Around 20 million Americans are living with a progressive disorder that can shut down the liver permanently. Nonalcoholic steatohepatitis (NASH) is a global health catastrophe playing out in slow motion, and there aren't any treatments available that can stop it.

Geoff Meacham, an analyst at Barclays, recently began covering a company with a NASH candidate in a phase 3 trial and issued a $55 price target that was 120% higher than the stock's closing price the day before. Let's look at Genfit's (GNFT -0.27%) pipeline to see why its candidates could be worth a lot more than this biotech's stock price suggests.

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Two birds with one agonist

We've known that peroxisome proliferator-activated receptors (PPARs) play key roles in the regulation of metabolism. In the days before statins, drugs that target PPAR-alpha were a standard treatment to lower cholesterol and they're still used to lower triglycerides. Targeting PPAR-gamma along with PPAR-alpha has had limited success as a treatment for metabolic disorders, but Genfit's taking a different approach.

Elafibranor acts on PPAR-delta and PPAR-alpha in a way that's supposed to crank up the metabolism of lipids. Since NASH patients all suffer from chronic inflammation of a liver swollen with excess lipids, burning more fat stored in the liver should reverse the course of the disease. Clinical trial results from an ongoing pivotal study won't be ready until the end of 2019, but mid-stage data suggests Genfit's candidate could make a big difference for NASH patients.

A terrific start

In 2016, Genfit announced results from a 276-patient study with two doses of elafibranor versus a placebo. Unfortunately, patients taking the drug didn't achieve NASH resolution at a significantly higher rate than the placebo group.

Once Genfit pulled out 42 patients with low NASH activity scores, and adjusted its stringent definition of resolution to one in use today, elafibranor didn't do too bad. An impressive 19% of patients achieved NASH resolution without worsening fibrosis, compared to 9% of the placebo group. 

When it comes to post hoc analyses like these, it's important to digest them with a healthy dose of skepticism. That's because you can usually find some way to form a group of clinical trial participants with positive-looking results, but repeating those results is fairly uncommon.

Worth a shot

Post hoc analyses aren't a waste of time, but the only thing they're good for is informing further studies that attempt to repeat the performance observed in the previous subgroup. Although patients more advanced stages responded well, very sensible post hoc analyses lead to disappointment more often than they provide long-term gains for shareholders.

Genfit designed elafibranor's ongoing pivotal study to only accept patients with a NASH activity score of four points or higher. Investigators will look in on the data at the end of the year to see if elafibranor really helps reduce NASH activity for these patients. If they find a statistically significant benefit the stock will soar.

Genfit has also been pushing elafibranor through development as a potential treatment for primary biliary cholangitis (PBC). PBC is what happens when chronic inflammation plugs up the pipe that carries bile from the liver to the stomach. With no place to go, that bile ends up in places it shouldn't be. There's just one other treatment available for this condition and a better option could eventually generate a few hundred million in annual sales for Genfit.

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The competitive landscape

We really aren't sure why some patients with fatty liver disease experience severe inflammation, but not for a lack of effort. There are just too many different combinations of genetic and environmental factors playing a role. 

Inflammation generally becomes less severe as lipid concentrations fall, and it hardly ever happens when those levels are in a normal range. It stands to reason that significantly lowering liver fat should lower NASH activity for most, if not all patients. If this is true, two NASH candidates much younger than elafibranor could become a major threat.

Viking Therapeutics (VKTX 2.83%) and Madrigal Pharmaceuticals (MDGL -1.68%) are both ready to begin pivotal trials with drugs that inspire the liver to slim down by acting on a thyroid receptor. There's a great deal of debate over which company has the better potential new NASH drug, thanks to limited data from trials with very different patient populations, but nobody's disputing their ability to effectively lower liver fat levels.

Know the risks

Moving into a pivotal study based on a post hoc analysis is dangerous to begin with, and that's not the only reason to be nervous. You probably don't remember, but Genfit has been throwing elafibranor noodles against the wall to see if anything sticks for over a decade.

From time to time, drugmakers discover a new use for candidates that couldn't handle their first intended job. For example, Viagra was discovered with the intention of treating heart disease.

While there's a chance that Genfit can double your money, it's important to understand biotech price targets are adjusted for risk. Since success could lead to several billion in annual revenue, multiplying potential sales by a small chance of realizing those sales could easily lead an analyst to conclude Genfit's worth more than twice as much as its recent $988 million market cap.

Genfit stock is certainly worth watching, but the chances of failure are too high for any sensible investors to feel good about buying it right now.