After A 50% Fall Sarepta Therapeutics Stock Now Looks Attractive

Sarepta Therapeutics stock (NASDAQ: SRPT), is a biotech company focused on the discovery and development of RNA-targeted therapeutics and gene therapy for the treatment of rare diseases. SRPT stock is now at the same level it was on Mar 23, 2020, when broader markets made a bottom due to the spread of Covid-19. This marks a significant underperformance compared to the S&P which moved 68% since its March 2020 lows, with the resumption of economic activities as lockdowns are gradually lifted and vaccines being approved in multiple countries. This underperformance can be attributed to the negative outcome from clinical trials for one of its drugs, SRP-9001, used for treating Duchenne muscular dystrophy (DMD). This news last week led to a 50% plunge from levels of close to $170 in early January to $82 in a single trading session. Although the news around SRP-9001 is surely disappointing, we believe the selling in the stock appears to be overdone, and it now looks attractive.

After the recent correction, SRPT stock is now up 62% from levels seen in early 2018, over two years ago. Some of the 62% growth of the last 2 years is justified by a solid 146% growth in the company’s total revenues from $155 million in 2017 to $381 million in 2019, led by the expansion of Exondys 51, used in DMD treatment. Sarepta’s Total shares outstanding increased 25% due to share issuances, translating into a 97% rise in revenue per share (RPS) from $2.62 to $5.17 over the same period. Given such massive RPS growth, the company’s P/S multiple expanded over the recent years. We believe the stock is likely to see upside after the recent correction. Our dashboard, ‘What Factors Drove 62% Change In Sarepta Therapeutics Stock between 2017 and now?‘, has the underlying numbers.

Sarepta’s P/S multiple expanded from 21x in 2017 to 25x in 2019. While the company’s P/S is 17x now (based on trailing RPS), there is a potential upside given the expected growth in RPS over the coming years, as well as comparing the P/S multiple to that over the recent years, P/S of around 24x in 2018 and and 25x as recent as late 2019.

So what’s the likely trigger and timing for upside?

Despite the challenging current environment given the pandemic, Sarepta actually reported a solid 41% sales growth in the first nine months of 2020. Its net loss of $2.50 on a per share basis compares with a $1.70 loss per share seen in the prior year quarter. What’s driving the sales for Sarepta is Vyondys 53 along with expansion of Exondys 51. Now, Exondys 51’s peak sales are estimated to be north of $1 billion, compared to sales of $381 million in 2019, while Vyondys 53 can garner $250 million in peak sales. Vyondys was approved in late 2019 and 2020 marked the first full year of its commercial sales. Looking at SRP-9001, a DMD treatment for all populations, it could garner over $1 billion in peak sales. However, the negative outcome from an early clinical trial resulted in a stock price crash. The company hasn’t given up on SRP-9001 yet, though. It plans to analyze the results for all patients in the second part of the study. While it will be interesting to see how this story develops going forward, the SPRT stock surely has seen a huge correction.

After the recent slide, SRPT stock looks attractive going by the valuation. At levels of around $90, SRPT stock is trading at under 13x its 2020 expected RPS of around $7.00, and under 10x its 2021 RPS of $9.35. This compares with P/S of over 24x seen in 2018 and 2019. Note that a high trading multiple is common for smaller pharmaceutical companies with promising drugs, and that appears to be the case with Sarepta as well. Overall, the stock looks attractive at $90 levels after a vertical fall from $180 levels.

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