The biotech industry is in constant search of the "next big thing." A few years ago, it was hepatitis C, which turned into a windfall profit producer for Gilead Sciences and a few of its competitors. Now, it appears that biotech has settled on nonalcoholic steatohepatitis, or NASH, as the next big thing.
NASH is a disease characterized by a buildup of fat in the liver that leads to inflammation and liver cell damage. Over time, NASH can lead to fibrosis of the liver, an increased risk of liver cancer, and even death. By 2020, NASH is expected to be the leading cause of liver transplants, and it affects anywhere from 2% to 5% of the adult population in the United States. As a result, Wall Street estimates the NASH drug market size to be anywhere from $20 billion to $35 billion, which isn't chump change.
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NASH drug stocks are catapulting into the stratosphere
Considering that a number of pharmaceutical giants are loaded with cash and looking for growth opportunities, buyout chatter has been especially loud among small- and mid-cap NASH drug developers.
Perhaps no company has received more interest in recent weeks than Madrigal Pharmaceuticals (MDGL 1.24%) which, might I add, has gained more than 1,800% over the trailing year.
Madrigal's shares exploded higher at the end of May following the release of midstage data for lead NASH candidate MGL-3196. This once-daily, oral drug led to a greater than two-point reduction in NAFLD Activity Score at week 36 for 70% of the patients who showed a greater than 30% fat reduction at week 12. Comparatively, just 32% of placebo patients saw such a reduction at week 36. Also, 39% of patients who'd responded to MGL-3196 at week 12 demonstrated NASH resolution by week 36. In the placebo arm, just 6% demonstrated NASH resolution.
Following the release of its midstage results, Madrigal has reportedly received buyout interest. This interest has been pivotal in sending shares of a few of its rivals higher as well. Small-cap Viking Therapeutics has more than tripled since the end of April. Its lead NASH drug, VK2809, has a similar mechanism of action as MGL-3196, therefore setting the stage for what Wall Street believes could be another successful midstage trial at some point in the future.
Similar strength was seen from microcap Galmed Pharmaceuticals (GLMD +4.76%), which rose by more than 150% during a single trading session two weeks ago despite mixed results. The move followed the release of phase 2b data from its 52-week Arrest study for NASH drug hopeful Aramchol. In that trial, a statistically significant reduction in liver fat was noted with one of the two doses (the 400 mg dose). However, the 600 mg dose led to a statistically significant improvement in overall NASH resolution (19.2% vs. 7.5%) and NASH resolution without worsening of fibrosis (16.7% vs. 5%) relative to the placebo.
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Wall Street is overlooking the most promising NASH drug stock
As you can see, there's a lot of excitement in the NASH space at the moment, and plenty of big drug stocks are itching to add a promising NASH drug to their product pipelines. But one name that continues to be left out in the cold is Intercept Pharmaceuticals (ICPT +0.00%).
Why no love for Intercept? For those of you unfamiliar with the situation, back in September, the company disclosed, and the Food and Drug Administration (FDA) confirmed, that there were some patient deaths associated with Ocaliva, which is Intercept's FDA-approved drug designed to treat primary biliary cholangitis (PBC). In February, the FDA added a boxed warning to Ocaliva's packaging alerting PBC patients and physicians of this danger.
Ocaliva (scientific name "obeticholic acid") is also the drug Intercept is testing in two phase 3 trials as its NASH treatment. Long story short, there are safety concerns about Ocaliva, which some on Wall Street believe could allow Madrigal, Viking, or any of the bigger players like Gilead Sciences or Pfizer, to leapfrog Intercept.
Four reasons Intercept is the NASH drug stock to buy
But there's a lot that Wall Street is overlooking, here, with Intercept Pharmaceuticals. Keeping in mind that I've been a shareholder since its September swoon (translation: I have an inherent bias), here are a few reasons Intercept -- not Madrigal, Viking, or Galmed -- is the most undervalued play in the NASH space.
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1. It already has an FDA-approved drug that's generating sales
To begin with, Intercept is the only company among this small group of NASH stocks with an FDA-approved product. Yes, Ocaliva's weekly prescription fills took a hit following word of patient deaths in PBC. However, patients with PBC tend to be very sick and have very few options available. This means Ocaliva still offers the potential to generate perhaps $200 million to $250 million annually. For context, it generated net worldwide sales of $129.2 million in 2017.
Should Ocaliva also prove successful in phase 3 studies involving patients with primary sclerosing cholangitis (PSC) -- the midstage Aesop trial for PSC met its primary endpoint -- the combination of PBC and PSC could push peak sales for these indications above $300 million to perhaps $350 million annually, by my best estimate.
2. Ocaliva's safety concerns have been overstated or misconstrued
Secondly, I believe Wall Street isn't examining the PBC patient-death data in the proper context. As noted, many of the PBC patients who tragically passed away were already very sick. What's more, the FDA and Intercept pointed out that a good number of these patients died from taking an improper dose of Ocaliva (i.e., they were taking it once daily as opposed to once weekly). That's not the fault of the drug so much as a need to reeducate patients and physicians. This is why there's a helpful boxed warning on Ocaliva's packaging now.
To add to the previous point, drugs can react very differently based on the disease they're targeting. Whereas Intercept and the FDA both identified potential complications that PBC patients should be aware of, no severe adverse events were noted in the broad-based mid-stage Flint study for NASH. With the exception of a higher instance of pruritus (itching) in patients taking Ocaliva, there were no statistically significant safety differences in the phase 2b Flint study between Ocaliva and the placebo. This is a major point that Wall Street seems to ignore.
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3. Ocaliva worked well in the Flint trial
A third factor for consideration is that Ocaliva worked! In the Flint study, it wound decreasing the NAFLD Activity Score by more than 2 points for 46% of patients, compared to just 21% who were treated with the placebo. There was also a noticeable improvement observed in liver fibrosis (35% vs. 19%) and NASH resolution (22% vs. 13%) for the patients in the Ocaliva arm as opposed to the placebo group.
Interestingly enough, the protocols of the phase 3 Regenerate trial, which is one of two ongoing NASH studies for Intercept, were amended in February 2017 with the FDA. Rather than having to demonstrate a statistically significant improvement in liver fibrosis and NASH resolution, Intercept's lead drug can now meet one or both endpoints and succeed. It's a significantly easier path to success with the modified protocols, but it still sets Ocaliva up to have a clear advantage if it hits both endpoints.
4. Intercept might be the first to market in NASH
Lastly, there aren't many competitors in the NASH space that can rival Intercept's lead. Genfit has elafibranor currently in phase 3 studies for NASH, and it's arguably the only peer that has a shot of beating Ocaliva to market in NASH, assuming approval. Every other company, which includes Madrigal, Viking Therapeutics, and Galmed, is likely a good two years (if not more) behind Intercept in terms of bringing a NASH drug to market.
Since there are no FDA-approved NASH drugs, a first-to-market advantage here would be huge. We saw exactly what happened when Gilead gobbled up Pharmasset in 2011 for $11 billion and brought Sovaldi, then Harvoni, to market in 2013 and 2014, respectively. Gilead's hepatitis C sales and pricing power went through the roof, and so did its share price. If Intercept can beat its peers to market, its $2.5 billion market cap could prove ridiculously undervalued next to the likes of Madrigal at $4.3 billion.
Even with my inherent bias as a shareholder, the promise of Intercept looks undeniable.
