Wave Life Sciences: Huntington’s Hypotheses, GSK Collaboration Catalysts To Move Needle

Investment Summary

As we continue our search in FY23′ for under-exploited names seeking to create medical breakthroughs in complex diseases, investors should know there’s plenty of alpha opportunities available. Immediately we turned to Wave Life Sciences Ltd. (NASDAQ:WVE) following its impressive run in FY22′ [Exhibit 1]. At the same time, it has broken away from the S&P 500 and the ‘jaws’ of the divergence continues to widen [Exhibit 1a].

WVE has novel hypotheses across numerous complex diseases, however it’s the company’s progress in creating a breakthrough for Huntington’s disease that has piqued our interest most. Here I’ll run through our investment findings for WVE and demonstrate that market positioning is bullish for the stock, providing confluence for its rally to extend to price objectives of ~$7 and then $11, roughly 21%–90% upside potential respectively. Net-net, we rate WVE a buy.

Exhibit 1. WVE weekly price evolution since December FY20′, noting hard rally off May FY22′ lows.

Exhibit 1a. Divergence from benchmark widening whilst covariance structure shifting downwards substantially

WVE recent developments underpinning buy thesis

1. GSK Collaboration

In December, WVE entered into a collaboration with GSK (GSK) to advance the development of its oligonucleotide therapeutics hypotheses. The 4-year research term will involve the combination of GSK’s human genetics research and commercial reach with WVE’s PRISM platform. It should be noted that PRISM is the only oligonucleotide platform that offers three RNA-targeting modalities such as splicing, editing, silencing, etc. The collaboration is a catalyst for WVE as it will provide capital and funding support to advance 3 pipeline assets.

In addition, GSK will receive the exclusive global license for WVE’s WVE-006 program for alpha-1 antitrypsin deficiency (“AATD”). The company will receive an upfront payment of $170mm, broken into $120mm cash and $50mm equity consideration. Moreover, there’s an additional $225mm and $300m on the table for developmental and sales milestone respectively, not to mention the tiered royalty structure should WVE-006 convert from the company’s pipeline. There are numerous advantages of this, by estimation. First, it allows WVE to build out its WVE program into potential commercialization without taking on additional execution risk capital. Second, GSK benefits by eliminating the pipeline risk in building out its own AATD programs. In our opinion, this is a large vote of confidence in WVE for investors to go by.

Exhibit 2. WVE-006 descriptors and preclinical data findings

2. Huntington’s disease advancements

It’s worth mentioning that WVE recently provided updates on 2 clinical trials of its investigational new drugs (“INDs”). The first update was on results from a study investigating chromosome 9 open reading frame 72 gene (“C9orf72”) mediated amyotrophic lateral sclerosis (“ALS”) and frontotemporal lobar degeneration (“FTD”), [collectively “C9-ALS FTD”]. Results showed effective and long-lasting targeting of the drug WVE-004.

Second, and what’s piqued our interest most, was first data readouts from the ongoing Phase 1b/2a SELECT-HD trial for Huntington’s Disease (“HD”), also known as Huntington’s chorea. For the benefit of our readers, you might be interested to know that HD is an autosomal dominant, progressive, neurodegenerative disorder. It’s a tremendously complex condition, characterized by uncontrolled hyperkinetic movements [dyskinesia, chorea] and cognitive decline. It is caused by a CAG trinucleotide repeat expansion in the huntingtin gene, which in turn encodes for the huntingtin protein. The expanded CAG repeat then leads to the production of an abnormal form of huntingtin allele, that is more prone to aggregation and toxicity.

The pathogenesis of HD is not fully understood, but it is thought to involve multiple mechanisms that contribute to the degeneration of neurons [brain cells] in the basal ganglia segment of the brain. One of the main mechanisms seen is the accumulation of the abnormal huntingtin protein in the neurons. The abnormal huntingtin protein aggregates in the neuronal cells, forming intracellular inclusions appropriately called huntingtin aggregates. These aggregates are believed to disrupt the function of the neurons, leading to their death, resulting in the multivariate presentation of the disease. On this, the disease progression of HD is variable and can range from mild to severe. The onset of symptoms typically occurs in the 3rd or 4th decade of life, and is often only diagnosed at this point. As it stands, HD is ultimately fatal, with death occurring on average 15-20 years after the onset of symptoms. Hence, any progression in treating HD, or even preventing its lineage through childbirth, is a major medical breakthrough in our opinion – precisely the reason we are constructive on WVE in the first place.

Within the SELECT-HD study, WVE demonstrated target engagement with WVE-003 that was selective for the HD-associated allele. It’s important to note that WVE-003 is currently the only HD drug in clinical development that is allele-selective. It has been designed to selectively lower the levels of mutant huntingtin protein by targeting a single nucleotide polymorphism that presents on the mutant allele, but not on the normal allele. This is a very key distinction, and a logical hypothesis in our estimation.

Subsequently, results from the SELECT-HD study showed that WVE-003 reduced levels of mutant huntingtin protein in cerebrospinal fluid (“CSF”) after administering a single dose of the compound, at either 30mg or 60mg [Exhibit 3]. Analysis of CSF samples collected from participants in the 30mg and 60mg treatment groups showed a mean reduction of 22% in mutant huntingtin protein levels at the 85 day follow up. The difference in mean reduction compared to the placebo group was 35%, a statistically meaningful result.

In our opinion, the essential takeout from the data was that the normal huntingtin protein was preserved, which is consistent with the drug’s allele-selective action. A total of 18 participants [n=18] have received the 30mg, 60mg or 90mg dose, of WVE-003, or placebo [n=6]. Note, at the time of analysis, none of the participants dosed with 90 mg had reached the 85 day follow up [so this cohort is not included in the biomarker analysis], but WVE presented the data at the Huntington’s Study Group (“HSG”) annual meeting in Tampa Wave during November FY22′. A similar safety and efficacy profile was observed.

Exhibit 3. Dose-response data for the 30mg and 60mg treatment arms of the SELECT-HD study, investigating WVE-003 in HD.

Market positioning in WVE to guide investment reasoning

Being a clinical stage biotech, sales and earnings growth aren’t factors we can go by in prescribing a valuation. It is therefore essential to understand how the market is positioning in WVE to guide price visibility over the coming months. First, we’ll point investors to the following charts that demonstrate various points on order flow and the actions of market participants.

You’ll note in Exhibit 4 that money flows [in red] into and out of WVE have compressed from June/July FY22′ highs. It’s a busy chart, but you’ll also notice the relative strength versus the S&P 500 [black] and the WVE share price [blue] each rallying alongside each other. This is unsurprising given the findings shown in Exhibit 1a in our opening paragraphs.

What’s important to take from the chart below is that large money flows have corresponded with a positive price response with WVE, and with current money flows lifting to the upside, this creates the case for the rally to continue.

Exhibit 4. Large capital inflows corresponding to positive price response in WVE equity. Further inflows may justify the rally to extend

Next question we sought to answer was to identify where the money flows were stemming from, on the institutional or retail side. Whilst there’s numerous ways to look at this, one simple measure is to compare daily volume trends with the negative and positive volume indices.

As a reminder, an uptick in the negative volume index (“NVI”) indicates ‘smart-money’ flows, as institutional sized investors typically buy on lower-volume days. Meanwhile, the positive volume index (“PVI”) illustrates more of retail inflows/outflows, depending on the price action.

The key takeout from the chart is that since December, the bulk of the volume and price trend has been driven by the NVI, underscored by the upward tilt in the NVI. At the same time, the daily volume trend has drifted lower, despite the WVE share price rally.

Exhibit 5. WVE price action corresponding with gross volume, NVI and PVI studies.

With respect to available price targets, we first traced the fibs down from the FY21′ highs to the May FY22′ lows. It is now riding the 50DMA as support after it crossed the 250DMA last year.

You’ll also see that WVE has rallied hard off this low point on a weekly basis, and recently tested the 78% mark on the retracement. It failed to break this mark, but if it catches another bid, we’d be looking for the next target to $7.20 then to $11.90. With a further pullback, target would be around the $5 mark.

Exhibit 6. Extensive rally from May FY22′ lows now looking to test $7.20 as the next key price objective

As to where the trend might go, we’d note that WVE’s price distribution is still bullish above the cloud, with the lagging line well in support of this. Note, the cross of the cloud to the upside to start the new year, providing additional bullish support. At the same time, on-balance volume has wormed higher in continuation of its longer-term uptrend. Recall, that investment funds and institutions will allocate slowly to build a position, in small percentages of the daily volume [in dollar terms], hence the value of checking on-balance volume. This is a bullish setup in our estimation.

Exhibit 7. WVE bullish above the cloud, with additional confluence from on-balance volume suggesting long-term buyers are present.

As such, we’ve got upside targets to $6.95 then $10.70 in our point and figure studies. These are tremendously bullish price objectives that support our buy thesis, demonstrating potential for the stock to push to these levels.

Checking the previous targets, we’d note these have served investors well to date, giving more confidence in using them. These numbers are also supported in the WVE options chain in Exhibit 9.

Exhibit 8. Upside targets to $6.95 and $10.70 after recent thrust off lows

Exhibit 9. WVE options chain

In short

WVE is embarking on an attractive growth route that we believe has the legs to continue into the medium-term. We are most interested in the HD developments, although it should be noted the company has several other pipeline assets worth staying constructive on. Investor positioning in the stock corroborates its potential to re-rate higher, back above its FY21′ highs. Those investors who entered in FY22′ have already recognized substantial upside from the previous lows. Net-net, we rate WVE a buy at $5.80–$6, seeking a return potential to ~$7 and then ~$11, seeking 21%–90% upside potential.