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The Food and Drug Administration just handed you a gift if you've been sitting on the sidelines waiting to invest in Sarepta Therapetuics (NASDAQ: SRPT  ) because you thought, like me, that it was too hard to handicap the likelihood that the FDA would approve Sarepta's Duchenne muscular dystrophy drug, eteplirsen, based on the biotech's limited data.

Unfortunately, your gift comes at the expense of boys that won't be able to get the drug for years.

It's never felt so bad to be right.

Alas, investors must move on
As I've said in the past, I think the FDA should approve eteplirsen and let doctors and the families decide whether it's appropriate. But after the failure of Prosensa (UNKNOWN: RNA.DL  ) and GlaxoSmithKline's (NYSE: GSK  ) phase 3 trial for their Duchenne muscular dystrophy drug, drisapersen, it's not surprising the FDA has decided that Sarepta should run a phase 3 trial of its own before approving eteplirsen.

Sarepta ended down 64% today on the news that a new trial will be required. At this knocked-down price, I think the risk-reward ratio is considerably better than it was when we were unsure of what the FDA would do.

Obviously, the phase 3 trial might follow the same fate as Prosensa and GlaxoSmithKline's drisapersen, but that was a risk even if the FDA gave eteplirsen the accelerated approval Sarepta was asking for. A confirmatory trial was always in the works and the accelerated approval would have been rescinded if the trial came out negative.

That is, of course, if Sarepta and the FDA can come to an agreement on the trial design. Sarepta was hoping to run an open-label trial comparing patients taking eteplirsen to Duchenne muscular dystrophy patients that have a mutation that wouldn't be corrected by eteplirsen. The FDA appears to be balking because a six-minute walk test, the best clinical endpoint, requires the patient to try their hardest to be accurate, which might not occur if the control group knows they aren't getting drug that can help them.

There's little doubt Sarepta and the FDA will come to some kind of resolution. It might not be exactly what Sarepta had in mind, but you have to play by the rules.

Without an accelerated approval, the reward has been delayed by a few years, which I would guess is why short-term investors are selling today. The long-term value of Sarepta, based on peak sales of eteplirsen, hasn't changed much.

A market cap north of $2 billion, like orphan-drug specialist Aegerion Pharmaceuticals, seems easily obtainable with a longer-term potential of closer to $20 billion like Alexion Pharmaceuticals once the company proves it can sell the drug.

Some of that potential reward will be lost to dilution that wouldn't have happened if Sarepta was able to sell the drug while it was running the clinical trial. Sarepta ended the quarter with a nest egg of $281 million, which likely isn't going to be enough to run a phase 3 trial, scale up manufacturing, and launch the drug. Increasing shares by 50% seems like a reasonable assumption.

Even if you factor in the likely dilution, with a market cap of around $500 million based on the 37.6 million fully diluted shares, Sarepta still has multibagger potential.

Big growth now
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Read/Post Comments (2) | Recommend This Article (3)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 12, 2013, at 7:22 PM, TruffelPig wrote:

    This is a really good well-balanced article summarizing a complex issue without oversimplifying . I just feel bad for the boys with that terrible disease - the drug seemed to really have helped some (e.g. Max) and it probably will be more difficult for families to get the drug.

    Another question I have is whether SRPT must run another trial for every different mutation for which different exon skipping has to occur?

  • Report this Comment On November 12, 2013, at 7:40 PM, fbert wrote:

    The sad part, not Just the young men, but imagine how much valuable time will be wasted with the vulture lawyers.

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