Is This Stock a Buy After a Massive 20% Drop in 1 Day?
Things are going from bad to worse for Sarepta Therapeutics (SRPT 0.84%), a biotech focusing on gene therapies. The company’s performance over the past six months had already been unimpressive. But on March 18, its shares fell by 20% in one day, following an update regarding its most important commercialized product.
If this sell-off is overblown, now might be an excellent time to initiate positions in Sarepta Therapeutics. Let’s examine the reasons behind Sarepta’s meltdown to determine whether that’s the case.
Elevidys is under the spotlight
Sarepta Therapeutics specializes in developing medicine for Duchenne muscular dystrophy (DMD), a rare genetic condition that progressively weakens the muscles. Its most important product is Elevidys, a gene therapy that targets the underlying genetic causes of the disorder.
Last year, Elevidys earned full U.S. approval for ambulatory DMD patients aged 4 and older. But it’s under accelerated approval for non-ambulatory patients, meaning it will have to confirm efficacy in at least one other clinical trial within this population before earning full approval.
However, Sarepta Therapeutics may have an even bigger problem with its most important product. The biotech announced that a young patient on Elevidys suffered fatal acute liver failure. While liver injury is a known risk of the treatment, no patient had ever died as a result. Elevidys’ role in this death could affect its sales. What should investors do?
Looking at the bigger picture
In the fourth quarter, Sarepta’s revenue of $658.4 million soared by 66% compared to the year-ago period. The biotech reported sales of $384.2 million from Elevidys and royalties totaling $4.9 million from Roche Holding, with which it shares the rights. In other words, Elevidys-related revenue accounted for well over 50% of Sarepta’s top line for the quarter. That’s why the market was spooked by the news of a patient death that Elevidys may have caused.
However, there are other critical facts to consider. The company reported that this patient had recently suffered from a cytomegalovirus infection, which can damage the liver. This may have been a contributing factor. Of the more than 800 people who have been treated with Elevidys, it might not be a coincidence that the only one who unfortunately died from a liver problem had recently had an unrelated infection that also damages this organ.
The worst-case scenario for Sarepta would be for regulators to pull Elevidys off the market due to safety issues. However, that’s unlikely at least for now, since there are few safe and effective treatments for DMD. Now that physicians and patients are aware of this death, it’s difficult to estimate how much these developments will affect prescribing trends for the therapy. Many are still also waiting to see whether Elevidys can earn full approval in non-ambulatory patients.
While the company has many other potential DMD treatments in development — and is running a phase 3 clinical trial for an investigational therapy for a rare disease called limb-girdle muscular dystrophy — Elevidys was supposed to be its most significant growth driver for the foreseeable future. The uncertainty surrounding the treatment’s future makes Sarepta’s shares somewhat risky. The stock could have significant upside if physicians and patients barely change their behavior.
That is a plausible outcome, considering that Elevidys helps fill a dire need in DMD. However, if it encounters more clinical and regulatory setbacks, they could be devastating to Sarepta Therapeutics’ medium-term prospects. So, investors comfortable with a bit of risk should consider initiating a small position in the stock on the dip; others will want to look elsewhere in the biotech industry.
