The shares of Sarepta (NASDAQ:SRPT) took a major hit in the last week of October after the FDA announced that it needs more data for its Duchenne muscular dystrophy (DMD) drug Eteplirsen. However, only a few days later, the drug authority released another statement clarifying its stance. This statement played a key role in removing fears that some form of fraudulent information was being provided by Sarepta and increased the hopes of the larger DMD community. The FDA stated that it had demanded clinical evidence from Sarepta that Eteplirsen actually increased the muscle protein dystrophin. The delay has been caused because the FDA had given clearer guidance on how to measure dystrophin produced by Eteplirsen.
The shares have regained some lost value since the press release by FDA. The company is planning to file an NDA (New Drug Application) for approval in mid-2015. This will be a major catalyst for Sarepta because its valuations are almost entirely linked with the success of Eteplirsen. Due to the crucial nature of the drug, the FDA is also willing to conduct a rolling review of the NDA and present it to a public advisory committee before making a final decision. These are all positive indications for a speedy approval of Eteplirsen for Sarepta shareholders and the larger DMD community. The recent acquisition of Drisapersen (DMD treatment under rolling review) by BioMarin (NASDAQ:BMRN) for a staggering $680 million is also a good sign for Sarepta.
Sarepta Therapeutics is a biopharmaceutical company, which is focused on developing RNA-based therapeutics. Eteplirsen is the most important product of the company and is currently awaiting a mid-2015 NDA review. Sarepta has also started clinical trials to produce drugs to treat infectious diseases such as Marburg Virus, Ebola Virus, Influenza, Dengue, and TB.
Sarepta Therapeutics is one of the companies working towards finding a cure for Ebola. The company has recently published the clinical trial results of the drug used to treat Ebola. Good news for the company is that the clinical trial results showed acceptable levels of safety and tolerability. The results also showed that the adverse effects of the drug were not much except for minor nausea and headaches. AVI-6002 showed high levels of survival when tested on guinea pigs and monkeys.
The next step is to see whether the same amount of survival rates sustain on humans or not. However, it is still too soon to say if the drug will be a success as it's still only in Phase 1 trials.
As mentioned above, the valuations of Sarepta are linked with the success of Eteplirsen. Eteplirsen and Drisapersen are both competing for the same market. With a mid-2015 review of Eteplirsen, both drugs (if approved) will enter the market in a short period of each other. Drisapersen has already been acquired by BioMarin for a pretty high price. Some sell-side firms are calling this is a risky but a sensible acquisition. Leerink's analysts are assuming that the drug will have peak sales of around $600 million by 2014 if it splits the market with Eteplirsen. This would mean that BioMarin has been able to purchase the drug for a bargain.
Eteplirsen has shown superior results to Drisapersen in trials which makes Sarepta a much better acquisition target.
Eteplirsen has shown 23% growth in dystrophin fiber in patients taking the drug for 24 weeks. Further studies have confirmed that the longer the duration (and not the quantity) of the treatment, the more effective the results. Eteplirsen is a charged neutral agent and doesn't cause renal or other dose-limiting toxicities. Drisapersen, however, is a charged negative and its Demand III (Phase 3) trial didn't show any statistically significant or clinically meaningful treatment difference between placebo and 6mg/kg of the drug for 48 weeks. This study failed to reach its primary end points, but another subgroup in the study showed a non-statistically significant but potentially clinically meaningful treatment difference of 21 m at week 48, and a statistically significant (P < .001) decline in creatine kinase, a potential marker of muscle cell integrity.
There are more than 15,000 boys suffering from DMD in the United Sates alone. Some sell-side firms are assuming that the Eteplirsen, if approved, will have a peak market sales potential of around $600 million. This would mean that the shares are still trading at a 1.0x peak sales potential. The sell side has a mean sell side target price of around $27, which means a 60% upside to current price levels. Considering the recent price tag of around $680 million for Drisapersen, a drug in no way superior to Eteplirsen, makes Sarepta a good acquisition target.
Chris Garabedian serves as the President and Chief Executive Officer of Sarepta Therapeutics. He took over this position in 2011. He has played various roles in the senior management in many biopharmaceutical firms. Prior to joining Sarepta, he was the Vice President of Corporate Strategy of Celgene Corporation (NASDAQ:CELG).
Revenue & EPS Outlook
For the third quarter of FY2014, Sarepta has reported a net loss of $29.2 million. The revenue for the quarter is reported to be $1.1 million, down from $4.2 million for the third quarter of FY2013. The main reason for the decrease in revenue is due to the decreased governmental contracts. The research and development expenses were up by $0.3 million (y/y).
The company has around $56 million in cash and around $183 million in short-term investments. Short-term investments are stocks/bonds held by the company which will expire under one year and are thus deemed highly liquid. If we assume that the company will keep burning around $35 million every quarter for operations, the short-term investments plus cash on hand should last around six quarters. However, Sarepta will have to generate more cash if it plans to market an approved Eteplirsen. This would most likely be done with a share offering. Any such offering will have a negative effect on the share price, but the timing and nature of any such event is difficult to predict.
The shares took a hit when the FDA demanded more data for Eteplirsen. The FDA later explained its demand in more detail and while the shares rebounded, they did not reclaim their entire value.
A lot has changed since then. The FDA has removed fears of any foul play on the part of Sarepta and also admitted that there is a lot of interest in Eteplirsen shown by the greater DMD community. The authority has also stated that it will present the eventual NDA to a public advisory committee before any decision. Moreover, the recent acquisition by BioMarin speaks volumes for the potential in this market and makes Eteplirsen an even better acquisition target considering its better trial performance. The mid-2015 NDA submission is a mega catalyst for Eteplirsen and the valuation should start to rise as we approach the review. Therefore, I believe that Sarepta is a good buy at current valuations.
There is an inherent risk in all biotechnology investments because most details about ongoing trials are not made public. An even bigger risk, in the case of Sarepta, is the ability of the company to properly handle the demands of FDA. If the company fails to follow the demands that FDA was forced to repeat (in the April meeting, the authority had already asked for changes to methodology used for measuring dystrophin), the investors and patients might have to wait a little longer for approval of the drug.
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