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Shares of Sarepta Therapeutics (NASDAQ:SRPT) ended last trading week with a bang as shares advanced some 18.0%. The reason was surprisingly not even good news from the company itself.

As competitor Prosensa issued poor research results for a competing drug, the cake for Sarepta might have become bigger if its candidate will be approved. At the same time, the probability of such an approval might have diminished.

Given the extreme outcomes and the lack of knowledge from my end at this point in time, I stay on the sidelines.

Bad News Is Good News

The spike higher was entirely caused by the news of Prosensa Holding (NASDAQ:RNA) which shares fell over 70% on Friday. The Netherlands-based company's experimental muscular dystrophy drug failed to show effectiveness, in this case to help patients to walk better in clinical trials.

Prosensa works together with GlaxoSmithKline (NYSE:GSK) to develop the treatment. As a result of the poor performance, the partners will make a full evaluation of all studies to be completed by the end of this year. The study on 186 boys in a time period of almost a year did not show improvements in the 6 Minute Walking Distance test over placebos.

A Decimated Stock

A Bloomberg article estimates that analysts were looking for sales of $350 million for the drug by 2020, which now may never materialize. While other results from separate studies are expected next year, many investors have thrown in the towel already.

The shares of Prosensa were sold to the general public as recent as June of this year, when they were offered at $13 per share. This made it an extremely painful offering for early day investors.

Valuation Implications For Sarepta

Following the announcement of the results, when Prosensa's shares fell 70%, thereby wiping out roughly $500 million in market capitalization, shares of Sarepta were on the rise.

In Friday's trading session, shares rose by 18%, thereby boosting the market capitalization of Sarepta by some $250 million.

The interaction clearly shows the competitive dynamics and the market perception for approval of drugs in the area. The combined market capitalization of both firms fell by $250 million, reflecting that potential FDA approval of Prosensa's or Sarepta's drug has become much more unlikely. The benefit for Sarepta is that it seems that it has lost a major competitor, in case its own product becomes successful and will be approved.

Investment Thesis

The news is both good as bad for Sarepta whose shares have already returned some 70% so far this year, after witnessing insane returns in the year before.

After these returns shares are valued close to $1.5 billion, including a net cash position of around $150 million. Note tat the company is burning cash at a rapid pace though at the moment.

So it all depends on Sarepta's Eteplirsen approval while Drisapersen seems to have failed. The company is optimistic though, as ventilated at a recent healthcare conference organized by Morgan Stanley (NYSE:MS).

Sarepta plans to submit a New Drug Application for the treatment of Duchenne Muscular Dystrophy. The filing is expected to happen in the first half of 2014. Given the failure of Drisapersen, it has no visible competition at this point in time for its candidate, which obviously is positive news.

So the cake will be bigger for Sarepta upon approval of Eteplirsen, yet the probability of actually cutting the cake might have diminished slightly as both firms were using similar research methods.

As I cannot accurately judge the chances, I remain on the sidelines. Just ask shareholders in Prosensa Holdings how painful it can be if you are wrong.

I remain on the sidelines.

Source: Sarepta Therapeutics: A Bigger Cake Outweighs A Lower Chance For A Party