What happened
Shares of the orphan drug specialist Sarepta Therapeutics (SRPT -1.57%) rose by as much as 15.5% in after-hours trading yesterday on heavy volume. This double-digit rally was sparked by a far better-than-expected second-quarter earnings report that hit the wires after the closing bell.
Not surprisingly, the key item investors seemed to be zeroing in on is the exceptionally strong sales of the company's Duchenne muscular dystrophy (DMD) therapy, Exondys 51. Sarepta reported that the drug's sales came in at a healthy $35 million for the three-month period, clobbering consensus by a whopping 56%.
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So what
With some payers openly balking at covering a controversial drug that costs $300,000 a year, it was starting to look like Exondys 51's commercial launch would get off to a particularly bumpy start. However, these stellar second-quarter sales clearly suggest otherwise.
Now what
Most importantly, Sarepta appears confident that this strong sales momentum is sustainable going forward and not simply a one-off event. As proof, management significantly increased revenue guidance to $125 million to $130 million for the year, up from its prior forecast of more than $95 million.
Are Sarepta's shares now a strong buy with Exondys 51's commercial launch off to a superb start? From a valuation standpoint, Sarepta's shares are presently trading at around 7.5 times Wall Street's high-end revenue estimate for 2017. That's a fairly standard valuation for a revenue-generating rare-disease specialist these days, implying that Sarepta's stock is fairly valued at present (at least relative to prevailing trends within the industry).
That being said, the Street's consensus 12-month price target stands at a staggering 58% higher than where the stock is currently trading. Analysts, in effect, expect Sarepta to follow in the footsteps of other orphan-drug giants like Vertex Pharmaceuticals that sport valuations that are clearly based on their long-term growth potential, not their underlying fundamentals.
Seasoned biotech investors, though, know all too well the dangers of buying stocks whose valuations are largely detached from their fundamentals. So, before buying shares, you should probably decide how comfortable you feel owning a stock that's likely to be heavily dependent on market sentiment for additional upside potential.
