The Reason Behind Sarepta Therapeutics Inc.'s Sinking Stock Price

By Sean

What: Shares of Sarepta Therapeutics , a clinical-stage biopharmaceutical company actively engaged in finding cures for Duchenne muscular dystrophy (DMD) and other infectious diseases utilizing RNA-interference technology, dove as much as 10% during Monday's trading session after making two substantial corporate announcements.

So what: First and most importantly, Sarepta announced that it had officially filed its new drug application with the Food and Drug Administration for eteplirsen, its exon 51-skipping therapy that'll target about 13% of DMD patients if approved. This move isn't a surprise as Wall Street and investors were made privy to the fact last month that the FDA would allow Sarepta to file for its NDA by mid-year as planned. As noted in the press release, Sarepta has also requested a priority review from the FDA, which could shorten the decision-making process down to just six months.

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However, with shares of Sarepta doubling over the course of five-plus weeks since it made the game-changing announcement that the FDA would allow it to file for an NDA vis--vis a rolling submission, today's reaction could easily signify a "sell the news" type event.

Also adding pressure to Sarepta is the second press release that the company had made an agreement with Midcap Financial to secure $40 million in debt financing. This debt matures in four years and bears a pretty high annual interest rate of 7.75%. Sarepta notes that it's already drawn down $20 million against its new term loan.

Money is needed to make the cogs turn for clinical-stage biopharmaceutical stocks without any revenue stream, but going into debt as opposed to raising capital via a share offering brings an entirely new set of risks to the table for investors -- especially if eteplirsen isn't approved by the FDA. Clearly this is worrying existing shareholders.

Source: Sarepta Therapeutics.

Now what: Sarepta stock could very well be the poster child for overreactions and emotional trading (hint: that's not a compliment). It's not uncommon for investors to overshoot when there's either good or bad news in the biotech sector, but it happens to a magnified degree with Sarepta. In other words, today's NDA filing and debt announcement probably isn't as "awful" as the 10% tumble would make it appear. Then again, a 100% increase in a little over five weeks on a simple thumbs-up from the FDA to file for an NDA may have been a bit excessive, too.

Personally, I view the sidelines as the place to be in the meantime. In my opinion, Sarepta has far too much riding on the approval of eteplirsen for investors to be caught on the wrong side of the fence if the FDA returns with a complete response letter. The bread and butter of Sarepta's drug development platform is built around exon-skipping, so any negative commentary from the FDA could throw serious doubt at Sarepta's remaining pre-clinical and discovery exon-skipping compounds.

By sticking to the sidelines you'll likely miss an initial pop if eteplirsen is approved, but you'll still be able to take advantage of its seven additional exon-skipping drugs in development that can cumulatively treat around a third of the DMD market. You'll also be able to take advantage of possible deals Sarepta may strike for licensing, and, of course, sales of the drug. If eteplirsen doesn't hit pay dirt, then Sarepta's stock could have a long way to fall.

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Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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