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Should Investors Be Excited About Sarepta's Delay?

By Todd Campbell - May 25, 2016 at 8:46PM

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The FDA has chosen to delay a decision on the company's eteplirsen for Duchenne muscular dystrophy.

After the FDA announced that it would need more time to complete its review of Sarepta Therapeutics' (SRPT 1.00%) controversial therapy for a rare form of muscular dystrophy, investors clamored to buy the company's shares, sending them soaring by 26.6% today. Does the FDA delay suggest an approval for eteplirsen is in the cards? Maybe not.

Image source: Sarepta Therapeutics.

Up in the air

Perhaps no stock has taken investors on as wild a roller-coaster ride in the past two years as Sarepta Therapeutics. The company's efforts to create a novel therapy, which skips a dysfunctioning part of the genetic chain necessary to create dystrophin, has endured alternating waves of positive and negative news. Most recently, a poor performance in front of a key FDA advisory committee that was considering eteplirsen for accelerated approval led to split opinions on whether or not the regulator would ultimately approve the drug on its FDA decision date of May 26.

The agency's decision to kick the can down the road on a decision means that the tug of war between Sarepta Therapeutics' bulls and bears will continue a while longer. How much longer is anyone's guess. The FDA's statement didn't include a timeline for approval, but in the past, delays for other drugs have been for a period of three months.

Sarepta Therapeutics' shareholders will point to the indefinite timing of an FDA decision as an opportunity for management, patients, and industry watchers to lobby for an eteplirsen green light. If that's true, so the argument goes, then the odds for an approval improve.

At the FDA advisory committee meeting in April, dozens of people testified in favor of approval, and those testimonials seemed to carry sway, even if ultimately the committee still voted seven to six against recommending a go ahead for eteplirsen. Among influential members who seemed to support eteplirsen was the FDA's head of drug evaluation Janet Woodcock, whose comments appeared to favor keeping a window open for an approval of the drug.

The stakes are undeniably high for all stakeholders

Eteplirsen addresses Duchenne muscular dystrophy, or DMD, a rare and life-shortening indication with few treatment options. Because of muscle wasting caused by improper dystrophin production, most patients succumb to their disease before reaching age 40.

The decision to approve eteplirsen is further muddied by Sarepta Therapeutics' trial design, and eteplirsen's iffy efficacy. Rather than conducting a large phase 3 study of eteplirsen comparing it to a placebo, the drug was studied in a small, non-placebo-controlled trial involving just 12 patients.

That trial showed evidence that eteplirsen boosted dystrophin production, but less clear was eteplirsen's ability to curb the progression of DMD. In primer materials supplied to advisory committee members by the FDA, the agency called into question the drug's efficacy, indicating that trial results for people receiving eteplirsen were in line with what is expected in the course of DMD.

Approving eteplirsen based on this trial could set a worrisome precedent, especially because the trial didn't prove beyond a shadow of a doubt that this drug works.

Song remains the same

Undeniably, there's a significant need for new DMD treatments; but the FDA officially rejected another DMD drug that works similarly earlier this year, and that decision was based on a trial that involved more patients. The agency also rejected considering another DMD drug application, saying that the application wasn't worthy of a review.

If the FDA breaks from this pattern and approves eteplirsen, then it would be a big win for Sarepta Therapeutics. The company has been spending money hand over fist, and a rejection could force a future dilutive stock offering -- or worse, a debt offering. 

Even if eteplirsen is approved, the total market opportunity in DMD might not be as big as some investors think. The DMD patient population is small, and eteplirsen only works in about 13% of them. 

Given that a decision on eteplirsen is anyone's guess, and the stock has already rallied, most investors might want to stay away. If the FDA grants approval, this drug has nine-figure potential; but if it doesn't, then all bets are off, and this stock could see its share price crumble.

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