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Prosensa’s Failure Will Not Justify Buying Sarepta

Recently, shares of Prosensa (NASDAQ: RNA) dropped 70% after announcing the negative outcome from its phase III study of an experimental drug, Drisapersen. Meanwhile Sarepta Therapeutics (NASDAQ: SRPT) has seen a significant increase in their market capitalization.

Prosensa’s primary focus has been developing therapeutics that treat rare neuromuscular and neurodegenerative disorders. Currently, its product portfolio consists of six potential compounds which may lead to finding treatment for Duchenne Muscular Dystrophy or DMD. Sarepta has a similar product in pipeline.

Boom and Bust
A late stage biotech, Prosensa already licensed its products to world renowned pharmaceutical company GlaxoSmithKline (NYSE: GSK) back in 2009. As a result market was overtly confident regarding its IPO and Prosensa’s stock price climbed to highest $33.28 from its $13 per share public offering. However, following the release of disappointing clinical study ( DMD114044 ) results for its drug Drisapersen last month, shares have dropped significantly.

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Comparing the price of Prosensa to its competing company, Sarepta Therapeutics, we find that there seems to be a strong negative correlation between the failure of Prosensa to rise in Sarepta’s stock price. However, investors must take note that Sarepta is a much larger company with 1.45 billion market capitalization and a diverse product portfolio. On the other hand Prosensa only has a 256.34 million market capitalization and their product portfolio is concentrated in a single niche rare disease.

Negative Results
Prosensa’s double-blind placebo-controlled study was conducted on a total of 186 young males. 125 boys took 6mg/kg/week dose of Drisapersen and the remaining 61 boys were given placebo over a 48 week period. After the study period all 186 boys were asked to participate in a standard 6-minute walking distance test. The expected outcome was that 125 DMD patients who took Drisapersen will show momentous improvements compared to the 61 DMD patients who took placebo. The result was very disappointing as there were no ‘statistically significant difference” between the two groups.

A Failed Study But Not A Failed Company
Capex - Cash
The chart above represents a comparison between total current cash and other liquid equivalents of Prosensa to its negative cash flow (cash from operations – capex). Since the end of Q1’13, its capex remained the same but operating cash flow significantly dropped compared to its cash reserve, which seems to be declining at a slower rate.  We don’t have the latest financial report on our hand for Q3’13. However, last quarter’s current liquidity levels demonstrated that as company, Prosensa should have enough current liquidity to pursue their R&D efforts regardless of the negative result of phase III. If investors are currently pricing the company after writing off the cost of phase III study for Drisapersen, even then the 70% decline in its stock price is not justified. Not to mention, Prosensa has another five compounds under development other than Drisapersen to be used for potential treatment of DMD.

Meanwhile, the management of Prosensa is trying to stay positive about the long-term prospects. CEO Hans Schikan mentioned to the press that they are disappointed in the phase III result of Drisapersen but they are committed to the overall program. GlaxoSmithKline owns the exclusive distributing license of Drisapersen and their head of rare diseases research & development, Carlo Russo, said that further analysis of the study result will help them to take the next steps for improving Drisapersen. He also hoped that progress will be made to help boys with DMD in the end.

Competitors Might Find Similar Results
The competition in finding treatment for rare diseases is based on the theory of first mover’s advantage. Till now, Prosensa was ahead of the game and as a result they got companies like Glaxo to distribute their product even before FDA approval. On September 20, market was expecting that Prosensa’s failure will create opportunities for its competitors in this niche genetic disorder.

Sarepta Therapeutics has a drug under development called Eteplirsen which is also using exon-skipping conceptualization to treat DMD, similar to Drisapersen. As a result, its stock price climbed up more than 25% from $37.37 and reached the high of $47.88 on October 2 since Prosensa released its findings regarding phase III study.

RnD Compare
Comparing R&D budget of these two companies truly reveals the difference between an Apple and perhaps a basket of Oranges. As Sarepta is also using exon-skipping approach to treat DMD, it may end-up getting similar results. It will not be a wise idea to jump the gun and buy Sarepta just because its competitors failed.

Regardless which company ends up winning the race to find a solution for DMD, the ultimate winners will be the boys who are suffering from this terrible disease that deprived them from mobility and an opportunity to live a healthy life. To repeat Carlo Russo, we hope that this free market competition between these two rivals will eventually lead to the development of a safe and effective drug.

Meanwhile from an investor’s point of view, failure of Prosensa’s phase III study actually questioned the validity of the entire exon-skipping approach to treat DMD.