Is Intercept Pharmaceuticals, Inc. Overvalued?

With a $9 billion market cap and a stock that has shot up 1,167% over the past twelve months, it is not too surprising that expectations are high for Intercept Pharmaceuticals (NASDAQ: ICPT  ) and investors are nervous about even the slightest hint of trouble in the clinical pipeline. To that end, it would seem that investors are more nervous about the prospect of a cardiovascular safety issue in the Phase II study of lead compound obeticholic acid (or OCA) than cheered by another strong trial outcome in primary biliary cirrhosis.

First, the good news
It continues to look as though Intercept has a winner with OCA in the treatment of primary biliary cirrhosis. As a reminder, this is a rare autoimmune disease that affects the liver and causes cirrhosis due to a progressive build up of bile in the liver. The current treatment, ursodeoxycholic acid or URSO, works in about one-half to two-thirds of patients.

Intercept management reported that OCA met its endpoints in the Phase III POISE study. In this small (approximately 217 patients) three-arm study, patients got either a placebo, 10mg of OCA, or 5mg titrated to 10mg. Both OCA groups showed strong efficacy, with 47% and 46% of patients achieving the primary endpoint of reductions in the liver biomarker ALP to 1.67x ULN, with a 15% or greater reduction from baseline, while 10% of the placebo group achieved the endpoint. Overall, the the treatment groups showed mean decreases of 39% and 33% ALP from baseline, whereas the placebo group showed a 5% reduction. Patients receiving OCA also saw significant reductions in other liver biomarkers like GGT, ALT, AST, and bilirubin.

The company did not provide detailed safety information (a full presentation of trial results will come at the EASL meeting in April), but there didn't appear to be anything new from this study. Pruritis remains a common side effect, but this is generally a treatable/manageable issue.

Filing, but also another study
Intercept will be filing for FDA approval on the basis of this study, but also moving forward with a Phase III confirmatory study that will start in the third quarter of this year. Investors have been worried that the FDA would refuse to approve OCA on the basis of biomarker data (as opposed to proving a clinical benefit), but the FDA's own expert advisory panels have been consistent in affirming the predictive value of these biomarkers. Nevertheless, the confirmatory study will be an important one for Intercept – should the study cast doubt on the clinical benefit of OCA and/or the link between biomarker improvement and clinical benefit, that approval could be reversed.

New worries in NASH
While the POISE study data were positive and that's a very good thing, it was largely expected to be a successful study. The bigger news appears to have come in the company's 10-K filing, where management revealed that the company's Phase II study of OCA in NASH (a study that showed a completely unexpected strongly positive benefit for OCA) apparently saw some cardiovascular side effects.

Details are sketchy at this point, but the 10-K referred to 10 events in seven patients (2.5% of study participants) with a "numerically higher" weighting to the group getting OCA. Whether that's 6-1, 5-2, or 4-3, it is a concern given the FDA's vigilance regarding cardiovascular safety. That there might be some cardiovascular consequences to a drug affecting the liver, the chief organ involved in cholesterol metabolism, cannot be considered a complete surprise, but the severity of these events/side effects is sure to be a talking point until full data are released (perhaps later this year).

NASH is also the one area where Intercept has more competition. Gilead (NASDAQ: GILD  ) is exploring the use of simtuzumab in NASH. Simtuzumab is a monoclonal antibody that targets LOXL2, an enzyme involved in the production of connective tissues, including the fibrous connective tissue formed in the liver in inflammatory diseases like NASH. Enrollment has been slow here, though, and it does not appear to be a major clinical priority to Gilead.

Intercept may also see competition from Conatus and its oral pan-caspase protease inhibitor emricasan. Caspase activity leads to apoptosis and inflammation in the liver, so it works by a different pathway than Gilead's antibody and Intercept's OCA (a Farneosid X receptor agonist). In a small Phase II study run by Conatus, emricasan showed a 59% reduction in ALT and the company has recently started a new small Phase II study to evaluate the drug in nonalcoholic fatty liver disease (NAFLD), including a subset with NASH.

The bottom line
The positive POISE data was not a surprise, but it does improve the risk-weighted valuation for Intercept. Moving the penetration rate to 80% and the approval odds to 85%, the value of OCA in primary biliary cirrhosis moves to $108, almost $20 higher than my prior estimate. Given the strong data, I would not be surprised if eventual OCA adoption is higher than currently expected (taking some share from URSO), and that could add meaningful value per share.

With the excitement over Intercept in particular and liver disease in general over the past few months, these shares have risen significantly. It is hard to call them a value when my risk-weighted valuation suggests a fair value of around $400, but it is worth mentioning that the NASH opportunity is enormous and even relatively modest assumptions about usage rates/penetration, support more than $200 of the stock's fair value today.

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