This Biotech Sold Itself Short


Cash is king for development-stage biotechs still trying to get their first drug on the market. Clinical trials aren't cheap, and the road to approval can be long and winding. Biotechs need to grab the cash any way they can, even if that means that means raising capital before a binary event.

So it's hard to fault Sarepta Therapeutics (NAS: SRPT) for selling 1.4 million shares before the company presented data showing that its Duchenne muscular dystrophy drug eteplirsen could substantially increase the distance patients could walk. The average pre-data selling price of $14.64 is substantially lower than where the stock sits now, and it was even higher immediately after the release.

Investors would own a larger portion of the company (or Sarepta could have sold the same number of shares and generated more cash) if it had waited to sell shares until after the data release. This kind of hedging is fairly common in biotech. Arena Pharmaceuticals (NAS: ARNA) sold shares ahead of the approval of its obesity drug, Belviq, as did Ironwood Pharmaceuticals (NAS: IRWD) before the approval of its irritable bowel syndrome drug, Linzess. But hindsight is always 20/20; the cash would have helped Sarepta fight another fight if the trial hadn't been positive. I'm sure Geron (NAS: GERN) investors wished that the company had raised additional capital before it learned that its lead cancer drug imetelstat failed a phase 2 trial in breast cancer.

Sarepta sold another 555,000 shares after the data was released at an average price of $30.40, so the net result was an average selling price of $19.05, not that much lower than where shares sit now. It also raised some cash when investors exercised warrants to purchase additional shares.

And now Sarepta is sitting on a comfortable $57.4 million nest egg. In the third quarter, the biotech burned through $7.8 million in cash used for operations. That burn rate will increase as it moves into a phase 3 trial and scales up manufacturing, so expect another capital raise next year. On Wednesday, Sarepta filed a $180 million shelf that will allow it to raise cash at a later date.

We should continue to get updates from the phase 2 trial as the patients continue to be dosed, but the next major catalyst is likely to be a decision about whether to apply for accelerated FDA approval based on the phase 2 data. Sarepta plans to meet with the FDA in the first quarter of 2013. This is a standard end of phase 2 meeting where the FDA looks at the data to date and then gives the company its opinion of what needs to be done next to gain FDA approval. That could be applying now or it could mean proceeding to a phase 3 trial, which would put approval years away.

Wonder if Sarepta will hedge its bets and raise capital ahead of that meeting? You won't hear any complaining from me if it does.

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