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Matt Winkler
Matt Winkler
Articles (68) 

Why Sarepta Is Like the Tesla of Biotech

Sarepta Therapeutics has exploded higher since last year on the hopes that its Duchenne muscular dystrophy drug is effective and insurance will keep covering it. Much like Tesla, its stock price is fu

March 12, 2018 | About:

Sarepta Therapeutics (NASDAQ:SRPT) has been one of the most rewarding biotech investments since the beginning of 2017. I consider it the Tesla Inc. (NASDAQ:TSLA) of the biotech industry. That’s a good thing as long as investors remain infatuated with the idea of a new company with a revolutionary product that has not yet proven itself in the marketplace. Could the company actually make money? Of course, but that's not currently why its market caps is so high.

Let’s flesh out the analogy further. Tesla is the first company to successfully introduce electric cars to the mainstream. But despite its success in terms of branding and awareness, it keeps piling on the losses. Losses are fine as long as the capital is available to keep plugging the funding hole, but it’s not fine forever. If Tesla keeps piling on losses, then at some point – nobody knows exactly when of course – investors are going to pull the plug, and the hope that has driven Tesla’s market cap up to now will quickly deflate. In this business, either you make money or you don’t. The promise of making money can only get you so far.

Moving to Sarepta, few biotech companies are as famous for the ingenious approach taken to treating a genetic disease caused by bad code, in this case Duchenne muscular dystrophy (DMD). The idea behind its sole approved product, Exondys 51 (eteplirsen), conceptually at least, is breathtaking. Eteplirsen binds to RNA in order to block the translation of bad genetic code at exon 51 into bad protein that doesn’t work. By blocking a single section, the hope is that a new reading frame will be established to make the rest of the protein functional. The end result should be a shorter but more functional protein that is translated instead.

Investors in the company and others who follow it are surely familiar with the soap opera story behind the Exondys 51 approval. There was much back and forth, FDA resignations even, setbacks, upside surprises, plunges on less than hopeful news, but eventually Eteplirsen got through the FDA on very scant efficacy data. Arguably, approval was based on hope.

The price tag for Exondys 51 is about $300,000 a year. For the drug to sell, it must be covered by insurance. And in order for it to be covered by insurance for the long term, it must be clearly effective. If it isn’t obviously effective, there is little chance that insurance companies will continue to cover such an expensive medication. FDA approval has not really established efficacy in any definite sense, hence all the drama behind its approval in 2016.

Go to Sarepta’s website and you will find its main product listed not as Exondys 51, but as Sareptassist. Sareptassist includes the drug itself, but also wisely comes with the services of a specialist who knows how to navigate insurance policies. This is obviously supposed to comfort sufferers and their families who may have no idea how to approach insurance coverage for this prohibitively expensive drug.

Comforting for them, but from an investor perspective, it means that the company is expending extra resources trying to help its customers get insurance coverage for Exondys 51. It’s a bit worrying, because it means that insurance companies are already reluctant to some extent to cover Exondys 51, and this in a full employment economic boom environment before any serious questions regarding Exondys’s long term efficacy have started to circulate.

If health insurance companies encounter any systemic trouble in the short term, it will be drugs like Exondys 51 that will be on the chopping block in terms of coverage, especially if efficacy remains questionable. Even with full coverage and even assuming there weren’t any challenges to coverage to begin with, Sarepta is still very far from long-term profitability. Loss narrowed in 2017 as was expected, but losses were still over $50 million, adding to a $1.2 billion net loss since inception.

Just like Tesla will need to prove itself soon by actually making money on its electric cars, Sarepta will also need to prove itself soon by making money on its controversial DMD medication. Both stocks are currently booming on hope. Exondys 51 is going to need to work well, and obviously, pretty soon. Otherwise, finding an insurance company to cover its extreme costs is going to be progressively harder to come by for the specialists waiting to answer the phone at Sarepta headquarters.

Disclosure: No positions.

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