Intercept Pharmaceuticals (NASDAQ:ICPT) has had a wild ride to redefine all wild rides. While this biotech was definitely interesting and undervalued on the merits of its bile acid therapeutic OCA for primary biliary cirrhosis (PBC), the unexpected success of a Phase IIb study in nonalcoholic steatohepatitis (NASH) has sent the shares into a new orbit. While the company's recent presentation at the JPMorgan Healthcare Conference spooked investors with talk of possibly pursuing a partner for the NASH program, this may ultimately be the best way to maximize value for the application.
Multiple Rare Disease Opportunities
I'll turn back to NASH in a moment, but it's well worth noting that Intercept was quietly building an interesting roster of rare disease indications for its lead compound OCA. OCA, or obeticholic acid, is a Farneosid X receptor agonist that has shown encouraging initial signs of efficacy in a number of dangerous and undertreated liver conditions.
The lead indication for OCA is PBC, a rare autoimmune liver disease where there is a slow, progressive destruction of the liver bile duct. This leads to bile building up in the liver, and if untreated will eventually progress to cirrhosis. There is a therapy available, ursodeoxycholic acid (or ursodiol), but it is not fully effective in between one-third to one-half of patients. Phase II studies of OCA have shown significant declines in liver enzymes like ALP, GTP, ALT, and AST, and the drug is currently in Phase III development with the POISE study results expected in the second quarter of this year.
While PBC alone would be a multi-hundred million dollar opportunity for the company, Intercept is also pursuing other (relatively) rare conditions like portal hypertension, primary sclerosing cholangitis, and bile acid diarrhea (BAD) in conditions like Crohn's disease. With that, I don't think it's entirely inappropriate to compare Intercept to Alexion Pharmaceuticals (NASDAQ:ALXN), a highly successful rare disease biotech that has developed Soliris for the rare diseases PNH and aHUS and continues to pursue additional indications in other rare hematology and nephrology indications.
Investors do seem to overestimate the sort of marketing leverage that rare disease specialists like Alexion can expect. Even so, these companies do face considerably less competitive risk than typical pharmaceutical companies and typically enjoy exceptionally lucrative reimbursement. In the case of Alexion, for instance, Soliris therapy can cost upwards of $500,000 a year for PNH and even more for aHUS.
NASH Changes Everything
The unexpected success of OCA in the treatment of NASH (also known as fatty liver disease) has dramatically changed the situation at Intercept. There was no particular expectation that OCA would help NASH, as no drugs have been approved for the condition and none have really shown solid efficacy so far. With that, it was actually the NIH that was sponsoring and running the study.
And then a shocking thing happened – on January 9, the company announced that the Phase IIb FLINT study was stopped early due to exceptional (and wholly unexpected) efficacy. Even with roughly half of the patients having not yet completed the second biopsy and classed as "non-responders", the trial showed a highly statistically significant (p=0.0024) improvement in NAFLD Activity Score (two points or more).
Now it seems OCA could emerge as a true blockbuster. NASH is still poorly diagnosed and characterized, but it is thought that there could be millions with advanced forms of the disease that put them at risk of cirrhosis. With that, the sales potential of an effective therapy could be on par with cholesterol, anticoagulant, or diabetes medications – on the order of billions of dollars.
It was this surprising NASH data that sent the shares soaring, but also has made the situation more volatile. Subsequent follow-up data did show that OCA raised bad cholesterol levels in patients, and management indicated that they may need a partner to develop this drug.
Honestly, I don't see the need to fuss over the possibility of a partner. The clinical development demands change considerably when you move from talking about conditions that impact tens of thousands to potentially millions of people. The same holds true with the marketing burdens – I believe that Intercept could develop the sales force it would need to sell OCA as a treatment for rare liver diseases, but the magnitude of the sales effort required for NASH would likely be considerably larger. It's also important to consider the reimbursement angle – small companies like Alexion have ably demonstrated that they can get good reimbursement for their specialty drugs, but the development of the NASH market may require the assistance of a larger, experienced player.
A Partner Won't Kill The Model
Between PBC, portal hypertension, and PSC, I calculate a fair value of $153 per share for Intercept today, assuming 75% market penetration and odds of approval that range from 35% for portal hypertension to 75% for PBC.
Assessing the value of the NASH indication is considerably more challenging, given how poorly defined the potential market is today. If there are just 120,000 patients in the U.S. and EU with serious fibrotic NASH and Intercept can charge the same price in this indication as I estimate for for PBC (around $38,000 on a weighted average), we're talking about a $4.5 billion drug and over $400 per share in value to Intercept.
Even if Intercept has to surrender 80% of the economics to a larger partner (and given the strength of the data, they may get better than 20% royalties), that is still worth over $100 per share today. With some estimates of the number of serious NASH patients reaching 2 million or more and each incremental 100,000 patients worth more than $100/share with 20% royalties, I'd say that a partnership is hardly a value-killing proposition.
The Bottom Line
I expect plenty of volatility in these shares. There are uncertainties as to whether the company can get OCA approved in PBC before a second confirmatory Phase III is completed, and the path forward in NASH is a total unknown right now. What's more, I'd be surprised if the company didn't try to take advantage of the stock move and raise some capital. Even with all of that said, though, this remains a very interesting biotech targeting a number of serious under-treated conditions.