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Two Biotech Movers with Upside Potential

Thursday - 4/11/2013, 4:11pm  ET

On Tuesday we saw several big moves in the biotechnology space, but two companies in particular are no strangers to big moves. In this piece I am looking at those two stocks to determine their outlook.

Sarepta Therapeutics

The clinical stage biotechnology company Sarepta Therapeutics continued its march higher with gains of 11% on Tuesday. These gains followed study results from GlaxoSmithKline’s drug drisapersen for the treatment of Duchenne Muscular Dystrophy (DMD). Most analysts predict that if successful the drug has sales potential between $600 million and $1 billion. Currently, Glaxo has more than $40 billion in annual revenue, meaning that this one drug is not as meaningful to the stock, but is a good indication of innovation and a new line of promising technologies.

The results of the study of Glaxo's drug further validate the mechanism of action for Sarepta Therapeutics’ Phase 2 drug, eteplirsen, a drug that will be highly watched over the next few weeks. The reason it validates Sarepta's drug eteplirsen is because both it and drisapersen are intended to skip exon 51 of the dystrophin gene, hence restoring the gene’s ability to code for a functional form of critical muscle fiber

Sarepta Therapeutics will soon meet with the FDA to discuss its Phase 2 study for its DMD drug eteplirsen. The company and investors are seeking an accelerated approval based on very strong Phase 2 results, and also based on there being no other approved treatment. The results from GlaxoSmithKline could give the company a better shot with the FDA, and if not, it provides more assurance to investors of the drug’s upside.

First, I urge you to read my analysis on Sarepta Therapeutics by clicking here. Sarepta is a stock I own and was also my selection last month as the “Value of the Month.” However, I would wait until after the FDA meeting to buy the stock, if you don’t already own it. There is a 50/50 chance of an accelerated approval; if it's not approved the stock will lose 20%-25% of its value, though if approval is granted the company will gain 15%-20%.

As I explained in my previous article, Sarepta is a company with a great technology, and eteplirsen is an orphan drug. Therefore, Sarepta is going to command the same 8-15 times sales seen in other orphan companies. As a result, with $700 million peak sales potential, a $7 billion market capitalization in five years is not impossible, and if you have a long-term time horizon then you should buy the stock. My point is that you won’t miss out on the upside if you wait, but by waiting you will have a better understanding of the drug’s future and the time it will take for Sarepta to produce sales.

Repros Therapeutics

Since March 27, shares of Repros Therapeutics have rallied more than 80%. These large gains have come following a large drug study where its product Androxal met its main goal. As a result, Androxal is poised to enter a fairly large market with peak sales potential of $300 million. This insinuates further upside for Repros, a company trading with a market cap of just $300 million.

In an article last week I explained a good way to play the developments from Repros, and then showed a trend where every big biotech jump since Sarepta has produced further long-term gains. Repros has rallied in the last two days, and my belief is that with news of a successful study, the stock will appreciate to a level at which future sales are baked into its valuation.

The only problem with Repros is that unlike Sarepta there are several questions surrounding management. Earlier this year the stock saw massive losses following an issue with its study, and there are many who are anticipating some sort of push to raise capital. However, the trial from Repros was positive, and at $300 million I believe the upside is far greater than the downside.

Conclusion

A biotechnology stock can change directions abruptly, and can be forever changed with the announcement of just one trial. Both Repros and Sarepta have seen incredible periods due to data and yet still have upside in their shares. To conclude I will say that you should watch both companies, be prepared for volatility, and perhaps be ready to jump in and capitalize on value when it presents itself. 

This article was originally published as Two Biotech Movers with Upside Potentialon Fool.com

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