by Hilary Kramer | January 14, 2014 2:34 pm
In investing, everyone wants to board a ship before it rockets into the stratosphere for untold gains. How many times have you read about a huge gain, and been disappointed that you hadn’t been prescient – or lucky enough – to have moved sooner? You tell yourself to “get the next one next time…forget about this one and move on.”
But that may not be the wisest move. As stocks that suddenly become two-, three- or four-baggers on sudden, unexpected news or events settle into their new price neighborhood, it’s important to realize why they’re there, what happened and why it may be time to jump on board before its next move upward.
A huge move upward is often not the end of a stock’s positive longer term trend. Stocks almost always jump for reasons tied to their underlying prospects, and these prospects can serve as a crucial catalyst for further gains that build upon earlier ones.
One such stock that recently made a huge move is Intercept Pharmaceuticals (ICPT). As often drives such pharma and biotech companies, the news around a successful clinical trial pushed ICPT shares to previously unseen levels. But while I’ve been a fan of this stock for a while and many of you have benefited from my past calls on it, I believe those who haven’t still have an opportunity for future gains given the tremendous potential for this company and its groundbreaking products.
First a little background. Intercept’s a clinical stage biopharmaceutical company focused on developing and commercializing innovative treatments for chronic liver diseases like primary biliary cirrhosis. Diseases like this can run into the billions of dollars in health care costs for treatments, transplants, complications and so on. Intercept’s built an expertise in bile acid chemistry to bring new medicines to this market (and there are not many alternative solutions).
Intercept’s main product that they have developed and are testing is obeticholic acid (OCA), a bile acid analog. It’s a chemical substance that has a structure based on a naturally-occurring human bile acid. OCA selectively binds to and induces activity in the farnesoid X receptor, or FXR, which the company believes has broad liver-protective properties.
According to Intercept, OCA’s being developed initially for primary biliary cirrhosis, or PBC, as a second line treatment for patients who have an inadequate response to or who are unable to tolerate standard of care therapy (Ursodiol, the only approved therapy for this indication) and therefore need additional treatment. PBC is a chronic autoimmune liver disease that, if inadequately treated, may eventually lead to cirrhosis, liver failure and death.
In both the United States and Europe, OCA has received orphan drug designation (meaning its being developed for a rare disease, and can gain easier marketing approval and receive financial incentives) for the treatment of PBC. Intercept owns worldwide rights to OCA outside of Japan and China, where it has out-licensed the product candidate to Dainippon Sumitomo Pharma. Patent rights cover the drug’s key components through 2022 before any potential extensions and adjustments.
So far, so good? I’ve been following ICPT since its 2012 IPO (at $17) and in fact recommended its purchase mid last year (Forbes, June 18, 2013). At that time, ICPT was trading in the low $30s with a market cap of $550 million. I was particularly interested then because of its ongoing OCA trial to not only treat PBC but other liver diseases as well. There was (and still is) huge opportunity for such treatments.
Preliminary results were positive but further results from its ongoing trials were expected later in 2014. With the drug’s eventual approval, I saw ICPT as a stock that could easily double or more with such a blockbuster potential. In 2013, it was very “under-followed” on the Street as most analysts waited for more news before it would get more attention.
While recommending a short term trade from a November buy of ICPT and an early December sale to lock in a 19% profit, I again turned bullish on ICPT recently. Just about two weeks back in a year end review interview with the Wall Street Journal, I again recommended ICPT with shares then trading in the mid-$60s. One factor I highlighted then was a possible acquisition as another key catalyst for the stock, and mentioned how I wouldn’t be surprised to learn of a buyout at a big premium.
As they say, timing is everything! In the last week, while there wasn’t an acquisition, what happened was the surprise announcement of the clinical trial results I was expecting, albeit earlier than anyone expected.
In fact, the multi-center, double-blind, placebo-controlled clinical (FLINT) trial was actually stopped by the Data Safety Monitoring Board (DSMB) because of such positive results after reviewing the study patients’ liver biopsy data. The company announced that the trial for patients with nonalcoholic steatohepatitis (NASH), a serious chronic liver disease, was stopped early due to “highly statistically significant improvement” in measures of liver health. The trial was sponsored and conducted by the National Institute of Diabetes & Digestive & Kidney Diseases (NIDDK), a part of the National Institutes of Health, at eight leading US academic hepatology centers comprising the NIDDK’s NASH clinical research network (CRN).
The NIDDK confirmed that “OCA has a significant beneficial effect on liver damage due to NASH.” Intercept’s CEO highlighted the importance of such treatment as “NASH has grown to epidemic proportions worldwide, having become a leading cause of cirrhosis and liver failure. On its current trajectory, the disease is projected to become the leading indication for liver transplant.”
There’s a huge opportunity to reach those suffering from this disease with no drugs currently approved to treat NASH. Studies have shown that over a 10-year period, at least 10% of NASH patients will develop cirrhosis. Liver-related mortality due to this disease is ten-fold that of the general population.
Quantifying the size of the market, recent epidemiological studies estimate that approximately 12% of the U.S. adult population has NASH, while 2.7% (potentially more than six million patients) are believed to have advanced liver fibrosis or cirrhosis due to progression of the disease.
The proportion of liver transplants attributable to NASH has increased rapidly in past years and over the next decade, the disease is projected to become the leading indication for liver transplant – and that’s ahead of chronic hepatitis C and alcoholic liver disease.
Specifically, Intercept said it finished the double-blind phase of their Phase 3 trial in PBC and that “a vast majority of the patients completing the 12 months have opted to cross over to the five year long term safety extension open-label phase of the trial.” In addition, the company obtained positive clinical data in all six Phase 2 clinical trials completed to date in five different indications. Further NASH trials of OCA are also being conducted by its partner Dainippon Sumitomo Pharma in Japan in 2014 with top lines results expected by the end of 2015.
To say the market reacted positively to this news was beyond understatement. Over the course of just a few days, the stock skyrocketed into the $400 range, closing Friday at $445. The company’s market value leaped from $1.4 billion to $8.6 billion in just two days of trading!
With this news, some Wall Street firms finally — albeit a bit late — jumped on the ICPT bandwagon. Citigroup (C) raised its target to $400, stating that its market cap (at the time $5.4 billion) didn’t reach the opportunity for these liver disease treatments. They estimated that the OCA could exceed a $5 billion sales level. Oppenheimer (OPY) also raised its target to $360 while Bank of America/Merrill’s (BAC) target is set at $872, the only one not yet exceeded with the most recent move.
So what to do now if you weren’t a shareholder a few days – or a few hundred points – ago? It’s likely that most analysts who haven’t been covering the stock until now will be somewhat tentative after such a huge runup.
However, I’m still quite bullish on ICPT. While the near term is likely to be somewhat bumpy, I see further gains up to 50% or more over the next twelve months, pushing the stock from current levels into the upper $600s.
There are a few different elements underpinning my view. The trial that was stopped was for one particular treatment, and for only one of a number of uses for its drug. Other trials are also proceeding and further positive results are likely to be forthcoming. Without any significant competitive treatments and a broad applicability for costly liver disease care, there’s tremendous opportunity to own this market. Patent-protected sales for a number of liver-based diseases should easily see Intercept’s solution moving into the ‘blockbuster’ category.
In addition, as I highlighted at year end, acquisition potential is still a strong possibility. While the price tag is certainly higher than it was just a few weeks back, it’s now also a target with a much lower acquisition risk profile given the increased certainty of eventual drug approval, always a trying process, and sales potential.
As a likely dominant vertical player in a lucrative pharma segment, it makes a lot of sense for Intercept to become part of an existing large pharma’s portfolio. As many of the large drug companies struggle with an expanding array of patent expirations but still maintaining large sales forces, newcomers like ICPT can be just the ticket to further their own growth.
We often lament our missed calls, wishing we had that time machine and could just go back a few days and make an investment or two. But sometimes just looking at a recent rocket ship and realizing that its current destination is only the first stop on a much longer journey can prove to be a much more useful – and profitable – endeavor.
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