Why the Performance of Sarepta Therapeutics Inc. (NASDAQ:SRPT) Eteplirsen Could Determine the Future of Drug Regulation

Why the Performance of Sarepta Therapeutics Inc. (NASDAQ:SRPT) Eteplirsen Could Determine the Future of Drug Regulation

Well it finally happened. After decades of development and really going through the Food and Drug Administration wringer, being berated and even excoriated by review panel after review panel, Eteplirsen was nevertheless approved. The stock, not surprisingly, is up almost 100%, and that is great news. However, what happens with Eteplirsen now could determine the course of the entire biotechnology industry for years, perhaps decades, to come.

First, as a quick reminder, back in May Market Exclusive had said the following:

Aggressive traders may want to go long here or buy call options if only for the approval jump. The options prices on Sarepta are extremely out of whack with near term options expiring in June more expensive than long dated calls expiring in 2018. This makes absolutely no sense and cannot last. A few out of the money 2018 calls should pay handsomely if Woodcock approves eteplirsen on May 26. Our suggestion though is to sell them shortly after approval.

And boy did 2018 OTM calls pay out today.

Our readers may also remember our explanation of how Eteplirsen is supposed to work:

In Duchenne muscular dystrophy, a bad exon displaces the reading frame of the entire remainder of the dystrophin protein. Imagine inserting an extra letter into a sentence and having a computer read the same sentence but with the spacing, or splicing unchanged. For example, we’ll add an extra “a” to the following sentence:

  • I am going to the store.
  • I aa mgoin gt oth estore .

The extra “a” threw off the reading frame of the whole sentence, with the exon splices being represented by spaces between the words. The spaces are the same after the same amounts of letters, but the words are all gibberish now and the protein doesn’t work. Eteplirsen is designed to do something like this:

  • Normal dystrophin reading frame: I am going to the store.
  • Dysfunctional dystrophin protein: I aa mgoin gt oth estore .
  • Eteplirsen-treated dystrophin: I aam going to the store.

Eteplirsen is supposed to cut out the exon, or word in this case, that contains the initial error, and restore the rest of the reading frame as normal. The result is, or should be, a truncated dystrophin protein that says “I going to the store.” It’s not perfect English, but at least it makes some sense.

The issue now with Sarepta and Eteplirsen is an enormous one, and not only for DMD sufferers and Sarepta shareholders. The entire biotech sector will be highly affected by Eteplirsen’s performance. Every single company with a drug in an accelerated approval pathway will be affected by Eteplirsen going forward. How this one drug performs could change the very fabric of the development stage fundamentally and for the very long term.

The issue is, Eteplirsen has not proven that it actually works. It has only given barely enough evidence that it just might. By approving it, the FDA is simply giving it a chance, and giving a chance to the kids that have the disease. This is noble, but still the drug might not actually do anything. By approving it over the protests of its own review panels, the FDA is risking its reputation. If Eteplirsen does not work—and it will be an incredibly expensive drug—then the FDA will get the blowback for causing people to waste money buying it, and it will have to take the heat for approving a drug with less than persuasive evidence that it actually works. They will look bad.

And most importantly, they will be less likely to give drugs like Eteplirsen the benefit of the doubt in the future.

However, if Eteplirsen does work, and does improve the lives of DMD sufferers by helping them move a little bit and prolongs their lives, the FDA will be vindicated and all kinds of good press complete with bouquets of roses and wreaths will be thrown at Janet Woodcock, the chief decision maker here.  For the future, that means that when a drug has data as inconclusive as Eteplirsen, the FDA will be more likely to give the benefit of the doubt and grant accelerated approval on the basis of what happened with Sarepta.

In short, if Eteplirsen works, the FDA is likely to become a generally more lenient regulatory body, affecting all biotech companies. If it doesn’t work, the FDA will be embarrassed and will likely clamp down on companies developing expensive drugs for rare diseases in the future, again affecting everyone and everything in the industry.

There is a lot riding on Eteplirsen working right now, not the least of which are the DMD sufferers themselves. For the sake of getting a drug through this bureaucratic monolith, biotech investors better be hoping that Eteplirsen works very well, and demonstrably so. Otherwise, we’re looking at a big FDA crackdown when it comes to taking chances on drug approval, making it that much harder for every company in Sarepta’s wake to get their candidates past the FDA.