Although U.S. stock markets are presently bumping up against their all-time highs, there's good reason to believe that equities will continue to surge higher in 2020. The U.S. economy remains in decent shape, high levels of innovation in key industries like biotech and tech are driving enormous demand for cutting-edge products across the globe, and the average valuation metrics (forward price-to-earnings ratio, price-to-sales ratio, etc.) have yet to hit totally unreasonable levels in most sectors.
So, with the stage set for another strong year for U.S. equities, it might seem like a herculean task to unearth stocks capable of beating the broader markets next year. But there are a few rare gems being bandied about that could actually crush most major indexes in 2020. Wall Street, for instance, thinks that shares of the rare-disease specialist Sarepta Therapeutics (SRPT 1.40%) could gain a staggering 52% over the next 12 months. What's more, some of the company's uber-bulls have recently rolled out price targets that imply a jaw-dropping 117% upside potential in 2020.
Can Sarepta's stock live up to these rosy forecasts in 2020? Let's look at the biotech's overarching value proposition and risks to find out.
Sarepta's strengths and weaknesses
Sarepta offers three well-defined levels of value creation for shareholders. On the primary level, the company's RNA platform for the muscle-wasting disorder known as Duchenne muscular dystrophy (DMD) is performing exceedingly well. It now has two RNA therapies for DMD on the market, Exondys 51 and Vyondys 53, with a third drug candidate, Casimersen, on track to hit the market in 2020.
Taken together, these three DMD drugs would cover about a third of the therapeutic landscape for DMD. That equates to a commercial opportunity of $1.5 billion to $2 billion a year in peak sales. So Sarepta's current market cap of $9.6 billion is seemingly justified by these first-generation assets.
Its second- and third-tier value generators, however, are where the real excitement is for shareholders in the years ahead. Specifically, the biotech is developing a powerful gene-therapy platform to produce one-time treatments for various forms of muscular dystrophy (the second tier of value creation), as well as a host of other rare diseases such as Charcot-Marie-Tooth disease and Pompe disease (the third tier of valuation creation). The big-picture issue is that these later-line experimental therapies could rake in anywhere from $6 billion to $10 billion in sales by the middle of the next decade.
That said, Sarepta's rare-disease gene therapy pipeline will almost certainly run into its fair share of clinical setbacks along the way. And the reimbursement landscape for high-priced therapies may also be considerably more restrictive in the coming decade than it is today. As such, it's arguably not a good idea to factor these early stage assets into Sarepta's near-term value proposition right now. A lot can go wrong in the interim, after all.
Can Sarepta's shares beat the broader markets in 2020? In a word, yes. Even though the company could lose its de facto monopoly in DMD in 2020 due to the likely approval of NS Pharma's Viltolarsen, this franchise should still generate exceptional levels of sales growth for the better part of the next decade. That long-term growth trajectory, in turn, should make this biotech stock a highly prized commodity in 2020. Wall Street's rather optimistic outlook for Sarepta's stock thus appears to be well justified.