As obesity rates continue to increase in the U.S., the race is on to find drugs that can treat the metabolic issues contributing to the epidemic, including conditions caused by fat accumulating in the liver. The umbrella term for these conditions is nonalcoholic fatty liver disease (NAFLD), and it's becoming increasingly common. NAFLD can progress to nonalcoholic steatohepatitis, or NASH, an inflammation of the liver that can lead to liver cell damage, fibrosis, or scarring.

It's no wonder that NASH is seen as one of the biggest untapped markets for drugmakers, given that the National Institutes of Health estimates that between 30% and 40% of U.S. adults have NAFLD and between 3% and 12% have NASH. Pharmaceutical companies large and small are pursuing the opportunity, with over 200 clinical trials for NASH underway worldwide.

And while interest (and share prices) have cooled since 2018 after a few visible clinical-trial failures, there are two companies that specialize in liver ailments and are still in the running: Intercept Pharmaceuticals (ICPT) and Madrigal Pharmaceuticals (MDGL -6.29%). Both have promising therapeutics for NASH in their pipelines, and the large population of potentially treatable patients makes this exciting for investors. Which stock is the better investment now?

Image of a liver superimposed on a skeleton.

Image source: Getty Images.

The dash for NASH turns into a distance race

The challenge from a public health standpoint is that these diseases are usually silent, meaning that unless complications develop, there are no symptoms. And since people with these conditions tend to be unhealthy anyway, they're likely to die of something else. Cardiovascular disease is the most common cause of death in people with NAFLD or NASH. If most patients don't have symptoms and won't die from their liver condition, why would they need a potentially expensive treatment?

This quandary led the U.S. Food and Drug Administration (FDA) to provide guidance to companies developing NASH drugs, one reason investor enthusiasm began to dampen starting in December 2018. The recommendations are intended to get drug companies focused on the population of NASH patients that are most likely to progress to cirrhosis and end-stage liver disease. The FDA wants to see treatments that reverse that progression in high-risk cases, while leaving the lower-risk cases to be treated with interventions such as diet and exercise.

The intervention by the FDA narrowed the scope of interventions that pharmaceutical companies would reasonably want to pursue and added some hurdles that will need to be cleared, but it also provided clarity on how to get a NASH drug approved. Intercept and Madrigal both have programs that are consistent with this guidance and could eventually grab a share of what could become a huge market.

Intercept: likely first to market

Intercept's lead drug is obeticholic acid, or Ocaliva, an agonist that targets the FXR receptor, a key regulator of bile acid, inflammatory, fibrotic, and metabolic pathways. The drug is already approved to treat a chronic liver disease called primary biliary cholangitis, which generated about $250 million in sales in 2019, but the big prize is NASH.

Intercept's late-stage NASH trial for Ocaliva met one of the FDA's recommended endpoints, improvement of fibrosis without worsening of steatohepatitis, but failed to pass the endpoint of NASH resolution, the elimination of liver inflammation.  In the primary analysis of results from the registrational trial, 23.1% of patients treated at the highest dose of Ocaliva had improved fibrosis with no worsening of NASH, compared with 11.9% of the placebo group. In a subsequent analysis of patients who completed at least 15 months of treatment, improvements in measures of NASH and liver biochemistry were also observed.

Intercept submitted an application to the FDA last September for Ocaliva to treat NASH in patients with advanced fibrosis, and a decision is expected June 26. The odds of approval are pretty high, and the company should have the market mostly to itself for a year, if not longer. The closest competitor is probably Genfit (GNFT 1.31%), which recently delayed analysis of its phase 3 trial for reasons that are unclear to observers. NGM Biopharmaceuticals (NGM -1.28%) got attention recently with strong results from its drug, but that was from an earlier, phase 2 trial, and the drug is a daily injection instead of a pill, posing no near-term risk to Ocaliva.

The path to the commercialization of Ocaliva for NASH is not without challenges, though. The FDA will be conducting an Advisory Committee review of Intercept's application in March, and there's potential for bad news from that.

But a bigger challenge in the short term may be the process of getting payers on board. The fact that Ocaliva will be the only drug in the space will help, but the company is discussing how the target population will be identified. Intercept is going after 500,000 NASH patients with advanced fibrosis under the care of specialists, out of 19 million total NASH patients. Coverage for the diagnostics to identify that sliver of the NASH population -- whether it be via biopsies or the preferred methods of noninvasive blood tests or imaging -- is a crucial part of the discussions.

Madrigal: possibly a better approach

Madrigal is further from a commercialized drug than Intercept, but the approach it's taking to NASH may result in a superior treatment. Madrigal's lead candidate, resmetirom, is a thyroid hormone receptor beta agonist that addresses NASH by lowering fat in the liver and lipids in the bloodstream at the same time. The company believes that this approach will not only reverse liver damage but also lower risk of cardiovascular disease.

In a phase 2 trial, resmetirom lowered liver fat by an average of 55% at the doses to be used in the phase 3 trial, and results indicated that about 90% of patients should have a reduction in liver fat of at least 30%. The reduction in liver fat was also accompanied by a statistically significant reduction in fibrosis and fatty liver disease activity, with 27% of patients achieving recovery from liver inflammation after 36 weeks.

Substantiating Madrigal's thesis that the drug will lower the risk of heart disease and associated morbidity and mortality were trial results that showed reduced blood lipids. The company reported sustained, statistically significant reductions of low-density lipoprotein cholesterol (LDL-C, down more than 20%); apolipoprotein B, also down more than 20%; triglycerides, down 36%; and lipoprotein(a), down 37%. This contrasts with the action of Intercept's drug, which actually causes a temporary elevation of LDL-C.

The prospect of cardiovascular benefits from resmetirom should allow Madrigal to target the entire spectrum of patients with fatty liver disease, rather than just the sickest NASH patients. Madrigal is launching two phase 3 trials, one in very sick NASH patients with an endpoint of NASH resolution, and one aimed at the much larger population of NAFLD patients with endpoints for reduction of liver fat and blood lipids. Madrigal expects both trials to read out by the end of 2021, putting it about two years behind Intercept, if all goes well.

One is a more reasonable bet

Intercept would seem to be the most rational bet at this point, given its first-mover advantage. But Madrigal's approach has the advantage of addressing an underlying cause of NASH -- liver fat -- while Intercept's drug is specifically targeting liver damage. Both drugs appear to reverse fibrosis, but Madrigal's also addresses the leading cause of death in NASH patients, cardiovascular disease.

The market seems to have already built into Intercept's share price an assumption of approval for Ocaliva. Even though the stock has given up some of its gains since the beginning of 2020, the company's market capitalization is still twice what it was in early 2018.

The stock might get a bounce in June if the approval sails through, but there's still a small chance that a problem could arise from the Advisory Committee review. There's even a slim possibility of a rejection, which could crush the share price. The process of winning payer approval and getting physicians comfortable with prescribing Ocaliva will probably be successful, but it could take longer than investors are thinking. And then, one to three years down the road, Ocaliva will likely have competition from drugs with superior efficacy.

There's plenty of room for disappointments for Madrigal's investors, as well. The path to approval and commercialization of resmetirom could have potholes and is not a sure thing by any means. The drug could make it to market in 2022 at the earliest; if it does, it could be very successful. 

I think either stock is a gamble at this point, but if I had to pick one, it would be Intercept. As it overcomes hurdles with the FDA, payers, and physicians, it could see share-price gains. But if I were thinking of buying the stock, I'd wait to see the outcome of the approval process this June first, even if it meant buying in at a higher price.