Several companies are eyeing the potential $40 billion market in treating nonalcoholic steatohepatitis (NASH), and Allergan (NYSE:AGN) and Gilead Sciences (NASDAQ:GILD) have multiple NASH pipeline candidates. But two small biotechs just might beat both of these big companies in the NASH market. Here's why Genfit (OTC:GNFTF) and Intercept Pharmaceuticals (NASDAQ:ICPT) are in the lead.

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Where things stand

Allergan only recently entered the NASH dash. The big drugmaker announced two acquisitions in September: Allergan bought privately held Akarna Therapeutics to get the company's farnesoid X receptor (FXR) agonist program targeting NASH. Allergan also acquired Tobira Therapeutics for its NASH program.

While Akarna's lead FXR agonist is only in preclinical testing, the Tobira deal gives Allergan a more advanced NASH candidate with cenicriviroc (CVC). Tobira recently announced positive results from a phase 2 study of CVC in treating NASH; the experimental drug will move into a late-stage study in 2017.

Gilead Sciences experienced a setback this year with its NASH program, when it canceled development of simtuzumab. However, the big biotech has three other pipeline candidates targeting the indication. Like Allergan, Gilead has an FXR agonist in its mix with GS-9674; the company's pipeline also includes ASK1 inhibitor GS-4997 and ACC inhibitor GS-0976.

All of Gilead's NASH candidates are currently in mid-stage clinical studies. The earliest of these studies wraps up in March 2017. Other clinical studies evaluating experimental drugs in treating NASH are scheduled to complete later next year, with one concluding in early 2018.

Genfit and Intercept, on the other hand, are both well into late-stage studies already. Genfit's phase 3 clinical trial for elafibranor started in March of this year, and should read out data in late 2018 or early 2019. Intercept's Ocaliva could also be on track for approval in the NASH indication in 2019.

Genfit vs. Intercept

If their late-stage studies go well, both Genfit and Intercept could beat Allergan and Gilead Sciences (among others) in reaching the market with a NASH treatment. Which of the two smaller biotechs appears to be in better position?

One argument for Intercept is that it has already scored a regulatory win for Ocaliva in treating another liver disease, primary biliary cholangitis (PBC). Intercept also reported positive results from a phase 2 study that showed significant improvement in fibrosis and NASH.

However, investors were concerned with results from another phase 2 NASH study of Ocaliva. The study, conducted in Japan, found that the drug failed to achieve significant NASH resolution or fibrosis improvement.

Genfit experienced its own phase 2 difficulties with elafibranor. The experimental drug failed to produce significant improvement in NASH symptoms. However, after examining data from the study, the company saw that patients with more advanced cases of NASH did benefit from taking elafibranor.

Elafibranor targets two nuclear receptors -- PPAR-alpha and PPAR-delta. This combination helps the drug reduce liver inflammation while decreasing triglycerides and LDL cholesterol and increasing HDL cholesterol. It also can regulate blood-sugar levels and improve insulin sensitivity in NASH patients. The cardiometabolic benefits of elafibranor could give it an advantage over other therapies.

Room for multiple players

There should be plenty of room for all of these companies to do well in the NASH market. The patient population is significant, and the need certainly exists for effective treatments.

Dean Hum, Genfit's COO and chief scientific officer, thinks that it's likely that the NASH treatment landscape will involve combination therapies. That makes sense. Some drugs work better in improving fibrosis, while others are more effective at treating NASH itself.

I suspect that Allergan and Gilead Sciences will eventually become winners in the NASH market. However, I expect that Genfit and Intercept will beat these big companies to the punch. I also wouldn't be surprised if these two small biotechs are gobbled up by a larger drugmaker along the way. There could be more companies eyeing the lucrative NASH market than we know about right now.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.