The Food and Drug Administration just handed you a gift if you've been sitting on the sidelines waiting to invest in Sarepta Therapetuics (SRPT +1.00%) because you thought, like me, that it was too hard to handicap the likelihood that the FDA would approve Sarepta's Duchenne muscular dystrophy drug, eteplirsen, based on the biotech's limited data.
Unfortunately, your gift comes at the expense of boys that won't be able to get the drug for years.
It's never felt so bad to be right.
Alas, investors must move on
As I've said in the past, I think the FDA should approve eteplirsen and let doctors and the families decide whether it's appropriate. But after the failure of Prosensa (NASDAQ: RNA) and GlaxoSmithKline's (GSK +0.24%) phase 3 trial for their Duchenne muscular dystrophy drug, drisapersen, it's not surprising the FDA has decided that Sarepta should run a phase 3 trial of its own before approving eteplirsen.
Sarepta ended down 64% today on the news that a new trial will be required. At this knocked-down price, I think the risk-reward ratio is considerably better than it was when we were unsure of what the FDA would do.
Risk
Obviously, the phase 3 trial might follow the same fate as Prosensa and GlaxoSmithKline's drisapersen, but that was a risk even if the FDA gave eteplirsen the accelerated approval Sarepta was asking for. A confirmatory trial was always in the works and the accelerated approval would have been rescinded if the trial came out negative.
That is, of course, if Sarepta and the FDA can come to an agreement on the trial design. Sarepta was hoping to run an open-label trial comparing patients taking eteplirsen to Duchenne muscular dystrophy patients that have a mutation that wouldn't be corrected by eteplirsen. The FDA appears to be balking because a six-minute walk test, the best clinical endpoint, requires the patient to try their hardest to be accurate, which might not occur if the control group knows they aren't getting drug that can help them.
There's little doubt Sarepta and the FDA will come to some kind of resolution. It might not be exactly what Sarepta had in mind, but you have to play by the rules.
Reward
Without an accelerated approval, the reward has been delayed by a few years, which I would guess is why short-term investors are selling today. The long-term value of Sarepta, based on peak sales of eteplirsen, hasn't changed much.
A market cap north of $2 billion, like orphan-drug specialist Aegerion Pharmaceuticals, seems easily obtainable with a longer-term potential of closer to $20 billion like Alexion Pharmaceuticals once the company proves it can sell the drug.
Some of that potential reward will be lost to dilution that wouldn't have happened if Sarepta was able to sell the drug while it was running the clinical trial. Sarepta ended the quarter with a nest egg of $281 million, which likely isn't going to be enough to run a phase 3 trial, scale up manufacturing, and launch the drug. Increasing shares by 50% seems like a reasonable assumption.
Even if you factor in the likely dilution, with a market cap of around $500 million based on the 37.6 million fully diluted shares, Sarepta still has multibagger potential.
