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Intercept Looks to Be First in Lucrative Market

But the pipeline of competing drugs is full, so we don’t see a moat for the biotech.

Intercept Pharmaceuticals ICPT is an emerging biotechnology company with one of the most advanced pipeline candidates for nonalcoholic steatohepatitis, or NASH, a massive market with high unmet need. Obeticholic acid, or OCA, is already approved in primary biliary cholangitis, a rare liver disease, which provides the company with steady revenue but is limited to a small patient population. Intercept’s valuation depends heavily on OCA’s potential in NASH.

NASH is a common but serious liver disorder linked to obesity and diabetes, with limited treatment options. Liver fat buildup leads to fibrosis, the thickening and scarring of liver tissue, which could progress to cirrhosis, liver failure, heart disease, and death. OCA has shown impressive efficacy in improving fibrosis in phase 3 trials, but its side effect profile, which includes severe itching and increased bad cholesterol, leaves room for competition down the road. However, given its advanced stage in the pipeline, Intercept has a high likelihood of being first to the lucrative NASH market in 2020.

The stakes in NASH are high, with a crowded pipeline contending for a slice of the $30 billion-plus market opportunity. We believe the potential segmentation of the NASH market will support multiple therapies and combinations, with later-stage NASH presenting a more lucrative opportunity. Closely following Intercept’s OCA is Genfit’s GNFTF elafibranor, with phase 3 data likely read out by the end of 2019 and a potential launch in late 2020. Other NASH competitors include Allergan’s AGN cenicriviroc, Madrigal Pharmaceuticals’ MDGL MGL-3196, Galectin Therapeutics’ GALT GR-MD-02, Galmed Pharmaceuticals’ GLMD Aramchol, Viking Therapeutics’ VKTX VK2809, and Gilead Sciences’ GILD combination therapy, which could launch between 2022 and 2023. Gilead reported disappointing trial results for selonsertib in cirrhosis in early 2019, slightly improving the playing field for Intercept, but its combination therapy remains a contender. We believe that competition (that is, drugs with strong efficacy and minimal side effects) will probably erode Intercept’s market share in NASH after 2023, but its first-mover status provides the company with a strong advantage.

Eventual Competition, Lack of Diversification Prevent Moat We do not believe Intercept possesses an economic moat. While the company's lead therapy, OCA, has already been approved in primary biliary cholangitis, or PBC, and could enter the lucrative NASH market as a first mover, we believe that competing NASH therapies with more attractive side effect profiles will eventually enter the market in the years following OCA's entry. In addition to competitive threats, we believe the company's heavy reliance on OCA's potential approval in NASH precludes a moat, given the lack of portfolio diversification and low cash generation at this point.

OCA is a farnesoid X receptor, or FXR, agonist, meaning it activates FXR, a receptor naturally expressed in the liver, intestines, and kidney. FXR’s critical role in regulating several biological pathways makes it a promising therapeutic candidate in a range of liver and metabolic diseases. Intercept’s Ocaliva was the first FXR agonist to be approved in 2016 in second-line PBC and remains the company’s sole marketed product. PBC is a rare indication resulting in liver damage and scarring, mostly affecting women over 40 years old. Given the small patient population and the availability of ursodeoxycholic acid as frontline treatment, we don’t believe the use of Ocaliva in PBC significantly adds to the company’s competitive positioning, but it does highlight the therapeutic potential of OCA.

The NASH market offers a much more lucrative opportunity, with the global market reaching $14 billion on a probability-weighted basis in 2028 by our estimates. We estimate that there are nearly 3 million people in the United States and Europe with advanced fibrosis or cirrhosis and eligible for treatment, and diagnosis rates are likely to improve as treatment options become available and diagnostic tools improve. At this point, there are limited treatment options, but a full pipeline of contenders implies we may see the first wave of approved NASH therapies in 2020, with Intercept’s OCA leading the way. We believe that patient segmentation will support multiple therapies, and the multitude of causes of NASH provides a strong rationale for combination therapies. While the widespread disease presents a significant market opportunity, NASH can be slow to progress, asymptomatic, and difficult to diagnose, which could hinder uptake for first movers.

In an interim analysis of its phase 3 trial, the higher dose of Intercept’s OCA met its primary endpoint in patients with fibrosis, showing statistically significant fibrosis improvement with no worsening of NASH after 18 months. While highly statistically significant on the primary endpoint, the other results from the trial were mixed. The drug did not show a statistically significant effect on NASH resolution without worsening of fibrosis, and the trial confirmed itching as the most common side effect. Further, the lower dose did not meet the primary endpoint, and OCA treatment was associated with increased bad cholesterol, which is concerning given that NASH patients often have cardiovascular comorbidities. The results largely affirmed our thesis: We believe that OCA has the potential to be the first approved therapy in NASH, but its safety profile leaves the door open to competition.

Intercept’s position is slightly stronger after selonsertib failed in cirrhosis in phase 3 trials in early 2019. Before the trial results, there was a chance that Intercept and Gilead would be vying for the first-mover spot, and now it looks more likely that Intercept will be first to market. The next closest competitor is elafibranor, which is expected to report phase 3 data by the end of 2019. Elafibranor has shown some cardiovascular benefit (opposed to OCA, which showed an increase in bad cholesterol) and evidence of NASH resolution. However, its effect on fibrosis improvement was inconclusive, and we believe it could launch in late 2020, several months after Intercept.

We see a potential second wave of NASH competitors entering in 2022, which includes cenicriviroc, whose potential launch timeline has recently been delayed by one year to 2022 after slow enrollment, MGL-3196, and GR-MD-02. In 2023, Aramchol, VK2809, and Gilead’s combination therapy could enter the market. In our base case, we model OCA’s market share in NASH declining after 2023 as better competitors are approved. Of all the competitors mentioned, we believe MGL-3196 and VK2809 could most rapidly gain share, given their strong early data. However, because of the heterogeneity of the NASH patient population and clinical endpoints used, it’s difficult to determine long-term winners at this point.

Ultimately, we do not believe the emerging biotech’s intangible assets are strong enough to support an economic moat. OCA’s composition of matter patent expires in 2022 but could be extended until 2027 and provide lengthy patent protection against generic entry. However, with the safety profile in NASH leaving room for branded competitor entry, we do not believe Intercept possesses an economic moat even with patent protection. We would reconsider this rating if OCA showed efficacy in other liver or metabolic diseases with large market potential and fewer side effects, or if other successful therapies diversified the revenue base.

Valuation Rests on One Drug We believe Intercept warrants a very high fair value uncertainty rating, given that its valuation largely rests on the opportunity of OCA in NASH. While OCA is a prime contender to be first to market, the NASH pipeline is full of near- and long-term candidates, and OCA's side effect profile leaves room for competition down the road and may affect its initial uptake, if approved.

Our estimates in NASH rely on an annual net price of about $10,000 in the U.S. Our analysis factors in the large population, high unmet need, efficacy, and potential side effects, but it is difficult to predict drug price without any approved treatments in NASH. Additionally, even if OCA gains approval and reaches the market, we believe the most severe NASH patients will provide the most lucrative opportunity for drug companies. If Intercept is cornered into the earlier-stage NASH patient population as a result of inferior pivotal trial data in comparison with other competitors, we would expect slower drug uptake at discounted prices, given the less urgent need in this cohort of patients. Variable pricing power contributes to the company’s very high uncertainty rating.

Further, NASH can be asymptomatic and difficult to diagnose, which could affect OCA’s momentum, if approved. Our projections factor in an improving rate of diagnosis, increased awareness, and advancements in fibrosis diagnostics over time.

The company is susceptible to the risk of severe side effects and even patient deaths. Patient deaths and cases of severe liver injury in Ocaliva patients with PBC surfaced in September 2017. The situation was resolved with an updated label for the drug (including a black-box warning highlighting the dosing regimen). We believe the successful resolution with the U.S. Food and Drug Administration and lack of causal connection found between the drug and adverse patient outcomes should result in limited impact to Ocaliva sales over the long term, but it does exemplify a risk for the company.

Intercept is in middling financial health, with drug development costs in NASH dwarfing the revenue from its single marketed drug, Ocaliva. Like other emerging biotechnology companies, Intercept has operated at a loss due to the high cost of clinical research. These losses have been financed largely through offerings of equity, collaborative research and development funding arrangements, development milestones from partners, and debt. The company ended 2018 with over $370 million in long-term debt and about $436 million in cash on its balance sheet. Based on our model, with a probability-weighted chance of approval in NASH, the company will not be profitable until 2021. We believe it will probably need to raise additional capital in the next couple of years.

Pipeline success in NASH (potentially as soon as 2020) would vastly improve Intercept’s financial position and allow the company to explore new market opportunities in other indications. Currently, the company is financially constrained, given that late-stage NASH trials are large, with hundreds of participants, and long, usually spanning several years.

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