Sarepta Therapeutics: From Exon-Skipping to Gene Therapy $srpt
Business model shifts, incentives to innovate, and a flywheel for rare diseases
Reading about gene therapies and the diseases they treat leads to two things: the first is a sense of awe at what modern medicine both can achieve and is trying to achieve; the second is a desire to read up on theodicies. The second reaction is especially the case when one reads about Duchenne muscular dystrophy, or DMD. Those affected by the disease have a mutation in the dystrophin gene that renders the body unable to produce the corresponding protein. Patients first exhibit symptoms at a young age, are typically wheelchair bound by age 12, and live until their early 30s. There is not yet a cure, although there are many companies working on treatments.
Sarepta Therapeutics is one of these companies, and its first three commercialized DMD treatments leverage exon skipping (considered an RNA targeted therapeutic) rather than gene therapy. Exon skipping is relatively straightforward, at least conceptually. DMD is caused by a mutation in one of the seventy-nine exons that comprise the dystrophin gene.1 In the case of Duchenne, this exon mutation prevents any dystrophin protein from being produced. As the name suggests, exon skipping skips over this mutated exon during pre-mRNA splicing, enabling the production of a functional, albeit shortened, dystrophin protein.2 Sarepta has three different exon skipping treatments that differ by the exon that’s skipped: EXONDYS 51 skips exon 51, VYONDYS 53 skips exon 53, and AMONDYS 45 skips exon 45.
Exon skipping has a few downsides, the most notable of which is that the treatment isn’t suitable for patients with a dystrophin gene mutation that doesn’t involve exon 45, 51, or 53. Unfortunately this segment of the patient population is significant, with 71% of those with DMD have a mutation that current exon skipping therapeutics aren’t suitable for. The second, and lesser, downside is that exon-skipping treatments are administered weekly.
Consequently, Sarepta has also focused its efforts on developing a gene therapy, ELEVIDYS, that can treat a much larger percentage of the patient population. Taking a gene therapy approach to DMD presents a bit of a challenge given the size of the dystrophin gene, which as far as we know is the largest in the human body. As one would expect, Sarepta used an AAV vector as the delivery mechanism; AAV vectors are favored in gene therapy because they typically don’t cause a massive immune response, but are limited by the size of the gene they can carry.3 The workaround is to use a truncated version of the coding portion of the dystrophin gene, but that comes with the downside of the treatment not being curative. Given the limited nature of existing DMD treatments, this is a trade-off worth making. ELEVIDYS comes with the added benefit of being a one-time treatment, rather than one that requires repeated dosing.
Sarepta received initial FDA approval for ELEVIDYS in June 2023, but only for those between the ages of 4 and 5. Importantly for everyone involved, this FDA approval was expanded this past June for ambulatory and non-ambulatory individuals aged 4 and above, or 80% of patients with DMD in the US. The approval wasn’t without controversy; the primary endpoint measured in the clinical trial was a statistically significant change in the NSAA (North Star Ambulatory Assessment), which is used to measure the motor abilities of those with DMD. Trial participants who received ELEVIDYS did not perform significantly better on the NSAA than those with the placebo, but they did perform meaningfully better on two secondary endpoints: time to rise from the floor and the four-stair climb. Dr. Peter Marks, Director of the Center for Biologics Evaluation and Research at the FDA, had this to say on his approval decision:
“Overall, the demonstrated benefits of ELEVIDYS in the treatment of ambulatory individuals, and the expected benefits of ELEVIDYS in non-ambulatory individuals, with DMD over 4 years of age who are eligible to receive this therapy in improving key functional endpoints such as the ability to stand, walk, or climb stairs, outweigh the risks. The benefit to risk considerations are favorable taking into account the existing uncertainties, such as the ultimate duration of response. Although it might be argued that other gene therapy products in development may prove superior to ELEVIDYS in future clinical trials, these products have yet to receive regulatory approval. During this time, the availability of this gene therapy option may help slow or prevent irreversible decline that might otherwise occur in both ambulatory and non-ambulatory individuals, particularly since the latter have few or no alternative treatments available to address their imminent further decline in function over time.”4
The key takeaway here is that while Sarepta’s gene therapy treatment is a step forward for patients, it remains very far from a cure. This makes it difficult to model the success of the business over time. In the shorter-term things look very good, because there simply isn’t much in the form of competition. Many of the competitors listed in Sarepta’s annual report are focused on exon skipping, which, as said above, is fundamentally limited in its ability to address the patient population. Vertex and CRISPR Therapeutics are exploring Crispr/Cas9 approaches to treat DMD, but neither company has anything in clinical trials yet. Pfizer nixed its DMD gene therapy candidate earlier this year after disappointing phase 3 results; Solid Biosciences and Regenxbio both have gene therapy candidates in phase I/II trials, but even if all goes well neither is expected to submit a BLA filing before 2026. While the next few years look promising for Sarepta, ELEVIDYS’ limited efficacy leaves the company very exposed should a competitor develop a superior treatment.
ELEVIDYS additionally represents a business model shift for the company from primarily recurring revenue to primarily one-time. The therapy ranks among the most expensive treatments in the US, coming in at 3.2mm per patient. That’s a staggering amount of money, but exon-skipping treatments aren’t cheap either.5 As mentioned, patients receive exon-skipping treatments weekly, and at a cost of 750k-1.5mm per annum. Beyond a few years, ELEVIDYS is the more cost-effective option. I think this business model shift ends up being quite a positive thing for those with rare diseases. The move from recurring to larger one-time revenue means Sarepta is heavily incentivized to continue innovating and has a large amount of cash to do so! That doesn’t mean Sarepta should become a pure gene therapy company. Recurring treatments can just be the right option for treating disease, and it’s unlikely to be a good thing for innovation if Sarepta goes out of business after pivoting entirely to a one-time treatment that a competitor then develops a clearly superior version of. Management is taking a prudent approach here: they don’t expect the exon-skipping treatments to be cannibalized by ELEVIDYS until 2026, and recently announced a collaboration agreement with Arrowhead Pharmaceuticals. Arrowhead develops rare disease treatments that leverage siRNA technology, and so require recurring administration to be effective. This balance of RNA therapeutics with curative gene therapies enables Sarepta to have a reliable stream of income while forcing the company to continue to innovate.
Management has also taken a prudent approach to its gene therapy pipeline, which is currently focused on LGMD, a collection of muscular dystrophy diseases that vary in severity. SRP-9003, currently in phase 3 trials, is a therapy designed to treat LGMD2E, a severe form of muscular dystrophy that affects a far smaller portion of the population than DMD. Importantly, SRP-9003 uses the same delivery vector as ELEVIDYS, which meaningfully derisks the treatment. This is an effective playbook for companies to tackle rare diseases:
1. Start with a gene therapy treatment tacking a disease with a relatively high prevalence rate.
2. Use the vector from that therapy to target diseases that affect the same type of cells, but with lower prevalence rates.
3. Repeat.
When one takes a cursory look at Sarepta’s valuation the natural response would be to conclude it’s extremely expensive, at 76x FY24 estimated earnings. What that misses, however, is what’s expected to be a massive revenue ramp in 2025. ELEVIDYS revenue came in at 181mm last quarter, an increase of 49% QoQ. That revenue figure is expected to double this quarter, and management expects 2025 revenue to come in at between 2.9B – 3.1B, two thirds of which will be ELEVIDYS. Consensus estimates have earnings of $10.99 a share next year, which would mean the stock trades at ~10.7x 2025 earnings. Furthermore, management doesn’t expect peak year ELEVIDYS sales to materialize until later this decade, suggesting further top and bottom-line growth beyond 2025.6 The current valuation makes a lot more sense in light of the sharp expected increase over the next few years.
What gives me pause is how confident one can be in picture of the business beyond 2025. As said above, the FDA’s approval of ELEVIDYS wasn’t without controversy, and the treatment’s sadly far from a cure. This creates plenty of room for Solid or Regenxbio to take share should their treatments prove more effective. It’s difficult to calculate terminal value for a business when revenue for its main product could drop substantially almost overnight! The other risk to the stock (beyond side-effects and reimbursement dynamics), is that investors lose confident in management. The company’s CEO, Douglas Ingram, has expressed an extremely high level of certainty in 2025 revenue estimates.7 That level of confidence means he’ll lose a lot of investor trust if 2025 guidance turns out to be too high.
Disclaimer: The information in this post is not intended to be and does not constitute investment or financial advice. You should not make any decision based on the information presented without conducting independent due diligence
Exons refer to the portions of DNA that actually code for a protein.
When DNA is first transcribed into RNA, both the coding and non-coding portions of DNA are transcribed into pre-mRNA. During splicing, the non-coding portions of pre-mRNA are removed as that pre-mRNA is processed into mRNA. Exon skipping tells the body’s cellular machinery to treat the mutated exon as though it is non-coding DNA, and so it’s not included in the mRNA product.
For those interested in learning more about delivery vectors, you can read my note on Dyno Therapeutics here.
It should also be noted that, thus far, Sarepta hasn’t run into trouble with insurance companies refusing to cover treatment.
“We currently anticipate that our 2025 net product revenue across our 4 approved therapies will come in between $2.9 billion and $3.1 billion, and that is still years away from peak year sales. Indeed, we will be treating the prevalent population over the course of this entire decade before moving to the incident population in 2030 to 2031.” - Q2 2024 Earnings Call Transcript
Sarepta’s CEO on 2025 guidance: “We felt a pretty significant amount of confidence to provide people with this overall shape of the launch and discuss 2025, which for us is a bit unusual. We wouldn't provide this kind of level of information….other than we wanted to really map out what we're seeing right now and feel like we're being transparent with folks. So we feel very good about this launch right now.”