Buy, Sell, or Hold: Sarepta Therapeutics

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When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether its possible upside outweighs its risks. Let's take a look at Sarepta Therapeutics (Nasdaq: SRPT  ) today, and see why you might want to buy, sell, or hold it.

Founded  in 1980 and formerly known as AVI BioPharma, Sarepta Therapeutics is based in Washington state and sports a market capitalization of about $770 million. It's a biopharmaceutical company, applying RNA-based technologies to treating rare and infectious diseases, such as muscular dystrophy, tuberculosis, and dengue fever.

You might yawn, looking at the stock's 10-year average annual return  of negative 2%, but over the last year, it's up -- more than sixfold! That's enough to have many wondering if it's too late to invest here, or whether there may be additional huge increases ahead.

One reason to consider buying Sarepta Therapeutics is its business. With the world's population growing, getting older, and living longer, demand for health-care products and services is likely to remain in demand.

Another reason to like Sarepta is that it has great potential. The market seems aware of this, as its shares roughly tripled in just one day, back in October, when the company released very good results in a Phase IIb clinical trial of its developmental Duchenne muscular dystrophy drug eteplirsen. Part of the excitement is due to there being no cure for this fatal disease at the moment, and the drug seeming to reverse its progress in patients. (It's important to remember, though, that FDA approval is never guaranteed.)

A look at the company's financial statements shows revenue growing at a good clip, rising from $11 million in 2007 to $47 million in 2011, though over the past 12 months that has slipped  to $44 million. There's ample cash for the time being, and very little debt . That's good.

It's also worth considering that the company tackles some rare diseases, where there often aren't many alternative medications available. In such cases, companies can often command steep prices for their drugs. Vertex  (Nasdaq: VRTX  ) , for example, has been charging close to $300,000 for a year of its cystic fibrosis treatment, Kalydeco. 

As you mull over Sarepta, know that it's not exactly without competition. For example, GlaxoSmithKline (NYSE: GSK  ) , partnered with Prosensa, is also working on a drug to combat Duchenne muscular dystrophy. The companies recently noted that they don't expect FDA approval for their drug, Dispersen, until at least 2014, though, giving Sarepta more time to try to get eteplirsen to market.

Meanwhile, remember how I said that FDA approval is never guaranteed? That's a good reason to think twice before investing in this sector, where it can help to have a strong constitution and a tolerance for volatility. Think back, for example, to last year, when MannKind (Nasdaq: MNKD  ) lost as much as 45% in a single day on news that the FDA had rejected its inhaled insulin drug, Afrezza, for the second time.

Then there's the stock's valuation . It doesn't have a price-to-earnings (P/E) ratio because it doesn't yet have earnings, but its price-to-sales ratio is around 15, fully three times its five-year average. Meanwhile, along with negative earnings, free cash flow has also been negative, and increasingly so in recent years. Still, the stock just received a Wall Street analyst's upgrade, with a much higher target price.

Share dilution is something else to watch, as the company's share count has risen from 9 million in 2007 to 23 million. If it keeps rising, it can shrink the value of shareholders' existing shares. (Issuing more shares to raise money that then generates a lot more money can work out well, though. It's not always a portent of doom.)

Finally, another risk is this: Sarepta has been working on treatments for the Ebola virus and other conditions, under contract with the Department of Defense. But due to military spending cutbacks, it received an order to halt some of its work.

Hold (off)
Given the reasons to buy or sell Sarepta Therapeutics, it's not unreasonable to decide to just hold off on it. You might want to wait for eteplirsen to win approval or for Sarepta's stock to drop some, offering a more compelling price.

Or you might just check out some other interesting biotech companies, to see if they inspire more confidence or offer more promise. Amarin (Nasdaq: AMRN  ) , for example, has a promising drug to lower triglycerides, and is securing patents to protect it.

The verdict
I'm holding off on Sarepta Therapeutics for now, but I'm intrigued. Everyone's investment calculations are different, though. Do your own digging and see what you think. The company may perform spectacularly in the coming years, but remember that there are plenty of compelling stocks out there.

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