Intercept Pharmaceuticals, Inc., (NASDAQ:ICPT) is a biopharmaceuticals company, based in New York City, New York, focusing on "the development and commercialization of novel therapeutics to treat orphan and more prevalent liver and intestinal diseases by utilizing its expertise in bile chemistry." During trading sessions last week, the PPS of Intercept climbed nearly 500% to its nadir due to the positive news centering the early stoppage of the Flint trial. The decision to prematurely cease the trial stemmed from Intercept's lead drug, obeticholic acid ("OCA"), superiorly met its primary outcome needed for the treatment of non-alcoholic steatohepatitis ("NASH"). Since their ascension, ICPT shares traded 40% to 50% discount to their 52-weeks high due to the subsequent press release regarding the unfavorable lipid profiles found in patients who received OCA treatment in the Flint trial.
I usually do not analyze companies that recently went public, thus I would have overlooked Intercept for the company IPOed no longer than a year ago. The statement "to every rule, there's an exception" is indeed true, for Intercept is the sole exception to my investing rule that I uncovered during the past seven years. Hence, I am going to present to readers my analysis of this excellent investing opportunity from an "integrated investing" approach of a young medical doctor, a researcher and an investor.
According to Warren Buffett's mentor, Benjamin Graham, Mr. market tends to behave in either extreme, by quoting a stock either too high or too low. This pendulous swing in the share prices of many issues creates an excellent opportunity for the intelligent and enterprising investors, who are willing to conduct additional research. Based on my due diligence, I would not recommend readers to purchase Intercept when the company's shares were trading in the proximity of $497. However, recent pessimism pushed the PPS of this great company down to its low of $247, which created a wide "margin-of-safety". As a result, this transformed ICPT into a bargain issue … one holding potential blockbusters. In Peter Lynch's world-renowned lines, I believed that this is "an investment that I would recommend to my mother-in-law."
The Pathophysiology of Non-Alcoholic Steatohepatitis ("NASH")
Before I would proceed further, it is important for readers to have a background understanding of NASH. The physician executives at Intercept described it best …
NASH is a serious chronic liver disease caused by excessive fat accumulation in the liver that, for reasons that are still incompletely understood, induces chronic inflammation which leads to progressive fibrosis (scarring) that can lead to cirrhosis, eventual liver failure and death. There are currently no drugs approved for the treatment of NASH. Studies have shown that over a ten year period at least 10% of NASH patients will develop cirrhosis, and liver-related mortality due to this disease is ten-fold that mortality of the general population. According to recent epidemiological studies, it is estimated 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 ahead of chronic hepatitis C and alcoholic liver disease.
The Mechanism of Actions of OCA Explained The Drug's High Efficacy And Potency In Treating NASH
Obeticholic acid ("OCA"), an FXR agonist/bile acid analogue, works by stimulating one of the two "holy grail receptors", namely, the farnesoid X receptor ("FXR"). By activating FXR, OCA induces a plethora of the following regenerative responses innate in the liver: the maintenance of bile homeostasis, reversal of fibrosis and stimulation of fibrosis repair, reduction of inflammation and portal pressure, improvement of insulin sensitivity, as well as, the reduction of lipid synthesis and reduction of hepatic toxicity.
Source: Intercept Pharmaceuticals
In contrast to the natural bile acid (chenodeoxycholic acid or CDCA), it's important to note that OCA is 100x more potent than CDCA due to the presence of an added ethyl group at the 6-C position in OCA.
Source: Intercept Pharmaceutical
The Flint Trial's Early Stoppage Is Highly Indicative of OCA Efficacy, Safety, And Potency
OCA is currently in its Phase II of development. On January 9th, 2014, the Flint trial was stopped early due to the interim data evidencing that OCA produced highly statistically significant results in meeting its primary end points: (1) preventing the progression of fibrosis and (2) reducing the NAFLD Activity Score ("NAS") by at least two points.
NEW YORK, Jan. 9, 2014 (GLOBE NEWSWIRE) -- Intercept Pharmaceuticals, Inc. today announced that the Flint trial of obeticholic acid for the treatment of nonalcoholic steatohepatitis has been stopped early for efficacy based on a planned interim analysis showing that the primary endpoint of the trial has been met. Flint is a multi-center, double-blind, placebo-controlled clinical trial assessing the safety and efficacy of a 25 mg oral dose of OCA administered daily to biopsy-proven adult NASH patients over a 72-week treatment period. The trial has been 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.
The decision to stop FLINT has been based on the recommendation of the Data Safety Monitoring Board, which reviewed liver biopsy data from before and at the end of the treatment period in approximately half of the 283 randomized patients, in accordance with a planned interim efficacy analysis. This analysis demonstrated that OCA treatment resulted in a highly statistically significant improvement (p=0.0024 on an intention-to-treat basis) in the primary histological endpoint, defined as a decrease in the NAFLD Activity Score of at least two points with no worsening of fibrosis, as compared to placebo. Those patients who had not yet completed the trial and therefore did not have a second biopsy were treated as non-responders in the ITT analysis. The pre-defined threshold of statistical significance for stopping Flint was p < 0.0031.
While it is anyone's guess regarding the specificity in the discussions amongst the members of the Data Safety Monitory Board ("DSMB"), I strongly believed that the DSMB stopped the trial because the interim data indicated that OCA worked quit well and it is indeed safe. Otherwise, why did the DSMB made such an important/consequential decision without supporting evidence?
An Integrated Approach Shed Light Into The "Alternative Hypothesis" Suggesting That The Changes In Lipid Profiles of Patients Taking OCA Is Inconsequential
It is understandable that most investors would panic when they heard the news that OCA might be associated with an increased in LDL cholesterol and a reduction in the HDL cholesterol … for even medical experts and physicians were trained to reflexively associate such changes in cholesterol with corresponding increased in cardiovascular risks. I confessed that I am guilty was well. Nevertheless, my training in integrated investing taught me to re-examine the established beliefs. Being a maverick, I am not ashamed by the very fact that nearly all of my students far exceeded me in the very skills that I taught them. Hence, I asked my better half, TP, whom I have mentored for the past four years, to help me to "connect the dots" as to why OCA might cause a rise in cholesterol … despite its outstanding regenerative effects on the liver. Based on what I learned from TP and what I learned from my own "gedanken" experiments, I proposed an "alternative hypothesis" - indicating that the increased cardiovascular risk associated with changes in cholesterol found in patients taking OCA is highly unlikely to materialize into cardiovascular pathology per se.
The Therapeutic And Anti-Inflammatory Effects of OCA Negate Potential Risks Associated With Unfavorable Lipid Profiles
In my "thoughts experiment", I closed my eyes and visualized various molecules working in dynamic reaction equilibriums. Accordingly, natural bile acid was visualized as one of the end products in a series of reactions … with this end product emulsifies/transports the fats that we eat across the intestine into the hepatobiliary circulation. Based on the principle of negative feedback inhibition, when bile acid builds up it would bind to FXR (its regulator upstream) transducing FXR an inhibitory signal to stop synthesizing excess bile acids. Since bile acids are synthesized from cholesterol, suppressing the synthesis of bile acids via the action of OCA (an enhanced synthetic bile acid) would result in an increase in total cholesterol. In other words, when OCA activates FXR, less cholesterol would be consumed in order to synthesize natural bile acids. This resulted in more cholesterol available in circulation, which showed up as higher level of total cholesterol and LDL cholesterol observed in the Flint trial. Though the exact etiology for NASH is unknown, I believed that inflammation rather than the buildup of fats alone is the culprit. Given the fact that OCA suppresses inflammation, this explained how OCA exhibited such highly statistical significant in treating NASH. Moreover, the therapeutic effects of suppressing inflammation by activating FXR would negate any potential negative effects of changes in lipids profile.
Inflammation Is More Important Than The Changes In Cholesterol In Being The Culprit That "Actually Materializes" Cardiovascular Risks Into Cardiovascular Pathology
In an analogous line of reasoning, I believe that atherosclerosis, the process of plaques building up in arteries, directly resulted from the inflammation rather the elevation of total cholesterol per se. An atherosclerotic plaque would be unlikely to form in a patient with high LDL and high total cholesterol while having a normal blood pressure and normal level of HDL cholesterol. Conversely, when the same patient has high blood pressure (hypertension) and low HDL cholesterol, their arterial wall would be more likely to be damaged from the increased pressure links to hypertension. In the presence of this damaging effect from hypertension, inflammation is much likely to kick-in to form plaques. So how does this relate to my premise that the elevation of total cholesterol/LDL cholesterol associated with OCA treatment is a minor issue?
Since OCA suppresses inflammation in the liver and I believe that this anti-inflammatory effect occurs in the arteries as well. Hence, the negative effects like plaque formation and cardiovascular pathology linked to the inflammatory process would be abated.
Statins And Omega-3 Fatty Acids Are Efficacious, Safe, And Cost-Effective Solutions To The Problem of Unfavorable Cholesterols
Let's assume that my alternative hypothesis, based on the fundamental principles of medicine and biochemistry, is invalid; my argument stating that the suggested unfavorable lipid profiles found in the interim data might be a minor issue … is still valid! For instance, the elevation in LDL cholesterol and the reduction in HDL cholesterol are obstacles that could be overcome by starting patients on a statin (for instance, Lipitor) and omega-3 fatty acids, respectively. Lipitor, a statin with an immaculate history of safety and efficacy, lowers the LDL cholesterol/total cholesterol by inhibiting the rate-limiting enzyme (HMG Co-A Reductase) involved in cholesterol synthesis. The fact that Lipitor is available as a generic drug made it the clinically effective, as well as, cost-effective solutions to the changes in blood cholesterols. In addition, the potentially lowered HDL cholesterol or good cholesterol associated with taking OCA could always be alleviated by prescribing patients with omega-3 fatty acids available over-the-counter. An alternative solution would be to recommend patients to consume healthy and delicious food like salmon, if they could afford it.
Potential Counter Arguments
While the odds of are favorable that Intercept is a prudent investment for the intelligent/enterprising investors, the drugs is still needed to be FDA approved and the approval process could be a "crap shoot" at times. Consequently, a negative FDA approval could send the stock's PPS into free-fall. However, a nod from the Agency could result in significant short terms profits. Based on my experience of studying hundreds of drugs that received approval and based on the reasons mentioned … I strongly believed that the odds are overwhelmingly in the favor for OCA's approval. The case for OCA's approval is case of "when" rather than "if" the FDA would approve the drug. Furthermore, OCA is currently being study for its indications to treat other pathology. This is not to mention the other drugs in Intercept's pipeline. Therefore, should OCA failed to gain the Agency's approval for treating NASH, the drug could still be used to treat other indications. Similarly, should OCA failed to gain the agency's approval to treat any disease, the company still has its other drugs in the pipeline. Hence, the margin-of-safety is indeed wide even from a pipeline perspective.
Favorable Chances That The Agency Would Approve OCA
I find it perplexing to believe that the FDA would deny patients of an efficacious medicine to treat NASH … a potentially lethal disease that does not have any effective and safe pharmacotherapeutic treatment available. Given that 10% of patients with NASH would develop the irreversible and fatal disease (hepatic fibrosis) without OCA, I believe that the FDA would be highly motivated to approve this drug. Otherwise, the FDA would have a difficult time trying to explain their rationale to legions of activist groups, who would publicly scrutinize (to the minute details) the Agency's interest, as well as, the interests of the experts working for Agency. It was not long ago that the Agency's rogue scientist who committed fraud marred the FDA's public image. I highly doubted that the Agency would want to risk another reputation-damaging press event.
The Excellent Benefits-To-Risks Profile Necessitates Clinicians To Prescribe OCA Once The Drug Would Gain FDA Approval
I strongly believed that physicians would prescribe OCA "en mass" after it gained the Agency's approval … for the simple yet important reason that this drug has a favorable benefits-to-risks profile. As an MD, I can attest to this well-known fact. Though I might be a young and inexperienced MD, I was taught by some of the best physicians and researchers in medicine and human nutrition. What I learned was that the key whether to prescribe a drug is its "benefits-to-risks" profile, as well as, whether the evidence-based medical guidelines support the drug as the standard of care. The evidence clearly demonstrated that there's no pharmacotherapy to treat NASH, once it is left to progress to hepatic fibrosis. The main risk of treating patient with OCA is an unfavorable lipid profile yet this drug could save patients from losing their liver, thus saving their lives. This fact alone substantiated a favorable benefits-to-risks necessitating and validating OCA' s much-needed therapeutic roles. In reference to the unfavorable lipid profile associated with taking OCA, it is not something that cannot be remedied as I previously elucidated.
Intercept's Unique Management Consisting of Nearly All MDs, And They Went "All-In"
I am not sure whether the management of Intercept has been asking similar questions like I have; however, they went "all in" by holding 42% of the shares outstanding in the company. This management is rare for all of their members are MDs (with the exception of one JD). It is not difficult to imagine that the physicians, running a company that they have a huge ownership stakes, would surely know the true prospects of their drug candidates.
It is understandable that some investors, myself included, would initially worry about recent insider sales. This prompted me to investigate deeper into ICPT insider transactions. Accordingly, I went through recent SEC filings and I uncovered that those transactions were initiated through the company 10b501 on December 19th 2013 ... when the PPS were trading in the $60 range! This important fact proved that the insiders did not sell because they saw something negative in OCA. Had they saw some impending doom in OCA, they would have sold whole lot more than the aggregate values of less than $6millions out of their 42% ownerships stake in a nearly $6 billion dollars company.
Before you decide to invest in Intercept, you should ask yourself whether ICPT's management would know more about the company that they run than Wall Street? Whether they would know about the chance of the Agency's approval for their drugs? Whether their drugs would generate blockbuster sales? After all, physicians are the ones responsible for prescribing drugs. Moreover, many physicians conduct clinical research; some physicians publish extensively, and some physicians even chair the very committee that votes to approve the drug.
As a final note, I have nothing personal against short-sellers and I strongly believed that certain companies should be shorted. In fraud and overvalued situations, shorting induces a safe environment for investors. Moreover, when shorting stocks the short sellers, who have excellent records of accuracy must run that extra mile to gain the edge in being dead accurate. I highly respect the prophetic short sellers like Andrew Left of Citron Research or Bill Ackman of Pershing Squares. However, ICPT is a situation that would burn any one trying to short this rare stock. In my research, I uncovered a well-known short seller, which I will not name, actually went long on ICPT at its current price.
Good Luck Investing!
Disclaimer: I am an MD, researcher, writer, and a patient activist. Currently, I no longer do clinical work. However, I have access to physician colleagues who I go to for additional insights. Since I am no longer working under any medical licensing authorities or affiliated with any programs or working for any hedge fund, I have the freedom of being able to write without any constraint. The companies that I featured are those that I researched thoroughly to the best of my ability. I often found myself spending days or weeks researching a company only to discard my research when nearing its completion, because I uncovered new data that do not support my thesis. Though I strive to provide the most accurate information in my research, the nature of information changes over time. Therefore, I reserved the right to change my holding without notification. I am not a registered financial advisor. I am not making any recommendation to purchase or dispose any securities. You should use the information provided by my research as a starting point to conduct your own due diligence. The nature of risks tolerance differs for different individuals. Hence, you should consult your investment advisor before investing in security. On a final note, please send me an email if you find that I miss certain information. You have my open ears.