Last week’s accelerated approval of Sarepta’s drug, Exondys 51™ (eteplirsen), for the treatment of a subset of Duchenne Muscular Dystrophy (“DMD”) patients, was an example of the amazing promise, and associated volatility within the biotech industry. We, at Locust Walk, are very happy for the Sarepta team and offer them a well-deserved congratulations on getting this important drug approved. Exondys offers a new and promising therapeutic option for patients.
And yet, for those who followed the story closely, their success was not easily achieved. While much has been written about the history of Sarepta’s regulatory “roller-coaster”, what I’d like to highlight are the dramatic swings its share price experienced along the way — both ups and downs. In fact, as shown in the chart below, in the past four years, the company had over ten one-day swings of > 25% in share price change, with many of those being directly as a result of clinical data or FDA activities.
While, many are accustomed to the volatility and risk profile of biotech companies, the stock market reaction to Sarepta, and its corresponding beta-value of 1.71, is an extreme example of the swings that development-stage companies often face. That being said, in the past year alone, there have been numerous examples of dramatic one-day swings in biotech stock prices as a result of clinical results or FDA interactions. In fact, as shown below, five such companies have had one-day stock increases of over 60% in the past year based on positive news.
Yet, while those jumps are exciting for the employees and shareholders of those companies fortunate enough to enjoy good news, unfortunately, in biotech there are far more companies that suffer from tremendous clinical disappointments, and the corresponding single-day stock dips. In fact, the announcement of disappointing clinical data has led to two times as many companies in the past year experiencing single day dips > 25% as shown in the table below:
Implications
While companies are not made or destroyed by significant one-day fluctuations in stock price, the dramatic swings are a reality of the industry and risk profile of drug development. At Locust Walk, we work with many clients who ask themselves the strategic question, “how can we mitigate binary risk?”
There are often two strategies that companies can pursue — out-licensing and / or in-licensing. By out-licensing and giving up rights to a product, companies can attract non-dilutive capital, share risk and gain capabilities (commercial, development, manufacturing, geographic, etc.) that can help to mitigate downside risk and enhance upside potential. This strategy is often pursued by smaller companies with limited financial resources and functional or geographic capabilities.
For companies who have more resources, the strategy of in-licensing or acquiring new products is a way to diversify portfolios and accelerate the path to critical value creation. As there will still be risk in any one deal, development program or commercial product, the more a company can diversify this risk and leverage its capabilities and expertise across multiple programs, the less it will be exposed to dramatic swings based on single day good or bad news. Furthermore, by doing the right deals at the right terms, companies can create great drugs and news flow that will provide dramatic benefits to patients, shareholders and employees.
If you are contemplating a sell-side or buy-side process as part of a strategic initiative to create value and diversify risk and would like to discuss the important role a transaction advisor can play in executing that strategy, please reach out to me at josh@locustwalk.com.
Written by Josh Hamermesh