We are initiating coverage on Genfit S.A. (OTCPK:GNFTF) (Euronext Paris: GNFT) with a Buy rating and common share price target of $61 (euro 54.50). Our valuation is based on risk-adjusted net present value of future estimated operating cash flows from the clinical use of elafibranor in non-alcoholic steatohepatitis (NASH), reaching peak market share of 20% in the US and EU by 2025 (patent expiry) (discount rate=15%, discounted cash flow method).
Figure 1: Genfit (Euronext), stock price chart (in euro).
Overview of NASH: Readers are advised to refer to our previously published articles on Seeking Alpha on various companies that are prominent in the NASH space (Genfit, Intercept, Tobira, Galmed, Catabasis). NASH is a major cause of morbidity due to liver disease worldwide and is projected to be the leading cause of liver transplants by 2020. The disease has become prevalent due to the obesity epidemic and is believed to affect about 3-5% of the population in the U.S., Europe and other countries. Currently, there are no approved therapies for NASH. Global market for NASH drugs is estimated to reach about $30 billion.
Genfit's Elafibranor is the only drug that has shown clinical efficacy meeting the new stringent regulatory end-point (NASH resolution without fibrosis worsening) in the phase 2 trial:
Peroxisome Proliferator Activated Receptor (PPAR) -gamma agonists were used in type 2 diabetes earlier but had side effects like worsening of heart failure. Elafibranor is a dual agonist of PPAR-alpha and delta receptors. PPAR-alpha activation controls the influx of fatty acids in the liver as well as has favorable effect on plasma lipids by decreasing triglycerides and increasing HDL. In addition, PPAR-Alpha activation also has anti-inflammatory action by nuclear factor-Kappa B inhibition. PPR-delta receptor activation enhances fatty acid transport and oxidation, increased HDL levels and increases insulin sensitivity and has anti-inflammatory action (source). Elafibranor has FDA Fast Track designation in NASH treatment.
Results of phase 2 trial for Elafibranor in NASH (GOLDEN-505 study) were published in the journal Gastroenterology recently (source). This was a randomized, placebo controlled, multi-center study done over one-year testing elafibranor 80 mg and 120 mg daily. The included patients had NASH (without cirrhosis), confirmed by liver biopsy read by a centralized pathologist. Inclusion criteria was NAS 3-8, with at least 1 for steatosis, ballooning and inflammation. All stages of cirrhosis, 0-3 were accepted; 15% pts had NAS of 3.
In the post-hoc analysis, conducted as per the modified stringent definition for NASH resolution, 21% patients showed response in 120 mg arm compared to 11% in placebo (in group: all patients who had liver biopsy at the end of treatment) (OR=3.52, p=.013). In NAS>4 with any stage fibrosis, response rate was 22% vs. 13% in placebo, (OR=3.22, p=.026). In NAS>4 with moderate/advanced fibrosis (F2, F3), response rate was 15% vs. 9% (p=.002, OR=10.59).
We compared the results of this study with the phase 2 (FLINT) published by close rival, Intercept Pharmaceuticals (NASDAQ: ICPT). This study used OCA 25 mg oral once daily for 72 weeks versus placebo in similar patient population as GOLDEN-505 study. When the study results were analyzed using the more stringent NASH resolution end-point, they were not significant for OCA (source).
Elafibranor could show significant reduction in fibrosis when 120 mg dose is given for 72 weeks in the phase 3 RESOLVE-IT trial:
Much of Intercept's multibillion dollar valuation seems to be based on 35% fibrosis reversal rate seen in the OCA arm after treatment for 72 weeks. Investors seem to be ignoring the fact that in the GOLDEN-505 study, a lower (80 mg) dose of elafibranor was given for initial 6 months (to test for any side effects), followed by 6 months of treatment with 120 mg dose in the 120 mg arm. The 80 mg daily dose is not sufficient to show NASH resolution and fibrosis reversal as shown in the phase 2 study. In the phase 3 RESOLVE-IT study, Genfit is testing 120 mg daily dose with the first interim analysis at 72 weeks. We believe that this study design is sufficient to show significant reversal of fibrosis with NASH resolution. Elafibranor has demonstrated about 0.5 score reduction in fibrosis in the responders to 120 mg dose vs. non-responders even with this flawed phase 2 study design.
Genfit is the only NASH company testing the new revised regulatory end-point (NASH resolution without fibrosis worsening) as primary end-point in a pivotal clinical trial:
As discussed above, Genfit has already shown that elafibranor can achieve this end-point even when a lower dose was given for first 6 months and the treatment duration was shorter than Intercept's FLINT study. Intercept's OCA has not achieved this end-point in the phase 2 study and this end-point is still a secondary end-point in Intercept's phase 3 REGENERATE study.
Genfit's elafibranor is safer and has favorable effects on lipid profile and glucose control unlike Intercept's OCA which has raised questions on its cardiovascular safety and causes disabling pruritus.
Most patients with NASH die of cardiovascular disease like heart attacks or stroke. Insulin resistance and abnormal lipid profile (high LDL, high triglycerides and low HDL) is core to the pathogenesis of NASH. Any drug which is a candidate to be used widely in NASH should have favorable effects on these metabolic abnormalities (like Genfit's elafibranor, Tobira's CVC and Catabasis Pharma's CAT-2054). Intercept's OCA was shown to have no positive effects on glucose control (like reduction in HBA1C) in phase 2 study and even worsened the lipid profile (increased LDL and decreased HDL). In obese patients with NASH, who already are very likely to have these metabolic abnormalities, any drug that causes worsening of these metabolic parameters (and exposing these high-risk patients to increase risk of heart attacks and stroke) is going to be a significant concern for clinicians. Moreover, the high incidence of disabling pruritus (about one-third of patients) is likely to limit long-term clinical use of OCA. Intercept is conducting another phase 2 trial in NASH combining OCA with statins, but unjustified prophylactic use of statins might worsen the already deranged liver function profile in NASH patients as well as predispose patients to other statin side effects like myalgia.
We are not concerned with the mild elevation in serum creatinine seen in the elafibranor arms in the GOLDEN-505 study. This increase in serum creatinine is a class effect of PPAR agonists and is likely due to increased production of creatinine by skeletal muscle or decreased clearance by kidneys. Moreover, this effect is more seen in patients with some baseline elevation in serum creatinine.
Genfit's miRNA based diagnostic biomarkers test could find use for non-invasive diagnosis of NASH and following up the response to NASH treatment:
Another gem in Genfit's developmental pipeline is BMGFT 03, the miRNA diagnostic biomarkers test that has shown higher sensitivity than existing non-invasive tests like fibrotest. While Genfit has not demonstrated data using this biomarker test as end-point while treating NASH with elafibranor, this test would aid clinicians in identifying patients who might benefit from NASH treatment and following their response to NASH treatment without repeatedly exposing them to invasive liver biopsy.
Genfit could be an acquisition candidate if elafibranor is successful in phase 3:
The wide valuation gap between the existing enterprise values of Genfit and rival Intercept is obvious. Bigger players like Gilead (NASDAQ:GILD) have shown M&A interest in NASH space through acquisition of smaller companies like Nimbus. Genfit could be an attractive acquisition candidate if elafibranor meets primary end-point of NASH resolution in phase 3 study and also shows fibrosis reversal comparable to Intercept's OCA (with acceptable side-effect profile).
- Interim results from ongoing clinical programs including NASH and PBC could be presented at the AASLD meeting in November 2016.
Figure 2: Ongoing clinical programs in the NASH space (source)
Financials and Valuation: Using the assumptions of annual drug price of elafibranor=$5,000, peak market share of 20% in the US and EU by 2035 at expiry of patent (drug launch in 2019), adjusting the risk using probability of 20% (average for companies who have successfully finished phase 2, according to Milken Institute) and discount rate of 15%, we estimated fair value for Genfit's common share=$61 (euro 54.50). We used net operating margin=17.5% of sales and reinvestment rate =87% to maintain the sector average 13% annual net income growth with return on equity=15% after drug launch in 2019 (as per NYU-Stern data). We only included the future estimated risk-adjusted revenue from elafibranor in NASH (US and EU) in this model. The free cash flows were estimated to decline at 5% annually after patent expiration in 2035. The cost of capital (discount rate) used was 15%. The link to the DCF model is here.
Genfit has announced a phase 2 study testing elafibranor in primary biliary cholangitis (PBC), another disabling liver disease that is the second most common cause of liver transplants and affects about 1 in 1000 women. Intercept's OCA is ahead in this indication and has already received favorable FDA opinion after successful phase 3. Genfit's elafibranor could also gain market share in this indication adding further value to the share price. In addition, Genfit has various early stage developmental programs like TGFTX1 (inflammatory and autoimmune diseases), TGFTX3 program (diabetes, dyslipidemia), TGFTX4 (anti-fibrotic) and TGFTX5 (chronic inflammatory bowel diseases) which were not included in our valuation due to early stage, but are likely to add further value to the company in the near future. Genfit has cash of about 102.8 million euro as of 3/31/16, which should be sufficient to complete the first part of phase 3 RESOLVE IT trial.
Risks in the investment: It is possible that the phase 3 RESOLVE-IT trial in NASH might fail to meet its end-points. Elafibranor might show side effects in the trial which might be not acceptable to prescribing clinicians. Even after regulatory approval, it is possible that the drug might not be widely used by clinicians or reimbursed by insurers. The company may need more capital to forward its R&D programs requiring debt and/or equity financing that might put downward pressure on the common stock. The common share traded in the US OTC market is very thinly traded and its price might be very volatile.
In conclusion, we are including Genfit (Euronext traded common share) to our model portfolio at an average price of euro 27.65 with price target of euro 54.50 (suggested allocation 1-2% of capital). Investors who do not have access to Euronext traded common share through their broker might consider buying the US OTC traded common share.
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Disclosure: I am/we are long GNFTF, GNFT.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article represents my own opinion and is not an investment advice or solicitation to buy or sell any security. Investors should do their own research and consult their financial adviser before making any investment.