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By Stefan Quenneville, CFA | 01-11-2016 10:00 AM

2 Undervalued Biotechs Vying for a Big Market

Gilead and Intercept are both developing drugs aimed at a $10 billion market opportunity in liver-disease treatment, but they present different considerations for biotech investors.

Stefan Quenneville: We recently put out a report on the therapeutic area of NASH. NASH stands for nonalcoholic steatohepatitis, which is really just a fancy way of saying fatty liver disease.

So, what is NASH? NASH is a very common but severe liver disease closely related to obesity and diabetes that has really no viable treatments currently.

What happens in NASH is that fatty deposits in the liver cause liver damage and scaring called fibrosis. So, what drug developers are doing is they are looking for drugs that can either stop or reverse the process of fibrosis. Given the millions of people that suffer from this, we think that a drug that can do that can serve a market opportunity of about $10 billion. Clearly, with an opportunity that big, there are a lot of biotech and pharma companies looking to develop drugs in NASH.

There are two things I'd like to highlight for investors who want to play the NASH opportunity; for investors with a higher risk tolerance, we like Intercept Pharma (ICPT), whose primary drug is in Phase III trials and is the most advanced drug in development for NASH currently. This is more of a binary outcome, so investors are taking on a lot of clinical risk where the results of that Phase III trial will come out in 2018, and it will be either a very strong showing or a weaker showing. So, there is both upside and downside risk in that name. But we do like the current risk/reward profile. We have it as a no-moat company, and it's currently trading at about a 50% discount to our fair value estimate.

Another less-binary way to play the NASH opportunity is through Gilead (GILD). Gilead has several earlier-stage drugs in development for NASH as well as several blockbuster drugs and other indications as part of their portfolio. So, there is less upside in the NASH opportunity but also less binary risk. We currently rate Gilead as a wide-moat company, and it's trading at about 30% discount to our fair value estimate.

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