Sarepta Traders Brace For Accelerated Approval For Eteplirsen

Shares of Sarepta Therapeutics (SRPT) are rapidly approaching the old 52-week high of $45.00 made in October 2012 after the company reported the initial results of a Phase IIb trial for the Duchenne Muscular Dystrophy (DMD) drug eteplirsen. Eteplirsen is an antisense oligonucleotide that silences a specific region of the gene coding for dystrophin, allowing muscular dystrophy patients to produce semi-functional dystrophin instead of dysfunctional protein.

Although there were only 12 patients in the now-famous Phase IIb trial, Sarepta proponents point out that enrollment for a full-scale DMD trial would have been extremely difficult due to the tiny patient population. Comparison of the efficacy data was also unnecessary due to the lack of any FDA approved treatments for the disease, although more efficacy data will be gathered in a future Phase III trial. The real question for Sarepta investors currently is whether or not the drug could see accelerated approval (AA), since the market is expected to react – dramatically – to this FDA announcement. Given smooth planning, an accelerated approval would probably allow Sarepta to introduce eteplirsen to the market DMD population as early as Q4 2014.

Sarepta stock has been quite the roller coaster in the last few months due to speculation over the potential AA of eteplirsen and the potential impact of GlaxoSmithKline’s competing exon 51-skipping drisapersen, although the decision should be in before the end of the month. Sarepta bulls, seemingly undeterred by the sudden $125 M equity financing performed on July 3rd, were confident enough in yesterday’s trading to bring the company’s market cap to a lofty $1.36 B.

From our monitoring of SRPT options, we can infer that many of last month’s deep put buyers (bears) were not expecting such a violent upward swing in SRPT stock. In recent weeks, the implied volatility resulting from the upcoming accelerated approval decision for eteplirsen kept premiums on those put contracts impressively high – even for those that were deep out of the money.

Even if it is denied accelerated approval by the FDA, Sarepta investors seem increasingly confident that eteplirsen will become the standard of care for DMD treatment a few years down the road. While Drisapersen would enter the market first, eteplirsen retains a competitive advantage in tolerability relative to its competitor. Eteplirsen estimates seem to already factor this “standard-of-care scenario” in, which is why our estimated $200-300 M in revenues can be considered low end.

Yesterday’s trading was also quite eventful, with SRPT making a bold 4.6% move that was barely challenged during the trading session. One bearish SRPT speculator skewed the otherwise bullish options activity with a 4,036 contract order for January 2014 60.00 Puts, bought for $23.50 apiece, which seemed more like a play on overvaluation of Sarepta rather than a bet on the impending AA decision.

While eteplirsen is an attractive asset for Sarepta that could realistically generate hundreds of millions without expensive commercialization efforts, note that the company’s valuation also includes the platform potential of its antisense technology and early stage pipeline compounds. No accelerated approval only removes a shortcut for eteplirsen’s very probably approval for DMD, and does little to hurt the company in the long run. The opposite is true for accelerated approval, which is less likely to induce a major rally in Sarepta after it has become so expensive.

Disclosure: Long via Short Puts