Has This FDA Decision Created a Value Investment Opportunity?

By now, news regarding Sarepta Therapeutics' eteplirsen has been analyzed, argued, and scrutinized from every possible angle. The bottom line is that Sarepta must complete a larger trial before eteplirsen can be approved by the Food and Drug Administration. This means that if effective, eteplirsen won't be launched in the market until 2016, not 2014. After a five-day 65% loss, is Sarepta now a good investment?

Why did Sarepta fall?
The FDA decided that Sarepta's New Drug Application, or NDA, for eteplirsen was premature given the failure of Prosensa and GlaxoSmithKline's similar product along with the sustainability of data in Sarepta's phase 2 trial.

Sarepta bears have been calling for this decision since Prosensa's drug drisapersen failed to produce strong results in its phase 3 trial. Both drisapersen and eteplirsen are similar drugs, both use an exon-skipping technology to repair genetic mutations. However, there are also some differences.

Prosensa vs. Sarepta
Eteplirsen was tested on patients during a six-minute walk test out to 96 weeks; Prosensa was tested out to 48 weeks. Although dystrophin levels are a questionable biomarker, many believe its signal intensity shows that a drug is working and that its function is being carried out within the body. With this in mind, eteplirsen had a greater number of patients with prolonged dystrophin levels compared to drispersen , and did so with very little toxicity, versus some reports of kidney toxicity for drisapersen. Moreover, some have suggested that eteplirsen was effective because it acted more slowly, causing levels to rise over an extended period of time, versus drispersen, which showed significantly higher distrophin levels at seven weeks post-treatment.

Now, when we look at the two companies, there is a clear disconnect between market caps. Prosensa has a market cap of $130 million, and Sarepta has a worth of $500 million. Hence, some are suggesting this disconnect means that Sarepta is overvalued. However, Sarepta still has a phase 3 trial to complete -- Prosensa has already presented poor data -- and eteplirsen has a best-in-class safety profile.

With that said, Prosensa still has a chance with drispersen. In drispersen's phase 3 trial, it was administered differently and given at a different dose than eteplirsen. Therefore, it is possible that by making changes, drisapersen will be proven effective. Yet, with the health risks, this possibility is unlikely.

Based on known data, I'm confident that eteplirsen has a good shot at eventually earning an FDA approval. However, investors still have to consider the risk that the FDA may not approve this drug. In my opinion, the greatest unknown right now remains trial design, but given the fact that we know beyond a shadow of a doubt that eteplirsen did improve the quality of life for those with the disease, I personally believe the odds are in Sarepta's favor.

Valuation into perspective
With shares of Sarepta currently trading around $15, I took some time to reflect on the day Oct. 3, 2012. That was the date that shares soared more than 100%, when Sarepta presented its 48-week data. At the time, there was no talk of accelerated approval, and no one knew that eteplirsen's statistical significant treatment benefit of 89.4 meters would continue to perform well for patients switching from placebo to eterplirsen and at both 62 weeks and 96 weeks.

These were all unknowns, yet despite these unknowns, Sarepta jumped to a price of $45. Hence, today the data is even better than it was on Oct. 3, yet Sarepta is trading at barely more than $15. To me, this suggests value.

What about patient population?
There's one thing that Sarepta bulls can not debate or ignore -- the phase 2 eteplirsen trial had only 12 patients! Therefore, it was almost insane to believe that an accelerated approval would be granted with such a small patient population, especially given Prosensa's failure.

However, this doesn't mean that Sarepta is overvalued. There are countless examples of small patient populations that warrant big market capitalizations in biotechnology. For example, just look at Clovis Oncology . This stock soared nearly 80% back in June after presenting data on a lung cancer drug called CO-1686. The drug showed clear evidence of meaningful activity, and did so in a patient population that had failed other treatments.

However, the kicker is that this data was on just four patients! The company has since updated investors on the study, showing that 89% of patients, nine patients total, had tumor shrinkage of 10% or more. Yet, the bigger question is: Do these nine patients warrant Clovis' $1.6 billion valuation? Given Sarepta's data, I think Clovis shows that Sarepta is not expensive, and that Clovis investors could be acting prematurely in betting so large with such limited data.

Final thoughts
The bottom line is that Sarepta has a product with peak sales potential of more than $700 million that will likely be FDA approved, at some point in time. Currently, we do not know the conditions of the phase 3 trial, which is a major concern going forward. With that said, eteplirsen has already proven itself effective against placebo and has helped young boys with this disease live a better and more mobile life. Due to this fact, I think the end result is good for Sarepta longs, and at just 0.7 times potential peak sales, the FDA might have given investors a golden opportunity to buy the stock on the cheap.

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The article Has This FDA Decision Created a Value Investment Opportunity? originally appeared on Fool.com.

Brian Nichols owns shares of Sarepta. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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