On Friday, nearly every Wall Street analyst that covers Sarepta Therapeutics (SRPT 1.16%) lowered their rating on the biotech company. JPMorgan dealt Sarepta a rare double downgrade from outperform to underperform in response to some disappointing clinical trial results.
Shares of Sarepta Therapeutics stock lost around half their value before the stock market opened on Friday and didn't recover before the market closed last week. If you're still not sure why, though, you're not alone. Here's why Wall Street turned its back on this biotech stock last week.
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The flop
Sarepta recently reported disappointing clinical trial data for SRP-9001, an experimental gene therapy for Duchenne muscular dystrophy (DMD) that helps patients produce micro-dystrophin a new protein that is supposed to work like dystrophin. Children born with DMD inherit faulty genes they need to produce regular dystrophin, a protein that keeps muscle fibers from grinding against each other when they move.
Early data from four patients treated with a single administration of SRP-9001 showed they were producing micro-dystrophin. In late 2019, Roche (RHHBY 1.64%) handed Sarepta an upfront payment of $1.15 billion for rights to commercialize SRP-9001. Fueled with cash from its international collaboration partner, Sarepta rushed SRP-9001 into Study 102 with 41 patients.
It doesn't look like Sarepta's deal with Roche will go much further. While SRP-9001 did help boys produce micro-dystrophin, it didn't lead to significantly better scores on muscle function tests compared to scores measured in the placebo group.
Sales unaffected
It isn't unusual to see clinical-stage biotech stocks give up half their value in response to a clinical trial failure, but Sarepta Therapeutics successfully markets two DMD treatments that aren't affected by the company's recent clinical trial failure.
Sarepta Therapeutics is still one of the only companies with approved treatments for certain patients born with DMD. Combined sales of those treatments, Exondys 51 and Vyondys 53, grew 23% year over year in the third quarter and they're expected to generate around $600 million in top-line revenue this year.
Where's the evidence?
A mid-stage trial flop that should have been a relatively small issue led to a stock market meltdown because it reminded investors that this company still hasn't shown convincing evidence its treatments improve outcomes for DMD patients.
Exondys 51 and Vyondys 53 are marketed under approvals that could be revoked if the company can't verify their benefit in a confirmatory trial. Sarepta's had plenty of time to provide evidence that could cement approval of its commercial-stage drugs and boost their popularity, but the company hasn't made the effort.
Nobody would describe the FDA's enforcement of post-approval confirmatory studies as consistent and investors aren't necessarily concerned about losing approvals for Exondys and Vyondys. Sarepta Therapeutics stock was beaten down because its latest clinical trial failure is an ugly reminder that the company still hasn't proven itself capable of developing a drug that actually works.
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Not long enough?
Sarepta Therapeutics isn't about to throw in the towel on its gene therapy program, and it probably shouldn't. That's because 48 weeks doesn't seem long enough to measure a clinical benefit for this slowly progressing disease.
The North Star Ambulatory Assessment (NSAA) asks patients to perform 17 basic tasks like standing up, and climbing stairs then awards up to two points for tasks that can be completed. Instead of losing abilities, the results Sarepta Therapeutics posted showed a 0.9 point improvement after 48 weeks among patients given a placebo.
Treatment with SRP-9001 isn't intended to repair damaged muscles, but it should prevent them from breaking apart over the long run. Since the placebo group didn't have enough time to exhibit muscle damage, we really can't say SRP-9001 didn't work.
Buy the dip?
Patients in Study 102 that initially received a placebo will be treated with SRP-9001 and all patients will be observed again in another 48 weeks. Results from Study 102 will inform a larger pivotal trial that could begin this year. The company is also advancing another gene therapy candidate, SRP-9003 for limb-girdle muscular dystrophy.
Sarepta Therapeutics finished September with $1.8 billion in cash and investments, which ought to give the company plenty of time to test its gene therapy programs thoroughly. Unfortunately, poor management of capital is a big problem for Sarepta Therapeutics. Despite $395 million in topline revenue during the first nine months of 2020, Sarepta's operation lost a whopping $393 million.
Chronic losses and the persistent lack of evidence that Sarepta Therapeutics can develop a drug that works make this a biotech stock to avoid for now.
