Phase III Trial And Payer Risks Will Shape Dravet Treatment Prospects

Catalysts

About Stoke Therapeutics

Stoke Therapeutics is a biotechnology company focused on RNA-based medicines, including zorevunersen for Dravet syndrome.

What are the underlying business or industry changes driving this perspective?

• Although 4-year open label extension data for zorevunersen suggest durable seizure reduction and improvements in cognition and behavior, future revenue will still rely on confirming these effects in the EMPEROR Phase III trial with a mid 2027 readout. Any delay or weaker than expected outcome could push back the timing and shape of potential revenue.
• Although there is growing use of genetic testing and treatment guidelines already encourage a genetic diagnosis in Dravet syndrome, payer criteria such as prior antiseizure medicine use and the need to interpret a broad data package including open label results could slow initial patient access and weigh on near term uptake and earnings.
• Although the company cites an estimated 16,000 Dravet patients in the U.S. and around 6,000 initially addressable patients under 25, converting diagnosed patients on existing antiseizure medicines to a chronic intrathecal therapy may take time and may limit early revenue ramp and operating leverage.
• Although payers have compared zorevunersen to other genetically targeted therapies and indicated they will review total evidence including New England Journal of Medicine data, reimbursement decisions for a high science rare disease drug can still introduce pressure on net pricing and margins.
• Although Stoke reports US$411 million in cash and expects funding through a potential U.S. launch window, continued investment in EMPEROR, open label studies and a commercial build out, even if lean, could keep expenses elevated and delay the path to positive earnings until after the market response to launch is clearer.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Stoke Therapeutics compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Stoke Therapeutics's revenue will decrease by 50.0% annually over the next 3 years.
• The bearish analysts are not forecasting that Stoke Therapeutics will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Stoke Therapeutics's profit margin will increase from -3.7% to the average US Biotechs industry of 19.2% in 3 years.
• If Stoke Therapeutics's profit margin were to converge on the industry average, you could expect earnings to reach $4.4 million (and earnings per share of $0.06) by about May 2029, up from -$6.9 million today.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 702.9x on those 2029 earnings, up from -296.6x today. This future PE is greater than the current PE for the US Biotechs industry at 17.7x.
• The bearish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.12%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• If the EMPEROR Phase III trial or the rolling NDA process in 2027 faces clinical, regulatory or operational setbacks, investor expectations around the timing and likelihood of zorevunersen approval could reset, which would affect expected revenue and future earnings.
• If long term seizure and cognitive benefits seen in the Phase I/II and OLE data are not reflected to the same extent in the controlled Phase III setting or in the eventual FDA label, the perceived value of zorevunersen as a disease modifying treatment could be lower than current sentiment suggests, which would affect potential pricing power and net margins.
• If payers treat zorevunersen more like existing antiseizure medicines rather than other genetically targeted therapies when making reimbursement decisions, the company could face tighter coverage criteria, higher discounting and slower initial uptake, which would affect net pricing, revenue and operating margins.
• If growing awareness of Dravet syndrome, broader genetic testing and concentrated specialist care lead to faster than expected identification and treatment of the estimated 6,000 addressable U.S. patients under 25, actual adoption could outpace cautious expectations, which would affect revenue and earnings relative to a flat share price view.
• If the company continues to attract long term fundamental investors and maintains a cash balance around US$400m while building out a relatively lean commercial infrastructure, the market could reassess execution risk and assign a higher valuation multiple, which would affect the relationship between earnings expectations and the share price.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Stoke Therapeutics is $35.0, which represents up to two standard deviations below the consensus price target of $45.1. This valuation is based on what can be assumed as the expectations of Stoke Therapeutics's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $60.0, and the most bearish reporting a price target of just $35.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $23.1 million, earnings will come to $4.4 million, and it would be trading on a PE ratio of 702.9x, assuming you use a discount rate of 7.1%.
• Given the current share price of $32.79, the analyst price target of $35.0 is 6.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.