Wall Street is enamored with the rare-disease drugmaker Sarepta Therapeutics (NASDAQ: SRPT). Despite this stock's 166% surge this year, after all, analysts have been quick to upgrade the biotech's shares following a positive, albeit extremely preliminary, peak at the company's experimental gene therapy for Duchenne muscular dystrophy (DMD) on Tuesday.
H.C. Wainwright analyst Debjit Chattopadhyay, for example, raised his 12-month price target on the stock to a jaw-dropping $267. That overtly bullish forecast implies an upside potential of more than 85% from here.
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Is Wall Street's faith in Sarepta well founded? Let's dig deeper to find out.
Orphan drugmakers are worth a premium
One of the main reasons Wall Street can't get enough of Sarepta is because of the rising tide across the rare-disease drug market at the moment. A recent industry report by EvaluateGroup, for instance, has the orphan drug space -- or drugs intended for fairly small patient populations like DMD -- nearly doubling in size over the course of 2018 to 2024. As the market share leader in treatments for DMD, Sarepta is therefore primed to benefit from this period of hypergrowth.
Another less often considered reason is the fact that payers rarely question the jaw-dropping price tags for orphan drugs. Unlike high-priced cancer, diabetes, or respiratory medicines, orphan drugs tend to fly under the radar of third-party payers, despite being some of the most expensive products on the market. So Sarepta and its fellow orphan drugmakers have rarely had to battle the political blow back that's hurt the valuations of more traditional pharma companies in recent times. The net result is that Wall Street has rewarded orphan drug makers -- including Sarepta -- with some of the richest premiums in the entire healthcare sector.
Last but not least, orphan drug companies have repeatedly grabbed massive premiums in buyout scenarios over the last decade. In other words, big pharmas hungry for new growth products have been more than willing to pay up to get their hands on these types of specialized medicines. And that favorable trend is showing no signs of changing course anytime soon. Therefore, Sarepta would probably require a sky-high premium from a suitor in order to get a deal done, and that fact bodes well for its future valuation.
What the bears don't understand
Sarepta's critics have been quick to point out the fact that the company's shares are trading at an enormous price-to-sales ratio of 65.1 right now, which isn't sustainable in their view. This biotech, after all, only has one Food and Drug Administration-approved product with the exon-skipping drug Exondys 51, this drug only targets a mere 13% of the total DMD patient population, and its approval was conditional -- meaning that Exondys 51 could be pulled from the market if confirmatory studies don't work out.
Additionally, Sarepta's other DMD product candidates such as golodirsen, casimersen, and even this gene therapy that wowed everyone yesterday, are a good ways away from reaching the market. The point here is that the company's top-shelf valuation isn't exactly supported by fundamentals -- but rather by speculation regarding the commercial opportunity offered by all of these experimental DMD candidates taken together.
While normally I'd say that the bears have a solid point, I have to disagree in this case for one simple reason: Wall Street has clearly decided that this is a top growth stock based on the various comments from a wide swath of analysts yesterday. Fundamentals be damned.
More precisely, Sarepta is quickly turning into another Amazon or Tesla, where the company's valuation is largely detached from its underlying fundamentals. So, can Sarepta's shares zoom past $200 as predicted by some on Wall Street? I'm nearly certainly it will at this point, and that's why I'm strongly considering adding this biotech stock to my portfolio soon.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. George Budwell has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Tesla. The Motley Fool has a disclosure policy.