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Intercept Pharmaceuticals - Over Reaction Or More Upside?

|Includes:CNAT, Galectin Therapeutics, Inc. (GALT), ICPT

The Intercept Pharmaceuticals (NASDAQ:ICPT) price surge due to its announcement that one of its drug studies had reached its primary endpoint early for a treatment of a liver disease for which there is no drug available was astounding. But was it an overreaction?

Before I answer that question, consider the following:

It achieved its primary endpoint early - excellent!

Experts are estimating that as much as 15% of the US population has some level of early stages of NASH (inflammation and fibrosis of the liver). Extrapolate that to the world population and you can see why the stock price reacted violently to the upside.

Analysts stock estimates are all over the board on this now, from 300 to over 800.

However, also consider the following:

The NIH reported after the Friday (1/10/2014) market close that patients taking the drug had "disproportionate lipid abnormalities"-including worsened cholesterol levels. The NIH described the lipid abnormalities as "increased total cholesterol," with increased low-density lipoprotein cholesterol, also known as LDL or "bad cholesterol," and decreased high-density lipoprotein, or HDL, also known as "good cholesterol." Elevated LDL is considered to be a risk factor for heart disease while decreased HDL also is a risk factor.

There are other companies competing for the same prize, all of which had spectacular stock price appreciation this week. Conatus Pharmaceuticals Inc. (NASDAQ:CNAT), Galectin Therapeutics Inc. (NASDAQ:GALT).

The company does not have any pipeline as far as I can see, based on publicly available information.

Now consider my take on this:

I have some personal interest in this 'disease'. My wife has been very ill for several years and this is just one of the things with which she suffers. So I have been reading up on all the latest achievements in the biotech/drug world, but am far from an expert (I am an electrical engineer by day). I would like nothing more than to have this drug succeed, as well as others to help her and others suffering.

It bothers me that they ended the trial early. Why? Well they achieved the endpoint, which is nice. But what about the people in the trial? Are they truly doing better, or is the 'lipid problem' significant enough that the NIH was fearful for the lives of the participants? I don't know, but I would think that if it is truly helping them without any potentially devastating effects, then you would want to continue the trial to not only help these people but also to obtain more data points.

Of course there is more work to be done with this drug candidate, and future trials will continue for at least a year, which is normal.

On that note, there is one thing I must say about the overall biotech/drug industry as a whole. Some of the brightest minds in the world have invented amazing, life-prolonging drugs. Unfortunately a good majority of these drugs also have side effects over the long term that can (and do) cause other (sometimes worse) problems. With my wife as an example, a drug she took throughout her childhood has caused lifelong health issues that are worse than the original problem (I cannot go into details about the drug for legal reasons). So just because a drug is available does not mean people will be willing to take it. My wife would not take this drug because the lipid issue is much worse than the cure in her case.

Stock Price

I am a numbers guy. And I just don't get how valuations are equated sometimes on wall street. Obviously it is all about future profit speculation, but the numbers I see, especially on this ICPT, are just so over the top optimistic. It seems the price of the stock at this point has already factored in its approval, sales success and future sales growth. Personally I see the stock price below $120 by the end of the year unless a huge unseen catalyst appears before then (buyout or orphan drug designation the most likely two).

If you consider the current financials, you will see they burn $86 million a year, and have about $156 million in cash, with no debt. That gives them about 2 years to start making money on a product to survive without requiring additional financing. That is good, but that may not be enough time to fully develop this drug for safe use. I believe they may use this opportunity of stock price appreciation to have a secondary offering and further dilute the share float, to raise more capital. One item that may confirm this is the huge insider selling on January 15th and 16th by both the CFO Barbara Duncan ($1.4 million or about 1/2 her shares) and the President/CEO Mark Pruzanski ($2.7 million - he does still have a large number of shares though). They sold in the $260-270 stock price range, which lead me to believe it is currently overvalued at that level.


As a stock investor, I would not touch this stock at this level based on my above evaluation. Under $120 I would consider it only if additional progress is being made to improve the drug.

As the husband of a potential patient, I am encouraged to see the progress but in my opinion it is way too soon and way too unsafe, at least for my wife.

Disclosure: I actually owned a small amount of shares in ICPT, but sold them one week before this runup. Ugh.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.