Sarepta Therapeutics (NASDAQ:SRPT) has been on my watchlist as the company is doing great work in the area of Duchenne Muscular Dystrophy. In fact, I last looked at the prospects of the business halfway January when shares were trading at similar levels as they are trading today, trading in the low sixties.
I concluded that 2017 has been a breakthrough year for the company following approval of its Duchenne drug. Debut sales, growth and wider approval to other indications, as well as greater geographical coverage were and remain key drivers for the shares.
I concluded that I was appealed to the shares given the strong growth and 10 times forward sales multiple. That said, I recognised the great momentum seen in 2017, which made me wait for shares to dip towards the $40-$50 region, as the turmoil in early February ¨only¨ resulted in a fall to the lower fifties. As shares have risen back to the lower $60s again, I reiterate my caution and patiently wait for a dip.
Good News Took A While
Sarepta has been founded in the 1980s already and long has been a dormant stock, trading at less than a dollar in 2012. Shares exploded from that point in time following good research results on its Duchenne drug candidate, prompting shares to rise to $50 in 2013. Ever since, investors have seen a great deal of volatility with shares ranging between $15-$60 on the back of the hopes about research results, setbacks, responses to FDA actions as well as progress and results released by competitors.
Sarepta finally obtained approval for EXONDYS 51 at the end of 2016 to help Duchenne patients as the approval pushed shares to a high of $60 at the time. EXONDYS is approved to treat roughly 13% of the US patient population of Duchenne, an indication prevalent among one in every 4,000 males in the US. The goal is to get approval for the wider population, as Sarepta aims to help at least half the population with its drugs.
In February of last year, Sarepta reported debut sales of EXONDYS 51 of $5.4 million for the fourth quarter of 2016, accompanied by sizeable losses. First quarter sales of 2017 (released in April) rose to $16.3 million, as the company hiked the full year sales guidance to $80-$90 million. Revenues doubled again in the second quarter (as became apparent in July) with product revenues hitting $35 million. This surprised management as well as the revenue guidance was hiked again to $125-$130 million.
Third quarter revenues grew to $46 million as the company hiked the full year guidance for 2017 again, implying that fourth quarter sales were seen at $53-$58 million. This indicates that momentum continues to be solid with revenues still growing by $10 million on a sequential basis. Sarepta actually ended up reporting fourth quarter sales of EXONDYS 51 of $57.3 million, near the high end of the provided guided range and consistent with the preliminary results already reported by the company.
This is very encouraging news as fourth quarter costs totalled $80.4 million, including $44.4 million in R&D expenses, thereby reducing operating losses to a rate of $23 million. Financing these losses is certainly no big issue as the company holds $1.08 billion in cash and equivalents, offset by just $430 million in debt.
The 64 million shares value equity of the business at nearly $4.0 billion, as they trade around the $62 mark. Including the net cash position of $650 million, this yields an enterprise valuation of close to $3.3 billion. With fourth quarter revenues of $57.3 million, this values the business at 14 times annualised current sales, although further growth is seen in 2018.
Looking At 2018
The company sees 2018 revenues of $295-$305 million but this was already known for a while as the company has communicated this before at the J.P. Morgan conference. This values the enterprise at 11 times sales, but unfortunately, no expense guidance has been outlined for this year. The only thing communicated was the direction of travel, involving higher (research and development) expenses.
Expenses could be significant as the company has 16 programs in its portfolio to expand EXONDYS to other Duchenne indications in its goals to serve a much larger portion of the patient population. The company is making real progress with the company's GOLODIRSEN research program, which if approved could boost Sarepta's approved share of the Duchenne population from 13% to 21% and create a significant potential boost to the current revenue base, on top of the current growth. Wider approval in terms of the GOLODIRSEN research program as well as approval of other research programs and approval in Europe will be key drivers for this year and the years to follow.
Based on the Q4 operating cost base of $320 million, Sarepta will continue to burn a bit of money this year although rising revenues can probably offset rising costs to a great extent, or potentially in its entirety. Based on the Q4 results, we can therefore estimate that the cash burn is likely to be limited, as investors could furthermore find comfort in the strong cash position of the business.
The comforting financial position, further growth, healthy pipeline and insider buying in 2017 creates reasons to be upbeat. That said, investors have to recognise the risks related to this story as well, including issues with the FDA's stance to approval of drugs in the area of Duchenne, the fact that Sarepta is a one-product company and the steep price of the product of course.
Balancing the risks and rewards is always the key task for an investor, and even more so in biotechnology names. Sarepta has a real potential here, although investors have put up their hopes as well given the great run, which the stock has seen already. I continue to reiterate my stance that I am looking for a pullback to reduce sales multiples going forward, as the turmoil in the wider market creates opportunities to deploy capital elsewhere in the meantime as well.
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