Investors Excited About Sarepta Earnings Report
Shares of Sarepta Therapeutics Inc (NASDAQ: SRPT) are on fire ever since earnings came out on Wednesday, July 19. Investors are clearly excited about the company’s potential. They even celebrated by sending Sarepta stock price up more than 20%.
“What’s got them so excited?” you ask.
Simple. Analysts expected $22.5 million in second-quarter revenue; Sarepta delivered $35.0 million.
You can thank the stellar performance to the company’s focus on treating Duchenne muscular dystrophy, or DMD, as it’s commonly known. It paid off enormously well.
The medication, which costs $300,000 per year (don’t worry, most of that is charged to health insurance companies), has become a standout drug for Sarepta. Analysts now believe it is poised to become a “powerhouse” in this field.
Its main drug, “Exondys 51,” is quickly taking over the American market and could soon dominate Europe as well. Such is the life of biotech stocks. They spend years on R&D…burning cash…then suddenly, a breakthrough. In the blink of an eye, these stocks go from rags to riches.
To put that in perspective, consider that Sarepta made nearly as much money in three months as it did in the six years previous. One quarter versus six years. This quarter, it made $35.0 million in revenues—between 2011 and 2017, it made $36.0 million.
That extraordinary leap is what makes biotech stocks so interesting. Nobody knows for sure whether a drug will receive approval from the Federal Drug Administration (FDA). But that regulatory approval is key to success.
The result is that biotech stocks can make fortunes overnight. We believe this bullish move in SRPT stock is likely to sustain through the coming quarters, barring an act of God, of course.
How Much Potential Is There for Sarepta Stock Price?
We are not alone in noticing that biotech stocks follow a hockey-stick growth model. Lots of investors have made the same observation, which is why the market is more patient with biotech stocks than with other industries.
For example, it’s easy to find unprofitable-yet-beloved tech companies, but try finding one without revenues. It’s much harder. Only biotech stocks get that leniency, because the nature of their business is different.
Chart courtesy of StockCharts.com
Biotech stocks aren’t judged by top-line growth in the same way as other tech companies. Or at least they aren’t judged that way until after they get FDA approval. At that point, the normal rules of investing apply.
But there is a moment between FDA approval and full-on growth that I would call an opportunity. This window is pretty small, though, so investors need to be careful about timing this trade. If you wait too long, the gains will have disappeared.
Because a trend constitutes three or four data points, investors will drip into Sarepta stock over three or four quarterly reports. We just witnessed the first surge. So long as Sarepta continues to exceed its guidance (something that a savvy manager should be able to orchestrate), we should see similar rises after the next two or three earnings reports.
But timing a specific event is difficult. Too difficult. Investors might want to simply dollar-cost average their investment and wait for the resulting tailwind to carry Sarepta stock price higher.
There are other reasons to believe that SRPT stock can surge. For example, the long-standing Sarepta BioMarin dispute is coming to an end, meaning that the company will be free from resource-draining patent fights.
Under its new licensing agreements, the company can really expand internationally, starting with Europe. That in itself is a reason to believe that top-line growth might accelerate (remember that revenue growth is now important).
Sarepta has $301.7 million in cash and $100.0 million in low-cost debt-financing, so there’s no doubt it can handle this expansion. However, I would caution the company about letting its bottom line spiral out of control, because that can be difficult to undo in later years.
That said, things are looking up for SRPT stock. Access to low-cost capital can separate the wheat from the chaff, especially in biotech stocks, and that is one thing the company does not lack.