I admit it: I love trying to catch a falling knife. Sometimes you get sliced in the process, while at other times you leave vindicated by having gone against the grain. My belief is that small-cap biotech Intercept Pharmaceuticals (NASDAQ: ICPT) will fall into that latter description when all is said and done.
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Why Intercept has fallen on hard times
There's no masking the fact that Intercept has had a miserable year. Shares are down 43% since the year began, and 63% over the trailing two-year period. This roller-coaster ride is plainly the result of Ocaliva, the company's lone approved drug from the Food and Drug Administration (FDA).
For the time being, Ocaliva has but one approved indication: primary biliary cholangitis (PBC). This is a progressive and fatal disease whereby the small bile ducts of the liver are destroyed, resulting in the buildup of bile and other toxins in the liver over time. Ocaliva is the only approved indication to treat PBC.
However, Intercept blew a tire, or should we say all four tires, in September when the company reported that PBC patients had died while taking its lead drug. Intercept noted on Sept. 12 that 10 patients had suffered liver failure, injury, decompensation, or death as a result of overdosing. Intercept used its press release as a reminder to physicians and patients that the sickest individuals not be given more than 5 mg of Ocaliva per week, despite reports that some had been dosed daily.
On Sept. 21, the FDA disclosed that in fact 19 people had died while taking Ocaliva, some of whom had indeed been administered excessive doses of the medicine. This higher death count worried Wall Street, which followed through with a host of downgrades. It also sets the stage for what could be new warnings for Ocaliva from the FDA, with a black-box warning a possibility at this point.
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Ocaliva is being tested in a number of other liver disease indications, and the obvious concern is that these adverse results will also manifest in future study data.
Three reasons I've aggressively been buying Intercept's stock
Despite these concerns, I've used the recent weakness in Intercept's stock as the perfect opportunity to open a position and buy aggressively on multiple occasions since. Overall, I see three reasons Intercept could reasonably be worth as much as 200% more than it is now within the next five years.
1. This isn't really Ocaliva's fault
First, consider the circumstances behind the aforementioned 19 deaths. While not all of these deaths occurred as a result of overdoses, a majority of them did. That's not the drug's fault -- that's a lack of knowledge on the part of the physician or patient. Intercept is working with physicians to ensure they understand what the safe dosing levels are for Ocaliva, but it's pretty clear to me that this was more a case of not following the label than it was that Ocaliva is a dangerous drug.
2. We haven't observed liver safety concerns in other clinical studies
Second, and building on that first point, medicines can react very differently based on the disease they're targeting. For example, while 19 deaths were associated with PBC patients, many of whom were already very sick, no out-of-the-norm major adverse events relative to the placebo were noted during the midstage Flint trial in patients with nonalcoholic steatohepatitis (NASH).
Data released in June for NASH patients with type 2 diabetes, a cohort that's particularly prone to liver complications and fibrosis, showed no difference in the adverse-events profile compared to the placebo, with one exception. Ocaliva patients were almost four times likelier to develop pruritus, which is a scientific term for itching. While unpleasant, it's not life-threating. Long story short, data from Intercept's other key studies doesn't appear to signal that Ocaliva is a safety concern.
3. There's a massive market in NASH
The third reason I've aggressively bought Intercept's stock has to do with its potential in NASH, a disease that affects between 2% and 5% of the U.S. adult population and currently has no cure. NASH is expected to become the leading cause of liver transplants by next decade.
Way back in 2014, Intercept announced that Ocaliva (obeticholic acid as it's known scientifically) had reached its primary endpoint in the Flint study. It wound up decreasing the NAFLD Activity Score by at least two points with no worsening of fibrosis in 46% of patients, compared to just 21% of those were treated with the placebo. Also, an improvement in fibrosis was seen in 35% of Ocaliva patients relative to 19% taking the placebo. Finally, 22% of Ocaliva-treated patients had NASH resolution, compared to 13% for the placebo cohort. Though the NASH resolution wasn't statistically significant relative to the placebo, the other aspects of this study were.
Adding to this point, Intercept and the FDA also amended the protocols of its phase 3 Regenerate trial in February 2017. Instead of having to demonstrated NASH resolution and statistically significant fibrosis improvement, Ocaliva will now only have to demonstrate NASH resolution or statistically significant fibrosis improvement. Meeting one of two co-primary endpoints ups the likelihood of success, and meeting both would really bolster Ocaliva's shot of becoming a blockbuster drug.
Though sales estimates vary wildly, I could foresee a NASH approval adding $2 billion or more in peak annual sales.
It won't be easy, but the opportunity is there
Even with my aggressive buying of late, I'm not oblivious to the risks.
For instance, there is that chance a black-box warning could wind up on Ocaliva's packaging, which could harm sales. More importantly, it could be a deterrent for future sales of the drug in treating NASH, if approved.
Intercept also isn't the only show in town. Genfit and a host of other drug developers are working on NASH drugs of their own, meaning there's a benefit to be had of being first to market. We're probably not going to get any data from Intercept on its pivotal NASH study until the first half of 2019, so the waiting game could chip away at the company's valuation.
Nevertheless, there's plenty of opportunity and value here. Even stripping out NASH, and taking into account its approved indication in PBC, as well as positive midstage results from its Aesop trial in patients with primary sclerosing cholangitis (PSC), its current valuation makes sense. Assuming approval in just PBC and PSC, $400 million in peak annual sales for Ocaliva is possible. That would leave very limited downside in Intercept from its current price if it were valued around a sales multiple of three. If Ocaliva gets the green light in NASH, this could easily return to $200 a share, if not higher. Essentially, shareholders are able to buy in right now with virtually no value placed on the NASH program, and I find that to unbelievable given the strength of the Flint data.
Patience is clearly going to be a virtue with Intercept Pharmaceuticals, but this investor is excited about what the future holds.
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