After Gilead Sciences (NASDAQ:GILD) transformed hepatitis C treatment with drugs offering functional cures, biopharmaceutical research has turned its attention toward another significant cause of liver transplant: nonalcoholic steatohepatitis (NASH).

Drugmakers, including Gilead Sciences, are betting NASH will be the next big megablockbuster indication, but they'll need to prove they can develop safe and effective medications for NASH first. Fortunately, we won't have to wait long for an update on their progress. Over the next 12 months, data will be available in the indication from trials being conducted by Gilead Sciences, Viking Therapeutics (NASDAQ:VKTX), and Intercept Pharmaceuticals (NASDAQ:ICPT).

What's NASH?

NASH is a liver disease that results from consuming a high-calorie diet and living a sedentary lifestyle.

A person pinching fat on their belly through a T-shirt


In healthy people, the liver contains less than 5% fat. However, in patients with NASH, fat levels can be much higher than that because of excess calories getting stored in the liver.

As fat levels in the liver increase, inflammation occurs in the liver that results in cell death and repair, and thus scarring or fibrosis. When liver fibrosis becomes widespread, patients are considered to have liver cirrhosis, which puts them at greater risk of liver failure and the need for a liver transplant.

Millions of people have NASH, but many likely are unaware of their condition. NASH is called a "silent" disease because people don't experience symptoms until late in disease progression.

Gilead Sciences takes aim at NASH

Gilead Sciences' hepatitis C drugs have been so successful that its addressable market is declining. As a result, its sales have been sliding. To reignite its revenue, the company's investing heavily to expand into new indications, including NASH.

The company's most advanced NASH drug is selonsertib, which is in phase 3 trials. Selonsertib is an apoptosis signal-regulating kinase 1 (ASK1) inhibitor that's being studied in patients with advanced fibrosis. Because ASK1 activity leads to cell death, inflammation, and scarring, Gilead Sciences thinks crimping its activity can help reduce fibrosis and stall disease progression.

In midstage studies, fibrosis and liver injury measures improved in patients treated with selonsertib for 24 weeks. Specifically, 43% saw at least a one-stage improvement in fibrosis and 26% saw a reduction in liver fat of 30% or more, as measured by magnetic resonance imaging-based proton density fat fraction (MRI-PDFF).

Gilead Sciences finished enrolling patients in selonsertib's phase 3 study in April, and management expects to unveil data from that trial early in 2019. If the late-stage study succeeds, it could allow Gilead Sciences to file selonsertib for Food and Drug Administration (FDA) approval.

A good performance might also bode well for combination studies that are evaluating selonsertib's use alongside either GS-0976 or GS-9674. GS-0976 is an acetyl-CoA carboxylase (ACC) inhibitor that aims to crimp the formation of fat, while GS-9674 is a selective, nonsteroidal farnesoid X receptor (FXR) agonist that could help the body break down more fat.

Viking Therapeutics' midstage study nears its end

Viking Therapeutics isn't in phase 3 trials yet, but data from a phase 2 trial of its NASH candidate, VK2809, will be reported before the end of 2018.

VK2809 is a thyroid hormone receptor beta (TRB) agonist that selectively targets fat in liver tissue and thyroid beta receptors in the liver that modulate cholesterol, triglycerides, and bile acid metabolism. Its selective targeting may boost metabolism and reduce fat buildup in the liver without impacting the cardiovascular system.

They could be onto something. Recently, NASH competitor Madrigal Pharmaceuticals (NASDAQ:MDGL) reported positive data from a phase 2 trial of MGL-3196, a drug with the same mechanism of action as VK2809.

In Madrigal's midstage study, 56% of patients saw a two point or greater improvement in NAFLD Activity Score, a measure of the accumulation of fat in the liver, liver cell swelling, and inflammation. Also, 37% of patients had a 30% or greater reduction in liver fat as measured by MRI-PDFF, and NASH resolution on biopsy at week 36 outperformed placebo. When Madrigal announced its data, management said it thinks it might be able to resolve NASH in up to 40% of patients in as little as nine months.

If Viking Therapeutics delivers similarly strong data, particularly on NASH resolution, then it could end up in a foot race with Madrigal Pharmaceuticals, which plans to talk soon with the FDA about the design of a phase 3 study.

Intercept attempts to expand Ocaliva's label to NASH

Intercept's Ocaliva is already FDA-approved for use in primary biliary cholangitis (PBC), but a much larger opportunity could be unlocked if Ocaliva's phase 3 NASH trial is a success. Ocaliva is a semisynthetic bile acid analogue FXR agonist, so its goal is like that of GS-9674, the FXR agonist that Gilead Sciences is evaluating in its combination trials with selonsertib.

Intercept is on track to report interim data in the first half of 2019 that could support an FDA filing to expand Ocaliva's label to include NASH, as soon as late next year. The approval in PBC offers support to Ocaliva's mechanism of action. However, data in NASH is arguably mixed and there are safety concerns to consider.

In 2014, independent monitors halted Ocaliva's phase 2b Flint NASH study early for efficacy when 45% of patients saw a two-point improvement in NAFLD Activity Score and 35% of patients achieved a one-stage or better improvement in fibrosis.

However, those results weren't duplicated in a separate phase 2 study in Japan. In the Japanese study, only the 40mg dose showed a slight statistical significance to placebo in delivering a two-point or greater NAS improvement. The 0.0496 p-value was only fractionally below the 0.05 level associated with statistical significance. In February 2018, the company that owned the rights to market Ocaliva in Japan returned those rights to Intercept.

Intercept says the Japan study was underpowered for efficacy, though, and if it's right, then its soon-to-finish phase 3 study could read more like the successful Flint study than the Japanese study.

As for Ocaliva's safety, the FDA added a warning to its label earlier this year to emphasize risks associated with incorrect dosing in patients with NASH and Child-Pugh Class B or C scores -- decompensated cirrhosis. The label change was warranted after some Ocaliva patients experienced liver decomposition or failure.

According to Intercept, only 2% to 3% of PBC patients fall into the "warning" patient population, but we'll still want to see if Ocaliva's sales growth slows in the coming quarters. In the first quarter, sales were $35.2 million, and in 2018, guidance is for sales of over $170 million.

The details will matter

NASH drug developers are including a lot of data in their study results. However, the FDA's approvable endpoints for NASH drugs are NASH resolution or fibrosis improvement, so investors might want to downplay results involving other measures.

It remains to be seen how these companies will outmaneuver each other or differentiate their drugs. However, the size of this market could support multiple players, particularly if combination approaches involving different mechanisms of action become standard care.

Of the stocks discussed here, Gilead Sciences is the least risky bet. The company generates significant revenue from other indications, so it's insulated against trial failure. Intercept Pharmaceuticals is a bit more risky because Ocaliva is its only approved drug, and safety concerns raise questions about future sales growth.

Finally, Viking Therapeutics is the riskiest because it's a clinical-stage company without any product sales. If Viking Therapeutics' data trails Madrigal's, or its trial fails, then shares could drop significantly. Alternatively, a trial win could cause a big run-up in its shares. Because of the binary nature of its upcoming results, only risk-tolerant investors should consider owning Viking Therapeutics.