Step Back From That Overnight Triple, Sir

When a company produces data as good as Sarepta Therapeutics (Nasdaq: SRPT) did with its Duchenne muscular dystrophy drug, eteplirsen, it's hard not to get excited. There are no real options for patients, so reversing the decline is rather remarkable.

That being said, whenever everyone is giddy about a stock is usually the best time to take a step back and access the true risk. Here are some things investors should be worried about:

  • There are only four patients in each of the treatment groups. The true efficacy can only be seen with larger numbers. Of course, the treatment effect is so large, there's a lot of leeway for the effect to contract and still be positive in a larger trial.

  • The lower 30mg dose had a higher level of distrophin-positive fibers than the higher dose, but didn't show a statistically significant difference on the walk test. The simple answer is that two patients in that group had a rapid decline and couldn't walk well, but the data are certainly not as clean as one would hope. (They never are.)

  • At the higher dose, patients walked an average of 27 additional meters compared to baseline, but how does that break down among the four patients? If it's rather evenly distributed, that's great, but if there were one or two super-responders and the drug didn't help the others at all, the potential market for eteplirsen could be smaller.

  • Is the phase 2 data enough to get accelerated approval by the Food and Drug Administration? Getting onto the market early changes the valuation significantly since a phase 3 trial might not start for a year while Sarepta scales up manufacturing, and then it would take a year to complete.

There's no doubt that if these data hold up, eteplirsen will be approved. An 89-meter increase relative to placebo is remarkable for a six-minute walk test in drugs for conditions that affect walking. PTC Therapeutics' Ataluren, which treats Duchenne muscular dystrophy, produced a 30-meter increase, while Sanofi (NYSE: SNY) and BioMarin Pharmaceuticals (Nasdaq: BMRN) Aldurazyme, Shire's (Nasdaq: SHPG) Elaprase, and Sanofi's Myozyme -- which all treat rare diseases -- increased walking ability by 28 meters to 38 meters compared to placebo.

With a market cap less than $1 billion, I don't think Sarepta is particularly overpriced, even taking the risks into account, but if you're going to buy at this level, you have to be counting on an accelerated approval. Otherwise, it could be years before you see another major increase in the stock price like we've seen today.

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