Weekly Biotech Report on Sarepta Therapeutics (NASDAQ:SRPT) Battle with FDA on Eteplirsen

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Sarepta Therapeutics (NASDAQ:SRPT)

Once again, the battle with Sarepta Therapeutics (NASDAQ:SRPT) continues. Eteplirsen for Duchenne muscular dystrophy was supposed to be either approved or rejected for accelerated approval on May 26. Instead, the FDA said it needed more time to review the data. Who knows what they’re looking at, this is probably more of a political power struggle between FDA top dog Janet Woodcock and whoever is directly under her.

Given there is a delay, it does at least mean that somebody at the FDA is pulling for Eteplirsen. The discussion is probably centered around what happens to FDA’s reputation if Eteplirsen ends up costing hundreds of thousands of dollars for patients but doesn’t actually work, versus what happens if Eteplirsen is proven to work later while in the mean time all these other kids died waiting for a drug that the FDA wasn’t convinced actually worked at the time and was too worried about its reputation to care about the actual lives at stake.

A simple moral calculus dictates that the FDA approve the drug and if it’s a waste of money then so be it, but at least these kids get to try something they want desperately to try. Better waste money and approve something that doesn’t work then find out later that it does as some of the kids who wanted it in the first place died waiting. Some analysts are theorizing a possible compromise involving data from an ongoing phase 3 being included. The problem is that Sarepta is out of money and needs more in order to manufacture Eteplirsen in order to even test it.

Meanwhile, the clock continues to tick, waiting for who knows what. Sarepta jumped to $23 on the news, which should give an end target of something around $50 a share if approval is finally granted. For all we know though, there may be some backdoor deal here allowing these kids to be treated with Eteplirsen without an official approval so the FDA can save face and keep away from this thorny issue until more data comes in. That’s a bit of a stretch of a theory and probably illegal on the part of the FDA, but anything’s possible with this crazy story. Let’s chalk that one up to conspiracy theory entertainment, no accusations here.

Those who took our advice not to buy near-term calls or puts expiring one day after the PDUFA date, were saved. Since the decision was postponed, most out of the money options that would have been affected one way or the other all expired worthless. We recommended 2018 options as some strikes were strangely cheaper at the time than the May and June contracts of the same strike. We had said in a previous report:

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.

Lesson being, never rely on PDUFA dates when playing options. If you bought 2017 or 2018 calls, now would be a good time to hedge with a put as well since the shares have risen significantly since the postponement. This will protect you in the event that Woodcock shoots down Eteplirsen.

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