Big Opportunity in Liver Treatment for Intercept Pharmaceuticals

NASH is a potential $30 billion market opportunity as it is a common but serious liver disorder closely linked to obesity and diabetes; it has limited treatment options currently. While many firms are vying to address this disease, we think Intercept’s OCA is one of the most advanced drugs in clinical development and appears relatively well positioned based on strong phase 2 results. However, its less-than-ideal side effect profile--it increased patients’ LDL cholesterol levels and caused severe itchiness--leaves an opening for future competition and potential combination treatments. Indeed, Gilead GILD, which has an earlier-stage portfolio targeting various mechanisms of the disease, and other players like Genfit GNFTF, Novo Nordisk NVO, and Allergan AGN have potential products that could be longer-term winners in this emerging therapeutic area.

Increasingly Competitive Market Although Intercept's OCA was approved in the orphan indication of primary biliary cholangitis and could be approved in a few years in the megablockbuster NASH market, we do not believe that the company has an economic moat yet. While we think OCA is a well-positioned drug in the increasingly competitive NASH pipeline, we are hesitant to award the firm a moat based on the prospects of one product. In addition, we anticipate that the company will remain unprofitable until 2022, despite the approval of OCA in PBC in 2016, because of the high cost of Intercept's large phase 3 program in NASH. Furthermore, a high degree of uncertainty still surrounds OCA's commercial success. While OCA demonstrated strong phase 2 results and has a first-mover advantage, its less-than-ideal side effect profile leaves an opening for future competition and potential combination treatments. Finally, we caution that potential drug launches in NASH may be hindered by the slow-moving nature of the disease and current limited diagnostic tools besides painful and costly liver biopsy.

We do think Intercept’s moat trend is positive, as OCA is currently in the pole position to be the first approved therapy in NASH. While OCA is an easy-to-genericize small-molecule drug, its key composition-of-matter patent expires in 2022 with potential to extend into 2027, providing a reasonably long runway for the drug franchise. In terms of competitive positioning, OCA has shown strong clinical results by preventing progression of NASH and reversing fibrosis, which ultimately leads to more severe cirrhosis of the liver. If the company can reproduce these type of results in its ongoing phase 3 trial, we think the drug will achieve blockbuster sales. While there is significant earlier-stage competition targeting NASH, we expect the NASH market will have room for several players and combination treatments.

Intercept's Value Hinges on OCA's Success The bulk of Intercept's value is tied to the success of OCA; regulatory, clinical, or product launch setbacks would adversely affect the firm's share price. While OCA is one of the most clinically advanced and well-positioned drugs of a cohort of new NASH products, several competitors are following close behind--notably, Genfit's elafibranor (GFT505), Gilead's selonsertib (GS-4997), Allergan's cenicriviroc, and Novo Nordisk's semaglutide (NN9535). In addition, while OCA has shown a strong efficacy profile, worries about its safety--notably the raising of LDL ("bad") cholesterol levels--may limit its ultimate uptake, given that many NASH patients also have cardiac comorbidities.

As of the end of 2016, Intercept had $689 million in cash and investments and $341 million of debt on its balance sheet. Like most biotechnology companies, Intercept has historically operated at a loss because of the high cost of clinical trials and research. These losses have been financed largely through offerings of equity, collaborative research and development funding arrangements, development milestones from partners, and more recently debt. While OCA was approved in 2016, we do not expect the firm to achieve sustainable profitability until 2022. As such, we expect that Intercept is likely to need to raise additional capital in the coming years, either through share or debt issuances.