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.
On October 3rd, 2012, Sarepta Therapeutics released the first 48 weeks of results from a Phase II 12 patient study based out of Nationwide Children’s Hospital in Columbus, Ohio. These 12 boys, ranging in ages 7 through 13, all carried the defective exon 51 gene. Of the twelve, 4 patients received placebo, 4 received 30 mg/kg of eteplirsen, and the final 4 patients received 50 mg/kg of eteplirsen once weekly for 24 weeks.
The results were shocking. Muscle biopsies done at weeks 12 and 24 showed that the treated population gained dystrophin-positive fibers within the muscle comprising a 47.0% improvement from baseline dystrophin levels. The treated group was thus able to significantly outperform in the trial’s stated primary clinical endpoint – a standardized 6 minute walking test (6MWT). In the 6MWT, the treated group’s out-performance became more significant as time went on. The results from both the muscle biopsies and the 6MWT were both significant enough to convince the oversight committee to ‘unblind’ the trial midway and ensure that the placebo group would get the benefit of eteplirsen as well.
Although the patient size was extremely small, the results were so astoundingly different between the placebo and eteplirsen groups as to be extremely statistically significant. Statistical significance in medical trials is known as a ‘p-value’, which is a statistical tool that estimates the probability that results are due to chance. The p-value in the combined 30mg & 50mg cohorts was less than 0.001, virtually ruling out randomness as a reason for the trial’s success.
As exciting as the statistical significance of the primary endpoints was the clean safety data generated throughout the trial. No clinical treatment-related adverse events were observed and no patients were discontinued treatment due to any serious adverse events. This is especially important since a competing treatment currently in trials (Glaxo’s drisapersen) recently saw a number of trial participants hospitalized due to kidney toxicity and low platelet counts (hat tip to Adam Feuerstein for being the first to publish on the severity of the safety data).
The succesful Phase II was not the first time eteplirsen was tested on humans. Since Sarepta began developing the drug, it has been tested in 38 DMD patients across 4 studies. 28 out of 36 DMD patients treated with eteplirsen who received muscle biopsies showed increased dystrophin production (% positive fibers) from baseline, including 20 out of 20 who received at least 10mg/kg/wk (From page 18 of January 2013 presentation)
In December Sarepta released updated data from the trial, which followed all the patients through week 62. Patients treated with eteplirsen for 62 weeks maintained a statistically significant benefit on the primary clinical endpoint (6MWT), compared to patients who received placebo for 24 weeks and then received eteplirsen for the remaining 38 weeks. Shortly thereafter Lazard raise Sarepta $125 million in a stock offering priced at $25.25 per share. Combined with the money raised from the green shoe, the company ended 2012 with more than $180 million in cash, more than enough funds in the bank to see eteplirsen to market.
Historically, drug companies like Sarepta would need to plan a Phase III study comprising far more patients than the Phase II before approaching regulators to file an NDA (New Drug Application). However, in the case of young boys reaching puberty and just beginning to suffer the life-threatening effects of DMD, waiting for a comfirmatory study before marketing the drug would amount to a death sentence.
With the passage of the FDA Modernization Act of 1997 (FDAMA) and amended in 2012 by the FDA Safety & Innovation Act (FDASIA), Congress created a pathway for rare diseases to receive fast track and accelerated approval (AA). Sarepta has made it clear that they intend to petition the FDA to allow the company to apply for AA and have a meeting with the FDA on this very topic scheduled shortly.
What are the conditions necessary to meet the requirements for AA? Sec 901 of FDAMA and FDAISA govern access to AA. Section 902 complements 901 by allowing expedited developement of ‘Breakthrough Therapies’ that benefits drugmakers by giving them frequent, prioritized access to FDA staff to help expedite the approval process.
Section 901 lays out three broad criteria that need to met in order to achieve AA status. The disease in question must be rare and life threatening. A surrogate endpoint needs to be identified that is reasonably likely to predict clinical benefits to prospective patients. And lastly, safety data is carefully weighed on a risk vs. benefit analysis, taking into account the needs and viewpoints of patients.
Section 902 works hand in hand with Section 901 by allowing a company access to FDA staff in order to ensure the most efficacious method to reach AA compliance. Importantly, Section 902 directs that clinical trials be both small and efficient (in the words of the statute “by minimizing the number of patients exposed to a potentially less efficacious treatment”)
It is clear to me that by all accounts a succesful treatment for Duchenne’s meets the criteria necessary to achieve AA. No one doubts that boys suffering from Duchenne’s are literally given a death sentence. While there are outlier cases of DMD patients living into their 50s, they are few and far between. Such standouts achieve extraordinary longevity through heroic usage of ventilators and other medical equipment leading to significant loss of quality of life. The sad fact is, the vast majority of DMD boys will not live to see their 30th birthday. There is currently no cure or treatment on the market that can change these grim statistics. In fact, it would not be far from the truth to say that a disease like Duchenne’s was the impetus for Congression action via FDAMA/FASIA in the first place.
It is also clear to me that the data on Eteplirsen meets the legislative intent of Section 901. The evidence linking the failure to properly express dystrophin mRNA with the deterioration of muscle is both widespread and without question accepted within the muscular dystrophy scientific community (This website maintained by UCLA is a good primer on this subject). Sarepta has proven the existence of dystrophin production in all 12 patients in the trial who received the drug – including the 4 placebo patients who subsequently went on treatment after week 24. Slides showing images from both the pre- and post-treatment cells taken from muscle biopsies are available on pages 12 & 13 of the January 2013 presentation. These images are stark examples of eteplirsen having the therapeutic effect of allowing the patient to manufacture dystrophic-positive fibers in the sarcolema (the membrane covering muscle fiber).
Without question, the safety data generated at trial was a home run when considered against the life-threatening nature of the illness. It’s not a stretch to say that of all the Section 901 hurdles, the safety profile of eteplirsen is the least worrisome of all.
The FDA is mandated to meet with a drug company developing a Section 902 Breakthrough Therapy in order to inquire as to Section 901 compliance within 60 days of requesting such a meeting (assuming the company in question meets all other statutory guidelines such as complete data submission, etc.) According to Sarepta’s CEO the request was made sometime in late December, so unless the FDA requested a short extension such a meeting has already occurred or is immediately about to. The company has also guided that they will make public the results of such a meeting once they receive the official transcript from the FDA, which is usually a 30 day process post-meeting. If the FDA ultimately decides to grant Sarepta the right to make an AA filing, it is accepted wisdom that this decision stems from the FDA’s opinion as to the positive merits of eteplirsen and therefore makes it extremely likely that the drug will ultimately get approved in a timely fashion.
Assuming approval, the future for Sarepta would be extremely bright. Orphan drug pricing is extremely high. The average price of 10 orphan drugs tracked by the company as comparables is $350,000. There are approximately 1,900 patients in the US amenable to being treated with an exon 51-skipping drug. At $350,000 per patient per year (eteplirsen is a maintenance therapy that would conceivably be given for life) that gives the company an addressable market for eteplirsen of $600m+. Sarepta is in the early stages of adjusting its technology to exons 45, 50 & 53 and there is no conceivable hurdle at present aside from regulatory red tape that would not make these additional drugs not feasible Ultimately, if succesful with eteplirsen and its cohorts, this market could yield billions of dollars in yearly revenue within the US alone.
Options pricing can be an extremely useful tool in analyzing what the current expectations are for this market-moving piece of information to be released. If you look at the difference in pricing between the March, April & May 35 calls, you will see a clear jump in premium and associated volatility starting in April. Therefore it is reasonable that the specialists making a market in Sarepta options expect a decision by the FDA to be released sometime after March 16th, the expiration of the March series of options.
Normally I would agree with the pricing in options on such a speculative and closely-watched name like Sarepta. However, I believe in this case there are a number of key upcoming catalysts that could both put the March options ‘in play’ as well as yield a short-term bounty to Sarepta stockholders.
On Monday, March 4th, the company will speak at the Cowen Health Care Conference in its’ hometown of Boston. On Thursday March 7th, the company will release earnings along with a corporate update. Either venue would be a good place to update shareholders as to the status of the AA meeting. It is highly probable, that the meeting will have already taken place by the time of the earnings announcement, and any body language or comforting comments around the process would be taken seriously by Wall Street.
It is also possible that Sarepta releases additional data on the ongoing open-label extension study with the original 12 patients. The extension study continues to assess the long-term safety and efficacy of open-label eteplirsen. The 6MWT continues to be performed every 12 weeks, and it is possible that the company releases that data publically. In the December 7th release of data, a continued benefit on the 6MWT was shown to exist through 62 weeks and if it continues to be replicated over time will add urgency to the push to get this drug fast tracked.
There is much controversy, stoked by a few well-disseminated bear pieces written about the chances of AA approval (the most widely read piece is the one on TheStreet.com written by Aafia Chaudhry) that have added unnecessary volatility to the stock. The bear argument revolves around 3 main points of contention. Bears argue that the small size of the trial is not conclusive enough to meet AA requirements. Bears further argue that unblinding the trial after week 24 taints the data enough to invalidate the study for purposes of meeting Section 901. And lastly, some of the bears have argued that there isn’t enough conclusive evidence that dystrophin-positive fiber counts predict clinical outcomes (6MWT performance) in DMD patients.
The idea that the trial was not large enough to meet AA requirements is laughable. Trial participant sizes are viewed through two lenses. Firstly, did the data generate enough successful data points to lower the p-value to an acceptable threshold? Modern science accepts a p-value of 0.05 or less to be statistically significant. The fact that the p-value was less than 0.01 is the main criteria by which the FDA will example the proposed efficacy of the drug.
The second lens through which the FDA examines trial size is to look at the size of the patient population residing within the US. The number of exon-51 patients is approximately 1900. However that number significantly overstates the number of eligible for-trial patients, as many of these boys have passed puberty and begun to show significant muscle deterioration. A significant percentage of the exon-51 population will, unfortunately, pass away in the next 24-36 months. When compared to the population size, a trial comprised of 12 patients is more than enough, in my opinion, to convince the FDA as to the efficacy and safety of this drug (As an aside, about 3 years ago I had a conversation with the CEO of a drug company attempting to work out the details of a pivotal trial in the US for a rare genetic disease afflicting approximately 500 people. The FDA indicated to him that it would be acceptable in this case to run a trial of only 3 or 4 patients!)
When the results of the dystrophin production in the treated arm became clear to the researchers in the trial, they immediately shifted the trial from a placebo-controlled double blind to an open-label extension This was a both scientifically correct procedure as well as a morally obligatory one. To argue, as some do, that the company needed to choose between making the proper ethical decision versus tainting the results and irreparably delaying the availability of the drug to the hundreds of needy patients is an argument that the FDA has dealt with in the past. Companies running drug trials are expected to adhere to highest ethical standards applicable, and the FDA has in the past approved numerous drugs on the basis of open-label studies where all participants would be irreparably harmed should they be denied access to a life-saving drug by virtue of being stuck in the placebo arm.
Lastly, the criticism that some have leveled at the linkage between DMD patients and a lack of dystrophin production shows a profound disregard for the state of science in the DMD community. I have not read a single piece of research on Sarepta that quotes an expert in this field questioning this link. All the major research programs underway in muscular dystrophy accept this linkage as a basis for further research, and anyone doing a cursory examination of the latest published research in the field will come across numerous publications that accept this premise. Any scientific panel stacked with experts in muscular dystrophy would be well aware of this basic accepted fact.
Many of these bearish arguments could fall by the wayside with the release of 72 week data from the open label extension study. What I find potentially meaningful in any new data released is the inclusion of the treated placebo arm. As mentioned above, after week 24 the trial was unblinded and the 4 placebo patients were put onto eteplirsen. The 72 week data will include 48 weeks of treatment data for this 4 patient arm, essentially increasing by 50% the trial size of treated patients at this important threshold (the original data set showing a successful meeting of the primary endpoint was measured at week 48) . If the data shows that these 4 patients have stabilized and maintained walking ability at the crucial 48 week milestone (as they appeared to begin to do at week 36) it will go a long ways towards silencing the bears’ argument that the data set is not robust enough. Again, I don’t think the March option pricing is taking this possible scenario into consideration, as the market for Sarepta’s common stock will need to adjust if the news is positive, based upon the increased chances of the FDA granting AA.
There is a very vocal support group surrounding DMD led by Jenn McNary (you can follow her twitter feed here and her website, DMDHero here). Jenn’s plight is particulary heartbreaking as she is the mother of two DMD afflicted sons, both with exon 51. One son, Max, 10 years old, was accepted into the trial while the other son, Austin, age 13, was not due to his deteriorated condition. Numerous articles and news clips have highlighted her story, which she has reluctantly undergone in order to further the cause of speeding up approval and potentially saving Austin’s life.
Jenn believes very strongly that the drug has postively impacted Max’s life. Unlike his wheelchair-bound brother, he runs down hallways and recently started opening jars with his bare hands. Lately Jenn has posted a number of videos, including this recent one from late February of Max purportedly skiing for the first time (I found it fascinating that this video has been played only 200 times. If anyone had any doubts that patients fell off the wagon after week 62 this video should put them rest for at least one of the subjects. You would think given all the attention this trial has received that others would be as focused on the patient participants and had come across this video!).
Jenn and others have lobbied hard for the FDA to approve an AA submission for eteplirsen. In her case, she suffers at the sight of her older son’s ongoing physical deterioration and wants to opportunity to arrest his disease progression by giving him eteplirsen as well. Unfortunately Sarepta cannot provide her with the medication due to the drug’s currently unapproved status. Jenn has therefore been at the vanguard of appealing to the FDA – which under FASIA the FDA is mandated to take into account the opinions of rare disease patients and advocates – and organizing letter writing campaigns and trips to Washington DC (This link is especially instructive as the group met with Janet Woodcock; Director of the Center for Drug Evaluation and Research (CDER) and discussed with her the use of Breakthrough Designation and Accelerated Approval pathways to expedite eteplirsen’s approval) in order to accomplish her going of saving Austin’s life.
I have spoken with Sarepta shareholders who have tracked down other families with children in the trial and I’m told the passion surrounding eteplirsen’s efficacy is as great if not greater in those families as well.
On March 11th, Jenn’s group is scheduled to meet with FDA Commissioner Margeret Hamburg. As surprising as this may sound, this single piece of information may be the most instructive of all.
Dr. Margeret Hamburg was first appointed Health Commissioner of New York City in 1991 by then-Mayor David Dinkins. Her accomplishments stood out enough that 3 years later she was one of the only leaders from Dinkins’ inner circle to be asked by newly-elected Mayor Rudolph Giuliani to stay. If you know anything about New York City politics this accomplishment speaks for herself. Dr. Hamburg stood out precisely because of her effectiveness in implementing a number of modern medical improvements to the City’s vast pulic health system, no small feat in the bureaucratically-hidebound NYC DOH (Department of Health). I had a family member working at the upper levels of the health administration and I can tell you firsthand that Dr. Hamburg was successful both because she had an excellant grasp of the medical field and because she was a consummate politician in effectuating her decisions within the organization that she led. Under her tenure New York City significantly lowered the incidence of tuberculosis (then ravaging numerous NYC immigrant communities) and drastically increased the rate of childhood immunizations.
She was given credit for much of these accomplishments, and in 1997 was appointed by the Clinton administration to become assistant secretary for planning and evaluation at the federal Department of Health and Human Services, where she both started a bioterrorism program and oversaw planning for a potential pandemic flu response. Again, she was successful at the Federal level both for her expertise in the medical field and for successfully navigating Washington politics in connection with accomplishing her stated medical goals.
From my vantage point, the idea that Dr. Hamburg would agree to meet in a well-publicized manner with Mrs. Jenn McNary and her group, while knowingly planning to deny the right to submit an AA application for etelplirsen betrays a lack of knowledge as to how Washington DC operates.
I’ve interacted over the years with experts involved in interacting with the FDA on numerous drug submissions. I can tell you that all politicians within government (and make no mistake about it, Dr. Hamburg didn’t get to where she is today by lacking political judgement) seek to attach themselves to the winning horse. In this case, the winning horse is Jenn McNary and her fellow activists who are out to save the lives of children. The FDA has already met with the patient advocates at the operational level (again, see the DMDHero notes from the February 15th meeting) and Dr. Hamburg, knowing as she does the status of etelplirsen within the FDA, could have easily declined the meeting if she felt the outcome was going to be a negative one. This meeting is so close to the FDA’s decision that any new information coming out of it would fail, in my opinion to affect the FDA’s decision.
So why agree to meet? It’s simple really – I believe Dr. Hamburg is meeting with the group this close to the decision point so that when the good news is handed down, the photo ops, the Washington Post article, the lavish specialty medical journal coverage can all point to Dr. Hamburg as one of those ‘heroes’ alongside the smiling McNary clan. Seriously, does anyone who knows something of her career expect her to agree to meet with these activists while knowingly planning to shoot them down a few weeks later??
You don’t have to be a cynic or believe in the bad intentions of Dr. Hamburg – I know for a fact that she is a consummate physician. Rather, in our democratic/capitalist system, impacting public opinion is a necessary prerequisite to getting anything accomplished within government. In other words, it’s just how the business of governing our country gets done in DC. The FDA oversees 25% of all consumer purchases in this country (food and drugs are a trillion dollar a year economy) and Dr. Hamburg surely knows she needs all the good will on Capital Hill to adequately fund her plans for the FDA. Being a hero – to Jerry’s kids at the MDA no less! – burnishes her image and with the upcoming budget battle for scarce Federal dollars you can bet that Dr. Hamburg will position herself accordingly in the eyes of public opinion.
When the photo ops of the March 12th meeting take place, one needs to evaluate whether or not Wall Street will be as skeptical as it appears to be with the stock in the high 20s. I think the relatively low volatility in the in-the-money March calls are a good way to take a flyer on Wall Street being pleasantly surprised by the FDA’s acceptance of eteplirsen.
Longer term, I think the value in Sarepta is enormous. Perhaps in a future piece it would be worth laying out the case for why the FDA will ultimately approve Sarepta’s drug platform as a basis to rapidly churn out treatments for the other exon-mutation classes of DMD patients. Sarepta already has treatments for exon 45, 50 & 53 in pre-clinical development.
But for now the attention should focus on eteplirsen alone. Lazard pegs the opportunity for exon-51 as being worth anywhere from $83 to $139 a share. I don’t doubt it. Wall Street values the legislatively-protected cash flow from orphan drugs very highly – just look at the multiple Sanofi paid for Genzyme – and Sarepta could have a similarly rosy future.
Immediately after the release of the positive Phase II data Sarepta’s stock traded in the mid 40s before sliding all the way down to where the company raised money at $25.25. Since the company is so well funded I don’t expect a similar meltdown post-AA rather I expect the market to begin to consider the value to Sarepta upon approval as well as the significant European potential for the drug. My best guess is that the stock retests its’ 52-week high of $45, with the price climbing into the decision once the drumbeats within and without the FDA begin to be heard.
At the time of this report the author was long Sarepta common stock and call options
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Update : I posted an updated companion piece on Friday March 8th, 2013.
You can find the link to the piece entitled “Profiting on the Possibility That the FDA Has Turned a New Leaf” here : http://www.littlebear.us/?p=662