Is This Stock a Buy After Soaring by 20% in 1 Day?

Key Points

• Sarepta Therapeutics' most crucial product is turning out to have severe safety issues.

• The company's efforts to improve its situation were well received, but this victory didn't last long.

• The biotech now faces additional safety concerns and heightened scrutiny from regulators and analysts.

• 10 stocks we like better than Sarepta Therapeutics ›

It's been a rough year for Sarepta Therapeutics (NASDAQ: SRPT), a small-cap biotech that develops medicines for rare diseases. The company's shares are down by 88% year to date due to safety issues with its most important commercial product, Elevidys (more on that later).

However, Sarepta's shares recently soared by about 20% in one day after the company announced a strategic plan, which Wall Street hoped would allow it to move past its issues. Let's see whether these developments make the stock a buy.

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Sarepta makes a move

Sarepta Therapeutics' Elevidys is a gene therapy for Duchenne muscular dystrophy (DMD), a rare genetic disease characterized by progressive muscle wasting. Unlike the biotech's other approved treatments, Elevidys targets the underlying causes of DMD, making it Sarepta's most important approved therapy and its most significant growth driver of late. However, the company has now reported not one but two patient deaths potentially caused by Elevidys.

Image source: Getty Images.

Both patients died from liver failure. Potential liver toxicity issues with Elevidys had already been observed in clinical trials -- but no one had died from them until this year, to the best of our knowledge. It's no surprise, then, that Sarepta's stock price plummeted.

The company is taking steps to rectify things. On July 16, it made several announcements that led to its stock price soaring.

First, it will be cutting expenses, notably by reducing its workforce by 36%.

Second, it will include a black box warning for acute liver injury and acute liver failure with Elevidys' labeling, after the U.S. Food and Drug Administration (FDA) requested that it do so.

Third, Sarepta's portfolio of DMD medicines, including Elevidys, continues to generate decent sales. The company announced preliminary net product revenue (which does not include royalties) of $513 million for the second quarter, of which $282 million -- more than half -- came from Elevidys.

In Q2 2024, the drugmaker reported total revenue of $362.9 million (including sales of $121.7 million and royalty revenue of $2.4 million from Elevidys), so this would mean year-over-year growth of at least 41.4% -- which is strong. All of that was music to Wall Street's ears.

Short-lived gains

But the story quickly took another turn. Sarepta Therapeutics' shares jumped on positive news on Thursday, July 17. They moved in the opposite direction the very next day, erasing all the gains from the previous trading session.

It was revealed that another patient had died after receiving one of the biotech's gene therapies. This time it was an investigational medicine called SRP-9004, which targets limb-girdle muscular dystrophy (LGMD), another rare muscle disease. The patient was enrolled in one of the biotech's clinical trials. Sarepta did not report this death -- which happened last month -- directly to investors; it first shared it with a biotech-focused research company called BioCentury.

There are at least two key points to note here. First, the revelation that another one of Sarepta Therapeutics' medicines could be causing liver toxicity issues is terrible news for the company. If this were just a problem with Elevidys, it might have been able to overcome the challenge by developing newer medicines, even as sales of its current most significant growth driver suffered due to lower demand. That plan now seems in doubt.

Second, the fact that management chose not to share this news promptly does nothing to increase investors' confidence in the company.

Not worth the risk

Sarepta has decided to deprioritize the development of SRP-9004, but that hardly fixes the problem. The company's gene therapies are now associated with severe liver issues. This would be likely to affect prescription trends among doctors, and patient demand for its products, for the foreseeable future. At least, it would if it weren't for another development: After initially resisting the FDA's request to stop Elevidys shipments in the U.S., Sarepta Therapeutics has decided to comply. So, for now, physicians and patients in the U.S. hardly even have a choice.

The FDA has also placed clinical holds on some of the company's ongoing trials for gene therapies targeting LGMD. At this point, there is hardly a single good reason to invest in Sarepta Therapeutics. Sure, if it resolves all its issues, the stock could soar.

But if it encounters more clinical or regulatory setbacks, Sarepta Therapeutics could find its shares practically worthless in the not-so-distant future. Investors should steer clear of the company; there are far more attractive biotech stocks to consider.

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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.