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Summary

  • Blockbuster drug: Eteplirsen produced convincing phase 2 test results, with strong possibility of accelerated approval in the near future.
  • Urgent need to treat rare fatal disease Duchenne Muscular Dystrophy, leading genetic killer of children.
  • Strong public support sends petition to the White House to push this forward.
  • Undervalued stock price doesn't reflect potential upside.

While Sarepta Therapeutics (NASDAQ:SRPT) is a high-risk investment, it serves a solid purpose with a solid goal, and offers an enormous amount of upside both in the short term and in the long term.

While it has approximately fifteen drugs in its early-stage pipeline, the stock's trading is primarily influenced by its lead drug, Eteplirsen, to treat Duchenne Muscular Dystrophy, a fatal disease that affects 1 in every 3,500 boys, causing them to lose mobility and eventually die around age 20. There is no cure for it. In October 2012, Sarepta's stock jumped from $14 to $45 on the news of Eteplirsen's amazing phase 2 trial results, which revealed that the drug not only slowed the disease's progression, but reversed the disease's effects, increasing mobility and adding strength. The drug was also found to be completely safe with no side effects.

If Eteplirsen is approved, it will likely have the whole market to itself, as there is nothing out there quite like it. It is a monopoly in the making.

The sample size was small; only 12 boys in the trial. Ten of the twelve produced amazing results. The other two boys showed signs of stability and increased dystrophin expression, but were not able to complete the trial because as their disease progressed, they lost their ability to walk, and therefore could not complete the 6-minute-walk-test. The drug was found to be more effective when treated earlier at younger ages.

Many analysts are concerned that the small-sample size is not enough to prove that the drug is effective. However, small sample sizes are normal for trials that address rare diseases, and the FDA granting accelerated approval based on small sample sizes is not unprecedented by any means. For example, Genzyme's drug, Cerezyme, was approved on only 12 patients.

The need for this drug is very urgent. The alternative to accelerated approval, for many of these boys, will mean certain death. This is precisely why the accelerated approval program exists in the first place; specifically for situations like this.

SRPT is trading well below its historical norm: In the first half of 2013, Sarepta's price fluctuated around $30-$45/share, and reached a high of $53/share in October 2013. It is trading significantly lower today, but there has not been a lot of change in the situation to justify this sharply-lower price. What caused the price to drop in November 2013 was a misleading report in the media that suggested the FDA called the filing of accelerated approval "premature." Despite the report, the FDA has made it clear that accelerated approval is still very much on the table.

Even if the accelerated approval gets declined, Eteplirsen will still get its chance to prove itself in a phase 3 trial. Meanwhile there is also the potential possibility that some of Sarepta's other drugs (that are still in the early stages) may amount to something significant.

The news has only gotten better in recent months:

On January 15, 2014, Sarepta released a report that Eteplirsen data was still strong after 120 weeks of treatment.

On March 26, 2014, a White House petition to push Eteplirsen for accelerated approval moved forward upon receiving over 100,000 signatures, which will mandate a presidential response. In addition, supporters have also been lobbying congress on the matter. This shows that there is a massive amount of public support, and a large amount of pressure not only on the FDA, but perhaps on those who may be indirectly involved but nonetheless have influence over the FDA.

Like most speculative biotech companies, Sarepta does not have positive earnings. Sarepta has proven to be very capable of raising cash, as they sold 4.95 million shares in a public offering to raise $125 million. They have $256 million in cash and investment at the year-end of 2013. What may be a cause for concern, is that their net loss has been widening. The company's net loss has nearly tripled over the past year from $5 million to $14.6 million. Their net loss was only $1.4 million in Q4 of 2012. They have also seen declining revenues; from $7.3 million in Q4 of 2012 to $2.3 million in 2013. The reason for the declining revenues, at least in part, is due to the U.S. government putting a stop-work-order on a contract involving one of their other projects, the Ebola-Marburg program.

The biggest risk to Sarepta is beyond the financials; it's the trial results. There is no guarantee Esteplirsen will be effective in a larger phase 3 trial, but there is pretty good evidence of it given the consistent positive results thus far. The FDA's decision on whether to move forward with accelerated approval also poses significant risk. Sarepta's earlier-stage drugs may become more relevant to influencing the trading as they move forward in the pipeline, and those results also pose a significant risk, even though the attention appears to be focused on Eteplirsen at the moment.

Conclusion: Sarepta Therapeutics is trading well below its true value. The possibility of accelerated approval of Eteplirsen will be an enormous short-term potential in the next few months. If accelerated approval is declined, it may cause a short-term drop in the share price, but the damage would be limited because Eteplirsen will have long-term opportunity to prove itself if the FDA mandates a phase 3 trial, and based on the evidence thus far, it would be wise to bet on Eteplirsen passing that test.

Source: Why Now Is The Time To Get Behind Sarepta Therapeutics