What happened
Shares of the rare-disease drugmaker Sarepta Therapeutics (SRPT -1.14%) crashed and burned in May seemingly due to nothing more than a lawsuit filed by a reporter against the U.S. Food and Drug Administration.
The lawsuit pertains to Sarepta because the journalist, Charles Seife, is requesting documents related to the FDA's approval of the company's Duchenne muscular dystrophy, or DMD, drug Exondys 51 last year. According to data from S&P Global Market Intelligence, Sarepta's shares ended the month down 18.7%.
Image source: Getty Images.
So what
The market's dramatic reaction to a lawsuit that's unlikely to result in Exondys 51 being pulled from pharmacy shelves underscores Sarepta's status as a battleground stock. The biotech's shares, after all, were surging higher in the wake of a flurry of buyout rumors and a host of hedge fund manager recommendations earlier in May. In other words, it didn't exactly take very much to shift the sentiment around this stock.
Now what
After this pullback, Sarepta's shares are now trading at around 7.6 times the company's estimated 2018 sales. While this valuation may seem rich to the uninitiated, the truth is that Sarepta is actually slightly undervalued relative to other orphan drugmakers with a product on market.
It's not uncommon, after all, for orphan drug specialists to trade at over eight or even 10 times their projected sales for the next year. That's a testament to just how highly the market values all the additional benefits -- such as extended periods of exclusivity and sky-high profit margins -- that come along with medicines for rare diseases.
In all, Sarepta does come with a hefty dose of risk because of Exondys 51's conditional approval status that might be revoked if further clinical trials don't provide clear evidence that it's an effective medicine for DMD. But that particular risk factor is a couple of years away from materializing based on the drug's progress in late-stage testing, implying that Sarepta's double-digit downturn may represent a compelling opportunity to buy an orphan drugmaker on the cheap.
