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Morningstar | Uptake of Intercept's Ocaliva Continues to Pick Up; Shares Still Undervalued With $150 FVE

No-moat Intercept reported third-quarter results, with $46.6 million in worldwide Ocaliva sales, up 9% sequentially and 14% year over year. This quarter's sales were marginally lighter than we anticipated, so we have adjusted our full-year outlook to $181 million in Ocaliva sales, down from $185 million. Management attributed some weakness to seasonality, with patients less likely to be diagnosed or start new medication during the summer months, but reiterated full-year guidance of $170 million to $185 million in Ocaliva sales. Further, Intercept reported lower-than-expected operating spending, so we've adjusted near-term expectations accordingly. After these adjustments, we do not expect a material change to our fair value estimate of $150 per share. Despite the stock trading nearly 10% higher on Oct. 31, shares remain undervalued, presenting an attractive entry point for investors.

Intercept has continued to build out its salesforce, focusing on targeting hepatologists and gastroenterologists, preparing the capacity necessary for selling Ocaliva in primary biliary cholangitis, or PBC, as well as the potential approval of obeticholic acid, or OCA, in noncirrhotic NASH (nonalcoholic steatohepatitis) patients with advanced fibrosis. The company's first potential regulatory approvals in NASH patients would be based on the results of the Regenerate trial of over 2,000 patients, which is expected to read out in the first half of 2019. While we expect Ocaliva to provide steady cash generation as uptake continues and the firm unlocks reimbursement negotiations in other regions, our valuation is significantly driven by our expectations for OCA in NASH. We model probability-weighted OCA sales of over $2 billion by 2023 compared with less than $600 million Ocaliva sales in 2023.