Intercept Pharmaceuticals (ICPT) and its shareholders have seen continued uncertainty in 2017. The historic path of the company has been much debated and volatile, as is its future.
I looked at the prospects for Intercept early this year as I feared the slow pick-up in sales of its main drug Ocaliva and continued losses, offset by M&A interest in the industry at large. Since January shares have fallen another 10% to levels just below the $100 mark, as it is time to revisit the thesis again.
Intercept has gone public in 2012 and at the time was an IPO based on a single drug candidate. This candidate was Ocaliva as favourable research results triggered a huge run in the shares. Intercept's shares rose from $15 at the time of the IPO in 2012 to levels above $400 per share in early 2014.
Ever since shares have come under pressure, despite the fact that Ocaliva has obtained FDA approval in May of 2016. Investors were hopeful that the company has a real blockbuster in its portfolio for the treatment of chronic liver diseases, indeed that the drug would be approved for multiple indications.
For now, Ocaliva is approved to treat patients which suffer from primary billiary cirrhosis, or PBC. The second line treatment has a target population of 300,000 across the globe, of which just 60,000 are diagnosed.
Investors have their doubts about the prospects for Ocaliva and therefore for all of Intercept, amidst a slow pick-up in sales, continued losses and concerns about the NASH study.
Hopes Come Down
Intercept has raised a lot of cash in its IPO back in 2012, and ever since has raised more money in subsequent secondary offerings. Following great test results in early 2014, shares jumped overnight to $450 per share, giving the company a $9 billion valuation with 20 million shares outstanding.
This was based on the expectation that Ocaliva would be the drug to treat PBC, but that it could be used to tackle NASH as well, a much more common disease, and thereby much larger market. The only bad thing is that Intercept only issued a relative modest amount of shares in the wake of the research results, as shares still traded above $400 per share.
Enthusiasm has faded on the back of delays, as Intercept only obtained FDA approval for Ocaliva in May of 2016 to treat PBC, while the (potential) NASH indication is still years away. The accelerated approval process for PBC makes that the effectiveness has not been well established as well.
What About The Sales Ramp-up?
In August of 2016, Intercept posted revenues of $75,000 for Ocaliva in the second quarter, after the drug has been approved in May. With treatment costs running at $70,000 per annum, the launch has been soft, yet shares continued to trade around $160 per share.
Product sales came in at $4.7 million in the third quarter, as the $75k cost of treatment per annum suggested that 250-300 patients were using the drug each day. Shares fell to the $100 mark as the entire pharma sector was under (price) pressure and investors worried about the ramp-up in sales.
When I check on the prospect for Intercept in early 2017, the fourth quarter results for 2016 were not released yet. Sales of Ocaliva improved to $13.4 million in the final quarter of last year. Revenues rose to $20.6 million in Q1 of this year, of which $19.8 million were generated in the US market, with overseas sales coming in at $0.8 million following the commercial launch in January of 2017 in Europe.
Revenues came in at $30.4 million in Q2 of this year, with ex-US sales coming in at $2.5 million. Despite the continued ramp-up in sales, Intercept continues to lose quite a lot of money. Costs related to the launch and ramp-up in sales of Ocaliva, further research (including a Phase III) program for NASH, makes that the company is bleeding a lot of money. After all, operating expenses run at a rate of $400-$450 million per annum, being far greater than the second quarter annualised revenue run rate of $120 million.
Including potentially convertible shares, Intercept has 25 million shares outstanding. At levels of $95, the company is valued at $2.38 billion and this includes $550 million in cash. Adjusted for that, operating assets are valued at little over $1.8 billion, equivalent to 15 times annualized sales. That said, the company is growing sales rapidly, but continues to bleed quite a bit of money. As this rate, the company is running out of cash in a year or two, but a ramp-up in Ocaliva could limited the cash outflows or actually result in real profits.
PBC Is Not Enough
Currently Intercept focuses mainly on PBC and while sales are still growing, it is not the blockbuster which some have hoped for. In January, I recognised that the PBC market could translate into a revenue opportunity of $600 million a year, based on a 20% penetration rate in the global market.
The real opportunity lies within the NASH opportunity, as the company spent hundreds of millions on its REGENERATE and CONTROL efforts in recent years. Unfortunately the company has reported a patient death in the CONTROL trial, which the company attributes that this patient was already very sick. It became evident that more deaths occurred during the trials, as the company refutes that is linked to potential overdose, but instead blames it on a very sick patient population already. Worse, the timeline of the results is expected to take quite a while as real data on REGENERATE is only seen in the first half of 2019.
Based on potential revenues of $600 million to $1.5 billion, (see January article) I estimated that combined with a 5-8 times sales multiple, Intercept might fetch a $3-$12 billion valuation, equivalent to $120-$480 per share. Nonetheless shares trade below the valuation as it takes time to grow sales, investors are not pleased with the pace of the ramp-up in sales, and discount the potential for success in NASH to a huge degree.
Still Risky, Still Potentially Lucrative
NASH is the real kicker for Intercept, yet the company needs accelerated success in PBC to limit the current cash outflows. Nonetheless the potential in NASH itself in combination with a marketed product, makes that the current valuation of Intercept remains very manageable for a potential takeout. So far names like Gilead, AstraZeneca and many others have not made a move yet. In fact, Gilead has recently acquired Kite in a high-profile deal. As Intercept already markets an approved drug, it is clear that a lot of smart executives in the industry have little faith in the sales ramp-up, not to mention potential usage in treatment of NASH.
At current valuations, it is clear investors are not having high hopes on the prospects for Ocaliva for NASH, despite the fact that the research is already in Phase III. Part of this relates to disappointing results from older studies which were carried out in Japan. Worse, there might be competition on the horizon for Ocaliva, as the long term effectiveness still has to be demonstrated. Given the heightened scrutiny and burn rate, there are few reasons to be upbeat. While sales are improving by $10 million on a sequential quarterly basis, much more and continued growth is needed before break-even, let-alone profits can be achieved.
For that reason I continue to reiterate my neutral stance as both risk and potential rewards are very high. The sales ramp-up continues to make progress, but much higher sales are needed to stop the cash burn and translate into reasonable sales multiples.