Things have not quite gone as hoped lately for shares of Sarepta Therapeutics (SRPT 1.08%). Recently, the biotech received approval from the Food and Drug Administration (FDA) for its cutting-edge gene therapy for Duchenne muscular dystrophy. Yet, the stock has nosedived, dropping 14% over the past 30 days.
At the same time, the consensus of Wall Street analysts sees the stock rising 65% by a year from now. Do the analysts know something that most investors don't? Let's take a peek at this biotech's positioning to find out.
What would need to happen for the stock to rise
Usually when a biotech company succeeds in getting FDA approval for one of its products, it causes the stock to go flying. A new treatment on the market means a new revenue source, and given the fact that such companies can largely set their own prices, generating profits from the sales typically follows.
So when the FDA gave the green light to Elevidys -- a gene therapy for Duchenne muscular dystrophy in children -- Wall Street analysts likely anticipated significant improvements to Sarepta's top and bottom lines. For 2023, they are, on average, estimating $1.1 billion in revenue, and nearly $2.2 billion in 2024.
But the chances of it meeting those estimates now look a bit lower than they did before the approval. Here's why. Elevidys works by knocking out the dysfunctional copies of the dystrophin-producing gene that are the root cause of Duchenne muscular dystrophy and replacing them with gene sequences that lead to the correct production of the most important sections of the dystrophin protein.
If the gene therapy works as intended, patients would only need to get the treatment once and their symptoms would either stop progressing or progress at a dramatically slower rate. Duchenne muscular dystrophy is a degenerative disease, and those with the condition begin to show symptoms at around age 5. It tends to prove fatal before age 30. Given these facts, Elevidys could significantly improve patients' lifespans as well as their quality of life.
The catch is that it will take years to determine to what degree that's actually the case. The FDA is requiring Sarepta to run a confirmatory clinical trial, which is already in progress and could deliver results in late 2023. The company is also initiating another trial for a slightly older cohort of patients.
But if regulators see the results from those studies and still want more data to support the contingent approval, it could be problematic as the company's existing trial designs require following patients for a total of about 7 years after they get the treatment. It's possible that the benefits from treatment will appear to be large for a few years, but ebb as time passes. And given that Elevidys is the first and only gene-editing therapy for this condition, the standards for proof of its long-term safety and efficacy are likely to be on the high side.
In other words, even though Elevidys has been approved for use, that doesn't guarantee that Sarepta shareholders will realize significant growth over the coming years, because there's a moderate risk that the treatment will experience stumbles that curb its use. Wall Street analysts are likely assuming that those risks won't be realized. They might be right, but there are still a few other issues with this company that might detract from their thesis.
Some barriers to a successful investment
Regardless of what the analysts are saying, you might want to avoid investing in Sarepta for now. The efficacy of its new gene therapy isn't the only risk.
Sarepta plans to price Elevidys at $3.2 million per dose. It remains an open question whether insurers in the U.S. will be willing to cover it at that price, though management is optimistic. If the cost ends up being prohibitive, expect lower revenue. There is also the faint possibility of curing all of the patients who are eligible, and having the medicine become a victim of its own success.
Separately, expect the business to continue having trouble with profitability. It isn't profitable now despite having four medicines for Duchenne muscular dystrophy on the market, and it's unclear when or if the new therapy will change that. And its stock is quite expensive, trading at a price-to-sales multiple of 10.
So unless you like to buy expensive shares of companies that still have a lot to prove, steer clear. Sarepta is doing great things for the community of patients with Duchenne muscular dystrophy, and it's planning on doing even more, but the risks for its business are substantial, and they won't be going away anytime soon.
