By Jake King
Sarepta Therapeutics (NASDAQ:SRPT) had a tumultuous year, reaching an all-time high of $55.00 last October before tumbling to lows under $13.00 when the U.S. FDA suggested that the company would need to run a phase 3 trial of its lead drug candidate, eteplirsen, before filing for approval in Duchenne Muscular Dystrophy (DMD). Investors had pinned high hopes on the FDA allowing the company to file early due to the unmet need in, and severity of, Muscular Dystrophy. Many Sarepta investors were left scratching their heads following the guidance, as public commentary from the agency as recently as last Fall suggested some willingness to expedite the approval process. Sarepta remains a contentious name as investors await updates from the company, the FDA, and relevant data from competitors GlaxoSmithKline (NYSE:GSK) and Prosensa (NASDAQ:RNA) that will shed light on upcoming events and the natural history of DMD.
PropThink had the opportunity this month to interview one of Sarepta's largest shareholders, George W. Haywood. Haywood has owned Sarepta stock and been a filing shareholder since 2005 when the company traded as AVI Biopharma (AVII) with a focus on infectious diseases like Ebola and Marburg. AVI changed its name to Sarepta in the summer of 2012. Haywood attended Harvard University at the age of 16, receiving a BA in Biology before attending Harvard Law School. He subsequently headed Corporate Bond Trading at Lehman Brothers and High-Yield Bond Investing at Moore Capital. Haywood has been a private investor since 1998. He was the largest private shareholder and a board member at XM Satellite Radio (now Sirius XM (NASDAQ:SIRI)); the largest private investor in Martek Biosciences; and as the largest shareholder in AVI from 2005-2011, led a successful effort in 2010 to change the executive team at what is today Sarepta Therapeutics.
Jake King, PropThink Editor: Thanks for joining us George. You've owned SRPT since before eteplirsen was even being tested in humans. Tell us a bit about what drew you to the company back then.
George W. Haywood, Private Investor: What interested me then was the antiviral capabilities, which of course have been completely ignored by investors since eteplirsen and DMD. You can understand eteplirsen is an exciting product, and the implications are even larger. But the largest implications of all would include the entire antiviral capability. In other words, what is the unifying theme among DMD, Marburg, and Ebola? Of course, one would not normally group those diseases in any sort of construct. The unifying theme here is that if you can tinker with things on a RNA basis - if you can whack cells at that basic level by down-regulating or up-regulating processes on that level - you can do miraculous things. So the promise - and this is a promise that antisense had all along - the promise is absolutely phenomenal. But it's historically swung between incredibly exciting and very disappointing. But if you have an antisense product that looks like it actually, successfully does this sort of change at that level - and is safe - you have an astonishingly promising product. Well, that looks like it's the case here.
King: And when did that shift to DMD?
Haywood: It shifted when I'd done some reading and heard some stuff about the compound, later called eteplirsen. AVI had promising results in pre-clinical studies, and I went to the house of a friend of mine who was hosting a dinner for Children's National Medical Center in DC for people who were doing research there. And one of the guys doing research there, who made a presentation at the dinner, was Eric Hoffman. Hoffman, as you know, is a co-author of the canine DMD paper. It was unpublished canine research then.
I'll never forget asking him two questions, and his answers are words that I'll never forget. One was: "So what are the chances that the results you achieved in dogs could be achieved in humans?" And he said, "100%." I said, "100%? How could it possibly be 100%? Everybody knows that stuff works in mice; it works in dogs; and then it often doesn't work in humans." He said, "Well, maybe I should say 70%, but only because we'd never given the quantity of PMO to humans that I gave to dogs. So we can't be sure it's going to be safe. However, because of the molecular structure, I don't think there should be any safety concerns. But we can't be sure. So I should say 70%."
I said, "Okay. Why do you say it's a 100% probability of working if safety is not an issue?" He said it's because DMD is a disease of muscle cells and muscle cells are essentially identical across mammalian species. So since it works in dogs, it's going to work in humans." I said, "Wow. Okay. So how would you characterize the news if it does work? Would you characterize that as a very important medical breakthrough? He said, "Oh, no. You don't understand. This would make worldwide headlines. Nothing like this has ever been done before."
What caused me to really focus on DMD? That's the answer right there. And because the answers that he gave to the questions about PMOs were so definitive and so riveting, I was focused ever since then.
King: The market took SRPT from $50 to under $15 in November despite no news regarding the clinical activity of eteplirsen. What's your take?
Haywood: You're right: nothing changed in terms of the performance reported by the boys who are on eteplirsen. Nothing changed on that front. The answer is simply the regulatory pathway. The FDA is important. It looked to most observers like the pathway would be pretty quick. Because it looked like the perfect candidate for accelerated approval, it was particularly disconcerting to the market to find out that the FDA didn't seem to agree - that the FDA said what they said in the pre-meeting minutes . . . the regulatory pathway went from being strewn with rose petals to being filled with cactus and barbed wire.
Was it overvalued at $55? Well, not if you think the truth is that this drug works and that it's safe. It was really undervalued at $55. If your definition of overvalued is: "Well, whether the drug works is not the important thing right now - it's whether the FDA is going to let it be approved." Frankly, that's the ultimate reality. I don't care if I have a drug that cures cancer; if for some reason - good or bad - the FDA will not let me sell that drug, then I guess my stock is a zero. So, the answer to your question of is it undervalued now or was it overvalued then depends very much on the FDA.
Assessments are being made every day by the market as to how the FDA views this. Is the FDA going to look at this the way the [DMD] boys think they should and say, "Okay, this drug is safe. It has been given in massive doses in pre-clinical trials in animals. 960 mg/kg to mice, 320 mg/kg to monkeys, 240 mg/kg to dog, and there has never been a safety concern - no liver tox, no kidney tox, nothing. There has never been a hint of a problem. Biochemists will tell you that such a result is predictable given the molecular structure of the PMO.
I believe it's incredibly safe and with strong evidence of efficacy - admittedly in a very small number of boys. Why would they not want to approve this drug given that the disease is fatal and that the condition of people who have it worsens everyday? People were clearly stunned when the FDA didn't take that view.
King: Talk about the most recent interactions that Sarepta had with the FDA. The FDA essentially said, "We want a larger study before we approve eteplirsen," yet officials at the agency continue to suggest that they want to help expedite the approval process. How do you reconcile these signals?
Haywood: That's the big question. You have Janet Woodcock, the number two person at FDA, and Bob Temple at number four, saying various things, right? All of these things seem consistent with the FDASIA legislation that was passed in 2012 that basically says, "We in Congress are telling you [FDA] that we want you to take more aggressive postures on this. We want you to accept smaller trials; we want you to accept shorter trials; and we still want you to do your job and protect the safety of the public. But we want you to consult with patient groups - we want you to be a more aggressive, responsive, activist FDA." And so, not surprisingly, the higher-ups would say things that were consistent with that legislation.
You would think that the higher-ups saying those things would sort of permeate the whole organization, but maybe it was naive to think that bureaucracy would actually work. So that split between the division and the people who are making public pronouncements is a very difficult thing for us to understand- to figure out in which way that gap is eventually going to be resolved. The problem for the FDA, I think, is that they made some clear statements when they talked about the reasons for doing a [reverse]. One is the idea that if these boys are over 350 meters on the 6-minute walk test at baseline, that stability is kind of to be expected after.
King: --Ok, so back up and talk about that natural history data the FDA references.
Haywood: Craig MacDonald did a study recently. This was the most recent thing that came out that can be read to support the thesis that boys at over 350m baseline six minute walk test don't decline. But if you are going look at that study, you need to look at which boys over 350 meters at baseline we are talking about. Are we talking about boys over 350m that range up to 600m? Are we talking about boys over 350 who are seven years old? Are they including a milder patient type (phenotype) than the exon-deletion population in Sarepta's study? They included all of those kinds of patients in that study. They are including some Becker Muscular Dystrophy boys [weakness materializes later in adolescence and worsens at a slower rate]. It's not surprising that that data would give a different result than the data you would get from a group that actually looks more like Sarepta's trial: nine years old on average at the beginning of the trial (they're about 2.5 years into that trial, so these boys are now about 11.5 years old, on average) and they really haven't declined. I think anybody who knows DMD will look at that and say, "Are you kidding? You don't think that this is impressive? What are you talking about?"
This baseline concern, it's not really supported by historical data when properly sliced and diced and analyzed in a way that's applicable to this particular patient population. Those of us that were around Sarepta thought that these guys at the FDA were focused really hard on DMD. That may not be the reality. They said some nice things, but they are really busy doing a whole bunch of stuff, and more important, there isn't any real institutional familiarity with DMD. Frankly, there never was a product that can do anything with DMD. So I think they never really had looked at it deeply before.
Then the other thing is that, to say that because of the [failed] drisapersen results, we question this whole idea about dystrophin as a biomarker. I think they ignore what's obvious.
When the FDA looks at that data from the drisapersen trial - which I think they now have - and then look again at Sarepta, that might be a nice "out" for them to change gears.
Let's step back here. [GSK's] was a 180-patient trial in which they had some 5, 6, and 7 year olds. And so they have a bunch of people that are much younger than the people in the Sarepta trial. And on average [their 6-Minute Walk Tests] were down 40 to 50 meters from baseline - a bit more for the untreated - but basically they're all down 40 to 50 meters on average in a year. What is that consistent with? That's pretty consistent with what Sarepta has said. And of course, and most importantly, the treated boys' data were about the same as the untreated boys [in that study].
It's all because they're only getting 6mg/kg - because the drug [drisapersen] is so problematic from a safety point of view. I believe they couldn't give them enough to have a therapeutic effect. Somebody reading that as an indictment of dystrophin as a surrogate market is unusual.
I think the accurate reading of the [GSK/Prosensa] results is that drisapersen didn't cause dystrophin production to any meaningful degree. And if you're not creating dystrophin, guess what, you're not going to do a whole lot on DMD.
On the other hand, eteplirsen, because it's safe, can be given in a much larger dose, in doses that actually do create a meaningful amount of dystrophin. That's how I see it.
King: So we're assuming that Sarepta's going to move on to a phase 3 before filing for approval. What are your expectations for a phase 3. What about the FDA questioning the 6-Minute Walk Test as an appropriate endpoint?
Haywood: Get bigger. They would have a larger, longer placebo-control. This, I assume, would be the length of the trial, maybe a year on placebo before switching. And then, maybe 90 boys in the trial, with 30 on placebo and 60 on drug.
And on the endpoints, it reminds me of the saying, "democracy is a terrible form of government, but it's better than all the rest." The 6-minute walk test is not a particularly great test. But so far, I don't know of a better alternative. It's been the accepted metric for DMD for a long time. So again, that's one of the things that kind of made people very disconcerted when the FDA started to question this. Fine. Just tell us what test you want in order to do this phase 3 trial. Figure it out and get it done. If you have a better idea than the 6-minute walk test, tell them what it is and they'll do it. If not, let's just do the 6-minute walk test.
King: What are your expectations now? Do you think there's any chance that the FDA still allows some sort of expedited approval process?
Haywood: It's hard to say. I still find it very difficult to understand why accelerated approval is not appropriate in light of Congress' ruling last year on FDASIA. So, I guess the question is: can [the FDA] do another 180 [degree turnaround] on the pre-meeting minutes? And if so, on what grounds would they do a 180? I think that one obvious potential turnaround is on the phase 3 drisapersen trial. Get the data on those boys.
If I gave you water and you didn't produce any dystrophin, I don't think that I would be able to say: "Well, Jake got water and didn't produce any dystrophin. So we're questioning dystrophin as a biomarker." Drisapersen had the same effect on most of the boys who took it. It didn't really cause any dystrophin production. It really doesn't make any sense to use that as a comparator. So that would be grounds for a reversal from the FDA.
We can also look at the decline that these boys went through, the boys in the Prosensa trial, and the best way to look at it will be to go through those 180 boys and find out how many of them fit something close to the profile of the boys in the eteplirsen trial. Let's look at the inclusion criteria on the 6-minute walk test. Let's do 350 to 450 because that's basically what eteplirsen did. So, now that we've got boys around the right age, now we have boys around the right baseline 6-minute walk test - let's look at how they did. GSK knows. When we have full access to the GSK data, we should able to do that pretty quick.
I think with that kind of information in hand the FDA can, possibly, do a reversal. We won't know until we see all of the data.
King: What's your current thesis? Where do you see Sarepta, and the stock, in 3 years?
Haywood: Well, to answer that question - to answer all of the questions that you are raising - it's all based on the conviction that I have that this drug works and is safe.
I've followed this from the very earliest that I heard about it - five years, six years - and every step of the way has been consistent with where it is now. My thinking is based on a strong suspicion that this drug is efficacious, confers a benefit, and is safe.
When you say three years, I mean, assuming that's whatever time frame it takes to jump over the hurdles from the FDA - if the drug is on the market it could be a $300 to $400 stock, because the implications are enormous. Some people say that Exon-51 is more difficult than others exons to address - for reason that I don't fully understand - but these are people who do understand it. With other exons, the efficacy should be greater. And there are more market than DMD. The thrilling nature of this technology - and again what is the link between this and Marburg or Ebola - the thrilling nature of the technology is the broad applicability. The door opens once you get exon-51, and the other dominoes fall pretty quickly after that.
King: You recently made public a sizable position in Neptune Technologies (NASDAQ:NEPT). What's the investment thesis?
Haywood: Neptune is a company that focuses on krill oil. The thesis would be that fish oil is good for you - krill oil is better. There are two sides to the company. One is their nutraceutical business, a krill oil that you buy over the counter at whole food stores or Safeway. Right now, krill oil makes up maybe 3 or 4 % of the overall market for omega-3 fatty acid products like fish oil. That market is around $3-4 billion on an annual basis. If you believe that [krill oil] is a superior ingredient, there's no reason to think that it could not occupy 40 or 50% of the market. It is more expensive than fish oil, but typically, people who are taking something because they believe that it's a good for their cardiovascular health won't try to save 15 bucks a month to get the inferior product. Most people, if they're convinced that something is good for their cardiovascular health, will spend the money. And I think that if you look very, very deeply at krill oil, you do come to a conclusion that it is, for several reasons, nutritionally superior to fish oil.
Krill oil has got some tangible marketing advantages. It's more sustainable and better for the environment. People who buy health products kind of care about that, and as people understand what krill oil is, it will begin to occupy a much bigger portion of the omega-3 fatty acid market than it does now. That's been the case so far. I mean, over the last three years the growth has been very, very rapid.
Neptune also has a subsidiary called Acasti (NASDAQ:ACST), which is publicly traded. Acasti is 50% owned by Neptune and develops a drug called CaPre. CaPre is a concentrated form of krill oil targeting high triglycerides.
King: My biggest question, and I think that of most investors, is in regards to Amarin (NASDAQ:AMRN) and their fish oil product, Vascepa. There's a body of evidence that suggest these omega-3 products don't have an impact on cardiovascular events or cardiovascular outcomes. That doesn't concern you?
Haywood: I've always not liked the idea that krill oil will be judged in view of Amarin. I've never been particularly impressed with Vascepa, which is Amarin's drug. Vascepa is stripped out fish oil. It takes fish oil, which is a healthy ingredient, healthy substance, and you strip out half of what's in it. They take out the DHA, and DHA is a very healthy, helpful ingredient.
They took it out for reasons that I would call cynical. They took it out because they said, "Okay. The drug that works here is [Pfizer's (NYSE:PFE)] Lovaza. And Lovaza is very effective in lowering triglycerides, but it has a flaw. It also raises LDL." So they thought that they could have a marketing advantage over Lovaza if they lowered triglycerides and didn't raise LDL.
So they looked at fish oil and said, "Well, what does what? DHA, that raises LDL," which it does. And so they pulled that out and they've got stripped down fish oil - EPA. They call it Vascepa and they effectively lower triglycerides without raising LDL. And that's what they did. And the numbers back it up. DHA increases LDL. But look at the studies on average. DHA is also more effective at lowering triglycerides than EPA. Although it does raise LDL, it also raises HDL [good cholesterol].
It's the ratio between LDL and HDL that's important. And it's important to understand why. If you look at the functions of LDL and HDL, LDL, which is known as bad cholesterol, is typically involved in the transport of fats in the body, where it gets deposited in arteries and places where you don't want it to be deposited. HDL is good cholesterol. HDL actually has a mechanical function of taking fats out of the body. So even looking at the isolated ingredient of DHA, if it raises HDL as it raises LDL, it's probably not that bad for you on that specific basis. So DHA, you're actually better off taking DHA than not taking DHA, but they stripped out the DHA [in Vascepa] in order to have something they could tout as not raising LDL.
The nutritional superiority of krill oil, I think, is conferred by two ingredients that are not in fish oil: phospholipids and astaxanthin, which is the very powerful antioxidant that's in krill oil.
If you take studies out there that look at the effects of phospholipids on lipid profile (and phospholipids are extremely effective at lowering triglycerides and LDL) and you look at sort of the witch's brew - EPA, DHA, phospholipids, and astaxanthin, which is what krill oil contains - you have that one ingredient that tends to raise LDL, DHA, which Amarin decided to get rid of. But at the same time you have an abundance of phospholipids which are very effective at lowering LDL.
So net-net with krill oil, you get a lowering of LDL and a raising of HDL. And at the same time, you get a very effective lowering of triglycerides. I think an effective way of looking at it is if you look at the single bullet studies: What does EPA do alone? What does DHA do alone? What do phospholipids do alone? What does astaxanthin do alone? If you are going to rank those four ingredients in descending order of effectiveness at lowering triglycerides, you would start with phospholipids number one most effective; number two DHA; number three EPA; and number four astaxanthin (astaxanthin actually would be on the list because there's a study or two that you can find that where it has an effect of lowering triglycerides).
So to me, common sense kind of says: if you've got a drug that consists entirely of number three on the list of effectiveness at lowering triglycerides, and I've got a combination of the most effective, the second most effective, the third most effective, I just want to take a wild guess and say, "My drugs are going to work better, or my ingredient is going to work better because I've got number one, two, and three - and all you've got is number three." And early work, sort of preliminary results, seem to back up that thesis.
King: So how do you look at that relationship? How much do you think Acasti, or the pharmaceutical-grade krill oil CaPre, is being factored into Neptune's valuation?
Haywood: I do own some Acasti but I think that with Neptune you have much of the upside with Acasti. The drug itself - CaPre - has some of the risks that normally come along with a datapoint. Now, I think that the risks involved in the data here are substantially less than the risks that people in the biotech world are accustomed to when they're waiting for clinical trial results. If you want to bet on Acasti, this is the pure play. The other side is really not CaPre, because [Neptune] has a business. They've been selling krill oil, and it's not a crapshoot now because - and I think the market really hasn't focused on this at all - Neptune has the IP in the area of selling krill oil as a nutraceutical. They have just finished signing agreements with all of their competitors, under which their competitors will have to pay them a royalty on all sales of the krill nutraceuticals in the US market and in several markets overseas where [Neptune] has patent protection.
King: Yeah, Neptune just settled with Aker Biomarine, Rimfrost, and it looks like Enzymotec will be next. So maybe you can talk about that a little bit.
Haywood: What it means is that if you like krill oil, you've got to like these guys. [Neptune] essentially has a commission on everybody. That's a pretty damn attractive position to have. So if you buy a bottle of krill oil in the United States, you're going to be paying a cut of it to Neptune if you're not buying Neptune's krill oil.
King: --And what's the royalty?
Haywood: I would guess high single digit. That's one thing that [Neptune] did very well - assert this IP, file these patents, and litigate very aggressively. And that has resulted in the entire krill oil market, all three competitors, saying "Okay. We've got to pay you. You got a patent, your idea, we've got to pay you." And they'll be paying for a long time. And, they're going to pay [Neptune] in arrears for previous patent violations. That's pretty damn strong. And so that means frankly that if you buy the thesis that krill oil is better than fish oil, and that krill oil will be making substantial gains in market share since it's only about 3 or 4% of market, these guys can't mess it up themselves. Even if they never figure out how to market anything, as long as their competitors market, they're making some pretty decent money.
King: So it's a growth and execution story, or marketing and execution story. What do you think is going to drive that? Does Neptune lead that effort?
Haywood: I'm not sure Neptune is going to lead it, because they're not the biggest right now. Aker is the biggest and they're the ones that have shown themselves to be most adept at marketing, so far. I love the fact that I get a cut of their business, but I would like to see Neptune do better at marketing, because I think not only is krill oil superior to fish oil, but Neptune has the best kind of krill oil. That's a very strong position to be in.
In brief: Neptune dominates krill oil. Their dominance in krill oil is not reflected in their market share so much as in their commission on the entire industry. In that sense, they are the intellectually dominant firm for krill oil. They have the potential to gain market share versus the others because they have a superior product. I mean, their IP has provided them with a superior product, but they have been out-marketed by Aker. Aker is more than twice their size in terms of market share. If you believe in krill oil, Neptune is the way to play it because they get a cut of everybody's action and because they have the best krill oil. And there are strong reasons to believe that krill oil will be gaining very rapidly in terms of the overall share of the omega-3 market, which is a very large market that continues to grow. I think that Neptune could have 10 to 15 times the revenue they have now. I could be wrong about how much it grows, but if I'm wrong, I won't be wrong enough that it doesn't grow from here.
King: Thanks very much for your time George. We appreciate the insight and look forward to watching both of these names through the year.
Mr. King explained why he was buying SRPT at $18.00 just two weeks back, with an options strategy for involvement in 2014. You can read the report here.
Disclosure: I am long SRPT, NEPT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: PropThink is a team of editors, analysts, and writers. This article was written by Jake King. We did not receive compensation for this article, and we have no business relationship with any company whose stock is mentioned in this article. Use of PropThink’s research is at your own risk. You should do your own research and due diligence before making any investment decision with respect to securities covered herein. You should assume that as of the publication date of any report or letter, PropThink, LLC and persons or entities with whom it has relationships (collectively referred to as "PropThink") has a position in all stocks (and/or options of the stock) covered herein that is consistent with the position set forth in our research report. Following publication of any report or letter, PropThink intends to continue transacting in the securities covered herein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation. To the best of our knowledge and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and not from company insiders or persons who have a relationship with company insiders. Our full disclaimer is available at www.propthink.com/disclaimer.