I presented a write-up on Sarepta Therapeutics (NASDAQ:SRPT) here in late September, and would like to update my thoughts since we've now seen results from the full 48-week trial for their lead compound eteplirsen for Duchenne muscular dystrophy (press release, conference call, and slides from the presentation at the World Muscle Society conference). In my opinion, the 48-week results were spectacular, and I think that eteplirsen is the most promising advance in biotechnology that I've seen in the last decade.
Comments on Da Wang and Macdonald's Article
While I'll get into details about why I am bullish below, I'd like to discuss a few observations about the Seeking Alpha piece that Carolyn Da Wang and Andrew MacDonald (DW&MD) posted (Part I and Part II). They are intelligent and informed observers who are far more cautious on the name than I am, so their piece deserves special attention. My main differences with them are that I don't at all see how they reach their conclusion that there is only a "slight chance that the FDA will grant accelerated approval" follows from their analysis, and I think they're leaving some important pieces out of their valuation.
The p-value of an outcome measure tells us the chance that, even if the drug does nothing, we would see at least as favorable a result in a trial of that design. That is true whether there are four patients or 12 or a million. Large sample sizes are important because they help show treatment effects that are hard to observe. They are a double-edged sword, however, since, as sample sizes get larger, even very small treatment effects can become significant. Reaching statistical significance in a very small trial requires a much larger observed difference between the treatment group and the placebo group than that required in a large trial. It's fair to criticize the elimination of the two patients who were unable to walk at 24 weeks, but the "some experts and investors" who are "skeptical about the p-value itself given the small size" whom DW&MD mention appear to me not to understand statistics.
DW&MD note that "eteplirsen employs a more novel and thus relatively less well-established mechanism of action compared" to orphan drugs they list, "which may invite some additional investigation." That's true enough, but Section 901(a) of the Food and Drug Administration Safety and Improvements Act of 2012, which passed both housed of Congress with strong bipartisan support, states Congress's intention that the FDA use the accelerated approval process, including approvals on smaller and fewer trials, to promote novel treatments for rare and serious untreated diseases.
The Oct. 17-18 meeting of the FDA's Endocrinologic and Metabolic Drugs Advisory Committee, which addressed two new drugs for the treatment of homozygous familial hypercholesterolemia (HoFH), presents interesting cases that shed light on the prospects for eteplirsen. Like Duchenne, HoFH is a rare disease that usually strikes in childhood. If untreated, the disease is fatal. The only effective treatment for severe cases, LDL apheresis (a procedure similar to dialysis in kidney disease), requires weekly or biweekly office visits, so is rarely used. All in all, you wouldn't want to have HoFH, but it's usually not as bad as Duchenne muscular dystrophy.
Aegerion filed their NDA for lomitapide based on a Phase III trial that included 29 patients, 23 of whom completed the trial, studied over the course of three years with no placebo control. Three patients reported at least one serious side effect, and four of 18 patients continuing in a follow-up study reported at least one serious side effect. The study did not look at clinical outcomes, but rather at cholesterol (LDL-C) levels as the primary endpoint. There was no placebo control. Nevertheless, the committee voted, 14-2, to recommend approval.
The panel also reviewed mipomersen, from Isis Pharmaceuticals (NASDAQ:ISIS) and Sanofi-Aventis (NYSE:SNY). Mipomersen is a drug in the same class as eteplirsen, though it uses a slightly different chemical structure. Despite significant safety concerns (none of which we have seen with eteplirsen), and the recommendation of the approval of lomitapide, which appears to have a much better safety profile, the FDA's Endocrinoogic and Metabolic Drugs Advisory Committee recommended approval 9-6. I'll come back to this below.
Of course, an Advisory Committee recommendation is not the same as an FDA approval decision, but it's difficult for me to make the case that the case for lomitapide is as compelling as that for eteplirsen, or that eteplrisen requires more additional study than does the much riskier mipomersen.
In my previous piece, I set a price target in the mid-$40s. The results from the 48-week data were significantly better than I expected, so I'm more enthusiastic about the stock now. I believe the first-day move to $44.93 was more than justified, and I believe the stock will trade significantly higher than this over time. Rather than set a new price target, I think all I'll say now is that I think at current prices Sarepta is a better buy now than it was when I did my first write-up. But it's hard for me to see how Sarepta will trade below $100 if eteplirsen is approved (that's my most conservative estimate), and I do think the FDA will approve eteplirsen in 2013.
DW&MD in their valuation, when getting their peak sales of $540 million, give no credit to Sarepta's efforts to treat Duchenne caused by mutations in other exons. They also don't value the drug development platform outside Duchenne or other programs. Finally, when I model partnerships, I give Sarepta credit for upfront payments. If eteplirsen works, the drug development platform has a lot of value in Duchenne, and potentially in many other conditions. Reasonable valuation models for a company can vary widely because of the many possible scenarios, but I still can't reconcile Sarepta trading at half of Synageva Biopharma's (NASDAQ:GEVA) market cap.
Duchenne muscular dystrophy is a genetic disease in which patients, almost all boys, experience rapid deterioration in muscle function from around the age of seven (before seven, DMD patients tend not to develop muscle function as quickly as do their normal peers). Most Duchenne patients are wheelchair bound by their early teens, and most die from respiratory failure or heart failure by their mid-20s. Most Duchenne patients also experience mental effects, such as autism or delayed learning. Basically, these patients do not get better, and evidence indicates that, after the disease reaches a more advanced state, the damage may be irreversible.
This video, from the Parents Project Muscular Dystrophy (and available from Duchenne Foundation), shows the stages of Duchenne.
Duchenne patients produce little to no dystrophin, a protein that helps to connect the internal structure of muscle cells to the connective tissue that surrounds the cells. While the exact mechanism for the physical decline in DMD is unknown, the evidence suggests that Duchenne patients essentially pull their muscles cells apart. This has some effects on the cell membranes, including making the membranes leaky (i.e., chemicals can cross the membrane that would not normally cross) and also causes inflammation.
The reason DMD patients don't produce the protein is that one area of the DNA that contains the genetic code for the protein is missing one or more nucleotides (the building blocks of DNA). In cells, DNA gets transcribed into a related compound, RNA, which the cell uses as a template for the assembly of the protein. Because of the missing nucleotides in the gene, the RNA does not assemble correctly, which makes it impossible for the patient's cells to assemble functional dystrophin molecules.
Eteplirsen is chemically similar to a portion of the RNA of Duchenne patients, but in reverse (this is called antisense). Basically it fits into a section of the dystrophin RNA molecule, like a lock fitting into a key, causing the patient's cells to skip over that section of RNA. Eteplirsen eliminates a section called exon 51 from the RNA (the process is called exon skipping), allowing cells to make a slightly modified version of dystrophin. About 13% of Duchenne patients have these errors in exon 51. Sarepta is also working on compounds that use the same technology to skip other exons.
When I was a PhD student in molecular biology in the 1980s and first heard about antisense RNA therapies, I thought they would have tremendous potential. I grew very skeptical as the next 25 years passed without any major breakthroughs. It's only within the last few years that we've seen positive clinical results from antisense drugs. When I saw the results from Sarepta's Phase II trial, I was stunned.
Phase IIb Clinical Trial Results
Of the twelve patients in the trial, four received a 50 mg/kg dose of eteplirsen, four received a 30 mg/kg dose, and four received placebos. After 24 weeks on placebo, two of the patients in the placebo group began receiving 50 mg/kg eteplirsen, with the other two receiving 30 mg/kg.
Investigators took biopsies from patients during at the beginning of the trial, at the end of the trial, and at either 12 weeks or 24 weeks into the trial to measure the fraction of muscle cells that contained dystrophin.
After 24 weeks of beginning eteplirsen treatment, all of the patients in the 30 mg/kg group and four patients showed marked increases in the fraction of their muscle cells sampled in a biopsy that contained dystrophin. In addition, all four patients in the placebo group showed similar increases in their dystrophin-positive muscle cell fraction 24 weeks after they began receiving the drug.
At 48 weeks, the 30 mg/kg group showed continued improvement in dystrophin-positive muscle cell fractions. The 50 mg/kg group showed little change after 12 weeks of treatment, but did show a marked increase in dystrophin-positive fibers at 48 weeks (there was no biopsy for the 50 mg group at 24 weeks or for the 30 mg/kg group at 24 weeks because biopsies are uncomfortable procedures and the investigators wanted to minimize the amount of muscle tissue they removed from these DMD patients).
This fraction increased at the 48-week point for the 30 mg/kg group. These differences were all statistically significant. Patients showed an increase of between 15% and 55% after 24 weeks in their dystrophin-positive fiber counts, and between 25% and 60% after 48 weeks (see page 9 of the slides linked above). This was significant for all both the 30 mg/kg and 50 mg/kg groups, and very impressive for both the 30 mg/kg and 50 mg/kg placebo groups (although not statistically significant, since there are only two patients in each placebo subgroup). More dramatically, you can see before and after photos from the biopsies on pages 10 and 11 (green shows the presence of dystrophin).
The biopsy results are presented on pages 8 and 9 of the presentation slides. The bottom line is that the 50 mg/kg group showed an average increase of 52% in dystrophin production after 48 weeks, the 30 mg/kg group had an average increase of 42% at 48 weeks, and the placebo group showed an average increase of 38% after 24 weeks of receiving eteplirsen. All of these results are statistically significant.
We see before-and-after slides showing dystrophin production for selected patients on pages 10 and 11. These images are clear cut-these boys had almost no dystrophin in their muscles at the beginning of the trial, and all twelve showed dystrophin within 24 weeks of receiving the drug.
All patients also completed a six minute walking test before entering the study and at least every 12 weeks during the trial, except two identical twin boys in the 30 mg/kg group whose disease progressed rapidly and who were unable to walk at 24 weeks.
At the time they entered the trial, these boys could walk on average 382 meters in six minutes. The treatment and placebo groups both showed slight declines after 12 weeks. The boys who received 50 mg/kg had their performance fall by an average of 12 meters at 36 weeks, vs. an average decline of 78 meters in the placebo group. By week 48, the 50 kg/mg boys walked an average of 21 meters farther than they had at the beginning of the trial (33 meters farther than their low point at 12 weeks), vs. a decline of 68 meters in the placebo group.
The other two boys in the 30 mg/kg trial who could still walk at 24 weeks showed a decrease in their walking scores averaging around 53 meters; that's about 25 meters better than the placebo group, which isn't a statistically significant difference (though, again, it's based on just two boys). Combining the 50 mg/kg and 30 mg/kg scores, they declined by around 62 meters less than did the scores of the placebo group, also statistically significant.
There were no serious adverse side effects. This is a significant advantage over a competing antisense exon-skipping drug, drisapersen (formerly PRO051 and GSK2402968), being developed by Prosensa Therapeutics and GlaxoSmithKline (NYSE:GSK), which I discuss more below.
Seeing the numbers from the clinical trial doesn't adequately tell the story. The families of three of the eight boys who were in the treatment groups went public to discuss their experiences, which is unprecedented in my experience. Those videos are available here, here, here, and here. It's worth reading the video descriptions, too, which reveal details such as one boy running in a 5K race to support the organization that provides some of his physical therapy.
Even for someone as jaded as I am, I'm touched by these stories of boys being able to do things they could not do before. Particularly poignant are the first two of these videos, which shows a family of two boys, one who is in the eteplirsen trial (Max) and one (Austin) who was not eligible (because he could not walk at the time the trial started), comparing the amazing improvement of their son receiving eteplirsen with the decline in function of their other son. You can see a follow-up video of Max, taken after he was on eteplirsen for 60 weeks, here, here, and here. If I didn't know that he had muscular dystrophy, that he had spent most of his time in a wheelchair, and that he could not perform simple tasks such as opening a milk bottle a year ago, I would not have believed it from watching these videos.
Sarepta Management will meet with the FDA staff to discuss the results from the trial late this year or in January. Among the topics they will discuss will be the design of a larger Phase III trial and also the FDA staff's views on whether there is sufficient evidence for the FDA to review an application for eteplirsen before the Phase III trial is completed. We will know when the meeting happens, but will probably not hear any immediate results from that discussion from Sarepta.
Following the meeting, Sarepta will decide whether to file their New Drug Application (NDA) in early 2013 to seek FDA review or to wait until they have completed their Phase III trial. Sarepta does not need the FDA staff's permission to file an NDA next year, but probably would not do so if there is strong resistance from the FDA staff.
Will the FDA Accelerate Review?
Normally the FDA requires statistically significant results from at least two trials before approving a drug. The FDA has the power to review drugs for serious or life-threatening diseases, including rare diseases such as DMD, for which there are no effective treatments using results from a smaller number of trials. This is called "accelerated approval."
In Title IX of the Food and Drug Administration Safety and Innovation Act of 2012 (see the link above, pages 90-106), which passed the Senate by a 96-1 vote and the House by a 387-5 margin, Congress gave the FDA access to additional resources and clearly stated its intention that the FDA expedite review for these drugs.
While I don't know of any bears who think eteplirsen does not show promise, the bear case tends to focus on prospects for accelerated approval and is built on these arguments:
First, the trial had only 12 patients. While this is certainly a barrier, my response is that the results were statistically significant, and this is exactly the kind of drug that Congress intended to address with the accelerated approval procedures.
Second, there is some concern that the boys in the placebo group lost walking ability faster than one would expect. I don't think their deterioration was outside the normal range. Some bears may be reading studies of all muscular dystrophy patients, including the more common and milder Becker muscular dystrophy, and some may not be aware that the study design excluded boys with high six minute walk tests, so we're starting with a population more likely to see a decline.
I'm still impressed that boys in the 50 mg/kg group improved their walking scores by 21 meters over their pre-trial scores in a disease that basically gets worse, not better. Plus, the results of the 50 mg/kg group were significant at p <= 0.001. While it is possible that a statistical fluke in selection of the placebo group biased the results, the fact that we see such a high significance in a small trial is evidence that the treatment effect is large.
Third, two boys were unable to walk at the 24 week mark. I haven't seen any bears claiming that eteplirsen caused their Duchenne to progress, but they have raised these two cases to claim that the data is not clean.
It would have been nice to have seen improvements in these patients, but the fact is that DMD is a rapidly progressing disease. Moreover, it's clear from biopsy results that dystrophin production doesn't really ramp up until sometime between 12 weeks and 24 weeks, so these two boys may well have progressed before eteplirsen had a chance to work. The conference slides (page 14) show stable or improving lung function after 24 weeks in these two patients, which is positive, but hard to evaluate without seeing pulmonary function numbers from the other patients. Finally, because the study design excluded patients with high initial six minute walk tests, it's not especially surprising that we saw two boys with rapid progression.
It is a sad fact of life that Duchenne is a rapidly progressing degenerative disease, and there's no reason to believe that eteplirsen caused their decline. Also, the two boys were identical twins, which could explain why they both showed such dramatic declines at the same time. These two patients had the lowest pre-study six minute walk test scores, and the data from the other patients indicates that positive eteplirsen outcomes are more likely for patients who had higher initial walking test scores (though that difference is not statistically significant). Also, the twins showed declines early, averaging a 50-meter drop by week 12, at which time biopsy results show there is little production of dystrophin in patients receiving eteplirsen, so they may simply have declined too soon to draw any conclusions.
Fourth, there is not a strong relationship between dystrophin production and performance on the six meter walk test, because the 50 kg/mg group performed better on the walk test but had a lower fraction of dystrophin-positive fibers on biopsy than did the 30 mg/kg group. As one wag has put it, "How much dystrophin do you have? 100%. How much dystrophin does Usain Bolt have? 100%. Who goes faster in six minutes?" Dystrophin production is necessary to rebuild muscles, but it is not absolutely correlated with everything a patient can do, and there's no reason to expect that it would be. Dystrophin levels also vary among muscle tissues, so there is a lot of variability from biopsy to biopsy. Finally, the percentage of dystrophin-positive fibers does not tell us how much dystrophin each patient has made per cell.
But my real answer is that we have enough data in the slides on pages 10 and 11 to see qualitatively that this argument is specious. Walking scores in each group, 30 mg/kg, 50 mg/kg, and placebo improved (excluding the two boys who were unable to walk) and dystrophin-positive fiber levels increased from nearly zero. Also, the two boys who were unable to walk at 24 weeks (patients 9 and 10) seem to show a smaller fraction of dystrophin-positive fibers than do the other boys receiving 30 mg/kg. I don't want to draw any strong conclusions from just two or three images, but if we focus on the correlation between dystrophin levels and walking test results after patients have received the drug, we're missing the bigger picture, which is the very high correlation between walking test results and dystrophin levels when measured before the trial began and at 48 weeks.
Fifth, the trial design specified looking at the number of lymphocytes in the patients' muscles. In addition to other effects, DMD patients experience inflammation, which lymphocyte counts can measure. The company has not produced this data, though we know there were no serious side effects, and the company did say in a conference call sponsored by Wedbush, Morgan that they looked for, but were unable to find, any evidence that eteplirsen increased inflammation.
I would have liked to have seen reduced inflammation upon treatment, but, even assuming that inflammation was not relieved at 48 weeks, I still feel strongly about these results. Producing the missing protein and showing good walking performance are far more direct measures in my mind. Also, I have yet to see any evidence that lymphocyte counts predict clinical outcomes (and all of the patients were taking steroids, which confound any examination of the effect of eteplirsen on inflammation).
Sixth, when Sarepta first released the top-line 48 weeks, they did not say that Western blots confirmed the presence of the protein. In a Western blot, the lab puts an extract from cells onto a gel, separates the proteins by applying an electric current, then testing for presence of the protein. I can tell you from my lab experience, if you see the protein in tissue samples, you will see it in the Western blots. However, Western blots do provide one piece of confirmatory information, which is the size of the protein. In the meeting slides (page 12), the investigators provided Western blots that show that we are seeing dystrophin. In a bizarre twist, a web blog, RNAiAnalyst, estimated that the patients in the study were producing only 2% to 5% of the dystrophin that normal persons do. The blogger reached this conclusion by assuming that the far left column in the Western blot was the normal control, when that is obviously a control that's been overloaded with dystrophin; the second from the left column is properly labeled as the normal control. The 2% to 5% estimate has nothing to do with reality.
Seventh, there has been some concern about unblinding. Patients did not find out which group they were in until between the 32nd and 36th week of the study, at which point the placebo patients had begun receiving eteplirsen. The results from the 50 mg/kg group at week 36, before they knew which drug they had received, were also significantly better than the walking test scores from the placebo group. While there might be a placebo effect in walking test results -- a child knowing that he's in the higher dose group might try a little harder, for example -- there's no way a patient's cells decide to work harder to produce dystrophin because they've heard that they're in the high dose group.
Set against these arguments are the facts that Duchenne is a rapidly progressing, fatal disease, and declines may be irreversible. The most effective treatment for Duchenne, steroids, while helpful, is minimally effective -- in general, it slows progress of the disease by around one to three years, but does not stabilize patients (patients receiving eteplirsen would also generally receive steroids). So it's either eteplirsen, which seems to be safe and effective, or nothing.
There are also several protections for patients if the FDA does indicate that it will review eteplirsen on the Phase IIb results. First, the patients in the Phase IIb trial are all in a continuing study, so the FDA will have many more months of walking test and safety data before deciding whether to approve eteplirsen. Second, Sarepta will still run a larger confirmatory Phase III trial, so the FDA will be able to withdraw the approval if the Phase III results do not match up with the Phase II results. Finally, the FDA would undoubtedly refer Sarepta to an advisory panel of physicians, researchers, biostatisticians, and a patient advocate, who will examine the adequacy of the data before they provide their independent recommendations to the FDA.
The choice that the FDA faces will be a stark one. They can review eteplirsen on the Phase IIb data or force Sarepta to delay by two years or more. Given the good results from the Phase IIb study and the absence of serious side effects, there is great potential in approving this drug early and little indication of any downside. If they delay, then another cohort of boys who might be helped will see their muscle function decline, probably irreversibly, and suffer confinement to wheelchairs and an early death because there is no effective alternative treatment. Ultimately, the FDA has to balance the risks of potentially approving a drug that does not work against the hazard of not approving a drug that could save the lives of dying children.
Moreover, muscular dystrophy is a fairly high profile disease and the muscular dystrophy community will be lobbying for accelerated approval.
In the end, I think anyone looking at eteplirsen at the FDA has to ask a simple question-if I were a physician treating Duchenne patients now and who plans to treat them in the future, given everything I know about eteplirsen's potential, the risks, and the protections built into the approval process, would I want this drug available early? I don't think that's a hard choice to make. We haven't seen a safety risk. The data and experience of the patients in the videos shows a lot of promise. The alternative is that some children who would have received eteplirsen would be guaranteed to be confined to wheelchairs and dying early. So I am highly confident we will see Sarepta file an NDA in 2013.
Dueling Informed Opinions on Accelerated Approval
Following the release of the 48-week top-line data, Summer Street Research Partners One sponsored two high profile calls. I was not on these calls, so my information is second hand, and Summer Street declined to comment when I called to fact check.
The first featured an investigator in Prosensa's and Glaxo's clinical trials for a competing product, drisapersen, that uses a different chemical formulation using antisense technology to skip exon 51. He said in a call that he did not think the data were sufficient for eteplirsen to get accelerated approval. Although he was impressed by the dystrophin-fiber counts, he does not think the six minute walk test results were sufficient. He's Belgian, so I'm not sure whether he has much experience with the FDA, and he did not discuss other cases in which the FDA has approved drugs based on either small studies (Afinitor, approved based on nine patients in a 28 patient study; Soliris, approved for a second indication based on 13 patients) or six-minute walk test results (Aldurazyme, Elaprase, Myozyme). So all I have is his opinion, not his analysis. This call marked the peak in Sarepta's stock price.
On the second call, a former FDA reviewer said that he is positive on the FDA granting accelerated approval on the data we have available, and also commented that he thought Prosensa's Phase II results were not as good as Sarepta's.
In a call set up by investment bank Wedbush, Morgan, Craig McDonald, a physician specializing in neuromuscular and neurodevelopmental diseases at UC Davis, discussed his views of the relevance of the kind of data that Sarepta collected in the Phase IIb study. He was not an investigator in Sarepta's clinical trials, but did consult with them on the design of the trial. He did not state an opinion on whether the FDA will grant accelerated approval, but he was impressed by the Phase IIb results, both in dystrophin production and walk test performance. He said that that the FDA wants to see clinically meaningful endpoints, and that six minute walk tests correlate well with quality of life, so are the kind of test that would meet that need. He also stated that studies show a change of 30 meters or more in a six minute walk test is clinically relevant. Finally, he stated that there is not a 1:1 correlation between six minute walk test results and dystrophin levels in Duchenne patients, essentially dismissing the bear argument that we did not see a dose response in the data.
One solid point that bears raise is that approval of eteplirsen will require scaling up production and demonstrating the quality of manufacturing to the FDA. I'm not a chemical engineer, but my opinion is that eteplirsen falls between very simple chemical synthesis, which is easy, and the fermentation of protein-based drugs, which is hard. Ramping production is an issue, but the company is putting a lot of effort into solving it.
Even with accelerated approval, Sarepta will not be able to market eteplirsen until it has shown stability in at least three batches from their commercial-scale production, which won't be available until 2014 at the earliest. They are ramping up medium-scale production for their Phase III trial now, and expect that to be ready around January 2014. If they file an NDA in 2013, they will proceed with commercial-scale up in parallel with the medium-scale manufacturing.
Drisapersen, Prosensa's/GlaxoSmithKline's Competing Drug
The drisapersen Phase II results, while positive, were not as impressive as were Sarepta's, and their patients showed proteinuria (protein in the urine), which can cause serious kidney damages over time. While I'm not privy to Prosensa's and Glaxo's discussions regarding dosage, their Phase III trial for drisapersen will test a dose of 6 mg/kg (they had started in their Phase I trial with doses ranging from 3 mg/kg to 12 mg/kg). I suspect that the reason Prosensa and GSK are using such a small dose compared to that used in the eteplirsen studies is to avoid kidney damage.
In the briefing documents for miposerin (discussed above), the FDA staff raised concerns about an elevated cancer rate in patients receiving the drug (link here, pages 136-42). This is a serious issue for drisapersen, since it uses the same chemical structure (called the backbone) as does mipomersen.
Even a cancer risk, which is a concern given the elevated cancer numbers in the mipomersen trials mentioned above (which use the same chemical backbone as does drisapersen) might be justified to treat Duchenne successfully. Still, the evidence right now favors eteplirsen, which has not presented any safety issues.
As I discussed in my last write-up, Prosensa has valuable intellectual property, including a European patent that covers exon-51 skipping treatments for DMD, which are an important factor in valuing Sarepta outside the potential for a competing product.
You can see my previous article (linked above) for my thoughts on valuation, though, given that I wrote that before I saw the 48-week data, I have a more positive view now. The increase in the stock price following the 48-week data catapulted Sarepta from small-cap to mid-cap status (market cap is around $630 million right now) that still deserves a much higher valuation.
While I do not rely on accelerated approval to justify my valuation, I do think accelerated approval is likely, and I believe that, should Sarepta announce that they will file their NDA in 2013, that will take to stock to several times its current price of around $22.52.
I'm not pricing in any premium for a takeover or any boost from a potential partnership, since the probabilities are hard to analyze, but I have no doubt major pharmaceutical companies are interested. I'm also giving the drug development platform outside DMD a fairly small value. Should Sarepta's exon-skipping technology prove useful outside Duchenne, we could be looking at the next Alexion (ALXN, market cap around $22 billion), but on an even larger scale.
I thought the initial move on the announcement of top-line results, from a close of $14.84 on Oct. 2 to a close of $44.93 on Oct. 3, was fully justified. Although I'm never sure what causes a stock to move, I attribute the subsequent fall to the recent price of around $22.52 to a few factors-profit taking after a large run-up, the possibility that the company sold some or all of the stock it is authorized to sell under its $40 million at-the-market offering program, and, mostly, some misunderstandings in the market of the significance of the 48 week results (which I address below).
Here are the upcoming events that can move the stock:
- Sarepta will present their Q3 2012 results after the market closes on Nov. 7. I doubt we'll learn much new on that call, though they may discuss whether they have sold stock under the ATM.
- Scheduling of the FDA meeting. In the PPMD conference call mentioned above, management said on Oct. 23 that they are still analyzing data and preparing their request for the end of study meeting. They expect the meeting will happen in January or February, and will tell us when it happens.
- Possible release of walking data from 60 weeks. Sarepta hasn't said whether it plans to release any data from the ongoing trial every 12 weeks. My best guess is that Sarepta will not release more data between now and their FDA meeting, both because they do not want the FDA to think that they are trying to generate pressure on the FDA. If they do release 60 week results, I would not expect to hear them until late December or January.
- Management says they expect to tell the public their decision on whether to file an NDA in 2013 about a month after the meeting with the FDA.
- Increased company outreach to investors.
- Higher profile of advocacy efforts from the muscular dystrophy community.
- Possible buyout or partnership offers.
- Probably the most important catalyst is that this stock is still relatively unfollowed on Wall Street. Jenn McNary, the most vocal proponent for eteplirsen (she is the mother of one of the children in the trial, see the videos above), has posted numerous videos of her son Max showing how well the drug works. Right now, she has only 370 followers on Twitter (@jennmcnary), although that number is growing.
If you agree with my thesis, but are a short-term trader, is Sarepta dead money until early next year? I don't think so. As we see more advocates, physicians, and scientists go public, the market will wake up to the reasons that the FDA should grant accelerated approval. With the stock grossly undervalued in my book, I expect that will drive the stock price up to a more reasonable level. Also, following the run-up to the mid-$40s and the subsequent fall, the longer this stock trades near current levels, the more the stock will find its way into firmer hands. Given the relatively small market capitalization of Sarepta, I expect that, as more large dedicated biotech funds become aware of the company, the stock will move up materially. Finally, while it's hard to handicap the possibility of a takeover or partnership deal in the next few months, neither would surprise me.
Disclosure: The fund of which I am a member has a position in SRPT stock and options. Our position may change at any time. Outside my interest as a member in my fund, 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, though my fund's profits or losses on our Sarepta position may affect the portion of my fund's income that is allocated to me. I have no business relationship with any company whose stock is mentioned in this article.