Sarepta Therapeutics Explodes Again: A Short-Seller's Worst Nightmare

| About: Sarepta Therapeutics, (SRPT)

Earlier in the year, shares of a little company called AVI BioPharma struggled to even break $1.00/share on open NASDAQ trading, and they actually got de-listed. After a 1:6 reverse stock split (six shares added up into one) and a name change to Sarepta Therapeutics (NASDAQ:SRPT), they were back on the NASDAQ at a healthier-looking level. Here's the amazing part -- in less than three months, the stock proceeded to rally 990% to bring the company to a market cap of $1 billion.

Wow, they grow up fast. Also, like the rest of us, I also wish I bought SRPT. On October 3, the company announced that eteplirsen (AVI-4658), its flagship product, met its primary endpoint in a phase IIb trial in its treatment of Duchenne Muscular Dystrophy patients. The study showed that patients who were administered eteplirsen fared much better in a six-minute walk test versus delayed treatment and placebo patients, and had far more dystrophin-fibers relative to MD in regular patients. The stock soared 170% in early trading on Wednesday. On Mad Money, Cramer apparently said that he had never seen such a big one-day gain in his 30 years of trading. It's certainly the biggest I've encountered myself.

As I write this, SRPT pulled back about 11% in early trading -- now roughly $40/share. After such a violent rally, how do we value the stock and determine its direction?

First things first: let's learn about Sarepta.

Sarepta, The Company

The company is headquartered in brain central -- Cambridge, Massachusetts. CEO Chris Garabedian came over to Sarepta in 2010 from Celgene (NASDAQ:CELG), a big biotech success story from the 2000s. He arrived at Celgene as VP of Corporate Strategy in 2007. By 2007, shares of CELG were actually exhausted from their enormous rally, and forever stayed in the general range of $60-80/share.

Sarepta's eteplirsen has a very innovative mechanism that interferes with RNA synthesis in Duchenne Muscular Dystrophy patients in that it creates mRNA that tells the body to create functional dystrophin proteins. Dystrophin is a vital component of muscle tissue, and is a root cause of muscular dystrophy.

Without any MD treatments on the market other than steroids and physical therapy, it's apparent that eteplirsen is going to be a help to the ~500-600 newborn males that are born with the Duchenne MD mutation each year.

Since the alternatives are lacking (the only thing close to eteplirsen for Duchenne MD patients is a similar drug, drisapersen, currently in Phase II clinical trials in the U.S. from GlaxoSmithKline (NYSE:GSK) and partner Prosensa), the continuous administration of eteplirsen will be a huge jump in quality of care.

Sarepta would have had a bad day on October 3 if it weren't for its timely announcement of the phase IIb results, though. The same day, the Department of Defense rescinded its contract and effectively froze work on the Phase I Ebola therapeutic program (AVI-7537). While annoying, this doesn't necessarily mark the end of AVI-7537, and shows that the phase IIb results were just that significant to SRPT investors.

SRPT, The Stock

I don't blame everyone for being initially skeptical on eteplirsen. Duchenne Muscular Dystrophy has no decent therapies for a reason -- it's very hard to repair a patient's dystrophin production or delay deterioration of muscle tissue. It's an uphill battle.

Still, we got exactly what SRPT shareholders were hoping for. Going back a few months, notice that SRPT shares doubled on July 24 with enormous volume. This happened when the company first held a conference call to discuss the phase II trial results. Now that we know just how good the data was, Sarepta is adjusting to reflect a very high chance of FDA approval later on.

There is also an impending short-squeeze that is going to force whatever is left of the ~3.2 million shares (as of the latest data available for settlement date 9/14 from nasdaq.com) that were short prior to the rally. Unless the results of the phase IIb trial for eteplirsen are found to be falsified (or some other disaster), there is no way for the bears to exit their shorts in Sarepta without losing all (if not more) of their position.

As large as the short squeeze is, SRPT needs to correct. If you're going long, I'd allow shareholders to take profits in the next few trading sessions. There is plenty of time to buy the stock later -- phase III trials for etepliersen haven't even started yet.

Disclosure: I 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.