Wave Life Sciences Ltd.

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

A clinical-stage biotechnology company focused on developing therapies for genetically-defined diseases using its proprietary platform for designing, developing, and manufacturing stereopure oligonucleotides.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Wave Life Sciences Ltd. (WVE) is a clinical-stage biotechnology company focused on developing novel treatments for genetic diseases. The company’s core technology centers around stereopure oligonucleotides, which are synthetic molecules that are designed to target and modify the behavior of RNA within cells. WVE’s goal is to create more effective and safer drugs to treat a variety of genetic diseases including CNS, hepatic, and muscular diseases.

Revenue Model and Distribution

WVE is a development-stage company. Thus it currently generates no revenue from selling products. Instead, revenue comes primarily from milestone payments, collaboration agreements, option fees, or sales of research materials. The company has several partnerships with major players in the biotech space, including GlaxoSmithKline (GSK) and Takeda Pharmaceuticals, which will provide future income depending on product success. WVE has limited sales capabilities.

Industry Trends

The biotechnology industry is a high-growth sector, driven by increasing demand for novel and effective treatments for a range of conditions, especially rare genetic diseases. Technological advancements in areas such as genomics and personalized medicine, as well as increased regulatory support are leading to more investment in biotech R&D and greater chance for treatments to hit the market. The oligonucleotide therapeutic industry is rapidly growing. While traditional pharmaceuticals have their uses, oligonucleotide therapeutics are becoming more prominent because they can be very precise in targeting diseases. As RNA has become a target for different treatments and clinical applications have expanded, companies involved in RNA medicine research have attracted substantial market attention and investors are expecting high returns from them, creating pressure on the industry.

Competitive Landscape

The oligonucleotide therapeutic field is highly competitive, with many companies, both large pharmaceutical players and smaller biotechs, seeking new solutions. Competitors include Ionis Pharmaceuticals, Alnylam Pharmaceuticals, and Biogen, with the competitive environment increasing as more therapeutic applications for oligonucleotides emerge.

What Makes WVE Unique?

WVE’s competitive advantage lies in its proprietary platform, “PRISM,” which enables the company to generate stereopure oligonucleotides (single-isomer). These molecules are intended to have several key advantages. These include:

Increased potency and efficacy.
Improved selectivity and safety profiles.
Reduced manufacturing complexity and cost.
Ability to target multiple genetic targets and apply to several types of diseases.

Financial Analysis

Balance Sheet: WVE’s balance sheet reveals a mixed picture. As of 2022, cash and cash equivalents totalled approximately $150 million, against total liabilities of nearly $220 million. The company has a negative equity of ~68 million. A concerning trend is the constant increase of net losses, which are caused by high spending on research. While the company has decreased its operating expenses, it’s doing so through cutting research spending, which may hurt long term growth prospects.

While cash is good for current operations, they need to raise more money eventually since they are not profitable.

Income Statement: WVE is still not making profits. In the year ended 2022, the company reported a net loss of approximately $250 million. R&D expenses are huge, at $180 million, and SG&A is around $80 million. While the revenue has increased as a result of collaborations, it is still not nearly enough to offset the losses. The negative operating margin of the company shows that it is still far away from turning profits. It depends on external funding.

WVE’s revenues are subject to fluctuation since they depend on collaboration agreements. When these agreements are cancelled, or payments are deferred, it hurts the company’s finances.

Cash Flow Statement: Cash flow is negative, even after adding back noncash expenses such as depreciation and share-based payments. Negative cash flow from operations shows that WVE is unable to support its operations with its own resources. Net cash used in investing activities shows that even with reduced investment, the company is not making significant progress in reducing cash burn. Net cash from financing shows that the company is still dependent on raising cash from various sources.

Moat Assessment: 2 / 5

WVE’s moat is narrow at best: It does have its proprietary PRISM platform. This can be a differentiator and can provide an advantage over traditional RNA therapies. However, there are some important factors why the moat has a low rating:

The effectiveness of the platform must still be confirmed through clinical trials and approval. Therefore, right now it’s in the development stage with uncertain future.
The competition is intense. There are many companies seeking novel RNA therapies.
Since the company is still in the early stages of commercializing its technology, it lacks the proven revenue generation ability.
While the PRISM technology is unique, there aren’t any guarantees that competitors won’t develop competing therapies or that WVE’s patents will protect them adequately. In summary, WVE does have some differentiated technology that may or may not form a wide moat. Due to the above factors, it is more likely that the moat is narrow at best, especially given the level of competition in this industry.

Risks to the Moat and Business Resilience

WVE faces several risks that could erode their moat and affect the business’s resilience:

Clinical Trial Failure: One of the largest and perhaps the most important risk to WVE is clinical trials failing or not showing significant positive results. The results from the clinical trials will prove whether WVE’s technology is truly effective. Many experimental therapeutics don’t get through the testing phase and can end up worthless.
Regulatory Risk: Gaining FDA and other regulatory approvals for their products will be a long and rigorous process with no guarantee of approval. This includes the risk that products can get rejected or approved with significant restrictions, hampering their market value. There is also risk involved in patent approval and management.
Competitive Threat: There are other pharmaceutical and biotech companies in the race to develop therapies based on RNA technology. The competitors, especially large cap pharmaceuticals, possess superior resources, financial strength, and distribution.
Manufacturing and Scale-Up Risk: Successfully scaling up production and maintaining quality control of their stereopure oligonucleotides, may create some unexpected costs or limitations that reduce profitability.
Funding: WVE is still burning through cash, and it’s dependent on external sources. If those sources dry up, it will be very difficult for the company to continue its operations and pursue research.
Market Adoption: Even if their therapies are approved, there is no guarantee for the market to be large enough to justify the high expenses incurred by the company.

Given that WVE is a clinical-stage biotechnology company, it has a very risky profile, and they have been facing some headwinds.

Understandability Assessment: 4 / 5

WVE’s business is mostly easy to understand, especially from the value-creation aspect of a company focused on novel therapeutics. WVE’s proprietary technology provides the business a moat. However, understanding their scientific concepts and RNA treatments is complex and may not be possible for lay investors. Their financial statements can have several complications, especially when analyzing collaboration agreements and revenue recognition, but, on a high level, are not too difficult to comprehend. The future will depend on the company’s science as well as its execution in the next few years. For a value investor, especially one not focused on biotech, it would take a lot of work to fully understand this company.

Balance Sheet Health Assessment: 3 / 5 WVE’s balance sheet reveals that the company is very reliant on equity financing, and the business does not have sufficient operating cash flow. The trend of decreasing cash and increasing losses also highlights concerns about long-term survivability. That’s not to say that the company is doomed to fail, just that there are significant risks going forward. As such, it is rated as a moderately risky company (3/5) by this author based on these issues.

Recent Concerns/Controversies/Problems

In their most recent reports and earnings calls, the company has been dealing with funding shortages, a delay in enrollment in clinical trials of their product candidates, and some setbacks related to collaborations. These setbacks will influence the long term prospects of the company. WVE is attempting to counter this through cost controls and new collaborations. They’ve stated multiple times that they have a cash runway until mid-2024 but might not have sufficient cash to reach major milestones.

In their earnings calls, the management has noted that they are working to optimize their workforce and focus their efforts on key programs and strategic priorities. They’ve had to cut research and development expenses to conserve cash. Additionally, they have secured a collaboration agreement with GSK, which helps them finance their operations. However, that agreement is contingent on clinical success, as are most others in the RNA therapeutic space, which makes them a very uncertain source of future revenue. The key aspect of WVE’s future is the success in clinical trials as well as being able to reach commercialization, but for now, there are many potential roadblocks for the company to overcome. They are facing heavy competition, and their ability to secure funding in the future is not certain.