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Sarepta Therapeutics (NASDAQ: SRPT), formerly known as AVI BioPharma, is the developer of the promising new treatment for Duchenne Muscular Dystrophy ((NYSE:DMD)) - a rare and devastating genetic disorder that occurs in roughly 1 out of every 6,000 births.

There are multiple types of muscular dystrophy, although Duchenne in particular is the most common. Children who are diagnosed with DMD are not expected to live long, as most mortalities occur soon after adolescence.

Sarepta has a handful of other compounds in development, but investors have mostly been watching the promising progress of eteplirsen (AVI-4658) - their Phase II DMD treatment. Not only has the drug shown big promise with an incurable and devastating disease, but the market potential for a DMD treatment is quite enormous. My estimates suggest that eteplirsen could generate at least $600 million annually, heavily depending on the price that it is sold at plus future competition. I do believe that the drug will see very widespread use by doctors following FDA approval and additional confirmation that its performance in recent clinical trials is attainable.

SRPT moved up over 14% last Friday following news that the equity research team at Cowen initiated coverage on the company with an "outperform" rating. This seems to be adding to the notion that the FDA will approve eteplirsen with the current clinical trial data. While this recent rally does not recover much of the losses seen right after the release of the phase II data for eteplirsen in October 2012 (shares spiked as high as $45), it does show that others are seeing the value potential of this orphan drug.

A Discussion On Muscular Dystrophy And Orphan Drugs

Investors are increasingly excited about muscular dystrophy due to its status as an orphan disease. Any orphan disease affects less than 200,000 people in the United States. In Europe, the orphan classification is given through low incidence rates - specifically anything less than 5 per 10,000 births. Orphan drugs, which target these diseases, are essentially "subsidized" by the government in order to compensate for the fact that these drugs will have smaller target patient populations after approval.

In the United States, the FDA gives orphan drugs 7 (instead of 5) years of exclusivity on the market. In Europe, these drugs receive up to 10 years of exclusivity. There are also tax incentives specifically designed to incentivize companies to create orphan drugs.

Although the indications of orphan drugs truly limit their potential, they seem to be surprisingly profitable given the extended periods of exclusivity and the lack of alternatives. There are thousands of orphan diseases that have yet to be cured (or at least treated with a specifically designed drug). Investors in the small pharma and biotech space seem to have noticed this, while seeing that the global market for orphan drugs ballooned to over $85 billion (according to NIH statistics from 2009). Orphan drugs were very popular investments in 2012, and should continue to be so this year due to their ability to generate substantial, prolonged revenue after approval.

SRPT - The Orphan/Value Play You Might've Been Looking For

Although Sarepta has more than tripled in value within the last few months, I think that there is certainly value potential left in SRPT based on what should be a relatively easy market launch following FDA approval. The problem seems to be that a good number of investors don't believe that the FDA will approve eteplirsen with a phase II-based NDA. The FDA is notoriously unpredictable in its decision-making, but a rejection would be surprising. Eteplirsen is proven in efficacy (and safety, given that it has not caused any major adverse events), and will target patients with a degenerative disorder that kills most patients before they even become adults. I would imagine that the FDA would justify rushing eteplirsen's development to address the unmet need for DMD.

There are an array of muscular dystrophy treatments in clinical development at various stages right now, although it can be argued that eteplirsen has the best current overall profile, and is looking at a possible approval in 2013 due to its promise.

Investors are still attempting to figure out when the FDA approval will come, which seems to have taken attention away from the actual value of the company (and pipeline). Sarepta is trading at a value of roughly $710 million. Leading up to eteplirsen's approval (after an NDA submission), I believe that we could definitely see that value jump to $1.2 billion. This means that investors who are willing to buy SRPT at its current price have a good chance of making 70% (or more) down the road.

Source: Sarepta Recovers Lost Ground With Bullish Analyst Activity