Turning Neutral: Morgan Stanley Downgrades Sarepta, Loxo Oncology, Global Blood Therapeutics

Multiple small- and mid-cap biotech stocks have benefited from a strong run, prompting Morgan Stanley to downgrade three companies in the group.

The Analyst

Morgan Stanley's Matthew Harrison downgraded the following:

• Sarepta Therapeutics Inc SRPT from Overweight to Sector Weight with a price target lifted from $64 to $87.
• Loxo Oncology Inc LOXO from Overweight to Equal Weight with a price target lifted from $103 to $130.
• Global Blood Therapeutics GBT from Overweight to Equal Weight with no assigned price target.

Sarepta: No Specific Concerns

Sarepta Therapeutics, a medical research and drug development company that focuses mostly on developing therapies for the treatment of Duchenne Muscular dystrophy, could see its stock soar to $247 per share under a bull case scenario, Harrison said. But there is now "less conviction" in this bull outcome compared to other biotechnology stocks, as there is no existing "edge in calling the outcome" of its ongoing trials, the analyst said. 

Sarepta's gene therapy program remains "promising," with no safety issues, so a downgrade of the stock is not based on any specific concern in the program, the analyst said. Investors should be cautious heading into an EU oral hearing for the Exondys 51 therapy in April, which could have a mixed outcome, he said. 

Related Link: Sarepta's Upside Story Is Just Getting Started

Loxo: Full Valuation

Loxo Oncology, which develops medicines for patients with genetically defined cancers, boasts a strong pipeline of products including larotrectinib for the treatment of TRK fusion cancers. Larotrectinib and LOXO-292, an RET fusion targeted therapy, could each see peak revenue north of $1 billion, Harrison said. 

Expectations for the company's therapies are "for the most part" already factored into the stock, which is up around 60 percent from November, the analyst said.

With few near-term catalysts, Loxo investors should expect "things to be relatively quiet," according to Morgan Stanley.

Global Blood: Modest Upside Potential

Global Blood, a clinical-stage biopharmaceutical company that mostly focuses on treatments for undeserved patient communities, was downgraded due to "greater opportunities" elsewhere, Harrison said.

Expectations for positive results in the company's GBT-440 in the first half of 2018 remain unchanged, and this is already reflected in the stock's price, he said. 

Part A of the Phase 3 HOPE study of Voxelotor in sickle disease is expected in the first half of 2018, but Global Blood has not committed to providing any VOC data, and it is unlikely the PRO will be replaced by VOC, the analyst said. Investor expectations are also calling for management to file on Part A, although the company said it will wait for Part B data.

The readout could potentially lead to disappointment, and under a worst-case scenario, a failure of Part A could result in a 90-percent plunge in the stock — although this outcome is "likely off the table," Harrison said. 

Price Action

Shares of Sarepta were trading lower by 1.6 percent Wednesday midday. 

• Shares of Loxo were trading lower by 0.49 percent. 
• Shares of Global Blood were trading lower by 3.2 percent. 

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