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Carolyn Da Wang and Andrew McDonald, Ph.D.

Sarepta Therapeutics (NASDAQ: SRPT) develops RNA-based therapeutics for rare genetic disorders and is a rising star in the orphan drug space, which is dominated by companies like Alexion (NASDAQ:ALXN), BioMarin (NASDAQ:BMRN), Questcor (NASDAQ:QCOR), and possibly Isis (NASDAQ:ISIS) and Aegerion (NASDAQ:AEGR). The company's lead compound eteplirsen treats the progressively lethal disease Duchenne Muscular Dystrophy (NYSE:DMD) and demonstrated impressive efficacy in a small size Phase IIb trial. These results tripled SRPT's share price, yielding a $775MM market valuation as of Oct 5th. The stock has corrected since then, trading at $26.53 with a market cap of $707M as of Oct 18th. With $24.5M cash and $1.7M long-term debt on the balance sheet as last reported, SRPT has an enterprise value of $685M.

Investors are excited about the possibility of an accelerated FDA approval, which would move the drug's launch timeline two years ahead. A positive decision by the FDA would help the company to gain a significant edge over its close competitor, Prosensa/GSK's Phase III candidate PRO051, in this billion-dollar global market. The end-of-phase II (EOP2) meeting with the FDA regarding eteplirsen's regulatory pathway in early 2013 is expected to be a key catalyst for the stock. The market is debating on the possibility of this potential accelerated approval. Two scenarios are painted for SRPT:

(1). Under the accelerated approval scenario, SRPT will file for a new drug application (NDA) based on the Phase IIb data and conduct a confirmatory trial while launching eteplirsen commercially. In this case, SRPT could file the NDA by mid 2013 and gain approval by end of 2013 or early 2014. The FDA accelerated approval allows use of surrogate endpoints as basis for approval under the condition that a confirmatory trial will be initiated to demonstrate the clinical benefits. In this case, the percent of dystrophin positive fibers will be used as the surrogate end point used for approval. In addition, SRPT will also provide demonstrations of the clinical patient outcomes using the 6-min walk test (6MWT).

(2). Under the regular approval scenario, SRPT will initiate a Phase III study in late 2013/early 2014 with a larger patient population and file for an NDA by 2H2015 with expected approval by the end of 2015 or early 2016 under priority review. A positive clinical outcome for patients in a randomized, double-blinded trial of a patient population of 40-60 using 6MWT distances as primary endpoints over 48 wks should suffice for approval.

The legislative environment is favorable given the President's Council of Advisors on Science and Technology (PCAST) backing the accelerated drug approval program in recent statements. SRPT certainly created some media buzz during a touching TV interview of two boy patients. The bulls argue that the good tolerability and significant improvement in at least some of the patients could warrant the accelerated approval for such a debilitating disease. The bears argue that the trial size is too small to provide solid statistics and that the FDA will require further results. Some key questions around whether additional testing is needed are discussed here.

1. Are the statistics reliable enough to convince the FDA?

(NYSE:A). Small sample size compared to other trials of orphan drugs. Orphan drug trials are normally conducted with a small number of patients; however, SRPT's trial size is pushing the limit. The size of several pivotal trials of orphan drugs with 6MWT as a primary endpoint ranges from 38 - 96 (Figure 1). SRPT could argue that the treatment benefit was much more significant than the other trials with an 89 meter (p-value <0.016) difference in 6-min walking distance for the 59mg/kg treatment group over the control group, compared to a benefit of 30-40 meters (p-values 0.001 to 0.025) in 3 other trials. However, some experts and investors are skeptical about the p-value itself given the small size. Another argument is that a more relevant n-size is the number of patients in which the previous trials have efficacy data on the drug, in which case many of the numbers are cut in half while SRPT has data on all 12 patients now with dystrophin and 6MWT for each.

It is worth mentioning that the FDA has historically approved orphan drugs based on very small trials (See Figure 3 in article: Aegerion Pharmaceuticals: We Are Bullish On The Lomitapide Story). For example, Corifact, Factor XIII concentrate for routine prophylactic treatment of congenital factor XIII deficiency, was approved by the FDA in 2001 based on a single-arm 14-patient trial. However, one needs to acknowledge that eteplirsen employs a more novel and thus relatively less well-established mechanism of action compared to some of these trials, which may invite some additional investigation.

Figure 1: Examples of orphan drug trials

(NYSE:B). Elimination of 2 patients from the treatment arm in the statistical analysis. Two patients in the 30 mg/kg treatment arm showed rapid disease progression and were not able to complete the 6MWT. These two patients were eliminated in the statistical analysis of treatment benefits based on a modified intent-to-treat analysis.

(NYSE:C). Variable subgroup analysis. Subgroup analysis showed statistical significance in younger patients (<9-yr old) or patients with higher baseline 6MWT distance (>400 m), but not in older boys or those with lower baseline.

2. Is the percent of dystrophin positive fibers a sufficient surrogate endpoint for approval?

The percent of dystrophin positive fibers will be used as a surrogate point if SRPT plans to file for an accelerated approval, based on arguments that lack of dystrophin is one of the key pathological events, and that 15-30% dystrophin positive fibers could be disease modifying according to some experts. All patients in the treatment arms showed impressive increases in the percent of dystrophin positive fibers (38-47%) in the Phase IIb trial, even though a definitive relationship between this biochemical marker and 6MWT seemed to be less consistent. Some medical experts are puzzled by the divergence of this biochemical marker and the 6MWT outcome in the two patients in the 30-mg arm whose diseases progressed rapidly despite a significant rise in the percent of dystrophin positive fibers.

Accelerated approval has been mostly used in cancer and HIV drugs where surrogate endpoints such as tumor reduction are well-established. There are other orphan drugs that are approved based on surrogate endpoints, such as Fabrazyme for Fabry disease, even without a well-established relationship between the biochemical markers and the improvement in symptoms. Overall, there is a chance that the FDA will accept the percent dystrophin positive fiber as a surrogate point for the basis of approval with supplemental data from the 6MWT results.

Overall, we believe that there is a slight chance that the FDA will grant accelerated approval of eteplirsen given its clean safety profile and evidence of efficacy despite skepticism towards the trial statistics, meeting the patients' demand for access to novel disease modifying medicines. In this case, the stock could have >30% upside potential. On the other hand, a more stringent analysis of the early trial data should lead to required additional testing in Phase III - this is a more likely outcome, in our view. Keep in mind we should see data for Prosensa/GSK's PRO051, which is in Phase III and the results are expected to be released by the end of 2012 or early 2013.

Clinical Trial Data Review

Phase I/II: This proof-of-concept trial showed good tolerability of eteplirsen, and biochemical efficacy in 7 out of the 19 patients enrolled at higher dosages. Standard clinical endpoints 6MWT data was not collected during this trial.

Trial design: an open-label, dose escalation trial (0.5 mg/kg - 20 mg/kg) was conducted in 19 patients to evaluate eteplirsen's safety and efficacy based on biochemical surrogate endpoints over a 12-wk period.

Safety: the drug was well tolerated with no significant drug-associated adverse events and no effect on pulmonary, kidney, liver, or bone-marrow functions.

Efficacy: Eteplirsen induced exon 51 skipping in all patients and variable degrees of dystrophin expression. 7 patients responded to the treatment, and 3 of them reported 15%, 21% and 55% dystrophin positive fiber.

Phase IIb: This 12-patient trial at 2 dosages confirmed the favorable safety profile over a longer term of 48 wks and met the primary endpoint of increase in the percent of dystrophin positive fibers. More importantly, it demonstrated significant clinical outcome of improvement over placebo group in 6MWT distance.

Trial Design: 12 patients were divided into 2 treatment arms, receiving 30 mg/kg or 50 mg/kg over 48 wks, and a placebo/delayed treatment arm which received 30 mg/kg or 50 mg/kg following 24 wks of placebo.

Safety: clean safety profile without major AEs associated with eteplirsen.

Efficacy: All patients in the treatment arms exhibited consistent high level of dystrophin positive fibers ranging from 30 to 60% after 24 wks. Since 15%-30% of normal is considered disease modifying, the trial certainly met the primary biochemical endpoints. The 6MWT distance treatment benefit was statistically significant in the 50mg/kg cohort at 89m (p<0.016) compared to placebo/delayed treatment group in the intent-to-treat population. However, there was no significant benefit in the 30mg/kg cohort due to two patients who showed rapid disease progression shortly after enrolling in the study. In a modified intent-to-treat analysis of evaluable patients across both dose groups excluding the 2 patients from 30mg/kg patients who showed rapid disease progress, there was a significant benefit of 67m (p<0.001) compared to placebo/delayed treatment group.

With respect to valuation, which we will discuss in further detail in a Part II article, a quick calculation shows that SRPT stock is worth about $27 (market cap $587M) and $42 (market cap $918M) under the standard and accelerated approval scenarios. The valuation is based on 5.0x peak revenue of $560M 4 years after launch discounted to present at 25%. Hence, we expect the FDA decision on the accelerated approval path will be a significant catalyst for the stock.

Source: Sarepta Part I: The Possibility Of An Accelerated Approval Of Eteplirsen