulators’ increased flexibility.
Amusa lifted his price target on AveXis to $135 last month from $102.50 while maintaining a Buy rating, based on the company’s move to broaden its market opportunity by tackling SMA 2. That is a less severe form of the disease, but one that often leads to the death of patients in their 20s. AveXis is dependent on its SMA treatment. If it hits unexpected roadblocks and doesn’t get FDA approval, the stock could collapse.
Spark is expected to get approval for its retinal gene therapy for a condition known as RPE65-mediated inherited retinal disease, but the condition is rare, affecting perhaps 1,000 to 2,000 people in the U.S. Spark probably needs success in a larger market—hemophilia A—to justify its $3 billion market value. It has generated impressive clinical trial results with a hemophilia B treatment, partnering with Pfizer. However, Pfizer gets the bulk of any profits. Spark has full ownership of its hemophilia A treatment.
Spark so far has released limited data from its Phase 1/2 hemophilia A trial, with information on just three patients. The news is encouraging, showing consistent levels of Factor VIII in patients’ blood after receipt of the therapy.
“We look for companies where we see platforms that can generate serial successes and not just a single product,” says ClearBridge’s Gordon. “Spark has one of those platforms.”
BioMarin—a large biotech company with several commercialized drugs—is ahead in developing a hemophilia A gene therapy, but one of its clinical-trial results showed a wider range of Factor VIII levels, potentially giving Spark an edge.
Wang, the Barclays analyst, began coverage of Spark earlier this month with an Overweight rating and a $104 price target, against a recent price of $87. “Despite increasing competition, Spark’s hemophilia A and B programs demonstrate the likely potential to achieve best-in-class profiles,” she wrote, noting that success in hemophilia A “appears only partially priced in” to the stock.
AUDENTES THERAPEUTICS is targeting two deadly ultrarare genetic diseases—X-linked myotubular myopathy, or XLMTM, and Crigler-Najjar syndrome—and expects to have initial reads from its Phase 1/2 trial later this year. It also is developing a treatment for Pompe disease, another rare disorder, that could begin a clinical trial next year.
Audentes shares have moved up sharply in recent months to $27 from $14, giving the company a market value of $760 million. CEO Patterson says the rally might reflect investor excitement as the company begins clinical trials. He notes that the treatments for XLMTM, a neuromuscular disorder that is usually fatal by age 3, and Crigler-Najjar, which prevents the breakdown of bilirubin, are designed to express the needed proteins only in targeted places—the skeletal muscles and liver, respectively. Bilirubin is produced from the natural breakdown of red blood cells.
Voyager Therapeutics’ lead treatment is for Parkinson’s. It aims to treat the progressive nerve disease by stimulating production of an enzyme that helps the brain synthesize dopamine, a process that gets badly impaired in the later stages of the disease. It is administered through brain surgery and differs from other gene therapies that seek to provide a cure.
Voyager reported encouraging Phase 1 trial results earlier this month that showed clinical benefits in patients with advanced disease. It plans to move the treatment to a pivotal Phase 2/3 treatment later this year. Evercore ISI’s Schimmer has been bullish on Voyager, whose shares doubled to $17 in the wake of the Parkinson’s news, given the high unmet needs of patients with the advanced disease. In a client note after the Voyager news, Schimmer reiterated an Outperform rating and $21 price target, writing that “our leading candidates for the ‘next big thing in gene therapy’ are Voyager, Regenxbio, and Audentes.” Private companies also are active in replacement gene therapy, including Agilis Biotherapeutics and Solid Biosciences.
As one of the most promising areas of biotechnology, gene therapy might bring significant benefit or even cures to patients with a range of serious genetic disorders, and alleviate diseases such as Parkinson’s and macular degeneration. Given the potential, both near and long term, investors might want to gain exposure through stocks such as AveXis, Regenxbio, and Spark Therapeutics.