The biggest binary event for biotech companies last year was arguably Amarin (NASDAQ:AMRN), which jumped 314% overnight in October after releasing positive clinical trial data for its lipid-lowering drug, Vascepa.
Investors may not have to wait that long into 2019 to see the largest one-day jump this year. Intercept Pharmaceuticals' (NASDAQ:ICPT) phase 3 Regenerate study of Ocaliva is scheduled to read out in the first quarter of this year.
Like Amarin did with expanding the patient population for Vascepa, Intercept's goal is to expand the approval for Ocaliva, which is currently cleared for patients with primary biliary cholangitis, into nonalcoholic steatohepatitis (NASH), a liver disease caused by fat deposits that lead to fibrosis (scarring) and eventually liver failure.
A multibillion-dollar market
Some estimates suggest the NASH market is as large as $35 billion in annual sales, although without any drugs on the market approved to treat the liver disease, it's a little hard to know exactly how big it may ultimately be. Even if the market turns out to be smaller, Ocaliva still has multibillion-dollar potential if the Regenerate study is positive.
While Intercept appears to be in the lead, it's not the only company developing a drug for NASH. In fact, Intercept's lead isn't really that large, since Gilead Sciences (NASDAQ:GILD) expects to release interim analyses from two phase 3 studies of its NASH drug, selonsertib, in the first half of this year.
Fortunately for the competitors, NASH is a progressive disease, which could allow different drugs to find niches at different stages of the disease and not compete directly. Intercept's Regenerate, for instance, is testing earlier-stage patients at fibrosis stage 2 or 3 (F2 or F3) or even patients at F1 if they have additional risk factors such as obesity or type 2 diabetes. Gilead's studies, on the other hand, are testing later-stage patients at the F3 or F4 stage.
2 sides to the coin
While Intercept Pharmaceuticals has plenty of upside potential, investors should be aware that there are no guarantees that Regenerate will produce positive results.
In the phase 2 Flint study of NASH patients in Japan run by Intercept's collaborator, Sumitomo Dainippon Pharma, 38% of patients taking the highest dose of 40 mg met the primary endpoint of a 2-point or greater improvement on the NAFLD Activity Score (NAS) and no worsening of fibrosis, which was barely statistically significant (p = 0.0496) compared to the 20% of patients taking placebo who met the goal. Two lower doses of 10 mg and 20 mg weren't statistically significant.
Intercept pressed on because of a subgroup analysis of patients in the Flint study with F2, F3, or F1 with an additional risk factor -- not coincidentally, the criteria for entering the Regenerate study as discussed above. That subset of patients who were treated with Ocaliva saw substantial improvements compared to placebo: 18% had NASH resolution vs. 5% for placebo; 60% had NAS improvement by at least 2 points vs. 30% for placebo; and 39% had liver fibrosis improvement by at least one stage compared to 21% for placebo. All three post-hoc analyses were statistically significant. While the data for patients with the same criteria as those enrolled in the Regenerate study population look good, the fact that they were post-hoc analyses makes it difficult to determine the likelihood of success for Regenerate.
At a market cap of $3.3 billion, Intercept's investors have factored in some -- but certainly not all -- of the potential sales from NASH. It's easy to see how Intercept could double on positive Regenerate data; at five times peak sales, a market cap of $6.6 billion would factor in sales of $1.3 billion.
But a failure could result in a substantial decline as well. Intercept only tallied $46.6 million in third-quarter sales of Ocaliva. Annualize that out and multiply by five and current sales only support a market cap of about $1 billion; sales in primary biliary cholangitis are still growing, so Intercept should be able to fetch a higher price-to-sales ratio, but it's clear there's plenty of downside potential if the Regenerate study fails.
Worth taking the risk?
Given the large number of unknowns and the large downside risk, most investors would be wise to sit out this binary event. Missing out on a huge payday if Regenerate is positive will look like a bad move in retrospect, but there's potential to pick up shares later, avoiding the binary risk and still taking advantage of some of the upside of Intercept's move into NASH.
More conservative investors looking to take advantage of the NASH market should consider much-larger Gilead, which isn't likely to double on successful results for selonsertib but also won't crash and burn if the trials fail.