Why Wall Street is Betting Heavily Against Sarepta Therapeutics

Clinical-stage biotechs working on novel treatments for Duchenne muscular dystrophy, or DMD, have soared lately as regulators on both sides of the Atlantic appear to be experiencing a change of heart. Specifically, the Food and Drug Administration or the European Medicines Agency have now given regulatory pathways to previously stalled clinical offerings from PTC Therapeutics (NASDAQ: PTCT  ) , Prosensa Holdings (NASDAQ: RNA  ) , and Sarepta Therapeutics (NASDAQ: SRPT  )

What's particularly interesting is that short-sellers have only piled into Sarepta Therapeutics, holding over 30% of the float. By contrast, shorts hold less than 7% of the float in PTC Therapeutics and about 15% in Prosensa. With this in mind, let's take a closer look at why Wall Street is betting so heavily against Sarepta.

Prosensa's patents may block Sarepta's drug from the European market
Prosensa holds key patents describing exon-51 skipping technology in Europe that could bar Sarepta's drug, eteplirsen, from being sold on the continent.

This loss of European revenue could keep the drug from reaching blockbuster status. Analysts project that drisapersen could see peak annual global sales of about $1.4 billion if it gets past both the FDA and EMA. Perhaps eteplirsen's potential chemical advantage will help it outcompete drisapersen in the U.S., but the Europe situation is undoubtedly an impediment to the drug's commercial potential.

A regulatory path forward does not guarantee full approval
I think one of the biggest reasons shorts are still confident in their position following the FDA's about-face on eteplirsen is that the agency is requiring Sarepta to complete at least one late-stage study for full approval. While the FDA has signaled that it could consider a conditional approval with some additional clinical data in hand in order to bring this drug to patients who need it, question marks still hang over eteplirsen's clinical benefit to patients.

Sarepta argues that eteplirsen clearly shows an increase in dystrophin expression in DMD patients, which translates into better walking and respiratory function. But the FDA appears to want to hold Sarepta to using the so-called "6-minute walking test" as the primary measure of efficacy. The problem is that this test has produced highly variable results among clinical trials and even for different DMD drugs.

Translating this into plain English, the high degree of variability inherent in the walking test makes it difficult to produce a statistically significant result. Sarepta has suggested that some of this variability results from researcher error, but motivational factors could be at play as well. In sum, short-sellers appear to be betting that the FDA will force Sarepta to use the walking test as the primary outcome measure in a late-stage study, which appears to have a far less certain outcome than dystrophin production.

Foolish wrap-up 
Sarepta's shares have certainly made a strong comeback since the FDA's previous decision to require an additional trial prior to a regulatory review. With the FDA's reversal on this issue, we could see the stock move closer to its former highs.

SRPT Chart

SRPT data by YCharts.

That being said, short-sellers haven't exactly shied away from this stock, making it one of the most heavily shorted equities in the health-care sector. My view is that eteplirsen is likely to gain conditional approval in the U.S. in 2015, which would be a major catalyst for this stock moving forward. After that, a large late-stage study could take two to three years to complete, meaning there shouldn't be any reason to pull eteplirsen from the market in the near term.

The European patent issue may also not be as bad as many think. Duchenne muscular dystrophy outreach groups have reportedly already contacted European authorities about making sure patients have access to Sarepta's drug as well. So political pressure may force Prosensa to agree to a licensing agreement with Sarepta in Europe. While I am not normally a fan of developmental biotechs as investment vehicles, Sarepta might be an exception to this rule. 

Will this stock be your next multi-bagger?
Give us five minutes and we'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks one stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.


Read/Post Comments (6) | Recommend This Article (1)

Comments from our Foolish Readers

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 June 07, 2014, at 10:20 PM, kimdan wrote:

    You failed to point out a couple big differences between the three drugs. Sareptas, Eteplirsen has statistically significant results in both endpoints in the P2, neither Drisaperson or Atalauren met any end points in any trial.

    The FDA has not decided the dystrophin issue. Neither competing drug produced meaningful dystrophin, Eteplirsen did.

  • Report this Comment On June 07, 2014, at 11:51 PM, uyutnaya wrote:

    The summary of the article - Sarepta is investment vehicle. Agree.

  • Report this Comment On June 08, 2014, at 6:31 AM, Windward1999 wrote:

    I am surprised that Santhera's successful phase III results last month are not mentioned. Clearly, Raxone is not in the same league as it treats a major symptom and not the genetic cause of the disease. Still, this could provide for the potential to be added to these three firm's drugs as none seems to cure patients and they can still benefit for additional treatments. Raxone has been submitted for another indication in EU already and has conditional approval in France. So the way to market should be straitforward

  • Report this Comment On June 08, 2014, at 8:56 PM, TheStockDoctor wrote:

    WOW, another biased article from TheFool, no surprise there. Even the slightest amount of DD on SRPT reveals that it has always had a strong short position against it, always about 1/3 of the outstanding shares, as does MANY stocks that have drugs that haven't received FDA approval yet.

    The EU patents by Prosensa are simply something that must be addressed, it is not a blocker by any means. The key difference between the approach of Sarepta and Prosensa - is that Sarepta's drug ACTUALLY WORKS. Parents know this, Patients know this, Doctors know this, and short-sellers will learn this soon enough.

  • Report this Comment On June 08, 2014, at 9:29 PM, TheStockDoctor wrote:

    Not to mention that GSK walked away from drisapersen and abandoned their whole investment in RNA's approach, seeing it as fundamentally flawed. There was no reason for GSK to walk away empty handed.

  • Report this Comment On June 08, 2014, at 9:34 PM, NoFoolInvest wrote:

    George, Thank you for your balanced overview but I don't like to short this stock due to disadvantage of timing.

    You are one of few who are able to provide more invaluable insight in the Fool for biotech investment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2983265, ~/Articles/ArticleHandler.aspx, 8/29/2015 11:08:06 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

George Budwell

George Budwell has been writing about healthcare and biotechnology companies at the Motley Fool since 2013. His primary interests are novel small molecule drugs, next generation vaccines, and cell therapies.

Today's Market

updated 13 hours ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:00 PM
PTCT $40.62 Down -0.49 -1.19%
PTC Therapeutics,… CAPS Rating: **
RNA $0.00 Down +0.00 +0.00%
Prosensa Holding B… CAPS Rating: **
SRPT $36.69 Up +0.46 +1.27%
Sarepta Therapeuti… CAPS Rating: **