Anatomy of a biotech debacle: Dark clouds grow over Sarepta

The post-mortem on the Sarepta ($SRPT) debacle yesterday raises some thorny issues for the biotech company.

Shares for the company plunged 64% by the end of the day Tuesday, wiping out hundreds of millions of dollars of market valuation in a brutal reaction to the company's admission that the FDA had closed the door to an early approval of eteplirsen, its promising mid-stage therapy for Duchenne muscular dystrophy. And while analysts speculated about the ugly realities involved in a lengthy late-stage effort needed to persuade now-skeptical regulators, some early signs quickly emerged indicating that the company could soon find itself fighting against a hungry group of angry litigators.

Adam Feuerstein at TheStreet, an early and vocal believer in an accelerated approval, took the lead in reviewing the new worst-case scenario for Sarepta, while offering a mea culpa to investors who helped bid up the stock to stratospheric levels.

TheStreet reprinted an email from an unnamed fund manager, and Sarepta bear, explaining why the market reaction was so catastrophic. The FDA--which Sarepta execs say was spooked by the failure of a similar drug at GlaxoSmithKline ($GSK)--didn't just close the door to an accelerated approval; the agency also raised big questions about its use of a dystrophin biomarker. Designing a Phase III study that can win over regulators now may also require a much larger study with more patients than initially expected, running longer than anticipated. And just getting an agreement on the design may well require months of negotiations.

The Sarepta short also raises another concern with Feuerstein's source: "It makes you wonder whether the FDA really changed their minds lately or if Sarepta misrepresented (through wishful thinking or worse) what the FDA had been telling them all along."

Every time a stock crashes like this on an unexpected turn of the regulatory cards, lawyers are quick to pounce. And before the dust had settled on the share price collapse, at least one law firm was circling Sarepta in search of some evidence of SEC violations. Given the track record on these kinds of legal probes, more attorneys are likely to follow the same path. 

For the record, Feuerstein says he made the wrong call on Sarepta. But when the facts change, as happens in this business, you won't find him mounting a defiant defense of a lost cause.

- here's the report from TheStreet
- and the press release from Bronstein, Gewirtz & Grossman on its investigation