2023-11-11 01:09:05 ET
Summary
- Sarepta Therapeutics reported strong earnings and revenue figures, with a 49% increase in net product revenues.
- The company's newest therapy, ELEVIDYS, generated $69.1M in net product revenues in its first quarter on the market.
- Although ELEVIDYS failed to meet its primary endpoint in a Phase III trial, it achieved statistical significance for all secondary endpoints and could still secure label expansion and full approval.
Sarepta Therapeutics ( SRPT ) recently reported strong Q3 performance along with key milestones that fortify their position as a leading force in precision gene therapies for rare diseases, including Duchenne muscular dystrophy (DMD). Not only did their earnings reveal impressive revenue figures, but also crucial developments in their efforts to combat this debilitating condition. Sarepta was able to net product revenues of $309.3M, marking a remarkable 49% increase year-over-year. Notably, ELEVIDYS, the company's fourth DMD therapy pulled in net product revenues totaling $69.1M in the first quarter on the market. As a result, Sarepta recorded a strong beat on EPS and revenue, which caused the share price to spike roughly 15% in the following trading session. Unfortunately, Sarepta reported disappointing results from their topline data from its Phase III EMBARK trial, evaluating ELEVIDYS in DMD the day prior to their earnings report. The data showed ELEVIDYS failed to hit its primary endpoint in the study, which nearly cut the share price in half. However, ELEVIDYS was able to achieve statistical significance for all secondary endpoints and could still be able to secure its label expansion, as well as full approval. Considering the FDA’s regulatory approach to gene therapies, I am looking to add to my SRPT position if the market wants to bring the ticker below my Buy Threshold.
I intend to provide a brief background on Sarepta Therapeutics and their recent earnings. In addition, I discuss the ELEVIDYS data and why I am not overly concerned at this time. In addition, I will discuss some downside risks that investors should be aware of. Finally, I reveal my plans for my SRPT position as we head into 2024.
Background On Sarepta Therapeutics
Sarepta Therapeutics is a leading biopharmaceutical company dedicated to discovering, developing, and commercializing innovative medicines for rare, genetic-based diseases.
Sarepta Therapeutics boasts a robust portfolio of RNA-targeted therapies, gene therapy, and gene editing. These technologies address the root causes of genetic diseases, thus, increasing the likelihood of finding effective treatments. With over 40 programs and late-stage initiatives in Duchenne and limb-girdle muscular dystrophy type 2E, Sarepta's pipeline is a leader in gene therapy and rare diseases.
Sarepta is best known for their efforts in DMD , a rare and devastating genetic disease affecting approximately 1 in 3,500 - 5,000 newborn males worldwide. Characterized by progressive muscle weakness, DMD often leads to serious complications, making Sarepta’s therapies cherished both by patients and providers. In fact, Sarepta's RNA-based therapies have been approved for specific genetic mutations, serving approximately 30% of the DMD community.
Sarepta’s Q3 Performance
Sarepta's Q3 performance suggested the company has made a substantial leap forward on the commercial front. The company reported $331.8M in total revenue for the quarter. However, their net product revenues of $309.3M, up from $207.8M in Q3 of last year. Equally noteworthy is the company's attainment of profitability on a non-GAAP basis, with $37.7M in net income, or $0.37 per diluted share. This was in stark contrast to a non-GAAP net loss of $70M, or $0.80 per diluted share, for Q3 of 2022.
Notably, Sarepta's newest therapy, ELEVIDYS, has made a resounding entry into the market, generating net product revenues of $69.1M in its inaugural quarter. In addition, Sarepta continues to impress with their strategic collaborations and recorded $22.5M from their collaboration with Roche (RHHBY).
Furthermore, Sarepta's financial state is strong, with the company boasting approximately $1.8B in cash, cash equivalents, investments, and long-term restricted cash.
ELEVIDYS Concern?
Sarepta's newest therapeutic breakthrough, ELEVIDYS, is the original gene therapy granted accelerated approval by the FDA and represents a significant milestone for the company in their efforts to be the leader in the treatment of DMD. However, the company reported topline results from their global Phase III EMBARK confirmatory trial for ELEVIDYS, which fell short of meeting its primary objective. This development led to a sharp decline in Sarepta's stock price by approximately 42%.
In June, the FDA granted ELEVIDYS approval through its accelerated pathway for children between the ages of 4 and 5 with DMD. This indication of a narrower age range than initially expected may have contributed to the market's reaction to the recent trial results.
However, the company believes they have provided compelling evidence that ELEVIDYS can alter the trajectory of the disease. While the study’s primary endpoint was not met, ELEVIDYS-treated patients exhibited marked improvements in motor function as assessed by the North Star Ambulatory Assessment. Furthermore, statistically significant outcomes on key functional pre-specified secondary endpoints, like time to rise and the 10-meter walk test, revealed a significant treatment advantage that applied regardless of age. It's worth noting that no new safety concerns emerged. The primary findings of the study clearly supported the use of ELEVIDYS for all measured outcomes. Remarkably, the study attained statistical significance on all predetermined critical secondary endpoints, signaling a beneficial therapeutic impact.
My Take
Yes, ELEVIDYS failed hit to hit the primary endpoint, however, the FDA has been willing to approve gene therapies with less than stellar efficacy. What is more, the FDA has had to rely upon surrogate endpoints for a variety of approvals. So, it is possible that the FDA allows ELEVIDYS to remain on the market with traditional approval… and maybe even greenlight a label expansion to potentially treat “all DMD patients”. Obviously, if the FDA does approve a label expansion, Sarepta should see a significant boost in their long-term prospects as nearly all DMD patients might be eligible for ELEVIDYS. Considering ELEVIDYS costs $3.2M per treatment, and roughly 20,000 boys are born each year with DMD, Sarepta could see upwards of $64B in revenue. Yes, not every DMD patient will be able to get access to ELEVIDYS for a variety of reasons, and we don’t know the company’s capacity to serve the DMD population each year. However, even if the company performs 1,000 treatments is still going to get them $3.2B in sales.
Considering SRPT’s market cap is around $7.5B, we can say that the ticker still has some potential upside if ELEVIDYS hits its full potential.
The Street expects Sarepta to report solid double-digit growth for the next few years and possibly clear $3.6B by 2026, which would be about 2x forward price-to-sales.
The industry’s average price to sales is roughly 4x, so SRPT is currently trading at a discount for its potential future performance.
Notable Downside Risk
Obviously, Sarepta does have a significant downside risk if the FDA does not approve the label expansion. Although the company has a few other commercial products, Sarepta is really counting on ELEVIDYS to see a big growth spurt and consistently report a positive EPS. I must point out that Sarepta has amassed $681.9M in R&D expenses in the first nine months of 2023, and over $350M in SG&A in the same time period. So, we might see the market move SRPT back to a more speculative ticker as investors might begin to question when the company can definitively post a positive annual EPS.
We have already seen how the market reacted to the data release, so a final decision to deny the label expansion could really hurt the share price and prevent a recovery for a prolonged period of time. As a result, I maintain my current conviction rating of 3 out of 5 and will stay in the Compounding Healthcare “Bio Boom” portfolio.
My Plan
For the most part, my SRPT position has been dormant over the past couple of years due to ticker trading above my near-term Sell Targets. In addition, I have been apprehensive about adding to positions that are above my Buy Threshold in a market that has been punishing speculative healthcare tickers. However, the market’s reaction to the data readout plunged SRPT right down to my Buy Target 2 of $56.25, where I had a small standing buy order placed just in case the market wanted to overreact to a negative headline. Well, it worked… I am not back in the accumulation phase for SRPT to build on my “House Money” position. However, I am not looking to amass a massive SRPT position at this time and will be looking to book profits once the ticker hits my Sell Targets. As mentioned above, I am not overly keen on building heavyweight positions in my speculative portfolio in this market environment. I will happily accept the market’s opportunity to derisk the position and keep some on the table for long-term investment and hopefully graduate to the “Bioreactor” growth portfolio.
However, I will consider changing my position if we see a drastic change in the ticker's technical grades or a positive update on ELEVIDYS.
Long term, I expect to maintain an SRPT position for the foreseeable future with the goal of trading the ticker in the “Bio Boom” portfolio until it potentially graduates to the “Bioreactor” growth portfolio.
For further details see:
Sarepta Therapeutics: Strong Q3 Earnings Help Offset Overblown Clinical Data Concerns