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Intercept Pharmaceticals & Chelsea Therapeutics: Which is Best?

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In a five day period, two stocks, Intercept Pharmaceuticals (NASDAQ: ICPT  ) and Chelsea Therapeutics (NASDAQ: CHTP  ) , exploded with gains following drug-related catalysts. And while both companies have appreciated greatly, are either a good buy? Or, are the rallies premature, much like Sarepta Therapeutics (NASDAQ: SRPT  ) in recent memory?

What moved Intercept?
Intercept rallied an unheard of 516% recently in regards to its Phase 2 drug obeticholic acid (OCA). The product was being tested to treat a disease called nonalcoholic steatohepatitis (NASH), and was stopped early after interim data revealed that its primary endpoint had been met .

With OCA showing an unquestioned benefit over placebo, Intercept stands ready to have the first FDA approved drug to treat a disease that effects more than six million people in the U.S. According to Bank of America, OCA could earn peak sales of $4 billion by treating this one disease. Therefore, from a valuation perspective, Intercept is now trading at 1.35 times peak sales, having a market cap of $5.5 billion.

What moved Chelsea?
Chelsea doubled in stock price after the company received an overwhelming vote of confidence (16:1) from an advisory panel for its drug Northera . The drug treats a rare form of blood pressure, but its fate had been one of the hot topics in biotechnology over the last few months.

Back in 2012 the FDA rejected Northera after receiving a positive recommendation from the advisory board. However, with a 16:1 vote in favor of approval, investors have to believe that Chelsea has a good shot at finally earning an approval. If so, Chelsea estimates that peak revenue of Northera could range between $300 and $375 million annually for this single indication . While Northera won't earn blockbuster sales on this FDA approval, Chelsea is not a company priced for billion dollar sales, trading with a market cap of $345 million. Thus, Chelsea trades at about one times peak sales.

Other investment factors

If we are looking at peak sales relative to market capitalization as the only indicator, then clearly Chelsea is presenting more value. Moreover, Chelsea has already received a positive advisory vote and is apparently weeks from an FDA approved product. For Intercept, we assume that it won't have to complete a Phase 3 study, but investors should be cautious --- many made a similar assumption with Sarepta Therapeutics last year.

Sarepta soared from $15 to $40 in a single session in 2012, after a Phase 2 trial showed incredible results in treating a rare degenerative genetic disease. Many thought this Phase 2 study alone would be enough to justify an early FDA approval, but late last year shares fell abruptly after the FDA begged to differ. While Intercept's Phase 2 trial is larger than Sarepta's, the same risk applies.

As noted, Chelsea will make it to market first, most likely, and also has less potential competitors. For Intercept, it could very likely compete with Gilead Sciences and Isis Pharmaceuticals, both of which are developing drugs to treat NASH.

Therefore, it appears as though Chelsea is the clear-cut-winner, but before we celebrate there is one final element to the story, and that of course is the pipeline of these two companies.

What do the pipelines look like?

Neither Chelsea nor Intercept have a pipeline full of drugs. However, both companies have several ongoing studies testing the two products that led to such large gains.

Intercept has a robust pipeline testing OCA in several similar diseases to NASH. In fact, most who follow the company considered its Phase 3 trial in treating primary biliary cirrhosis (PBC) the most near-term catalyst, meaning the NASH results really did come from nowhere. With that said, given OCA's success in treating NASH, investors might now be particularly excited about its likelihood to successfully treat PBC or any of the other three Phase 2 indications . Clearly, if all are successful, OCA could earn more than $4 billion in peak sales.

Chelsea hasn't developed Northera quite as deep, but does have two Phase 2 trials for Intradialytic Hypotension and Fibromyalgia. Combined, if successful, these two indications could add another $700 million in annual sales , thus making Northera a blockbuster. However, given the controversies that surrounded Northera and its 2012 FDA rejection, it might not be wise to make any conclusions or assumptions about these two indications just yet.

Final Thoughts
Both of these companies look to have a lot of promise, Intercept clearly with more revenue potential but also priced significantly higher. Thus, for investors comfortable with risk and searching for high upside potential, Chelsea might have the best ratio.

Keep in mind that the company still has to gain FDA approval for Northera. However, Intercept is still years from getting OCA in the market, as it won't read-out its final data until the year end. Then, like Sarepta, investors will live with the fear of what the FDA might decide as it relates to a possible Phase 3 study. Hopefully, Intercept won't have to complete a Phase 3 study, but at this point there is no way to know with absolute certainty. And if so, will it still be the first NASH treatment to market, because if not, peak estimated sales are unlikely to be met.

With that said, Chelsea had a great outcome with the advisory panel, and if approved, won't have any near-term competition.  Not to mention, Northera has rather low expectations; expectations for OCA are sky high, and by the time it's FDA approved, who knows what the competitive landscape will look like.

While Intercept's pipeline has more promise, as of today, and in the immediate future, both stock gains and valuations are tied to these two drugs and the one indication that created such large gains. Hence, Chelsea looks cheaper considering its peak sales outlook for this one indication, and assuming it's FDA approved, will be on the market creating revenue sooner than OCA. Therefore, Cheslea looks to be presenting the best risk-to-reward ratio right now, but keep an eye on pipeline development, future data, and meetings with the FDA, because Intercept's long-term future could be very bright as well.

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Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 24, 2014, at 6:06 AM, erniewerner wrote:

    Hi, your article seems to presume that for many, the investment thesis for Intercept includes an approval off of the phase 2 results. I own Intercept shares, so I am rooting for your scenario, but I think very few investors actually believe a near term approval is at all likely or even a reasonable possibility. NASH treatment would involve years, even decades of treatment. The safety results for OCA are pretty good, but not nearly comprehensive enough to justify even an accelerated approval for this indication. The company has indicated its path forward involves meeting with FDA to determine phase 3 parameters. If your understanding is better than mine, then there will be quite a correction when it is finally fully understood that there will be further testing. I'm betting that such is not the case.

  • Report this Comment On January 26, 2014, at 12:33 PM, marp11 wrote:


    and its FDA APPROVED

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Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

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