Developmental biotechs are frequently the target of short seller's affections because they can (and do) implode in dramatic fashion. Shares of the clinical-stage biopharma Geron (GERN 2.29%), for example, plummeted by more than 50% in a single day earlier this year, after the company's flagship cancer treatment, imetelstat, was placed on clinical hold by the Food and Drug Administration. And this is but one example among many in the volatile biotech industry, where shorts have made out like bandits.
Sarepta Therapeutics (SRPT 6.09%) is another developmental biopharma that has caught the eye of short sellers, leading to a roller-coaster ride for shareholders:
Sarepta's rapid swings in share price have mirrored the on-again, off-again relationship between regulators and the company's exon-skipping Duchenne muscular dystrophy, or DMD, therapy called eteplirsen. In a nutshell, the FDA originally refused to review an accelerated application for the drug's approval based on a small midstage trial, but later reversed this decision following a public outcry from DMD advocates.
While Sarepta has other clinical candidates, including its revamped Ebola disease drug AVI-7537, the bulk of its value reflects eteplirsen's potential to gain regulatory approval, and subsequently validate the company's entire DMD platform. With a regulatory review for eteplirsen imminent and shares trading well off their 52-week high, I think now is a good time to consider if this stock is still a good short.
Eteplirsen is scheduled to be submitted for regulatory approval by year's end
According to Sarepta's latest presentation to investors, the company plans to file eteplirsen's new drug application with the FDA by the end of the year. Depending on the review type the FDA grants the application, approval (or rejection) could come within six to eight months, putting a regulatory decision on track for roughly the third quarter of 2015.
Before then, we should also learn more about the patients still enrolled in the open-label portion of the drug's midstage study via the 168-week data readout. Based on the last update at 144 weeks, I expect this next data readout to show a continued lack of long-term efficacy, and for the stock to dip (again) as a result. The 144-week data showed that some of the boys on eteplirsen exhibited a dramatic decline in walking ability. In sum, eteplirsen's regulatory filing could be a positive catalyst for the stock, but the remaining data readouts might hurt the drug's chances of ultimately being approved.
Sarepta is not a slam-dunk investment
Many investors appear to believe that the sea change at the FDA, and even within the European Union, regarding DMD drugs signals a green light for eteplirsen's approval. By contrast, I am highly skeptical of the drug's chances of approval this time around.
The FDA undoubtedly caved to public pressure in allowing a regulatory filing to go forward, after the agency previously said an application would be "premature" at this time. Eteplirsen has only been tested in 12 patients at the midstage level, and the study's design brought up more questions than answers.
Now with the longer-term data showing a weakening of eteplirsen's latent effect, the FDA might force Sarepta to complete a larger, late-stage trial before approval. After all, it still seems rather odd that eteplirsen increased levels of the deficient protein (dystrophin) in these boys, but this increase didn't necessarily translate into improved locomotor function.
The question Sarepta needs to answer to quiet the critics is: Do increased dystrophin levels have a clinically meaningful benefit in DMD patients? At this point, I don't think there is nearly enough data to arrive at a satisfying answer, putting eteplirsen's approval in doubt.
Then again, Sarepta is attempting to short-circuit the question entirely by requesting the FDA use dystrophin production as a primary outcome measure. If the drug doesn't result in significantly improved clinical outcomes such as respiratory or locomotor function, however, what is the point of increasing dystrophin production in DMD patients? To be clear, I'm not saying that dystrophin production won't be a good efficacy marker ever -- only that there isn't enough data yet to suss out the relationship between dystrophin levels and clinical outcomes.
Foolish wrap-up
Sarepta has been a battleground stock on Wall Street for years, shown by the high institutional and short seller ownership. In my view, the short sellers are probably on safer ground with Sarepta going forward. The company hasn't done enough in the clinic to justify an accelerated approval for eteplirsen, in my opinion. So the public might simply have to wait a bit longer for new DMD drugs until the science has run its course -- a condition that is applied almost universally to experimental treatments.
