Sarepta Therapeutics (SRPT) has become a bit of a lightning rod, with the company’s shares trading near the middle of their 52-week range (from $3.30 to $45.00). The stock has momentum and is attracting more investors to the story, particularly given the highly favorable stock chart metrics of late (see prior story here). Behind the bullish technical signals, investors should be aware of the fundamental story. While we agree that SRPT has huge upside potential in the long-term and that there is a high probability of getting there, the short-term could be tricky for the stock given the binary event centered around the company’s end-of-Phase II meeting with FDA, expected later this month. Based on the outcome of that meeting, for which FDA will send the meeting minutes to the company 30 days after, SRPT plans to communicate with investors on whether the company will submit its lead product candidate, eteplirsen, for accelerated approval in the treatment of Duchenne muscular dystrophy (DMD). The Phase II results for eteplirsen were highly favorable from a safety and efficacy standpoint, but the trial was only conducted in 12 patients (results seen in 10 evaluable patients). A key marker of potential efficacy in the Phase IIb trial was not clear cut, and GlaxoSmithKline’s (GSK) competing compound, drisapersen, has shown some safety issues, causing some investors to question FDA’s stance on approving DMD treatments based on small studies.
As a result, the key controversy in the stock is the question of whether or not the company will be able to receive accelerated approval, which would enable eteplirsen to enter the market up to 24 months early, in addition to lowering the overall risk profile on SRPT’s future cash flows. Accelerated approval could cause SRPT to soar above analyst’s price targets (currently risk adjusted and averaging $40 a share). However, no accelerated approval would result in the stock trading down to the low-$20 level (based on investor and analyst sentiment) given the long wait for Phase III trials to be conducted and a standard regulatory review. Therefore, the next trade for the stock is the company’s communication to investors on the end-of-Phase II meeting outcome, most likely in April. Our bias is that the company will file for accelerated approval, as DMD is a horrific disease with very limited treatments for affected young boys, and the FDA is not in the business of telling sponsor companies what to do. A firm “no” by the FDA, albeit unusual, would stop the company from submitting a new drug application (NDA) early, but again, we believe that the agency will not be opposed to starting its review of the current data, as it can always ask for more clinical evidence later by issuing a Complete Response Letter (CRL).
Given the strong potential upside in SRPT, it makes sense for speculative investors to have some money on the table now in case the end-of-Phase II meeting indicates accelerated approval is likely. However, because the FDA may signal to the company that it won’t grant accelerated approval based on the small study, investors would be wise to keep some dry powder to average down under this scenario. Having one-third of a position in SRPT is a rational approach, and keeping two-thirds of cash intended for this position on the sidelines could prove the best way to get in the game, remaining ready in the event the first trade doesn’t go favorably. Either way, SRPT has the potential to be worth multiples of where the stock trades today, so in the end, patient investors are likely to be rewarded regardless of their exact entry point. We expect shares of SRPT to trade in the $28-$32 range, with a potential to climb into the mid-30s on a break-out above the $32 level. However, SRPT shares are likely to remain in a tight trading range until the company announces a decision on filing eteplirsen’s NDA for accelerated approval.
Background on Sarepta and eteplirsen, the company’s potential blockbuster drug. Sarepta develops novel RNA-based therapeutics, and because RNA controls protein synthesis, therapeutics that target the cellular processes involving RNA can treat underlying causes of diseases or disorders. Sarepta’s pipeline of product candidates leverages these synthetic structures, called phosphorodiamidate morpholino oligomers (or PMOs). PMOs are modeled after the natural framework of RNA but have structural modifications designed to allow the compounds to offer drug-like properties. The company’s lead product candidate, eteplirsen, is being developed to treat Duchenne Muscular Dystrophy (DMD), a type of muscular dystrophy that results in muscle degeneration and eventual death. Issues with DMD begin during adolescence and worsen in the teen years; patients generally die by the age of 30. The disorder is caused by a mutation in the dystrophin gene, which codes for the protein dystrophin, an important component of muscle tissue that is necessary for structural support, and eteplirsen works by targeting precursor RNA and forcing the cellular machinery to skip over exon 51 (the DNA segment that codes for the dystrophin mutation), resulting in an altered mRNA template. By creating an mRNA template that does not code for exon 51, the cells of patients diagnosed with DMD are to able produce functional dystrophin, and Phase II clinical trials have shown improvements on multiple levels.
Eteplirsin Phase II results are impressive. Early-stage results certainly demonstrated promise, and eteplirsen is now being evaluated in an ongoing, open-label Phase IIb study that enrolled and dosed 12 patients in 2011. A third of patients began the study on placebo and switched to active drug at week 24, while the treatment arm of the trial (n=8) began on either 30mg/kg or 50mg/kg of eteplirsen (two of the 30mg/kg patients dropped out after rapid disease progression). The results, reported at 24 weeks and subsequent ~12-week intervals, have been highly encouraging. The 50mg/kg dose of eteplirsen enabled a 69.4m benefit in the 6-Minute Walk Test (6-MWT and secondary endpoint of the study) versus the delayed treatment arm (p≤0.019) at 36 weeks. Patients for whom treatment with eteplirsen was delayed showed a decline of 78.0 meters in distance walked, while patients on 50m/kg of the drug experienced a decline of just 8.7 meters from baseline at 36 weeks. Subsequently, the delayed treatment arm showed disease stabilization from weeks 36-62, in tandem with expected dystrophin production. As measured by biopsy at week 48: “Eteplirsen administered once weekly at either 30 mg/kg or 50 mg/kg for 48 weeks (n=8) resulted in a statistically significant increase (p≤0.001) in dystrophin-positive fibers to 47.0% of normal. The placebo/delayed treatment cohort, which had received 24 weeks of eteplirsen at either 30 mg/kg or 50 mg/kg following 24 weeks of placebo (n=4), also showed a statistically significant increase in dystrophin-positive fibers to 38.3% of normal (p≤0.009).” At week 62, the most recent administration of the 6-MWT, “eteplirsen-treated patients who received 50 mg/kg of the drug weekly (n=4) demonstrated an increase of 21.0 meters in distance walked from baseline (mean=396.0 meters), while patients who received placebo/delayed-eteplirsen treatment (n=4) showed a decline of 68.4 meters from baseline (mean=394.5 meters), for a statistically significant treatment benefit of 89.4 meters over 48 weeks (p=0.016).” All patients treated with eteplirsen have continued to maintain a clinical benefit.
Yet the data also had some curious findings. The trial’s primary endpoint is a change from baseline in the percent of dystrophin positive fibers in muscle biopsy tissue – a surrogate endpoint ( a biomarker) that many hope will be predictive of clinical benefit and therefore suggestive of accelerated approval. Notably, the correlation between the change in dystrophin at biopsy and the results of the 6-MWT don’t seem to line up with dosage as one might expect. Dr. Aafia Chaudhry summarized this discrepancy in February while outlining her bearish outlook. In addition, the small patient population, 24-week cross-over, and the open-label design of the Phase IIb study have led Chaudhry and much of Wall Street to conclude that the FDA will not accept an accelerated approval for eteplirsen. We believe that the dystrophin/clinical response discrepancy carries less weight than bears would suggest, as biomarkers are not always predictive of a drug’s effect. Patient variation plays a key role in clinical response, and in relation to the 6-Minute Walk Test, any number of individual variables could affect results. Additionally, the dystrophin biopsies may not have been comprehensive enough (i.e. taken from areas of the body where muscle may or may not have improved). The cross-over design can be justified ethically; keeping patients off of a potentially life-saving treatment, proven or not, isn’t something anyone could get comfortable with. Nevertheless, this, the small patient population, and the open-label design will come under close scrutiny from the FDA, and will prove to be Sarepta’s biggest hurdles in regards to an accelerated approval.
Street estimates are conservative for eteplirsen, as well as SRPT’s potential valuation. DMD affects approximately 1 in every 3,500 male births, and approximately 10,000 boys have DMD in the U.S. (40,000 worldwide). Also in the U.S., approximately 13-15% of those with DMD have the exon 51 mutation, and as a result, SRPT is developing compounds in addition to eteplirsen using its proprietary PMO technology for other relevant exon defects (exon 45, 50, and 53). While most analysts see eteplirsen achieving revenues of about $600M by 2020, with peak sales nearing $1B, we note that the opportunity for other exon skipping drugs means that the revenue opportunity could actually be much larger, perhaps double or triple the eteplirsen opportunity. And because most analysts are not including other exon skipping drugs in their models, or those that are have significant discounts on these potential therapies, the true long-term value for SRPT could be much higher than analysts are estimating (price targets currently average $40). We also note that the majority of analysts are not factoring in accelerated approval for eteplirsen, and are not building in EU sales for the drug, suggesting key upside to current price targets if these successes are achieved. For example, most analysts are using a 20%-25% discount on cash flows from eteplirsen, but if accelerated approval is granted (essentially bringing the drug’s launch two years closer), price targets would rise more than 50% simply on the reduction of risk and two less discount periods.
Drisapersen, GSK’s competitive product, has safety issues that don’t apply to eteplirsen. Some have speculated that the tolerability and toxicity issues seen with GSK’s candidate for DMD, drisapersen, could cause the FDA to become more cautious on other DMD candidates, and that this could stand in the way of an accelerated approval for eteplirsen. We believe this is not the case for several reasons. To start, drisapersen belongs to a class of drugs called phosphorothioates, as does the recently FDA approved cholesterol lowering treatment, Kynamro (aka mipomersen) made by Isis Pharmaceuticals (ISIS). We note that the phosphorothioates are notorious for certain side effects such as kidney toxicity (proteinuria), injection site reactions, thrombocytopenia, and inflammatory reactions, which are not part of eteplirsen’s profile. This is because eteplirsen is a morpholino type compound, not a phosphorothioate like Kynamro or Prosensa. In fact, when reviewing the FDA Advisory Committee briefing documents for Kynamro (See Section 8.5 Targeted Safety Issues), one can see that this agent led to a high level of side effects similar to those caused by drisapersen, such as proteinuria, inflammation, injection site reaction, and even liver enzyme elevation. In fact, we should not be surprised to see toxicity issues with GSK’s drisapersen candidate given that in a 12-patient Phase IIa clinical trial, all patients on this compound had proteinuria, which, in addition to some patients experiencing elevated liver enzymes, persisted through week 93 in the open label extension portion of the study. In contrast, eteplirsen has thus far shown a very strong safety profile, with no serious adverse events reported to date. The 50mg/kg dose evaluated in SRPT’s Phase IIb trial is the highest dose of an RNA therapeutic that has been tested in humans to date. This is important, as drisapersen’s chosen dose is only 6mg/kg, which signals that this drug is being managed to avoid side effects. In December, SRPT announced 62-week data for eteplirsen, and notably, patients in the extension phase of the Phase IIb study have had drug exposure for over one year without any serious side effects. In addition to strong safety, the drug also showed durable clinical efficacy at 62 weeks. While we believe drisapersen’s efficacy is likely to be similar to eteplirsen’s given their comparable mechanisms of action, the different chemical compositions separate the two therapies, with eteplirsen likely the clear winner in terms of safety and tolerability. As a result, we believe the FDA will not be as concerned about eteplirsen’s safety, hence, a higher probability that the compound could gain approval on an accelerated basis.
Pipeline and a firm balance sheet offer quality backdrop to eteplirsen
Sarepta’s PMO antisense technologies allow for the targeting of different RNA types, resulting in proprietary drug design and development to up- or down-regulate targeted genes and proteins. While eteplirsen is the company’s most advanced program, the same technology could be applied to other fatal genetic disorders, or more specifically, other forms of muscular dystrophy. Meanwhile, Sarepta develops a number of treatments for infectious diseases, including Marburg and Ebola Hemmorhagic Fevers, and on Monday, the company announced favorable findings from pre-clinical Marburg studies. Remember, this is early work, and investors are focused almost exclusively on eteplirsen. Nonetheless, the strong data seen for the Marburg treatment was an incremental positive. More importantly, Sarepta has a strong balance sheet to support continued clinical development, with approximately $180M in cash and equivalents after a December equity financing. The company has no material long-term debt. Extrapolating from the company’s 2012 cash burn of less than $30M, Sarepta is positioned for either scenario that could play out in the near-term: preparation to market eteplirsen, or preparation for a Phase III trial. Regardless of the company’s move towards or reception of an accelerated approval, we expect Sarepta will initiate a Phase III study in 4Q13 or early 2014. Whether this trial will be a confirmatory or pivotal trial remains to be seen.
