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Some investors love to bet big on small pharma stocks in the hope that these companies produce a new hit drug that takes their share price into the stratosphere.
This is not one of those success stories.
Sarepta Therapeutics was a once-promising biotech utilizing cutting-edge gene therapy to create drugs like Elevidys, its treatment for Duchenne muscular dystrophy (DMD). But Sarepta’s stock plunged after the death of one patient taking Elevidys in March, followed by a second in June.
Here’s where it gets bad
The company announced a corporate restructuring last Wednesday, including layoffs of 500 employees and a complete reorganization of its pharma pipeline. That gave investors hope of a recovery, and shares soared 21% higher that day.
But late Thursday, news broke of a third patient death, this time during the clinical trial of a different drug treating limb-girdle muscular dystrophy (LGMD). Shares of Sarepta promptly plunged 36% on Friday.
Sarepta reported the third death to the FDA on July 3, weeks before its corporate restructuring. “Management deemed the death a non-material event and decided not to disclose this news on a call about restructuring held two days earlier, further undermining credibility,” Deutsche Bank analysts wrote last Friday.
Suffice to say, using layoffs as a smokescreen for news of another patient death has made shareholders concerned about management’s decision-making ability. According to Barron’s, a survey of investors conducted by BMO Capital Markets revealed that, on a scale of 1 to 10, 85% of respondents now rate the credibility of Sarepta’s leadership team at 2 or lower.
Here’s where it gets worse
The FDA has issued a voluntary recall for Elevidys, but Sarepta has taken the unusual step of declining the recall, instead leaving the drug on the market. The company’s reasoning is that the third death is related to an entirely different medication administered in a different way for patients with a different disease.
But Deutsche Bank analysts said this was “purely semantics,” and that the treatments for DMD and LGMD both rely on the same underlying viral vector.
The unspoken-yet-likely reason for Sarepta’s refusal: Elevidys accounted for 50% of Sarepta’s revenue last quarter, according to Barron’s. Taking it off the market would have catastrophic consequences for the company.
What’s next for Sarepta
Sarepta fell another 5.36% today, and shares are now down nearly 89% in the last six months. With investors and patients alike worried about the viability of the company’s key product, analysts are swiftly abandoning ship.
“Should Elevidys remain on the market with a black box warning, we anticipate this series of events and lack of transparency will have seriously damaged patient demand, taking perhaps years to rebuild trust of the DMD community,” Deutsche Bank analysts wrote. They downgraded the stock last Friday, as did the teams at Leerink Partners, Mizuho and Needham today.—MR