Frustrating Trading Session for Sarepta Print E-mail
By Brian Wilson, Lead Contributor   
Tuesday, 23 October 2012 10:32
It's been a frustrating trading session for anyone who was faithful to Sarepta Therapeutics (NASDAQ: SRPT) after the company released solid phase II trial data for their flagship drug etiplirsen on October 3rd, which sparked an immense rally that brought shares almost 200% higher in one trading session. While the clinical trial results weren't mindblowing, the fact that Sarepta is targeting Duchenne Muscular Dystrophy (an incurable disease with few effective treatment options) means everything to SRPT bulls.

If etiplirsen gets an FDA approval, expect it to become the standard of care for slowing muscular dystrophy progression in patients. Not only is any advancement in muscular dystrophy treatment big progress for patients affected by the genetic disease, but drug companies that target less common disease like this get something known as “orphan drug status”, which gives seven (instead of five) years of exclusivity for any drug that makes it to the market.

Etiplirsen did meet its primary efficacy endpoint in the recently completed phase II trials, meaning that Sarepta is able to progress the drug into phase III trials. The recent success in primary efficacy endpoints was measured through a statistically significant improvement in etiplirsen-treated patients versus placebo/delayed-treatment patients in a six minute walk test. Under its fast-track developmental status, many make the argument that the FDA may approve the drug without the completed phase III results, although it seems unlikely given the ridiculously small patient population in the phase II studies – a total of twelve, including the placebo/delayed-treatment arm.

The notion that the FDA will be approving eteplirsen before completed phase III results is also based on an argument based on moral obligations for the FDA to provide access to eteplirsen for MD patients as soon as possible, but it's currently a matter of intense speculation and rumors. Neither the FDA or Sarepta are offering clarity on the situation yet, although it seems that we will have to wait patiently for phase III data that can further confirm eteplirsen's efficacy and safety profile.

Since the spike on October 3rd, we actually saw Sarepta slide quite significantly. This can be readily explained by profit-taking from SRPT shareholders who bought in earlier in the year (or even before that). The reason that profit-taking makes so much sense at this point in time is that SRPT is at an uncertain point with regards to eteplirsen's FDA approval. The general consensus is that the drug is going to get approved – the only question is when, and whether or not SRPT is worth waiting for up to that point. SRPT is, after all, up almost 500% YTD (even after all the recent selling). If I were holding SRPT at such massive gains, I would be tempted to take the money and run too.

This dynamic does provide value investors with a very good chance to buy shares, but only under the assumption that eteplirsen is a guaranteed approval for Duchenne Muscular Dystrophy at a later point in time. Analysts estimate the drug market potential for eteplirsen in the United States alone to be as much as $400-500 million in annual revenue, which makes SRPT quite undervalued based on future cash flow expectations from eteplirsen. Sarepta is valued at roughly $550 million with recent trading, although traditional models would put the company at a worth closer to $1 billion or more. Sarepta did manage a steady 60% decline since October 3rd (the press release date of the exciting phase II results), so we can say that SRPT only needs to regain the ground it lost this month to approach the $1 billion valuation mark.

Summarizing the situation, it seems that stock market “dynamics” have temporarily depressed shares of SRPT with little regard to the actual situation of the company and its drug. Sarepta's phase II results imperfectly demonstrate that eteplirsen is a soon-to-be Duchenne Muscular Dystrophy treatment (despite low patient population), and it's generally agreed that the worst case scenario is a multi-year wait for FDA approval due to the length of phase III trials. Although the market generally “knows” that Sarepta is undervalued given the prospects of eteplirsen, the inconvenience of holding the shares in lengthy periods of boredom and uncertainty is enough to provide the value investors with an opportunity to buy a discounted stock that will return to intrinsic value eventually.



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