What happened

The downtrodden biotech space has kicked off the second half of 2022 with a boom. Hard-hit gene-editing and gene therapy companies in particular have started the back half of the year on the right foot. Underscoring this point, Bluebird Bio (BLUE 3.59%) stock has already risen by 17% over the holiday-shortened week as of Thursday's closing bell, according to data provided by S&P Global Market Intelligence.

What's more, shares of CRISPR Therapeutics (CRSP 0.77%) have gained 22.6% over the same period, and fellow gene editor Editas Medicine (EDIT 0.33%) also saw its equity rise in price by a healthy 20.7% this week. By contrast, Bluebird and Editas shares both fell by over 50% over the first six months of 2022, while CRISPR's stock price stumbled by a noteworthy 20% during the first half of the year.

Image Source: Getty Images.

What's behind this sudden trend reversal? The most likely explanation is simply short-sellers covering their positions (buying back their borrowed shares). In keeping with this theme, Bluebird, Editas, and CRISPR all saw a sharp rise in their short interest during the first six months of 2022. Short-sellers piled into these three names earlier this year due to the fact that they are all cash flow negative, which is a tough spot to be in during a persistent bear market and an era of rising interest rates. Bluebird, in fact, is staring down a serious cash crunch at the moment.

Short-sellers, for their part, are probably backing away at this stage for no other reason than to play it safe in the event that big pharma starts to go bargain shopping.

Why might big pharma target beaten-down gene-editing and gene therapy companies in the second half of the year? The key reason is that these high-value fields are starting to move beyond the research stage of their life cycle and into the realm of commercially available therapies.

Speaking to this point, Bluebird's gene therapies for beta thalassemia and cerebral adrenoleukodystrophy appear to be on their way toward a formal approval from the Food and Drug Administration (FDA) following a pair of positive advisory committee votes last month. What's more, CRISPR is also expected to file for regulatory approval for its Vertex Pharmaceuticalspartnered blood disorder candidate, exa-cel, later this year.

Are any of these three biotech stocks still worth buying? CRISPR is arguably the most attractive bargain among the three. The company's ex-vivo gene-editing platform has posted stellar trial results so far, and Vertex could very well decide to buy its partner as a result.

Bluebird, on the other hand, is a tough call. The company ought to have a compelling buyout case if the FDA does grant it a pair of approvals soon. The bad news is that the biotech's balance sheet may force a sale at a heavily discounted price (relative to the commercial potential of its lead assets).

Finally, Editas might simply get lost in the mix when everything is said and done. There are several gene-editing companies vying for the spot of top dog, and Editas' clinical pipeline lags in several key areas at the moment. Time will tell.

George Budwell has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CRISPR Therapeutics, Editas Medicine, and Vertex Pharmaceuticals. The Motley Fool recommends Bluebird Bio. The Motley Fool has a disclosure policy.

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Why Shares of Bluebird Bio, CRISPR Therapeutics, and Editas Medicine Soared This Week - The Motley Fool