There really is no industry quite like biotechnology. Whereas most businesses are valued based on the products or services they provide, the majority of the biotech sector is valued based on the diversity and potential of a company's drug development pipeline, which, of course, leaves their valuations open to a lot of interpretation.
Investors also have to worry about cash burn with the biotech sector more than any other industry because most biotech stocks are either in their clinical development stage or early commercialization stage, and it can take years or even decades, before a company is able to generate regular cash flow. In other words, there's a very real chance of a biotech stock running out of money if it doesn't have ample avenues to boost its cash on hand while conducting its research and development.
With that in mind, today we're going to take a look at clinical-stage drug developer Sarepta Therapeutics (SRPT 1.40%) and examine whether it could be running out of money. We'll take a look at Sarepta's business model and whether it has ample cash on hand to hit its strategic goals, and also examine ways it could boost its cash position should the need arise.
Sarepta's business model
Sarepta has a lot going on with its drug development pipeline, including an infectious disease portfolio attempting to develop therapies to treat the Ebola and Marburg viruses, as well as Dengue fever, tuberculosis, and influenza. However, Sarepta's bread and butter is its RNA-based exon-skipping pipeline designed to treat Duchenne muscular dystrophy, or DMD, a progressive and fatal disease that adversely affects patients' muscles. DMD is diagnosed in children, with the disease often proving fatal by age 25.
At the moment, Sarepta's house of cards is riding on the success or failure of eteplirsen, an exon-51-skipping drug designed to treat about 13% of all DMD patients (there are multiple types of DMD). The remaining seven exon-skipping therapies the company is currently studying are in the preclinical or discovery stage of their development process.
Thus far, the data for eteplirsen has been pretty positive, even though we're only talking about a dozen patients in a midstage study. In July, Sarepta reported the progress of its eteplirsen-treated patients through 144 weeks from baseline (nearly three years). Those who'd been treated with eteplirsen from the get-go have experienced a 33.2-meter decline in the six-minute walk test, or 6MWT, a reduction of 8.5% since baseline. Based on the predicted untreated population, this is an improvement of 75.1 meters. Those patients in the control arm group who were subsequently moved over to the eteplirsen arm after 24 weeks have also shown a lessening in their decline.
Sarepta's current cash balance
As of the end of the second quarter, Sarepta announced that it had $284.2 million in cash, cash equivalents, short-term investments, and restricted investments, which was up $19.3 million from the $264.9 million it had at the end of 2013.
But, it's important to keep in mind, here, that while Sarepta's cash position improved over the past six months, this was only because the company priced 2.65 million shares at $38 in April, netting it an after-tax aggregate of $94.5 million. Put another way, without this common stock offering, Sarepta Therapeutics has burned through $75.2 million in cash in just the past two quarters.
Though a lot will depend on whether or not eteplirsen is approved by the Food and Drug Administration and successfully brought to market, it's very possible Sarepta could burn through an additional $200 million to $250 million in cash through 2016. Even though Sarepta is projected to be profitable on an annual basis by 2017, this could be cutting things very close.
How Sarepta can boost its cash position
The good news is Sarepta's hands aren't completely tied if it needs to raise money. Of course, not all methods of raising cash are good news for its shareholders.
Optimally, Sarepta is hoping to get eteplirsen approved by the FDA and on pharmacy shelves by the second half of next year. Revenue from eteplirsen won't make Sarepta profitable anytime soon, but any consistent cash flow will help reduce the company's cash burn rate. Additionally, contracts for its infectious disease portfolio drugs could be amortized and help abate its cash burn.
Secondly, Sarepta can consider turning to a larger pharmaceutical company for assistance as a licensing partner. GlaxoSmithKline (GSK 0.11%), for example, was partnered up with Prosensa (NASDAQ: RNA) in the development of DMD drug drisapersen. Unfortunately for the duo, drisapersen, which demonstrated solid results in phase 2 studies, flopped in a larger phase 3 study and caused Glaxo to walk away from the partnership. This failure could make other partners gun-shy about collaborating with Sarepta until after an FDA decision is rendered, but the possibility of licensing the drug is certainly on the table.
Finally, Sarepta can do what it did in April and issue common stock in order to raise cash. Of course, pricing its shares at $38 in April and having them valued around $22 now would make a share offering pretty unwelcome. Also, share offerings dilute existing shareholders, which may only further pressure Sarepta's already-volatile stock price.
Could Sarepta be running out of money?
Now that we have a better idea of what Sarepta's pipeline entails, where it's current cash position stands, and how the company could boost its cash position or lessen its cash burn rate if needed, let's return to our original question: Could Sarepta be running out of money?
I suspect the answer to that question is that it's unlikely, but I also wouldn't completely rule out the possibility, either. A lot is going to depend on whether or not eteplirsen is approved by the FDA. If eteplirsen is rejected, it could throw a monkey wrench into Sarepta's remaining exon-skipping drug development pipeline, which works along the same pathway. In addition, the FDA could come back requiring additional testing, which could wind up costing Sarepta a lot more of its cash than was planned.
With Sarepta on track to get an FDA decision on eteplirsen by Q3 next year (by my estimate) we won't have to wait too long for that answer. In the meantime, I continue to believe investors' best bet is to stick to the sidelines until after the FDA hands down its decision. Only then will we have a better idea of whether Sarepta's current cash position is sufficient moving forward.