September 19, 2016, 5:40pm EST
The biggest mover in the market today was Sarepta Therapeutics, up as much as 100% on an FDA approval. We owned the stock in our Billionaire’s Portfolio, where we made more than 330% on the position in 18 months.
Today, I want to talk a bit about the back story on it; why Sarepta was one of the best risk/reward trades in the market.
Since 2012, the stock has gone from $3 to $45, back to $21, up to $55, back down to $12, up to $40, back down below $12, back to $25 and now back to $12.
Still, two years ago, Sarepta was a little–known stock. Perceptive Advisors, a specialist biotech hedge fund, stepped in and bought 9.5% of the stock on the prospects that the company would get approval on its drug, Eteplirsen, to treat Duchenne Muscular Dystrophy. And they’ve endured all of the swings along the way.
Perceptive was the best performing hedge fund in 2015. It put up a 52% return, after fees, in a year when almost every hedge fund and mutual fund lost money, and the S&P barely eked out a gain. Among the winners, a private investment in Acerta, which was said to give Perceptive “the biggest return in the history of pharmaceuticals investing.” The fund also had a huge 2013 with four stocks that did over 500%.
Since 1999, the fund has returned north of 40% annualized, before fees. Clearly, they have a record of success picking the winners in the complex (but high rewards) biotech space. With that, we followed them into Sarepta.
In the past year, Sarepta became a highly covered and written about stock—with a lot of drama, because the big catalyst was due to come this year.
The FDA held an advisory committee meeting earlier in the year, where the committee reviewed the drug and gave their recommendation to the FDA on whether or not Eteplirsen should receive “accelerated approval.”
For context, Sarepta’s primary competitor’s drug was rejected by the FDA late last year. This meant Sarepta had the only drug on the table that can potentially treat Duchenne MD.
This review meeting was a highly controversial and publicized event that included personal testimonies from boys and families suffering from DMD.
Despite this, the committee concluded the meeting by recommending against the approval of Eteplirsen, by a very thin margin. Still, we knew there was a good chance that it could be overruled by the FDA’s top drug advisor, Janet Woodcock.
Perceptive’s Joe Edelman publicly said the same. We had one of, if not, the best biotech investors in the world saying “I find it hard to believe that the FDA would turn it down.”
What some investors missed? The important consideration was that Sarepta was seeking “accelerated approval.” For terminal diseases that have no treatment, the bar for approval in that “accelerated” application to the FDA is significantly lowered. They look at safety. They look at efficacy (does it work?). By rule, the FDA must give a lot of flexibility on the latter.
It was always widely agreed that Sarepta’s drug is safe. What was highly debated was efficacy. The FDA committee’s contention was that the trial studies were too lean to prove effectiveness, even though the testimonials said otherwise (patients and doctors alike had been begging the FDA to approve the drug for over a year). Given that it was safe, but highly debated on efficacy, the risk/reward of approving favored an approval, given the FDA was working on the lower approval bar detailed above.
Though the analyst community was mixed on the perceived outcome, it was believed that, on an approval, the stock would trade near $60.
We had two scenarios:
Scenario 1: If the FDA approves Eteplirsen in an accelerated approval, the stock could be worth $60 a share. It’s not uncommon for biotech stocks to jump 200% in one day when its drug is approved by the FDA. That would be a 260% return from its share price of just months ago.
Scenario 2: If Sarepta’s drug was not approved, the stock would probably sell back below $5 a share, based on Sarepta’s cash and intellectual property.
But the beauty of the trade: Even if Eteplirsen did not get accelerated approval, the company would get another chance to go back to the FDA with more studies and data, and Eteplirsen could have gotten approval next year—so our downside would be time.
Additionally, other biotech companies would be interested in Sarepta’s DMD assets even in the case of a non–approval by the FDA, and therefore Sarepta could be acquired at a nice premium.
So we were looking at risking maybe 50% downside or so, to make 5X on the upside—a 8 to 1 risk to reward trade in Sarepta.
As we know now, the news was good! Both for investors and, most importantly, for the boys suffering from the devastating DMD disease. Sarepta stock traded as high as $56.
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