Sarepta Therapeutics (SRPT) last Thursday morning released its fourth quarter and full-year 2013 financial results and hosted a conference call for investors. SRPT’s 2014 outlook is still in limbo, though a meeting with the FDA yet this quarter should shed light on how the year plays out. PropThink discussed in January how we intended to participate in SRPT this year. Since then, the stock has climbed 65%, gains improved further considering the options strategy outlined in our original recommendation. With impactful news likely in the next 45 days, we would not be surprised to see SRPT continue towards $34.50, closing the stock’s mid-November gap.
Key takeaways from the call include:
Clarity on Phase 3 as Early as This Month
The company continues to await guidance from the FDA on the design of a phase 3 confirmatory trial for eteplirsen in Duchenne Muscular Dystrophy. A meeting with the FDA that was tentatively scheduled for February has been pushed back to March, though as of last week the meeting had not yet been scheduled. The meeting will include discussion of the phase 3 trial and should offer final confirmation as to whether an accelerated approval is entirely off the table for eteplirsen. On the call Sarepta indicated that the phase 3 trial won’t begin dosing until after the second quarter given the need for final protocol submission, review, and IRB involvement.
Recall that Sarepta discussed publicly the outcome of its November meeting with the FDA just days after the event – the company did not wait for meeting minutes (which they still haven’t seen) – suggesting that investors could have clarity on the phase 3 protocol (and confirmation that accelerated approval is off the table) within the next month. Sarepta hopes to have determined final protocol for the phase 3 by the end of this quarter.
The FDA has continued to request additional information related to eteplirsen since the meetings late last year, which SRPT bulls will take as a sign that the FDA continues to evaluate an expedited approval process. The additional information included source data for the primary dystrophin endpoints; immunofluorescent analysis and data on the exploratory dystrophin analyses (RT-PCR and Western blot); and patient-level data from recent natural history publications and from an MRI study that is not being conducted by Sarepta (imagingDMD).
Sarepta is Preparing Drug Supply
Sarepta is prepared to supply eteplirsen for the upcoming phase 3 study, and in the next month will deliver to the FDA analytical/comparability analyses on eteplirsen for the trial or commercialization. Sarepta said they’ve completed several mid-scale production batches, moved three of those batches through fill-finish, and is in the process of completing this analytical testing and comparability analysis. Officially, this process is in preparation for the clinical study, but the company is preparing for a commercial launch. On the conference call, Sarepta said they have a plan in place “to further scale up a global network of suppliers should the FDA reconsider its position on a potential filing for early approval of eteplirsen, or otherwise approve eteplirsen through an expedited regulatory pathway.”
Most importantly, we believe that investors are becoming increasingly comfortable with a phase 3 program, meaning PropThink’s strategy may play out perfectly. When we opined on Sarepta in early January, our focus was squarely on being involved in SRPT on the off-chance that the FDA capitulated on its suggestion that a filing towards an Accelerated Approval would be premature. At $18, we believed upside in the best case scenario would take SRPT through its highs at $55+, and a worst case scenario would return SRPT to $12. In the month since, we believe that investors have become more comfortable with the FDA requiring a phase 3 confirmatory study before approval. We expect that the FDA finally confirming “no accelerated approval” won’t have the same impact on the stock that we once thought it would. April/May options suggest a swing of $11-$13. A 13-point dip would take SRPT back to $15, leaving our entrance/options strategy still looking quite favorable.
Sarepta Continues to Emphasize the Platform and Pipeline
This is good for investors. Companies like Isis (ISIS), Alnylam (ALNY), Arrowhead Research (ARWR) and even Tekmira (TKMR) have captured investors’ imaginations with the potential of their respective RNAi platforms. Sarepta is taking the same approach, which seemed to begin in January at the JP Morgan Healthcare conference and the hiring of Dr. Art Krieg as Chief Scientific Officer. SRPT’s 8-point gain since then is in-part driven by investors giving the company credit for its efforts. On Thursday’s conference call, Sarepta CEO Chris Garabedian likened their deal-making efforts to Sanofi’s (SNY) $750 million investment in Alynlam in January:
…now that [Krieg] is digging in deep into what we’ve been able to generate, he’s very good at communicating the utility and application of RNA technology and soon morpholino chemistry specifically. And we are open to a variety of structures across a variety of therapeutic areas. And obviously we have seen a lot of deals in the RNA space, notably Alnylam did a nice deal where they had a equity component with a step up premium to that equity, that’s something we could consider as well. So, again we are, we have several companies that have expressed interest and we look forward to meeting with those companies and talking about all the potential applications and what type of deal structure to work with them.
Sarepta said they are on track to file with the FDA to move two new exon-skipping assets into the clinic for exons -45 and -53 yet this year, and plans to initiate dosing in a clinical study of the -53 asset in Europe in the second half of 2014.
Financials
Sarepta generated $125 million in the fourth quarter through the use of its At-the-Market equity financing arrangement and the exercise of warrants. The company ended the year with $264.9 million in cash/equivalents and expects an operating loss of $110-120 million in 2014. The company anticipates expenses will continue to increase in 2014 as new trials get underway. The company should have enough cash for 18 months of operations.
In connection with SRPT, PropThink has taken a long position.
