Sarepta Therapeutics (NASDAQ:SRPT) has seen its stock drop in recent days because of perceived weakness regarding its lead drug candidate Eteplirsen. In fact, in one day Sarepta lost over half of its value when the FDA released briefing documents showing a negative view towards the drug. Many investors are expecting a negative panel outcome, especially after a Duchenne Muscular Dystrophy drug by competitor BioMarin Pharmaceuticals (NASDAQ:BMRN) was rejected by an FDA panel. However, the widely held perception that Sarepta will receive a negative decision from the panel is creating a compelling investment opportunity for investors with a high risk tolerance.
Eteplirsen works by helping for Duchenne Muscular Dystrophy (NYSE:DMD) patients to create a modified form of Dystrophen for their muscles. While this is not a fully functioning form, it is believed that at least the partial functionality of this dystrophin can meaningfully slow down or perhaps even stop DMD in certain patients. Currently, Sarepta is seeking approval for patients who have a very specific mutation in Exon 51, and Eteplirsen is specifically designed to help skip over this mutation, which is present in about 13% of patients with DMD.
Eteplirsen underwent several clinical trials in order to test its effectiveness in patients with DMD, and therein lies the problem. The FDA and Sarepta seem to disagree about the clinical benefits of Eteplirsen. The FDA has expressed concerns about the small sample size stating that "the robustness of the study is a concern since a single patient could change the results substantially." This is, however, as Sarepta pointed out rather misleading. As part of its clinical trial protocol, Sarepta removed the best performing and worst performing Eteplirsen patient, which helped to give a better sense of the data in order to eliminate outliers. Also, it should be noted that trials involving drugs for orphan designations tend to have to be small, as there are not as many patients affected by the specific type of DMD being targeted by Eteplirsen. All of the trials conducted by Sarepta seem to be smaller in nature and showed a clinical improvement for patients, especially in the ability of the patient to walk after taking the drug. At both dosage levels, Eteplirsen showed a substantial improvement in the amount of dystrophin created naturally by the patient, which would suggest that there is some clinical benefit being achieved from the drug. With a dispute between the FDA over the efficacy of the drug, I would expect to see Sarepta have to explain a lot to the FDA panel about why Sarepta's interpretation is correct. Eteplirsen in trials was shown to be more effective than placebo, but a key concern about the drug being raised by the FDA is that the 30mg version of the drug seems to have at least a quicker clinical outcome for patients than the 50 mg version. This would suggest then that the data could be an anomaly, at least as far as the FDA is concerned. Sarepta does respond to this by showing that the 50mg version is effective and showed significant dystrophin levels at weeks 48 and 180.
This sets the stage for a very interesting day on January 22nd when Eteplirsen will be analyzed by an FDA advisory committee. For investors unfamiliar with the FDA structure, when the FDA is seeking outside input as to whether a drug should be approved it will set up advisory panels which typically include experts in the field. While the findings of the panels are not binding upon the FDA, the FDA generally takes the advice of its panels. A negative panel decision can essentially doom the potential for a drug to be approved, whereas a positive panel decision could help to build a mounting case for the approval of controversial drugs. In the case of Sarepta, based on the briefing document provided by the FDA, it appears as though Eteplirsen will have an uphill battle to convince the panelists to approve the drug.
Should the panel come back negative, it is likely that Sarepta will have to run additional clinical trials in order to prove the effectiveness of its drug. However, this would not meaningfully push back the timeline for launching Eteplirsen when compared with its major competitor.
So Why Does This Create An Opportunity For Investors?
With the substantial pressure against the stock and what was perceived as negative FDA briefing documents, Sarepta took the unusual step of filing an addendum, which allows for it to address some of the FDA's concerns before the drug reaches the panel. While the market is betting against Sarepta having a positive outcome, it appears as though Sarepta has done a great job clearing up some of the FDA's concerns about the efficacy of its drug. Should Sarepta be able to continue correcting these misconceptions and instead get the panel to approve the drug expect for the shares to skyrocket. Any positive panel decision would also put Sarepta in a position where it would be ahead of its nearest competitor Biomarin. This would allow for Sarepta to be able to prove to the market that its technology is able to get a drug approved for this rare condition, and would put Sarepta well ahead of Biomarin.
With the market largely betting against approval, it seems as though investors could make a large amount of money based on the potential for a surprise approval from the panel. Don't forget that the company dropped over 50% based on what were perceived as negative documents from the FDA regarding the efficacy of Eteplirsen. If the company is able to get the panel to sign off on the drug it is likely that the panel will effectively bind the hands of the FDA into signing off on the overall approval of the drug. This would help to give Sarepta an of beating Biomarin to the punch to develop an effective drug for DMD that is able to obtain approval. In the event that Sarepta is able to get one past the committee, I would not only expect the value of Sarepta stock to increase, but I would expect to see a drop in the value of Biomarin shares, as being beaten to the market (even if they are not competing for the same patient populations) should make investors question the viability of Biomarin's approach.
Why Would a Panel Approve Sarepta's Drug
The FDA is under substantial pressure to help patients with rare diseases for which there lacks an effective course of treatment. This is the very definition of DMD for patients. There are a lack of treatment options, and the clinical outcomes for patients with DMD remain grim. For patients, any drug that could potentially restore even some function, or at least help slow the deterioration of function, would help to improve their quality of life. Expect for patient advocates to be pressuring the FDA to approve a drug for DMD, even if it has relatively limited efficacy. While the FDA is not obligated to respond to patient pressure, patient advocates could help to give a human side to the data that the panel is seeing. This is important, as patients talking aboutthe effect that Eteplirsen could have on their life would allow for the panel to take into account the ramifications of a rejection. I would expect for Sarepta to go for the heart strings with personal stories of patients that have been helped by this drug.
The panel could also decide that the FDA's analysis of the efficacy issues are fundamentally flawed. As Sarepta pointed out in its amendment, the data seems to support Eteplirsen, and the committee could look at the data and determine that there is a sufficient amount of data to determine that Eteplirsen is efficacious in its targeted patient population. I would expect for safety to not be as big of an issue at this advisory panel, while the panel will of course have to weigh the overall efficacy of the drug versus any safety concerns when dealing with rare diseases, companies are typically given more leeway because of the debilitating nature of the diseases that they are trying to treat.
What Happens if the Panel Says No?
If the panel refuses to sign off on Sarepta's drug, I would expect a drop in stock value. The company will likely be rejected by the FDA with the request to run additional trials in order to further prove the efficacy of Eteplirsen in patients with the Exon 51 mutation. This could cause a problem for the company as not only would a trial be expensive, but it would take some time to identify DMD patients that qualify for the treatment and then get them enrolled in the trial. Also the trials for DMD tend to be longer in nature, as there have to be observed clinical benefit of a large period of time. In one Sarepta trial, patients were monitored over a period of 120 weeks. It is safe to expect that the clinical trial demanded by the FDA would take at least a year in order to show any sort of efficacy, which means that even assuming that Sarepta is able to quickly enroll patients it is unlikely that it would be in any way meaningfully able to respond to the FDA before two years from the date of rejection.
The concern for investors would be about how Sarepta can pay for the clinical trial. According to its most recent quarterly filing, the company expects to have enough cash to fund operations through at least the next twelve months. This should help to give investors some sense of relief that they will not be immediately diluted. However, there is a risk of dilution associated with a negative outcome from the FDA if the company should have to fund another clinical trial. The clinical trial will take longer than a year, and therefore helps to introduce a risk of dilution to investors. In the third quarter alone, Sarepta posted a loss of $51.9 million, which suggests that the company is burning through its cash pile at an alarming rate. Any dilution would be even more painful due to the suppressed stock price that Sarepta would experience because of the rejection of its lead drug candidate by the FDA.
With the market betting against Sarepta, investors with an appetite for risk can be in for a large potential windfall should the panel vote in favor of Sarepta. When analyzing the issues raised by the FDA, Sarepta appears to have a response that shows the efficacy of its drug and helps to at least give the drug a fighting chance when it goes in front of a panel on Friday. Should Sarepta be able to get a panel to sign off on the drug, it is likely that the FDA will have to sign off on the drug, which will allow for Sarepta to reach the market well ahead of its competitor. For investors with a high appetite for risk, this is a decision to watch closely.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.