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The recent positive results announced by Sarepta Therapeutics (NASDAQ:SRPT) have pushed the stock up by 200% as we write the thesis. Given the target market of $500, we still see a huge upside potential. Given the disease the medicine targets i.e. DMD, a rare and highly debilitating one, the FDA might as well be prompted to grant the drug an early approval but certain consideration has to be taken into account, which we highlight below. We nonetheless remain positive on the stock and recommend a buy position.

Sarepta is a biopharmaceutical company which is entirely focused on the discovery and development of RNA-based therapeutics for the treatment of rare and infectious diseases. Its lead candidate drug is Eteplirsen for the treatment of Duchenne Muscular Dystrophy. Efforts are also directed towards infectious diseases with the lead development programs (funded by the U.S. government) aimed at Ebola and Marburg hemorrhagic fever viruses. However, on 3rd October, it was announced that the company has received a notice from the U.S. Department of Defense that the Ebola portion of the contract for the development of hemorrhagic fever virus therapeutics was terminated due to shortage of funds. The Marburg program remains intact however. Since the focus of the company is on the development of treatment of DMD, a small set-back in its other endeavors will not significantly impact the price of the stock.

Duchenne Muscular Dystrophy ((NYSE:DMD)) is a genetic disorder, mainly affecting boys, which causes progressive muscle weakness owing to the breakdown and loss of muscle cells. It affects 1 in every 3,500 male births. Those diagnosed with the debilitating disease lack a protein named dystrophin in the muscle fibers. As the disease progresses, boys become unable to walk and the disease ultimately degenerates into complete paralysis causing death before patients reach the age of 30. The progression of the disease is also associated with the development of respiratory muscle dysfunction and difficulty in breathing.

Its lead program for the treatment of DMD is designed to address specific gene mutation; i.e. only for those 13% whose dystrophy is caused by a specific type of mutation. Yesterday the company announced that Eteplirsen has helped improve the muscle functions by increasing the distance they walk in 6 minutes time compared to when they commenced the dosage. Not only that, but the drug also seems to improve the levels of dystrophin for better muscle function. This is a huge step in treatment of the disease which is still non-curable and only degenerates with the passage of time.

Despite the stellar results, a particular factor possibly discouraging the FDA from granting an early approval (which many patients are hoping for) is that the study involved only 12 patients. Furthermore, Sarepta is not alone in its fight for a drug for the disease. Prosena, a Dutch biotech along with GlaxoSmithKline (NYSE:GSK) are developing a similar drug whose results are expected later this year. And the GSK study will involve a larger number of patients. However, much will depend on Sarepta's meeting with the FDA. But investors must remember that the FDA has been lately granting rapid approvals to drugs for rare diseases and also factor in the strong lobbying from patients and their advocates.

Sarepta also needs to look into its manufacturing facility for the drug before the FDA can approve the drug. These things take time and we don't forecast an extremely fast FDA approval.

Valuations

There is a potential market of $400-$500 million for drug in the United States but exactly when the company can tap into the market seems unclear. As cited earlier, a lot will depend on the company's meeting with the FDA later this year and whether the Sarepta can ramp up its manufacturing facility. The company could also be a buyout target by a big pharma.

Currently the stock is trading at $40, up by approximately 200% from pre-news price. Based on the expected peak market potential of $500 million and an average 4x multiple for the biotech industry we estimate a price target of $88.

Chart 1:

Market Share

Sales

Price Target

50 %

$ 250

$ 44

75 %

$ 375

$ 66

100 %

$ 500

$88

We have a positive outlook on the stock and recommend the stock as a buy.

Source: Buy Sarepta Therapeutics: There Is Still Upside In The Stock