Intercept Pharmaceuticals: What Investors Need to Watch

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After soaring on positive clinical trial news in January, shares of Intercept Pharmaceuticals (NASDAQ: ICPT  ) have fallen 50% from their highs. The biotech, which currently sports a market cap of $5.5 billion, jumped following positive data from its drug obeticholic acid (OCA) in treating nonalcoholic steatohepatitis (NASH), and its potential to treat primary biliary cirrhosis (PBC). Therefore, it could be able to reach the market before other biotechs developing drugs in this space, including Gilead Sciences (NASDAQ: GILD  ) and Galectin Therapeutics. There have been a few reasons that Intercept's stock has fallen recently, but there are also reasons for investors to believe this company has a bright future.

NASH: A large market opportunity
Intercept shares doubled in 2013 thanks to investor enthusiasm around the potential for its drug OCA to treat PBC. This growth was also partly attributed to bullish sentiment surrounding its three other ongoing Phase 2 trials with OCA. In January, it then soared from $70 to over $450 after a 283-patient trial in treating NASH was stopped early for efficacy.

Intercept announced a successful trial in treating NASH despite only 50% of patients finishing the treatment. The reason is because 47% of treated patients responded to OCA versus 10% to placebo, and this was a strong enough ratio to where the endpoint was met before the study's completion. 

 . Granted, Intercept will complete the trial and present final data later this year, but the reason that Intercept shares have soared this year is because the data look very strong for this indication.

NASH is considered a progression of NAFLD (Non Alcoholic Fatty Liver Disease), and is also highly connected to those with type 2 diabetes. There are no FDA-approved drugs to treat NASH, but an estimated six million adults in the U.S. have the disease. In fact, Bank of America is predicting that sales of OCA could top $4 billion in treating NASH .

Intercept deserved the losses
While Intercept may have an efficient treatment for NASH, it still has to go through the regulatory hurdles to get OCA on the market. This includes a complete data readout at the end of this year. Therefore, with nothing but time ahead, it's natural for the company's stock to be volatile.

The stock's recent drop was created by a domino effect of headlines in the months of March and April. First, the company disclosed that in a separate Phase 2 trial, OCA caused cardiovascular side effects ; this created fears that a safety trial might be required.

The company then priced and completed a secondary offering of one million shares at $320, which was amplified by heavy selling in biotech stocks. Thus, with the iShares NASDAQ Biotechnology index losing 18% of its value since March, it seems only reasonable that the best-performing company in the index this year would also be weighed down.

Lastly, Intercept is not the only company trying to treat NASH. It does have competition from the likes of Gilead, and to a lesser extent Galectin Therapeutics. Hence, it is possible that the realization of potential competition has caused investors to rethink their position following such large post-data gains. . 

Gilead has a Phase 2 candidate called GS-6624, which is a monoclonal antibody that is being tested to treat NASH. While the majority of Gilead's $105 billion valuation is tied to its HIV and hepatitis-C products and pipeline, investors realize that NASH is a large enough indication that Gilead likely wants to control it. The company has already initiated a 225-patient trial at 75 different locations; this should mean a speedy trial. Also, it's worth noting that Gilead's trial is just 58 patients smaller than Intercept's study, so if successful Gilead might not be far behind Intercept in the regulatory process. 

Then there's Galectin, a stock that's rallied in connection to Intercept. Galectin is still years behind Intercept in the development process, with its GR-MD-02 candidate only having pre-clinical data . Currently, it is being studied in a Phase 1 trial for safety and dosing in treating NASH with fibrosis. Therefore, while its received a fast-track designation from the FDA, investors should note that a lot can happen in large trials. Intecept's success is not necessarily a reflection of Galectin's future.

Now it's time to be long
With all things considered, Intercept's stock losses are a good thing as it makes the company's stock much cheaper. After all, the fundamental catalyst of OCA being first to the market to treat NASH still exists. Specifically, the fear of cardiovascular side effects has been addressed, with the company saying it's insignificant and normal . Furthermore, in the midst of last month's selling pressure, the company also announced a successful Phase 3 trial in treating PBC; this makes OCA one step closer to being FDA approved. .

Therefore, OCA has a good chance of being on the market before Gilead's drug and other potential competitors. Granted, OCA won't be FDA approved to treat NASH this year, but drugs are currently being used to treat the disease off-label and OCA is the first drug to show a meaningful benefit in treating the disease. Therefore, getting an FDA approval translates into a first-to-market advantage for Intercept, which could go a long way in reversing the trend of this stock. 

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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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