Shares of Sarepta Therapeutics (SRPT +0.61%), a clinical-stage biopharmaceutical company focused on finding a cure for Duchenne muscular dystrophy and other infectious diseases, surged 19% in June (per S&P Capital IQ), based on the expectation for and subsequent filing of a new drug application for its lead drug.
The short-term picture really began to shift in May when the Food and Drug Administration announced it would allow Sarepta to file for a rolling submission of its NDA for eteplirsen. Eteplirsen is an exon-51 skipping RNA-interference drug designed to increase production of dystrophin, the sheath that surrounds and protects muscle fibers, in children and young adults affected by exon 51-based DMD.
Previously, Sarepta and the FDA had not been on the same page regarding what was necessary to determine the efficacy of eteplirsen in a phase 3 study, as well as when and if Sarepta could file for a rolling NDA. The FDA's change in stance in May provided clarity that shareholders haven't had for some time, and that optimism carried over into June. Late last month, Sarepta announced that it had completed and filed its rolling NDA paperwork for eteplirsen with the FDA.
Sarepta in late June also announced $40 million in debt financing through MidCap Financial, of which it has drawn down $20 million thus far. The debt is due in four years and bears an annual rate of 7.75%. Drug launches and phase 3 trials are expensive, so consider this debt financing a way for Sarepta to gain a little more equity breathing room for the time being.
Source: Sarepta Therapeutics.
The question investors need to ask here is whether that 19% increase in June, or essentially a doubling in Sarepta's share price over the past month and a half, is sustainable.
Although no one knows with any certainty whether the FDA will approve eteplirsen, the bulk of Sarepta's valuation is built around the hope surrounding its exon-skipping drug development platform. Don't get me wrong: There is some implied value for its infectious disease research, but eteplirsen offers Sarepta a chance at immediate revenue or a licensing partnership that would remove its cash concerns.
Eteplirsen approval would validate Sarepta's drug development pipeline and spur excitement that the remainder of its DMD pipeline (which cumulatively covers nearly half of all DMD subtypes) could succeed.
On the other hand, being caught on the wrong side of the fence could leave shareholders with a huge red mark in their portfolio. Because Sarepta's valuation is built around treating DMD, if its most-developed drug fails to garner FDA approval, shareholders are probably going to want to hide under the bedsheets for a few days.
What's an investor to do? If you have an extremely high tolerance for risk, and you're prepared to lose most of your investment if the cards don't fall your way, then Sarepta could present a worthy gamble. If approved, eteplirsen alone could generate $600 million in peak annual sales, and Sarepta is currently valued at just $1.25 billion -- a pretty reasonable valuation, all things considered. But if you don't have a high risk tolerance, I'd consider waiting out the FDA's decision on the sidelines. Don't worry, there will still be plenty of catalysts to take advantage of later, including Sarepta's remaining DMD portfolio and the possibility of landing licensing partners.
