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Morningstar | Maintaining $150 FVE and No-Moat Rating for Intercept; Shares Undervalued

We are maintaining our fair value estimate of $150 per share for Intercept, an emerging biotechnology company with obeticholic acid, a lead candidate to treat nonalcoholic steatohepatitis, or NASH. NASH is a massive market opportunity that could exceed $30 billion, by our estimates, and will likely support multiple therapies and combinations. We are also reiterating Intercept's no-moat rating and stable moat trend. Despite appreciation of over 20% year to date, shares continue to look undervalued. We believe that the market is fixating on OCA's side effects and long-term competitive threats while underappreciating the likelihood that Intercept's OCA could be first to market. Our model assumes a 65% probability of approval of OCA in fibrosis in 2020 and a 50% probability of approval in cirrhosis in 2021, as well as market share declines after 2023.

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. If approved, we think OCA's efficacy, paired with first-to-market status and patient segmentation within NASH, could bring the company to profitability in 2021 and provide funding for further drug development.

OCA is already approved as Ocaliva in primary biliary cholangitis, or PBC, a rare liver disorder primarily affecting women over 40 years old. We don't believe Ocaliva significantly adds to the company's competitive positioning as there is an alternative treatment available for PBC, but we think it demonstrates the therapeutic potential of OCA. 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 and gives Intercept additional avenues of drug development once the company completes trials in NASH.

A crowded industry pipeline is vying for a slice of this lucrative opportunity, but Intercept's OCA is one of the most advanced candidates, with a potential launch in 2020, along with Genfit's elafibranor. We previously considered Gilead's selonsertib a close competitor, but disappointing data in cirrhosis reported in February 2019 significantly decreases the likelihood of approval, in our opinion. Gilead's combination therapy (GS-0976 and GS-9674) is still a contender but would likely not launch until 2023, if approved. Other NASH competitors include Allergan's cenicriviroc (launch pushed back by a year to 2022), Madrigal's MGL-3196 (potential launch 2022), Galectin's GR-MD-02 (2022), Galmed Pharmaceuticals' Aramchol (2023), and Viking Therapeutics' VK-2809 (2023). Madrigal and Viking are emerging as promising candidates, with strong efficacy and tolerable safety profiles, but they remain in early stages.

Ultimately, we believe that competition will likely erode Intercept's market share in NASH after 2023, but its first-mover status provides the firm with a strong advantage and a road to profitability. We expect detailed phase 3 data from Intercept as well as other NASH data from competitors at the International Liver Congress later this week, from April 11 to April 15.

For more on Intercept's position within the NASH competitive landscape, please see our August 2018 Healthcare Observer "NASH Market Opportunity Undervalued, With Lack of Credit to Wide-Moat Gilead and No-Moat Intercept."