Sarepta Therapeutics: Growth Trajectory Alters Trading Strategy (NASDAQ:SRPT)

In my last Sarepta Therapeutics (NASDAQ:SRPT) article, I discussed Sarepta’s Q3 performance and their clinical progress in Duchenne muscular dystrophy (DMD) and other rare diseases. At that time, Sarepta had recently revealed their Q3 product revenue was up 49% year-over-year, aided by ELEVIDYS, which pulled in $69.1M in its first quarter on the market. Unfortunately, ELEVIDYS’ Phase III EMBARK trial failed to hit its primary endpoint, generating an abrupt sell-off for SRPT. However, the market’s reaction was a bit overblown considering ELEVIDYS was able to hit its secondary endpoints, thus, keeping the potential label expansion and full approval in play. It appeared as if investors were overlooking the FDA’s track record of using surrogate endpoints for gene therapies due to the inability of standard endpoints to showcase a therapy’s true benefit. Well, it turns out the FDA accepted ELEVIDYS’ supplemental Biologics License Application (sBLA) for eliminating age and ambulation restrictions from the label. If approved, Sarepta’s growth in the DMD population would be nearly unbridled, as nearly all DMD patients would qualify for the treatment. The hay is not in the barn for ELEVIDYS, but Sarepta’s growth prospects have forced me to dramatically alter my SRPT strategy moving forward.

I intend to provide a brief background on Sarepta and their recent Q4/2023 earnings. Then, I will move on to ELEVIDYS and its potential to be a game-changing gene therapy for all DMD patients. In addition, I will point out some risks that SRPT investors should consider when managing their position. Finally, I reveal my updated SRPT strategy.

Background on Sarepta Therapeutics

Sarepta Therapeutics is a cutting-edge biotech dedicated to advancing therapies for several rare diseases with a portfolio constructed using three different platform technologies (RNA, Gene Therapy, and Gene Editing). These therapies intend to take on the primary cause of these rare diseases, thus, formulating therapies that could be a cure for some of the worst diseases known to man.

With over 40 programs and advanced initiatives in Duchenne and limb-girdle muscular dystrophy type 2E, Sarepta’s pipeline is arguably the industry leader in gene therapy and rare diseases.

Sarepta is particularly celebrated for their efforts in DMD, a rare and debilitating genetic disease affecting approximately 1 in 3,500 – 5,000 newborn males globally. Described by progressive muscle weakness, DMD leads to severe complications, making Sarepta’s therapies cherished by patients and providers. Particularly, Sarepta’s RNA-based therapies have received approval for specific genetic mutations, benefiting around 30% of the DMD community.

Sarepta’s Q4/2023 Performance

Sarepta’s performance in Q4 earnings revealed that the company has made significant progress on the commercial front, with a beat on EPS and revenue. The company reported $365.1M in net product revenue, up 55% from Q4 of the previous year. Total revenues came in at $396.8M in Q4, which includes product revenues, collaboration, and other revenues. For full-year 2023, net product revenues came in at $1.1B, a 36% increase over 2022. I must highlight that ELEVIDYS was responsible for $131.2M in Q4 and $200.4M for the full year.

In terms of cash, Sarepta finished 2023 with roughly $1.7B in cash, cash equivalents, investments, and long-term restricted cash.

Outlook On ELEVIDYS Approval

DMD arises from a mutation within the DMD gene in charge of encoding dystrophin, a fundamental protein safeguarding muscles. Mutations accompanying DMD halt the production of functional dystrophin, leading to progressive muscle deterioration and symptomatic disease. ELEVIDYS inserts a gene code for ELEVIDYS micro-dystrophin, a truncated dystrophin variant that mimics the function of ordinary dystrophin. ELEVIDYS employs an augmented AAVrh74 virus, which has a strong affinity for cardiac and skeletal muscles muscle tissue.

The ELEVIDYS clinical development program has been comprehensive with multiple studies and patient populations.

However, the company reported that their global Phase III EMBARK confirmatory trial for ELEVIDYS did not meet its primary objective. Nevertheless, the company believes it has a strong enough case to claim ELEVIDYS has the potential to impact the disease’s trajectory. Patients treated with ELEVIDYS showed enhancements in motor function on the North Star Ambulatory Assessment (NSAA). Moreover, Sarepta reported that ELEVIDYS hit statistically significant outcomes for functional secondary endpoints, with no new safety concerns. Last but not least, ELEVIDYS was able to improve dystrophin expression, which should lead to the end of DMD symptoms.

I understand that ELEVIDYS did not meet its primary endpoint, and that should be a major concern for the therapy’s label expansion. However, the FDA has already approved gene therapies with subpar efficacy and has leaned on surrogate endpoints for approvals. As a result, the FDA may focus on the dystrophin expression data and the improvements in movement assessments to potentially approve a label expansion to treat all DMD patients.

Current Growth Prospects

I don’t think there is any question that the prospective label expansion should enhance Sarepta’s long-term prospects. The company already saw a strong bump in their revenue once ELEVIDYS hit the market at the end of last year, so a label expansion should only improve its performance as it moves deeper into its launch.

Looking beyond ELEVIDYS, the company has several pipeline programs that should help offset the threat of ELEVIDYS cannibalizing the company’s PMO revenue and possibly contributing to Sarepta’s long-term growth. Particularly, the Phase III EMERGENE pivotal study (SRP-9003-301) is evaluating SRP-9003 gene therapy for limb-girdle muscular dystrophy Type 2E (LGMD2E) by restoring beta-sarcoglycan expression. This study’s emphasis on beta-sarcoglycan as a critical endpoint due to it being the underlying cause of muscle dysfunction.

As a result, the company is comfortable with the FDA considering the use of beta-sarcoglycan expression as a surrogate endpoint. Moreover, the total body of evidence from prior studies should be a strong foundation for regulatory approval.

The company has plans to work with the FDA for an NDA for SRP-5051 based on MOMENTUM study data for DMD amenable to exon 51 skipping. The study hit its primary efficacy endpoint by demonstrating a statistically significant improvement in dystrophin expression at both doses. Remarkably, SRP-5051’s high dose at week 28, exhibited dystrophin production 12.2x higher than eteplirsen (Sarepta’s EXONDYS 51 gene therapy).

Sarepta is planning on meeting with the FDA in Q3 of this year to discuss the potential for accelerated approval based on the MOMENTUM Part B. Meanwhile, the company reported that the study remains ongoing, which will allow them to continue to collect additional data to further bolster their case for approval.

Overall, the company appears to be accelerating the development and approval of innovative therapies for rare diseases. Therefore, I believe it is appropriate to expect additional growth in the coming quarters and years. In fact, the Street anticipates solid double-digit growth for Sarepta over the next few years, possibly hitting $3.3B in revenue by 2026, representing about 3.6x forward price-to-sales.

Indeed, these are just the Street’s estimates; however, I think the commercial potential of the company’s approved products and extensive pipeline justify their projections.

Risks To Consider

Despite my bullish outlook for Sarepta, the company still has to face significant downside risks. First, Sarepta will have to deal with the possibility of regulatory failure for ELEVIDYS and other pipeline programs. The company is heavily reliant on ELEVIDYS for growth and consistent positive earnings per share, so failure to obtain the label expansion would dramatically impact on the share price and the company’s long-term outlook.

Another concern is getting payers to cover the company’s gene therapies. The cost of gene therapies is often millions of dollars, with ELEVIDYS costing $3.2M for the treatment. That is not a discount price tag for a payer to shell out for a therapy that might not work or will have durability concerns down the road. So far, most of the approved gene therapies have been priced to cost significantly less than paying for a lifetime of contemporary treatment options so that they can be worth it in the long run. Still, payer support is always going to be a concern for a therapy that costs millions of dollars.

Sarepta’s target markets are also a concern to consider. DMD and LGMD are not massive markets with clear CAGRs to project future growth. In fact, I couldn’t find any reliable data for LGMD2E’s market size or projected growth rate. In some ways, Sarepta is establishing or resetting the market for their respective therapies. Furthermore, Sarepta’s therapies could cannibalize their markets because their products are intended to be curative therapies. If all goes well, these patients should be a one-time curative treatment and the market essentially shrinks until another case is discovered. Therefore, the company needs to constantly innovate new therapies and target new indications to maintain a growth trajectory.

Lastly, Sarepta will have to deal with other gene therapy companies that could have superior technology or resources. In addition, the company will still have to compete with contemporary products used to treat DMD and other indications. In fact, the FDA just approved Catalyst Pharmaceuticals’ (CPRX) aGamree, a new corticosteroid product for DMD.

Honestly, most of my concerns are a result of the company being a trailblazer and dealing with the unknowns of launching gene therapies for rare diseases. As a result, I am maintaining a conviction rating of 3 out of 5 and SRPT will maintain its position in the Compounding Healthcare “Bio Boom” Speculative portfolio.

Plan

The upcoming label expansion to treat all patients with DMD is nearing, with the FDA setting ELEVIDYS’s PDUFA date for June 21st of this year. If approved, the label expansions could expressively improve Sarepta’s long-term prospects, building on ELEVIDYS and encouraging growth as additional therapies move closer to commercialization.

My SRPT position has remained stagnant since my last article, with a small buy order filled near my Buy Target 2 and an equivalent sell order following their earnings report. So, I am still waiting for an opportunity to accumulate a larger position to compound again. However, the ticker is reluctant to give up its premium valuation. As a result, I am going to have to adjust my Buy Threshold and Targets in order to finally restart my accumulation.

My formula for determining Buy Targets and Sell Targets is a mixture of fundamental and technical analysis, but SRPT’s rich valuation is forcing me to consider the ticker’s daily chart rather than the company’s balance sheet.

Looking at the SRPT Daily Chart, we can see a quick recovery following EMBARK’s top-line data readout sell-off and eventually topping out at nearly $152 per share.

This rapid ascent had a dramatic impact on the chart’s technical rating as the share price sliced through anchored-VWAPs, volume shelfs, and the 200-day EMA. Now, the ticker has settled back into an area of support around $126 per share and is fighting a downtrend ray from the February high. The ticker’s ability to quickly recover from sell-offs has forced me to upgrade my Buy Threshold from $112 per share to $125 per share. In addition, I will be raising my Buy Target 1 to $116 per share and my Buy Target 2 to $69 per share.

Another alteration will be my position size, which has been miniscule for over a year. Now, I am looking to build a large SRPT position over the remainder of 2024. However, I do plan to take profits on swings once the stock reaches my sell targets in an attempt to get my position back to a “House Money” status and build a core position to ultimately transfer to my “Bioreactor” growth portfolio in the coming years.