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Sarepta Therapeutics

Risk-on: FDA setbacks shadow Sarepta’s gene therapy, but valuation screams opportunity

Last Thursday, we came up with the idea to initiate a position in Sarepta Therapeutics. For now, we’re quite underwater in this trade, but we’re far from concerned. Let’s revisit the investment case:

What’s going on?

Sarepta Therapeutics has come under the scrutiny of the U.S. FDA after two deaths occurred in a clinical trial involving Elevidys, a gene therapy for the severe muscle disease Duchenne Muscular Dystrophy (DMD). Both patients died from acute liver failure. The stock dropped significantly as a result.

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What is Duchenne?

Duchenne Muscular Dystrophy is a rare genetic disorder where the body produces little or no functional dystrophin — a protein essential for keeping muscles strong and intact. The disease primarily affects boys and usually leads to death before the age of 20.

How does it work?

Imagine your body is a large factory, and the building instructions are written in a book called DNA.

This book is divided into chapters called genes. Each chapter contains important sentences (called exons) and random junk (called introns) that serve no purpose.

Before your body starts building anything, it removes the junk (introns) and keeps only the important parts (exons). Then it follows those parts to build things like muscles, eyes, or hair.

Now imagine one of those sentences (exons) has a giant coffee stain and is completely unreadable. When your body tries to read that sentence, it gets confused and stops building. In Duchenne’s case, it stops building dystrophin.

PMO portfolio

For this, Sarepta has developed so-called exon-skippers. These drugs have already been on the market for a while.

An exon-skipper basically says: skip that unreadable sentence and continue with the next. This allows the body to still produce some functional dystrophin. Not perfect, but better than nothing.

No issues with PMOs

These drugs haven’t caused any problems, have been available for some time, and generate stable cash flows. In 2024, they accounted for $967 million in revenue.

ELEVIDYS

ELEVIDYS goes a step further: using a modified virus vector, it delivers a functional mini version of the dystrophin gene directly into the muscle cells. It is one of the few approved gene therapies on the market.

In theory, this technology is superior to PMOs, as a one-time treatment replaces the damaged sentence in the book with a slightly altered but functional version, giving the body permanent instructions to produce dystrophin.

Accelerated approval

ELEVIDYS received accelerated approval from the FDA on June 22, 2023, based on promising results as a gene therapy for young Duchenne patients (ages 4–5). Early clinical studies, including STUDY 101 and 102, showed positive effects on both safety and motor function in a patient group for whom few effective treatments exist.

Clinically and commercially, Elevydis seemed to be a success. However, two tragic cases of patients dying from acute liver failure have led to a significant drop in the stock. The market is now pricing in a worst-case scenario in which Elevydis is pulled completely (or worse).

Although that risk exists, we believe it’s unlikely. The situation is more nuanced. Let’s first examine how this could happen.

What went wrong?

Elevidys is a one-time gene therapy administered via infusion. This is done using a harmless virus (AAV) that carries the new gene through the bloodstream to reach the liver and muscles.

As a result, the liver receives a high volume of AAV particles. Liver cells absorb and must break down these particles, which can overload or stress the liver. The immune system may also respond to the viral particles, causing inflammation and liver cell damage. In some cases, additional factors such as infections play a role.

Deceased patients

As tragic as it is, it’s important to note that the patients who passed away were 16 years old (70 kg) and 15 years old (50 kg). These belonged to the non-ambulatory group (already in a wheelchair), for which the drug is not yet officially approved.

One patient had a recent CMV infection, which may have made the liver more vulnerable. Moreover, due to weight and condition, the patients were given higher doses—meaning more viral particles and more pressure on the liver.

What are logical next steps?

1. Label changes and safety updates

The FDA may require Sarepta to update the Elevidys label with stricter warnings, such as a “black box warning” for liver failure or death. Sarepta has already proposed such updates and informed the FDA accordingly.

2. Market restrictions or withdrawal

The FDA may decide to allow Elevidys only for ambulatory patients or temporarily halt approval for non-ambulatory patients. In an extreme scenario, the therapy could be partially or fully withdrawn from the market.

Can the FDA impose a fine?

The FDA’s authority to impose direct fines in these types of cases is limited. Instead, the agency may issue official warnings or require corrective actions. Civil or criminal penalties are possible in cases of fraud or deception, but there’s currently no evidence that Sarepta misled regulators.

Can families sue Sarepta?

Families of the deceased patients can sue the company for inadequate warnings about liver failure risks or for medical errors during treatment.

The likelihood of liability increases if Sarepta should have issued earlier warnings. If the patients were part of a clinical trial and gave informed consent, liability may be reduced, but not entirely ruled out.

Financially, however, the claims pose no significant risk to Sarepta. In the worst-case scenario, it could cost up to $5 million per claim.

Valuation

Let’s take a look at Sarepta’s value:

PMOs

No issues have been reported with the PMOs. They’re expected to generate around $1 billion in revenue this year. The margins are high and recurring due to medical necessity. If we isolate this segment, it would conservatively yield $700 million in cash flow—equal to $7.12 per share.

ELEVIDYS

The real upside, of course, lies in ELEVIDYS. Assuming it’s only approved for ambulatory patients, it could still conservatively generate another $1 billion in revenue. This assumes that non-ambulatory patients are excluded.

Even in this case, ELEVIDYS would already be a blockbuster. There are about 500 new Duchenne diagnoses in the U.S. each year. The treatment costs $3.2 million—creating a $1.6 billion U.S. market.

This streamlines to $1.12 billion in cash flow, or $11.40 per share.

Pipeline

Of course, most of the cash flow is reinvested into Sarepta’s broad pipeline, enabling portfolio diversification.

The company has now built a solid track record in bringing therapies to market—so we should assign some value to that as well. For the purpose of this analysis, we’ll assume that value comes for free.

Conclusion: A Bargain

Let’s say, hypothetically, the pipeline is paused, the PMOs remain on the market, and ELEVIDYS is used only to treat young ambulatory patients—then the current market cap could be fully recovered within a year, highlighting the extreme undervaluation at today’s price.

Last week, we cautiously initiated a small position and have since slightly expanded it. We already own some shares and committed to acquiring 300 more shares at $20—equivalent to a $6,000 obligation.

Our break-even point has been lowered to $13.36. If the stock remains above $20, the options expire worthless and we keep the $2,000 premium. This should all play out within about a year. Given the volatility and current conditions, the stock fits perfectly in the Risk-on category.

From a value perspective, it’s also a long-term portfolio candidate. But first, the storm needs to pass…

Stock Information

Name: Sarepta Therapeutics Inc.
Ticker: SRPT
ISIN: US8036071004
Exchange: NASDAQ

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