) -- A little-known factoid about

Sarepta Therapeutics

(SRPT) - Get Sarepta Therapeutics, Inc. Report

that bothers me a bit: Sarepta, born AVI BioPharma, was incorporated in July 1980, making it one of the world's oldest biotechnology companies.

That's a long time to be in business without ever developing a successful drug. But now, three decades and $320 million later, my colleague Adam Feuerstein thinks

Sarepta may have finally hit the biotech jackpot

. I agree with him that the company's lead drug, eteplirsen (formerly AVI-4658), shows promise as a treatment for Duchenne muscular dystrophy (DMD) -- a progressive disease that leaves patients wheelchair bound by their teens and dead shortly thereafter. Feuerstein, however, omitted some important risks to the Sarepta-eteplirsen story that deserve to be highlighted.

Sarepta's eteplirsen induces the body to "skip" a section of the exon (a sequence of nucleic acids) that codes for dystrophin, a protein critical to muscle repair that is dysfunctional in patients with DMD. Think of a row of puzzle pieces with one missing. Eteplirsen facilitates creation of a semi-functional protein by hiding a mismatched puzzle piece (exon 51), which in turn enables matching puzzle pieces (sections of protein) on either side of the mutation to connect.

Last month, Sarepta reported seemingly astonishing results from a tiny Phase IIb study of eteplirsen in DMD. After 36 weeks, four eteplirsen recipients walked 69.4 meters further in six minutes than four patients treated with 24 weeks of placebo and 12 weeks of drug. These results reached statistical significance despite the small number of patients enrolled. Importantly, the six-minute walk test (6MWT) results for all patients showed worsening, but the eteplirsen group did so more slowly.

If these data hold at 48 weeks and patient dystrophin levels correlate with clinical response, Sarepta will have meaningfully de-risked the program and the stock could easily double from current levels. The company will present the 48-week data in mid-October at the World Muscle Society conference. Assuming positive results, Sarepta would likely start a pivotal trial by year-end. At the same time, Sarepta may seek early, accelerated approval of eteplirsen based on the tiny phase IIb study.

Eteplirsen seems extremely intriguing but I'm a skeptic. Before investors' eyes register those cartoon-like dollar signs, let's review five potentially underappreciated risks to the Sarepta story.

1. Several initially promising DMD treatments have stumbled.

In 2008, Wyeth -- now


(PFE) - Get Pfizer Inc. Report

-- halted development of stamulumab (MYO-029), a monoclonal antibody intended to boost muscle strength by blocking an inhibitory protein called myostatin, due to lack of efficacy. Last year, Genzyme (now part of


(SNY) - Get Sanofi Sponsored ADR Report

) abandoned partner

PTC Therapeutics

after a Phase IIb trial failed to show a meaningful 6MWT benefit for ataluren, a compound intended to make the body ignore so-called "nonsense" mutations like the one that causes DMD. PTC is still developing ataluren, but the prospects appear dim. Although these aren't eteplirsen-specific red flags, it seems prudent to note the tombstones if we hope to successfully navigate the DMD graveyard.

2. Competitors are at least a year ahead.

Early last year,


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initiated a 180-patient, randomized Phase III trial of GSK-2402968 in DMD. The drug, formerly known as PRO-051 and licensed from privately held


, also induces exon 51 skipping and has promising early data. In a small Phase I/II study published in the April 2011

New England Journal of Medicine

, GSK-2402968 recipients demonstrated a 35.2-meter absolute improvement in 6MWT from baseline, on average, after 12 weeks. Although this compares well with historical data, the study didn't include a control arm and the authors caution that: "No increase in specific muscle force was noted." To me, that means these results should be viewed with skeptically furrowed brows.

Notably, the FDA required Glaxo to conduct a one-year, placebo-controlled Phase III trial of GSK-2402968 in DMD, which strongly suggests Sarepta has little chance of receiving accelerated approval based on the Phase IIb data. At the very least, the fact that Glaxo successfully enrolled the study proves that complaints about the ethics of a lengthy placebo-controlled trial are completely unfounded.

3. Sarepta's placebo group results may be anomalous.

The company's Phase IIb study included 24 weeks of blinded treatment, during which patients were randomized to either drug or placebo. At 24 weeks, patients in the high dose eteplirsen group showed a 28-meter 6MWT difference versus placebo. Investigators unblinded the study at that point and allowed placebo patients to receive drug. After another 12 weeks, those patients that had initially received eteplirsen vastly outperformed those in the placebo-delayed treatment arm, due largely to rapidly declining 6MWT results in the latter group.

I worry that the absolute 78-meter decline in 6MWT for the placebo group at 36 weeks seems unusually rapid. A 2010 study published in

Muscle and Nerve

suggests somewhat slower progression -- less than 60 meters of decline -- at 52 weeks. Although this difference could be due to normal disease variability or patient differences, the late acceleration of progression in the placebo group is a red flag.

Feuerstein, in his

last column on Sarepta

, wants, justifiably, to see a correlation between 48-week dystrophin levels and clinical outcomes. I do too. Those data could eliminate my concern about this issue.

4. Sarepta's patent situation seems shaky.

Prosensa has rights to patents, both in the U.S. and Europe, which appear to cover Sarepta's eteplirsen. In fact, Sarepta tried and failed to overturn Prosensa's European patent related to treatment of DMD through skipping of dystrophin exons 51 and 46. That's a concern. Although a weak patent estate won't impact Sarepta's data, it might temper eteplirsen's commercial potential.

5. Corporate red flags are a concern.

I'm not crazy about Sarepta's recent name change and one-for-six reverse stock split, but those are forgivable offenses given potentially groundbreaking data. I'm far less sanguine about the June 2012 resignation of Chief Scientific Officer Dr. Peter Linsley. Although Dr. Linsley informed the company of his intent in mid-April, this should be considered a concern for two reasons. First, high-ranking executives rarely resign without any apparent reason on the cusp of positive data. Second, Sarepta never issued a press release about the change, instead choosing to disclose the information in an SEC Form 8-K. Although management briefly mentioned the change on the company's Q1 2012 call, investors seem to have missed it.

I'm not ready to declare eteplirsen a breakthrough, but it definitely appears promising. Given Sarepta's $230 million market capitalization and the obvious unmet medical need in DMD, I think the stock is a reasonable long position for biotech investors with a healthy appetite for risk. Nonetheless, I would keep the position on the smaller side since the roads of biotech can be unexpectedly bumpy.

Caveat emptor.

Disclosure: Sadeghi has no positions in any of the stocks mentioned in this article.

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Nathan Sadeghi-Nejad has 15 years experience as a professional health-care investor, most recently as a sector head for Highside Capital. He has worked on the sell side (with independent research boutiques Sturza's Medical Research and Avalon Research) and the buyside (at Kilkenny Capital prior to Highside). Sadeghi-Nejad is a graduate of Columbia University and lives in New York. You can follow him on Twitter @natesadeghi.