Investing in biotech stocks is risky. And one of the more volatile ones of late is Sarepta Therapeutics (SRPT 1.08%). Shares of the company crashed last week after it released results from phase 3 trials, which failed to impress investors and analysts. Is the company in big trouble, or is this latest setback simply a good opportunity for long-term investors to buy the stock at a reduced price?
Elevidys didn't meet its primary endpoint
For biotech investors, the results of a clinical trial can often be more important for a stock than its actual earnings numbers. Trials help determine a drug's safety profile and how effective it is in doing what it is designed to do. A primary endpoint is the main goal for a trial, and if that isn't met, that can be a sign it is not effective.
That's what happened last week to Sarepta. On Oct. 30, the company reported results from a phase 3 study of its gene therapy, Elevidys, a treatment for Duchenne muscular dystrophy (DMD). In June, the Food and Drug Administration (FDA) granted accelerated approval for the treatment, but it was for a narrower group -- children between the ages of 4 and 5 -- than what the company intended. Sarepta was hoping the approval would cover children up to the age of 7.
Following an accelerated approval, the FDA normally requires another trial to further test a treatment option. And in the results Sarepta recently released, the data failed to show there was a statistically significant improvement in patients versus a placebo. As a result of the news, the healthcare stock plummeted by 43% last Tuesday.
The company remains optimistic
Investors are concerned that not only may the label not get expanded to cover older children but that the FDA may even pull the accelerated approval. When the FDA granted the accelerated approval in June, it required an additional study and said that it would review the data to determine "if further action, such as a revised indication or withdrawal of Elevidys, may be necessary."
But Sarepta's management still believes there's a possibility for a good result in the end, stating that the FDA has "confirmed that, based on the totality of the evidence, they are open to such label expansion if supported by review of the data." There aren't many treatment options for DMD, and the FDA says its accelerated approval in June "addresses an urgent unmet medical need." The importance of making another treatment option available could encourage the FDA to have more flexibility on the approval -- people with DMD usually don't live past their 30s.
Ultimately, it depends on how the overall data looks and how far off the trial was in missing the mark. Simply falling short of the primary endpoint may not tell the whole story, which is why management appears to be cautiously optimistic.
However, investors also need to remember that management will often paint a rosy picture regardless of the situation the business is in. So, it's important to take any guidance or reassurance with a grain of salt. Until the FDA makes a firm decision on Elevidys, there's going to be a lot of uncertainty around the business.
Sarepta's financials have been improving
The good news about Sarepta is that the business already has multiple approved products targeting DMD, and the company has been achieving some strong results. Through the first nine months of the year, Sarepta has reported $846.6 million in revenue, which is a 25% increase from the same period last year.
Elevidys has already begun to contribute to the top line, with its sales totaling $69.1 million in the most recent quarter, which ended on Sept. 30. The company's operating loss of $20.8 million was just a fraction of the $131.4 million operating loss that Sarepta incurred a year ago. If it can expand Elevidys' label, then that could help the company find a path to getting its financials into the black. At its peak, the therapy could bring in $4 billion in annual revenue with the label expansion.
Is Sarepta Therapeutics stock a buy?
Although Sarepta's stock bounced back after last week's sell-off, it's still down 38% this year. Wall Street analysts are feeling a bit more pessimistic about the stock, with many of them lowering their price targets since the release of the trial's results. But many still have price targets set at over $100, and the consensus price of nearly $150 implies an upside of more than 86% from where the healthcare stock trades today.
Sarepta has multiple products approved for DMD, and while these latest trial results may be a setback, it doesn't sound as if all hope is lost just yet. And given the urgent need to treat the condition, Sarepta could be worth taking a chance on. Its financials are improving, and the company does appear to be on the right track.
That being said, this isn't a stock that's suitable for the faint of heart. If you can stomach the risk, this can be a potentially attractive contrarian stock to buy today. Otherwise, you're better off watching from the sidelines.
