Clinical-stage biotechs working on novel treatments for Duchenne muscular dystrophy, or DMD, have soared lately as regulators on both sides of the Atlantic appear to be experiencing a change of heart. Specifically, the Food and Drug Administration or the European Medicines Agency have now given regulatory pathways to previously stalled clinical offerings from PTC Therapeutics (NASDAQ:PTCT), Prosensa Holdings (UNKNOWN:RNA.DL), and Sarepta Therapeutics (NASDAQ:SRPT)
What's particularly interesting is that short-sellers have only piled into Sarepta Therapeutics, holding over 30% of the float. By contrast, shorts hold less than 7% of the float in PTC Therapeutics and about 15% in Prosensa. With this in mind, let's take a closer look at why Wall Street is betting so heavily against Sarepta.
Prosensa's patents may block Sarepta's drug from the European market
Prosensa holds key patents describing exon-51 skipping technology in Europe that could bar Sarepta's drug, eteplirsen, from being sold on the continent.
This loss of European revenue could keep the drug from reaching blockbuster status. Analysts project that drisapersen could see peak annual global sales of about $1.4 billion if it gets past both the FDA and EMA. Perhaps eteplirsen's potential chemical advantage will help it outcompete drisapersen in the U.S., but the Europe situation is undoubtedly an impediment to the drug's commercial potential.
A regulatory path forward does not guarantee full approval
I think one of the biggest reasons shorts are still confident in their position following the FDA's about-face on eteplirsen is that the agency is requiring Sarepta to complete at least one late-stage study for full approval. While the FDA has signaled that it could consider a conditional approval with some additional clinical data in hand in order to bring this drug to patients who need it, question marks still hang over eteplirsen's clinical benefit to patients.
Sarepta argues that eteplirsen clearly shows an increase in dystrophin expression in DMD patients, which translates into better walking and respiratory function. But the FDA appears to want to hold Sarepta to using the so-called "6-minute walking test" as the primary measure of efficacy. The problem is that this test has produced highly variable results among clinical trials and even for different DMD drugs.
Translating this into plain English, the high degree of variability inherent in the walking test makes it difficult to produce a statistically significant result. Sarepta has suggested that some of this variability results from researcher error, but motivational factors could be at play as well. In sum, short-sellers appear to be betting that the FDA will force Sarepta to use the walking test as the primary outcome measure in a late-stage study, which appears to have a far less certain outcome than dystrophin production.
Sarepta's shares have certainly made a strong comeback since the FDA's previous decision to require an additional trial prior to a regulatory review. With the FDA's reversal on this issue, we could see the stock move closer to its former highs.
That being said, short-sellers haven't exactly shied away from this stock, making it one of the most heavily shorted equities in the health-care sector. My view is that eteplirsen is likely to gain conditional approval in the U.S. in 2015, which would be a major catalyst for this stock moving forward. After that, a large late-stage study could take two to three years to complete, meaning there shouldn't be any reason to pull eteplirsen from the market in the near term.
The European patent issue may also not be as bad as many think. Duchenne muscular dystrophy outreach groups have reportedly already contacted European authorities about making sure patients have access to Sarepta's drug as well. So political pressure may force Prosensa to agree to a licensing agreement with Sarepta in Europe. While I am not normally a fan of developmental biotechs as investment vehicles, Sarepta might be an exception to this rule.