Shares of Sarepta Therapeutics (SRPT -0.64%) nosedived last week as the Food and Drug Administration (FDA) did not approve the company's gene therapy treatment, SRP-9001. Panic has been setting in, as the stock has been in sell-off mode.
Should investors be worried about this development, or is this just a bump in the road for the biotech stock?
FDA delays decision on gene-therapy treatment
Investors were expecting a decision on Sarepta's gene therapy SRP-9001 this week. The therapy is a potential treatment for Duchenne muscular dystrophy (DMD), a severe genetic muscle disorder that can significantly shorten a person's life span with the average life expectancy of around 27 years. The FDA, however, delayed its decision on the treatment and will now make a decision on or before June 22.
The agency says that it needs more time to adequately review the therapy and whether to grant it accelerated approval. Previously, an FDA panel recommended accelerated approval, but only with a razor-thin 8-6 majority voting in favor of it. The FDA doesn't always go along with what its panels suggest, but it serves as a gauge as to how convinced medical experts are on the effectiveness of a particular treatment option.
Should investors be worried?
Sarepta Therapeutics' stock was down more than 10% last week as investors learned about the news that the FDA was pushing back its decision on the treatment. The stock has effectively given back the gains that it has achieved this year.
The positive is that the agency appears to be in favor of approving SRP-9001, but investors may be worried that it will be for a narrow age group. Sarepta noted in a recent press release that the FDA "is working toward potentially granting an accelerated approval for SRP-9001, initially for Duchenne patients ages 4-5 years old." The clinical trials for SRP-9001, however, focused on an age range of 4-7 years old.
It's a potential blow for a treatment that analysts have projected could generate approximately $3.6 billion in peak revenue by 2028. But the agency hasn't made a formal decision on SRP-9001, and moving the Prescription Drug User Fee Act (PDUFA) date doesn't mean approval won't be forthcoming. But if it comes on a narrower scope, that could significantly impact the revenue the treatment may end up generating for the business.
Sarepta's business is already a risky investment
Sarepta is a growth stock that comes with plenty of risk. In its most recent quarterly results, for the period ending March 31, it incurred an operating loss of $138.1 million, which was 59% higher than the $86.9 million loss it reported in the prior-year period. Even though sales were up 20%, rising expenses have more than erased the positives from the higher sales numbers.
The company has also been burning through more cash, with cash used in operating activities over the past three months totaling $209.4 million versus just $101.2 million a year ago. Although the company is well funded with around $1.9 billion in cash and short-term investments, it's not a trend it can continue with for long.
Should you buy Sarepta's stock on the dip?
In the past 12 months, shares of Sarepta have risen by 70%. The rare-disease company can make for a potentially attractive contrarian buy, as positive news of an accelerated approval for SRP-9001 could lift its shares and make up for the recent sell-off. And it already has multiple DMD treatments approved and generating revenue right now.
But it could still take years for the business to become profitable, assuming it can at all. And that means there's going to be a fair bit of risk with the stock, especially with the business carrying more than $1.2 billion in long-term debt on its books.
If you are willing to take on the risk, this could be a potentially good buy in the long run. However, most investors are better off going with safer growth stocks than Sarepta.
