Sarepta Still in Limbo, Though Another Long-Term Buying Opportunity Presents Itself

Shares of Sarepta Therapeutics (SRPT) turned volatile Monday after the close ($32-$49) as the company announced the results of its recent end-of-Phase-II meeting with the FDA, a meeting that could put the company’s treatment for Duchenne Muscular Dystrophy, eteplirsen, on the road to a much faster approval. The takeaway from the meeting was, in fact, relatively vague. Although the FDA has asked for more information from the drug developer — a comprehensive summary supporting dystrophin as a surrogate endpoint, and a detailed discussion of clinical outcomes in the study — it’s clear that the FDA is still considering the acceptability of an accelerated approval filing (read more about this process in our previous report). In a conference call on Monday evening, management emphasized the FDA’s unusual flexibility about the timing of future meetings and dialogue, suggesting an uncharacteristic involvement from the agency. Sarepta hopes to hold a follow-up meeting with the FDA by the end of 2Q13 depending on the agency’s time requirement for proper review of the new information, once submitted. The company believes this won’t necessarily be subject to the typical timelines for sponsor/agency meetings, including the 60 to 75 day response period. In addition, Sarepta will still need to carry out a CMC meeting with the FDA, planned for 3Q13, before it can move forward with an accelerated filing. Overall, the company believes that its timelines have not been altered materially, but note that SRPT lacks any meaningful catalysts over the next three months.

SRPT is compelling long-term holding, and we’re cautiously optimistic of an accelerated approval. The more important consideration now is how to be involved in SRPT over the short-term. Shares opened early trading on Tuesday down 10%, and we expect fast money to continue exiting, as there was little clarity in regards to the filing, SRPT has no catalysts in the near-term, and a number of analysts have taken the news negatively. Both Leerink Swan and Janney downgraded the stock on Tuesday. With no near-term catalysts to speak of and a poorly defined timeframe on the FDA’s next response, we’re expecting the stock to trade within a tight channel in the low- to mid-$30‘s through the first half of the year, thus there’s still a chance to make an entrance into a quality long-term holding. Taking a small position around $34 makes sense, offering exposure to the accelerated approval decision in the next six months, while keeping reserves dry in order to average down in the case of a negative FDA response; Option pricing suggests a ~$10 swing on the decision. Still, don’t miss the forest for the trees; eteplirsen and SRPT should come out on top in the long-haul. Evidence regarding drisapersen, Sarepta’s closest DMD competition being developed by GlaxoSmithKline (GSK) and Prosensa, already suggest that eteplirsen will be the treatment of choice. With eteplirsen peak sales estimates for $600M-$1B, $SRPT’s $1.17B market capitalization is arguably low compared to its prospects.