Most of us have never heard of it, but nonalcoholic steatohepatitis is a chronic disease that threatens the lives of around 30 million people in the U.S. alone. There aren't any available treatments for NASH, and it looks like Intercept Pharmaceuticals, Inc. (NASDAQ:ICPT) could generate billions for its shareholders with a drug that's several steps ahead of the competition.
Does Intercept's lead over a tsunami of competitors make the stock a buy now? Let's look at arguments for and against the stock to find out.
Reasons to buy
It's hard to say just how many potential patients Intercept's lead drug, Ocaliva, could gain if it earns approval to treat NASH because it's hard to define the disease itself. According to the National Institutes of Health, around 30% to 40% of adults in the U.S. store excess fat in their livers. Among this group, an estimated 20% experience the inflammation and liver tissue damage that makes NASH a life-threatening disease.
With perhaps 30 million NASH patients out there, some analysts think annual Ocaliva sales could top $8 billion. Biotech stocks tend to trade at mid-single-digit multiples of annual revenue, which means Intercept's present market cap of around $3.1 billion could increase many times over.
Ocaliva is already approved for the treatment of a disorder called primary biliary cholangitis, which affects around 290,000 people in Intercept's target markets. Intercept collected 53% more revenue during the first half of 2018 than the previous year period, which at $79 million put a big dent in research and development expenses that totaled $96 million.
The company is still bleeding money, but at least it has a revenue stream to lean on if Ocaliva doesn't have what it takes to treat NASH. We'll find out when top-line results are revealed from the ongoing Regenerate trial in the first half of next year.
To be considered a success, Ocaliva needs to show that patients taking it experience less inflammation, less fibrosis, or both. Since it smashed through these goals during the mid-stage Flint study a few years ago, its chances of hitting the mark again seem pretty good.
Reasons to be nervous
Last September, Intercept stock sank after the Food and Drug Administration issued rang alarm bells over a spike in deaths among patients taking the drug that led to a black box warning on Ocaliva's prescribing label. Although it appears the problems arose from improper dosing, more recent additions to the FDA's adverse event database have investors feeling anxious.
Patient deaths should always be taken seriously, but investors need to understand that Ocaliva's approved to treat patients with damaged bile ducts that already tried to control the disease with standard care. I don't think we need to worry about the drug getting yanked from pharmacy shelves because it's dangerous, but it doesn't bode well for Ocaliva's long-term outlook in an increasingly competitive space.
Earlier this year, Madrigal Pharmaceuticals (NASDAQ:MDGL) stock skyrocketed after the company reported results from a NASH candidate that could become a thorn in Intercept's side in the years ahead. It's hard to make comparisons between MGL-3196 and Ocaliva without a head-to-head study, but Madrigal's candidate helped resolve NASH symptoms among 39% of patients after 36 weeks compared to just 6% of those given a placebo. During the Flint study, Ocaliva helped patients hit a similar endpoint 45% of the time while those in the placebo group achieved resolution 21% of the time.
It's far too early to call a winner, but investors need to remember that insurers don't need competitors to field a better drug to wrestle discounts from Intercept, they just need something viable to point at while negotiating. Unfortunately for Intercept, Madrigal isn't the only company developing new NASH drugs. Industry heavyweights, Gilead Sciences, AstraZeneca, and Novartis are supporting the development of promising NASH candidates and it seems like a new biotech is founded each month with the express purpose of tackling NASH. Intercept's sales team could have a hard time keeping up.
A buy now?
A big run-up for Ocaliva sales in the first half of 2018 suggests the rate of adverse events isn't unreasonable given the patient population allowed to take it so far. If the pivotal Regenerate study reads off positive results without major safety signals, Intercept could begin marketing the drug to millions of NASH patients that have no other options by the end of 2019.
If approved, I think a highly motivated population will drive enough sales of the drug to support Intercept's recent $3.1 billion market cap before the next competitor erodes the company's pricing power. This isn't the pie-in-the-sky forecast bullish investors want to hear, but it's more than enough to call the stock a buy right now.