Sarepta: Many Drivers For 2018

Summary

• Sarepta continues to see a steady pick-up in sales growth for Exondys 51, as has previously been communicated.
• The prospects for wider approval to other ¨patient groups¨ within Duchenne Muscular Dystrophy, and greater geographic coverage lays out a pathway for growth.
• I like the prospects for further growth in combination with expense discipline as Sarepta might become profitable by the end this year.
• I like the company but recognise the momentum seen already and opportunities in the market following the latest heightened volatility, looking for a dip before allocating capital to Sarepta.

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.

2017 Trajectory

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.

Analyst’s Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[CEFA]

"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."
If some of the above come to fruition this year, then I think the rumors of a buyout will occur before 2019.
Starting at $150 a share.

[thlizrd]

Correction: Golodirsen AA is coming by the end of March, imo! —thlizrd🦎

[thlizrd]

Golodirsen is coming by the end of March! —thlizrd🦎

[CEFA]

Up 20% over 4 trading days.

From around $62 to $74.

Thoughts?

[thlizrd]

Well, I must admit, I do get a little emotional when it comes to DMD. But, I don’t generally disagree with your approach as being analytically stringent. In fact, I am very analytical myself, so I can appreciate that human quality.

Bottom line is my point that FDASIA created new standards for approval re: drugs for rare diseases, and so many are unwilling to accept this due to their embrace of mathematical rigor in trial design, generally a noble endeavor. Farkus_MD even left the FDA over this point of contention.

But, the reason for FDASIA was simple: children are dying while we work towards approval. When a treatment has been proven safe and evidence of efficacy exists, why not allow the family to assume the risk of trying the drug?

Who cares if it’s expensive? If it were not expensive, there would never be another one. No company is gonna bring a drug to market for a few thousand patients and price it as if it were Lipitor.

Companies such as Sarepta generally assume 100% of the copay and patients have no out-of-pocket costs. So, if my insurance rates go up a little to help incentivize more drugs for rare diseases, I am ok with that.

In the case of eteplirsen, 10 of 12 kids are still “walking”. The only two who are not walking failed almost immediately after starting the trial, which seems to imply that the drug was delivered too late. So, some common sense is required here.

If you google DMD and take a look at patient videos, you will see my point. Forgive me for being a little too emotional and thank you for being a gentleman. —thlizrd🦎

[thlizrd]

Damn. Talk about not being able to see the forest because of the trees!

Ten of twelve DMD kids from these trials are STILL WALKING six years into treatment. This doesn't happen in untreated DMD kids. You say, "since there is no approved alternative, there is nothing available for comparison". Wrong. Go meet the family of a DMD kid in his 20's and you will find your comparison.

Educated idiots like you have been detractors from the very beginning. And, if left unchecked, these kids would still be dying slowly. As it stands, however, they are stabilizing and even improving on treatment.

Finally, please do us all a favor and go read FDASIA. The US congress passed this law as a "direct order" (not a suggestion) that latitude be given in trials of rare diseases where numbers are low, efficacy is ill-defined, and measures of efficacy are questionable.

But, you can't teach an old dog new tricks. GET THIS THROUGH YOUR THICK SKULL: The game has changed and we will no longer let our children suffer and die in order to appease some anal-retentive p-value professor. 'Nuff said. ---thlizrd

[donasoledad]

thlizrd, RELAX! Chill on the insults. I made my points without calling anyone an idiot. If these results are so fantastic compared to what would have happened without it, then why wouldn't that have been borne out in a full blown phase 3 trial? Prosensa partnered with Glaxo Smith Kline and put drisapersen to the test using 60 patients in a phase 3 trial even though they had their drug for much less time than did Sarepta. Drisapersen failed on efficacy, and it also caused inflammatory responses at the injection site perhaps due to it being a subcutaneous injection rather than intravenous like eteplirsen. But as the CEO of Biomarin(the company that bought Prosensa) Jean-Jacques Bienaime stated, "there is significant overlap between these two drugs". You say, in so many words, that nobody with DMD is still walking in their 20's unless they are taking Exondys 51. However, the MDA's own website says:"Until recently, boys with DMD usually did not survive much beyond their teen years. Thanks to advances in cardiac and respiratory care, life expectancy is increasing and many young adults with DMD attend college, have careers, get married and have children. Survival into the early 30s is becoming more common, and there are cases of men living into their 40s and 50s." Though ambulation was not mentioned in that statement, it's still a fact patients' lives have been extended significantly without Exondys 51. And when you say walking, what level of walking are you talking about? Can they only walk for a test? (I do remember that when patients were brought to the FDA Advisory Panel Hearing they had to be wheeled in). This drug only increases the level of dystrophin from 0.1% of normal to 1.1% of normal. With such a low level of this critical protein, how ambulatory can they be? Is it definitively better than treatment with the only other approved drug for DMD, the glucocorticoid Emflaza? (Yes, I missed that fact in my earlier comment). Exondys 51 is almost 10 times as expensive as Emflaza. Is it worth it? If you're going to reply try to do it sans the insults. Peace out!

[windcross]

Ignored skeptics for years because Duchenne parents said Exondys made a real difference. Yet bean counters insisted it didn’t because it didn’t meet their trial specifications with blinded kids receiving placebo. Hoping the CATB can skip Phase III too, as dying kids don’t need more bureaucratic hurdles to better health, less pain and agony, and prolonged lives

[CEFA]

For the skeptics.

Why would numbers and data on a sheet of paper be more meaningful than a doctors' belief that a therapy works because his patients are responding to it?

This is happening in real time, right now. Patients are responding to therapy and doctors continue to prescribe it and insurance continues to pay for it.

[donasoledad]

Any word on that confirmatory phase 3 trial for Exondys 51 that the FDA required on approval? Is there any data which shows that this drug is actually effective in the expanded population? To this point Sarepta has only given phase 2 clinical data on 12 patients. Or are they just raking in the dough now and nobody cares? This drug was not much more effective than Drisapersen in clinical trials.(And remember that the FDA deemed Drisapersen unworthy of approval). Exondys 51, then called Eteplirsen, simply lacked the ISR issues that Drisapersen had. They both had about the same antisense efficacy. Eteplirsen hit its target 5% of the time while Drisapersen hits it 4% of the time. Also, it is my understanding that this drug costs about $300,000 per year. With only 500 prospective patients for this drug, that caps the revenues from Exondys 51 at $150,000,000. Where are all the other revenues coming from?

[papafred99]

Those on Exondys51 expressing their belief in its effectiveness is all the proof I need to be supportive and stay long and strong.

[CEFA]

Because of what treating physicians are seeing right now in the real world, they keep on prescribing the drug because based on how their patients are responding, they feel it is effective.

CEO Doug Ingram says, he has yet to meet a treating physician that does not see a significant benefit from Exondys51. "...not met a skeptic yet..."
A physician who was "not a fan" of Sarepta, said through clenched teeth, that Exondys51 is the only therapy he sees that works.

Ingram said that "physicians...not only supportive but getting pretty passionate about what they're seeing with the therapy."

Also besides Exondys51 they have an industry leading pipeline of 16 distinct DMD programs and 1.1 billion in cash.

Revenue for 2018 will near 305 million for Exondys alone, so their is no near term "cap" on revenue as you stated.

And on the conference call, Ingram stated that "After the final meeting minutes from our FDA meeting are complete, we will provide an update on our GOLODIRSEN plans. We also note that on February 15, the FDA issued a draft guidance with the development of treatments for DMD and related Dystrophinopathy. A particular importance to technology like our RNA targeted pipeline.

In addition to other elements the guidance states the “deficiency of functional Dystrophin appears to be the proximate cause of the systemic and functional consequences of Dystrophinopathy, just to find particular interest in Dystrophin as a biomarker and a potential surrogate endpoint for accelerating approval.” As our RNA targeted technology is designed to restore Dystrophin, we are pleased with the FDA further guidance on the importance on Dystrophin restoration as a treatment approach for DMD.

[The Value Investor]

Good point, but that argument could be made at any price, which kills the argument as well.

[windcross]

VRTX is 10x SRPT market cap
SRPT is 100x CATB market cap
Recently bought a lot of CATB with SRPT proceeds that cost $10
Very long both SRPT and CATB
Learned from ALXN $10 stock sold too early at many different multiples that rare disease drugs can be a major winner. The kids need some breakthrough drugs for genetic diseases that cripple and kill them. SRPT PMO platform is powerful.

[windcross]

SRPT will own the DMD space but they must buyout CATB. That drug prevent dystrophin from degrading fast and SRPT’s drugs will make the RNA form new dystrophin. The DMD space is similar to the Cystic Fibrosis space, even in potential patients, which VRTX owns now. But VRTX is 10 times bigger valuation the SRPT. SRPT will have many more multiples of market cap, but they must get Euro approval and more exon approvals first.

[stk28097]

I like the sound of this

[Dr. Analyst]

avoid srpt
highly overvalued

[tsantay]

keep trying loser....see you at 100.....

[stk28097]

You should short it then

[Martin Hodik MD]

I’d honestly like to hear your take on why srpt might be overvalued. I saw you argue the other day that the eteplirsen approval was provisional and that they could lose it or what. But there was nothing provisional about it. There’s quite clear data that eteplirsen works sufficiently to the benefit of the patients (including our own cohort of patients). Plus, the company has more similarly promising drugs in their pipeline.

[cdostrom]

Long SRPT. I am expecting further breath of treatable patients.