WHY THE BOOKIES ARE WRONG ON SAREPTA THERAPEUTICS
The options market proves the old adage that there is no such thing as a free lunch. Investors who dabble in special situations expect that the marketplace knows the basic outlines of your thesis, and prices risk accordingly. That’s not to say you can’t make money betting on outcomes, just that the firms on the other side taking your wager always make sure that the table pays odds commiserate with the gamble.
Therefore, one of the first things I do when sizing up a special situation is to take a look at the options pricing. Firms that sell lottery tickets know that they can pay out spectacular sums on such exotic bets, and therefore do their utmost to ensure the proper pricing for those wishing to take such flyers. When there is a catalyst in the wings that could impact the valuation of a stock significantly one way or the other the options pit should be the first place to look and see what conventional wisdom thinks about the odds of such an event. Companies that are in the process of selling themselves almost always have elevated options pricing, to factor in the risk that a deal gets announced at a sizable premium. Biotech companies awaiting word on a new drug application (NDA) can sometimes have some of the highest options pricing of all listed equities.
However, there are always exceptions. And while the most dangerous words in investing are “Its’ different time” in the case of Sarepta Therapeutics (Nasdaq: SRPT), this time it may just be truly different.
Sarepta Therapeutics’ lead drug candidate is Eteplirsen, a treatment for a class of patients with Duchenne muscular dystrophy (DMD). Eteplirsen is one of the first novel treatments to come out of antisense therapy, a technology with tremendous promise but to date few results. Antisense relies on scientists’ ability to insert genetic material to effectively ‘silence’ harmful genes by targeting a section of RNA with an antisense oligonucleotide. Since the first experiments in 1978 successfully inhibited a sarcoma virus, scientists have long known that serious illnesses based upon genetic mutations would be prime candidates for antisense therapy. However, to date only two antisense treatments have made it through the FDA, fomivirsen (Vitravene) in 1998 and mipomersen (Kynamro) in January of this year. Although dozens of antisense treatments are currently in development, it is fair to say that to date the technology has been long on promise but short on results.
There are few genetic disorders more catastrophic then DMD. Approximately 1 out of every 3,600 boys are born with this genetic defect. It is caused by a mutation in the dystrophin gene, located on the human X chromosome, which codes for the protein dystrophin. Dystrophin plays an extremely important role in developing healthy muscle tissue. Without the proper level of dystrophin, a young boy will build up excess calcium, which ultimately penetrates the cell membrane causing all sorts of havoc. Around age 10, DMD patients experience a rapid deterioration of muscle tissue, causing extreme difficulties in walking and other muscle-intensive tasks. As the deterioration progresses, patients require the use of a wheelchair, and ultimately, full paralysis sets in. The average DMD patient lives to about age 25.
The dystrophin gene is composed of 79 exons. Boys born with DMD will have a mutation in one of the exons, which can be easily identified with DNA testing. Eteplirsen is designed to ‘skip over’ exon 51, which at 13% of the DMD patient population comprises the largest DMD subgroup (In the US there is a market of 35,000 DMD patients of which approximately 1,900 have a mutation in exon 51). By skipping over the mutated gene, eteplirsen allows the cells to produce healthy dystrophin mRNA, which in turn expresses within the muscle therapeutically active (although truncated somewhat) dystrophin.