Could the rare-disease-focused biotech Sarepta Therapeutics (SRPT 4.18%) one day become a towering, innovative, and profitable growth business, as biopharma Vertex Pharmaceuticals (VRTX 1.15%) is today? It’s more likely than it might seem at first glance. Here’s why.
What’s so special about Vertex?
Vertex Pharmaceuticals has been a solid investment for a few reasons. First, it’s the only company that sells therapies treating the root causes of cystic fibrosis (CF), a rare hereditary lung disease. Rather than settling for producing one drug to serve the CF market, Vertex has several, some of which are repackaged combinations of its other medicines.
Its pipeline is packed with more therapies for CF, and it also features programs targeting other rare diseases. The appeal of such an approach is that it enables Vertex to use its institutional acumen and close relationships with the community of CF patients as a competitive advantage. And it’s led that market for many years already, generating billions in earnings along the way, and $3.3 billion in net income in 2022 alone.
Focusing on a niche market like CF means having a lower risk of competition. It also makes the company a favorite of patients, not to mention the portions of the medical and scientific communities working on the disease.
So by virtue of its core strategy (and years of fruitful effort), Vertex is positioned as the go-to provider and drug developer for its customers, a prized employer for the CF field’s top people, and an appealing collaborator for all manner of different biotechs working on tailored gene-therapy solutions for rare diseases. And that’s a great place for it to be.
How Sarepta could rise to greatness
Sarepta’s strategy is broadly similar to Vertex’s, which means it could in theory follow a similar trajectory to ongoing success.
It focuses on developing medicines to treat Duchenne muscular dystrophy (DMD), a rare and fatal hereditary disease that affects muscle cells. Its product lineup features four medicines for the condition, and its pipeline has five additional programs in preclinical and clinical trials.
Around 20,000 people are diagnosed with DMD each year, so there’s a relatively small population of patients to treat. As the disease is degenerative and starts causing problems before patients turn 5, finding those patients and treating them quickly is a priority and a challenge.
But as shown by Vertex’s success, small markets present opportunities for leadership that would be impossible in larger and more crowded ones. Nonetheless, from the perspective of prospective shareholders, there are a couple of things that will need to change before Sarepta can convincingly be called another Vertex.
The most important issue is that it isn’t yet profitable. That’s a problem as it calls into question the value of eventually being the master of the DMD market. In other words, if it’s currently the only company making therapies that treat the root cause of DMD rather than its symptoms, and its four marketed products aren’t bringing in more money than it costs to develop, manufacture, and distribute them, what’s the benefit of penetrating the market further?
But given that its trailing-12-month research and development (R&D) expenditures of $896 million are largely what’s keeping it in the red, its unprofitability is ultimately a solvable obstacle. Ramping up revenue of its latest drug for DMD, which launched in the third quarter, could also potentially lead to profitability. Management thinks that the therapy, called Elevidys, could one day have peak revenue in excess of $4 billion yearly; that would certainly cover its latest 12-month operating expenses of $1.4 billion.
Another potential obstacle is that Sarepta may have more trouble expanding the approved indications of its medicines for DMD than Vertex did with CF. That would make its road map for maintaining its revenue base considerably more difficult to navigate.
As DMD is a degenerative disease that starts at birth and worsens over time, it’s critical to intervene as early as possible. For the biotech’s approved gene therapies, that has meant targeting patients under age 5. But its latest phase 3 clinical trial, which sought to test whether Elevidys could be useful in children between the ages of 4 and 7, did not meet its primary endpoint, which was based on the North Star Ambulatory Assessment (NSAA) scale.
Importantly, the treatment met its secondary endpoints, so there’s still an argument for using it. Regulators may yet agree with the company’s assertion that the therapy could still be helpful for the target demographic. Still, the stumble shows that Sarepta is working in a genuinely difficult area of medicine where the constraints are significant. That leaves shareholders at a high risk of paying for setbacks.
Is it a good idea to invest?
In the long term, it’s very likely that Sarepta will become profitable, but it’s also likely that it’ll face continuing difficulty in expanding the labels of its medications to cheaply expand its addressable market. It has what it takes to be the next Vertex Pharmaceuticals, though it might take a bit longer than shareholders prefer. Does that mean you should buy the stock now?
Not exactly. Unfortunately, one of the constants in recent years has been that investors dump the stock whenever a company experiences a less-than-ideal clinical trial result. Whether or not those shareholders are right to sell, anyone who invests today will be going along for a potentially bumpy ride.
Once there’s a few quarters of profits on the books, investors are likely to become more accommodating to bumps in the road. So keep an eye out, and at that point think about whether to buy shares then.
