Nowhere in the public markets will you find as risky a class of investments as in the early stage biotech sector. For every one company that successfully manages to develop, test and launch a commercial therapeutic, there are at least a dozen failures that litter the field with sub-$1 stock prices as a mark of their shareholder’s disappointment.
Investors as a whole live with the risk because the rewards are huge. Warren Buffett has been quoted as saying, “In business, I look for economic castles protected by unbreachable ‘moats’”. Nowhere in the marketplace can you find a product with as solid a moat as a life-saving drug. Companies like Merck (MRK), Pfizer (PFE) and J&J (JNJ) have pocketed billions of dollars annually, with little in the way of individual competition, by selling drugs that transform the lives of those take them.
Within the pantheon of successful drugs, one cohort stands alone as being virtually impregnable, providing its’ owners with hundreds of millions of dollars in annual profit and almost no chance of competitive pressures impacting market share – namely the class of ultra-orphan drugs. These therapies target extremely rare diseases afflicting a handful of patients. Since the pool of patients is extremely small, drug companies marketing treatments for rare diseases can get away with charging hundreds of thousands of dollars a year per patient.
BioMarin Pharmaceutical (BMRN) illustrates the riches that come along wtih successfully launching an ultra-orphan drug. In 2005 BioMarin received approval from the FDA to market Naglazyme, a therapy for children born with Maroteaux–Lamy Syndrome (MPS VI). Children born with MPS VI lack certain enzymes needed to break down molecules that help build bone, cartilege, skin and connective tissue. Although no definitive studies have been done, it appears that the rate of incidence of MPS VI approximates one birth out of 500,000.
To treat this extremely rare disease, BioMarin charges more than $600,000 a year. Sales of Naglazyme last year were more than $250 Million, or around 50% of BioMarin’s total sales. Trading around $61 per share, BioMarin has a market cap of more than $7.7 billion, implying that the Naglazyme franchise has a value exceeding $3 billion dollars. With the success that naglazyme is having in helping patients who suffer from MPS VI – coupled with the extremely small market size of patients – there is little to no chance that another drug company will develop a competing product, leaving this highly profitable market in BioMarin’s hands for a long time to come (it is worth noting that as a biologic, it is very difficult to manufacture. Because of this, it is extremely unlikely that once the drug comes off patent a generic reproduction can be made by another company that is therapeutically 100% exactly the same).
Historically, the time it takes to develop, test and shepherd a drug through the FDA approval process has been so long that patients can literally die while waiting for a promising drug to get to market. However, recent legislative and regulatory developments have made it so that the FDA has become more responsive to patient’s wants and needs in seeing potentially life saving drugs come to market faster. In 2012 Congress passed the FDA Safety & Modernization Act (better known as FDASIA/PDUFA V) which expanded provisions embedded in a previous set of legislation from 1997 known as the FDA Modernization Act (FDAMA).
One of the main goals of PDUFA V was to expand the ability of drug manufactures to collaborate with the FDA in speeding up the approval process of treatments for rare but life-threatening illnesses. The ultra-orphan drug market was a prime target of this legislation. Together, FDASIA and PDUFA V lay down alternative, expedited pathways for drug companies to gain approval for this class of treatments without all the belt-and-suspenders work of multiple, large trials designed to prove efficacy and safety beyond a shadow’s doubt.
One of the prime beneficiaries of this new approach by the FDA could be Sarepta Therapeutics (SRPT). Sarepta is developing eteplirsen, a novel treatment aimed at a subset of young boys suffering from Duchenne muscular dystrophy (DMD). DMD is the result of a genetic mutation that inhibits a person’s ability to manufacture dystrophin, a necessary component in healthy muscle tissue. Boys who suffer from DMD begin to show symptoms at an early age, and it is a progressive degenerative disease which eventually affects all voluntary muscles in the body. The average life expectancy of a boy born with DMD is 25; there currently is no treatment for the disorder.
In October 2012 Sarepta reported stunning results for a 12-patient phase II study of eteplirsen. The results were so earthshattering that the stock almost tripled the day they were announced. Since that time, the stock has been volatile, dropping from the low 40s to the 20s as Sarepta took advantage of its’ high-flying stock price to raise $125 million from institutional investors and prepare for large-scale commercial manufacturing of eteplirsen.
Normally, a company that completed a succesful phase II study would then seek to complete a pivotal (phase III) trial before approaching the FDA for approval to sell the drug. However, under the expanded mandate Congress gave the FDA to speed up the approval process for rare and fatal diseases, Sarepta has approached the FDA with the intent to seek out its’ permission to file for accelerated approval (AA). It is uncommon for the FDA to grant a company the ability to file for AA, and there is much disagreement amongst the analysts and investors in the biotech community as to whether or not Sarepta will be granted this authority for eteplirsen. The stakes are not small in this debate; the consensus seems to be that if Sarepta is granted AA the stock will climb significantly past $40, whereas if it is forced to proceed first with a larger phase III the stock could swoon to $20 (it last closed around $30 a share).
I have written in the past regarding both the both the bull and bear arguments for Sarepta and why I thought the chances of the company being granted AA were high (you can find my earlier work linked here). There are respected opinions on both sides of the debate (for the record, JMP Securities sees the chances of AA as 20-30%, Piper Jaffrey at 50/50, and Lazard appears equally bullish) and any potential investor in Sarepta should familiarize himself with both sides of this argument.
Sarepta is slated to meet with the FDA sometime in March to learn whether or not the Agency looks favorably on the company filing for AA. Sarepta plans to release the decision as soon as it receives written minutes from the meeting confirming the FDA’s decision. Until such time, investors will not know for certain what the outcome is, and the resulting uncertainly will continue to add volatility to Sarepta’s stock price.
However, investors continue to look for scraps of incremental information that might shed light on which way the FDA is leaning. To that effect, I believe an important piece of information has recently come to light that adds credibility to the argument that the FDA will ultimately fast track eteplirsen’s approval.
Dr. Janet Woodcock is the director for the Center for Drug Evaluation and Research (CDER), the division at the FDA responsible for evaluating prescription and over the counter drugs before they are approved for sale within the United States. The researchers who oversee Sarepta’s interactions with the FDA are all housed within CDER. As director, Dr. Woodcock sets the tone for all her staff and therefore her approach towards novel drugs targeting rare and fatal illnesses should be highly influential towards whether or not eteplirsen is granted AA status.
On Thursday, March 7th, a small company that produces life science related podcasts (known as mendelspod.com) published a 20 minute interview with Dr. Woodcock (the full audio of the podcast can be accessed here). The host, Theral Timpson, steered the questioning towards a deeper understanding of Dr. Woodcock’s apparent shift within CDER towards a faster and more streamlined approval process for new and cutting-edge drugs that could potentially save lives.
Much of what Dr. Woodcock has to say about getting such drugs to the market faster would seem to shed favorable light on Sarepta’s chances for AA. In fact, some of her comments are so on the mark that they almost seem to be directed toward eteplirsen itself. Consider the following snippets taken from the interview :
I recommend that all investors interested in following Sarepta should carefully listen to the entire interview. There aren’t more than a handful of targeted treatments (eteplirsen targets exon 51, a small strand of DNA that certain DMD patients have a mutation) dealing with rare and intractable children’s illnesses that are currently front and center at CDER. Dr. Woodcock specifically points out, more than once in the interview, that targeted therapies in rare diseases should require smaller number of people in trials in order to demonstrate that they are effective. She makes reference to identifying biomarkers- a characteristic that is objectively measured and evaluated as an indicator of pharmacologic response – in order to aid in identifying candidates for approval. In the case of eteplirsen this would naturally be the production of dystrophin, which Sarepta has proven in its’ Phase II to be a succesful byproduct of receiving a continuous infusion of eteplirsen.
Elsewhere in the interview Dr. Woodcock makes an impassioned argument as to why rare illnesses ought not to require multiple large trials to confirm “astounding” clinical outcomes before approving a treatment. She discusses balancing the needs of safety and therapeutic outcome, in which she turns”to (my) own individual judgement on what I think is right – what’s right for the people, who are my customers, which are the patients.”
In the case of the DMD community they have been extremely vocal about what is right for them. Again, see my earlier piece for more detail on how the position of DMD patients and activists impact eteplirsen’s chances for AA. It’s clear to me that Dr. Woodcock is validating their needs and interests in her comments to Theral Thimpson.
Ultimately the bear argument on why eteplirsen would not be granted AA boils down to the small sample size the drug has been tested on. Listening to the entire interview with Dr. Woodcock I believe most casual observers would come to the conclusion that such worries are unfounded in the case of “astounding” clinical outcomes. No one doubts that the handful of children in the trial whose lives have been irreparably changed for the better is nothing short of astounding.
The FDA has numerous safeguards in place to assure that a drug receiving AA continues to undergo scrutiny from the Agency to ensure that the drug should remain on the market. Foremost amoungst those procedures is the responsibility of companies granted AA to undergo a larger confirmatory study at the same time they are marketing the drug to patients. Sarepta is quickly moving forward with making the necessary capital expenditures to ensure an adequate manufacturing capacity for both the confirmatory study and the commercial market. If granted the right to file AA, it appears likely that accomplishing both the study and commercial sales would begin in earnest in 2014 – at least 2 years ahead of where patients would be if they had to wait for the drug to crawl through the normal approval process. For many exon-51 DMD patients those extra two years would be a bridge too far.
As mentioned above, all investments in biotech belong to a class of investments that are amongst the riskiest types of equity investments individual investors could make. However, I believe the evidence, including the recently released interview with Dr. Woodcock, make Sarepta an attractive investment for those investors looking for exposure to the ultra-orphan drug market.
At the time of publication of this article, the author maintained a long position in Sarepta Therapeutics