1. Villanova Equity Society
New Member Stock Report
Current Stock Price / Date: $176.50 / 11/30/15
Company Name: Intercept Pharmaceuticals
Sector: Health Care
Ticker: ICPT
Industry: Biotechnology and Pharmaceuticals
Recommendation: HOLD
Analyst Name: James Van Elslander
Business Description
Intercept Pharmaceuticals is a biopharmaceutical company that is still in the development stages
in terms of their drugs and therapeutics. Most Specifically, Intercept’s main aim is the creation,
development, and advertisement of therapeutics for treatment of internal diseases – with a
particular focus on chronic liver diseases. Intercept does this through its bile acid chemistry,
which is the modification of the synthesis of bile acids in the liver. Intercept has created
Obeticholic acid (OCA), which will be developed for treatment of chronic liver disease.
Intercept’s focus is on developing therapeutics for common diseases where there are no current
solutions. Because of this, their cost structures, which are incurred, are large, as a lot of
technology and human capital must be invested into the development of these drugs. However,
when successful in developing these drugs, Intercept can see a large increase in their value. For
example, in January of 2014, the stock price rose from $72.39 to $462.26. The price then fell to
$317.58 in late March of 2014, where the market capitalization was approximately $6.2 billion.
This was a direct result of an analysis trial, which proved that Intercept’s Obeticholic acid could,
in fact, improve liver histology. Intercept puts a lot of R&D capital into their drugs, such as $80.3
million in 2014. This shows the absolute confidence that Intercept has in their chronic liver
disease treatment drugs because they are putting a lot of capital into it, and therefore once their
drugs are commercialized, there is a large potential for growth.
Because Intercept is still in its development stages, investors have seen very poor earnings per
share values over the past few years, but it is the potential growth that should be enticing for
investors.
Source: NASDAQ.com
2. While Intercept Pharmaceuticals is still primarily in its development stages, the FDA has granted
them the ability to use OCA trial therapy to treat nonalcoholic steatohepatitis (NASH), and
primary biliary cholangitis (PBC). During these trials, 60% of NASH patients who were tested
with the treatment saw improvements in NASH resolutions, and an additional 39% of patients
saw improvements in liver fibrosis.
In Intercept’s most recent 10-k report, they stated, “Our current plan is to commercialize OCA in
the United States and Europe for the treatment of PBC, NASH, and other indications by targeting
primarily specialist physicians who specialize in the treatment of liver and intestinal disease,
including both hepatologists and gastroenterologists.”1
Intercept is initially planning to distribute
its product in Europe and the US as stated, but considering that they own the rights to OCA
worldwide except for Japan and China (Intercept licensed the OCA compound to Dainippon
Sumitomo Pharma Co.), they will have a large market to enter into.
Because Intercept is still in its development stages, it does not have any primary suppliers to this
date. However, they noted in their 10-k that they will not manufacture the drugs themselves once
they get licensed to sell, but instead that they have an agreement with a third-party service
provider which will produce their pharmaceutical ingredients. They do not have agreements
though for a commercial supplier of OCA, and do not intend to manufacture a contract with a
supplier until OCA is approved.
Intercept Pharmaceuticals top asset right now is their portfolio of patents on OCA, which end
from 2022 - 2033. OCA has proven to be incredibly effective in treating liver disease, as seen
with Intercept’s trials in March of 2015, where OCA had a strong performance in combating
NASH. Secondly, a key capability of Intercept is the demand for treatments of chronic liver
diseases. Over 30 million people in the United States alone suffer from a form of liver disease.
Intercept noted that they would also commercialize their product in Europe as well to start, which
amplifies the growth potential with a drug approval. Once Intercept gets OCA approved, which I
believe they will in the foreseeable future, then investors will have the green light to buy stock in
ICPT. As of a current status, Intercept has a low actual value proposition, however their potential
value proposition is exponentially high due to the demand for liver disease treatment not only in
the United States, but worldwide.
Another important probability to consider is the failure of the OCA approval. If the FDA does not
give the drug approval, and OCA does not get drug licensing, the value of Intercept will drop
incredibly. That is why I gave Intercept the ‘Hold’ recommendation: should the OCA drug get
approval, Intercept’s value will rise immensely and the stock price will commensurately rise.
However, if the drug fails to get approval, and Intercept decides to pause or cease the R&D of
OCA, then the value will drop, and investors will have the option to short ICPT, making money
in either of Intercept’s outcomes.
1
http://ir.interceptpharma.com/financials.cfm
3. Industry Outlook
Chronic liver disease in the United States has been a continual problem, and over 30 million
Americans suffer from some form of liver disease. There are currently minimal therapeutic
treatments for liver disease, and so the initial demand for Intercept’s OCA drug would be very
high. OCA’s trials have proven that the OCA drug is efficient in treating liver disease, most
specifically PBC and NASH. Intercept is leading the biopharmaceutical industry with its OCA
drugs, as Intercept’s competitors have not performed well in their trials of drugs. One of
Intercept’s competitors, Genfit, attempted to develop a therapeutic liver-treatment drug, but their
trials in early March, 2015, were underwhelming, and the drug failed to show effective treatment.
This creates a large strength for Intercept moving forward, as they are leading the industry in
terms of developing a drug to cure chronic liver disease. If they continue on at this pace, and get
FDA approval on their drug, they will see large amounts of revenue. From 2011 to 2014,
Intercept’s revenues actually decreased, from 1.8 million, to 1.7 million2
. This can be credited to
the fact that Intercept is still in a developmental period, and have not commercialized a drug yet.
But it is the potential for growth that investors should be interested in, and that is another of
Intercept’s strength, along with their industry-leading OCA drug.
The opportunity presented to investors with ICPT is very enticing. Intercept has potential for
growth or losses concurrently, and there is a green light model available for when investors
should buy or sell. If Intercept’s OCA drug should get FDA approval, and is allowed for the
distribution to specialists, Intercept’s stock price will rise incredibly. The green light to buy here
would be as Intercept is in its final development stages before commercialization. If investors are
able to get in here, they will see tremendous growth in their earnings per share. Yet, if Intercept
states that they will have to cease their operations of developing their drugs, then investors will
have the green light to short this stock, and they can expect to make a good amount of money off
of this until Intercept is able to find funding to continue the research and development of their
drugs.
A particular weakness of Intercept is the fact that it is still a developmental company, and does
not have any commercialized products. Because of this, Intercept will have to keep funding their
R&D, and they will need substantial additional funding to do so. If this funding is not readily
available, Intercept may have to delay or end their research and development, which would cause
a large decrease in the value of the company.
Obviously, the biggest threat for Intercept right now is the potential for them having to terminate
their R&D until they are able to get funding for their operations. However, Intercept currently has
$716.7 million in assets, which should be sufficient for Intercept to commercially launch its
therapeutic liver treatments within the next few years.
2
Bloomberg Terminal
4. Currently in the Biotech industry, companies who have commercialized drugs are performing
incredibly well. From the first quarter to the second quarter, Gilead Sciences saw EPS growth of
56%, and Biogen Inc. performed marginally better, seeing EPS growth of 57%. Intercept has had
negative EPS values from the first quarter to the second quarter, dropping from approximately
-1.50 to -2.00. This can be credited to the fact that Intercept is still developmental, and cannot
achieve large revenue similar to the other companies in the Biotech industry. The biotech industry
as a whole has done incredibly well over the past 5 years, with the index rising about 400%.
Source: Yahoo! Finance, NASDAQ Biotech Industry Index
If Intercept is able to commercialize its OCA drug, then they will be able to experience these
gains that the other biotech companies have experienced over the past few years. However, Hilary
Clinton has imposed a new Affordable Drug Pricing Task Force that looks to control drug pricing
in the United States. This could hinder the potential revenue that Intercept could experience in the
coming years slightly, but overall there would be an immense increase in revenue due to the high
demand for the PBC treatment. The United States spending on health care over the next decade is
estimated to be about $4.2 trillion, and this increase in medical spending supports the expansion
and commercialization of Intercept’s drugs for successful liver therapeutic treatment. This
increased spending in the health care sector is a result of an aging population, and the demand for
quality treatment. Since there is no current therapeutic solution for most chronic liver diseases,
Intercept’s OCA can see significant popularity and receive large revenue if it gets its drug
licensing from the FDA. If OCA gets approved, Intercept would take a large share of the market,
and experience the gains similar to those of the other biotechnology companies shown above in
the NASDAQ index.
Intercept has traded as an incredibly volatile stock over the past 3 years. As of late December
2013, ICPT traded at approximately $67. However, about 10 days later in January of 2014, the
price skyrocketed up to $445. This soar was a direct result after Intercept’s successful first trial of
the therapeutic liver drug treatment. Since then, it has fallen and has fluctuated between around
$150 to $300 as a causation of Intercept’s updates on the trials of OCA. Because of these trends,
if Intercept is able to get FDA approval and commercialize the therapeutic treatment drug for
5. PBC, it will obviously spike again in terms of stock price, and investors will see large returns on
their investments.
Recent Developments
Intercept is currently in Phase 3 of OCA trials seeking FDA approval of the OCA drug for PBC
treatment. This is Intercept’s primary focus, and as previously mentioned, they will look towards
specialists for distribution if they receive FDA approval. Their primary areas in which they will
distribute the drug are in Europe and the United States, but then they will continue to expand their
distribution. The pending approval decision for using OCA for PBC treatment is on February 29th
of 2016. Many analysts speculate that the approval of OCA is likely, which will result in Intercept
launching the drug in the first or second quarter of 2016.3
Intercept has indicated that there are
currently 66 thousand patients in the United States right now who have uncontrolled PBC,
without therapeutic solutions. This will be a big start for Intercept if they get FDA approval, as
they will already have thousands of people with demand for their therapeutic liver treatment.
Initially, Intercept will have approval granted strictly for the usage of OCA treatment towards
treating PBC.
Intercept is also in Phase 2 of the trials for using OCA as treatment for NASH. If this drug passes
Phase 2 in March of 2016, then Intercept will continue to develop it and potentially
commercialize two drugs in 2016 and into 2017. Intercept Pharmaceuticals will be presenting at
the Oppenheimer Health Care Conference on December 8-9 in which many other biotechnology
companies will be present. This is an opportunity for investors to meet with Intercept’s company
management team, and investors will be able to determine whether Intercept will be prevalent in
the coming year.
Throughout the first three quarters, Intercept has continued on its trends of increasing investment
into R&D as they are at the final stages of their OCA treatment for PBC. Through September
30th
, Intercept reported $83.7 million expenses into research and development, and $142.6 million
in total operating expenses. As well as this, Intercept has $38.8 million in total liabilities, and
$716.7 million in assets. Intercept has $695.7 million in cash, cash equivalents, and investment
securities, which should be sufficient funding for the continuation of Intercept’s operations. The
date of their next quarterly earnings report has not been established yet, but in 2014 and 2015, the
fourth quarter earnings reports have been released on March 14, and March 2, respectively.
Therefore, the next quarterly results report can be expected in early March. R&D sales are
estimated to increase as Intercept is entering its final trial stages for PBC treatment. Intercept will
also see an increase in total liabilities, as they have trended upwards over the past few years.
Again, because Intercept is still developmental, they will not be profitable over the fourth quarter
of 2015, yet the potential for growth continues to rise. Along with this, there is the possibility that
3
http://www.smarteranalyst.com/2015/12/03/biotech-beat-analysts-weigh-in-on-zafgen-inc-
zfgn-and-intercept-pharmaceuticals-inc-icpt/
6. Intercept will get FDA approval and commercialize their OCA drug, which would allow them to
obtain revenue in the later half of 2016.
Financial Highlights (Compare to Industry Averages / Competitive Peers where possible)
As Intercept states in their most recent 10-k, they have never been profitable and they have no
commercialized products from which they can generate revenue.4
Because of this, Intercept has
never seen earnings or revenue, yet they are able to remain financially stable.
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Source: Reuters.com
As seen here, Intercept’s current ratio from the most recent quarter is nearly 3 times greater than
the industry average, and almost 7 times greater than the sector average. This proves that
Intercept is financially stable because the current ratio displays the ability of the company to pay
its liabilities. With the assets that Intercept does have, a lot of the money has been going into
R&D, as seen below.
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Since 2010, Intercept has increased their investment into research and development, giving them
a total operating expenses value of $114.9 million in 2014. Stated earlier, Intercept has around
$700 million in assets, which shows their capability to pay their liabilities. Intercept currently has
24.33 million outstanding shares, with 17.26 million of that being floated stock. This relatively
large amount of floating stock makes the price of Intercept’s stock less volatile than other
companies, but the amount is still small enough that there will be a soar in the stock price if
4
http://ir.interceptpharma.com/financials.cfm
Source: NASDAQ.com
7. something good happens inside of Intercept (600% increase in stock price in January 2014). For
investors, this means that should the OCA drug get approval for PBC treatment, then they can
expect a large increase in stock price and see high returns. On the other end of the spectrum,
should the OCA drug not pass Phase 3, investors can short Intercept, and see large returns on that
side as well.
Valuation (Compare to Industry Average / Competitive Peers)
At Intercept’s current stock price of $155.24, investors would be getting a great bargain, despite
the high price. As noted before, Intercept has jumped as high as $497.00 as a result of the OCA
drug passing Phase 1. If Intercept’s stock price soars to nearly $500 over a successful trial, then I
believe investors can expect similar results if the OCA drug is commercialized for PBC
treatment. Intercept’s price-to-book ratio is currently -5.54. This could mean that Intercept is
either undervalued, or that something is wrong with the company. However, Intercept is not
outside of the norm with biotech companies, as it takes a lot of R&D and time to commercialize
drugs. Therefore, I believe that this low P/B ratio means that Intercept is currently undervalued,
providing a great opportunity for investors. Intercept does not have earnings, and therefore a P/E
ratio is not available/negative, yet if Intercept is able to commercialize a drug, I expect a high P/E
ratio because Intercept would have very high earnings in the future. Intercept has never made
dividend payments and as a result has always had a dividend yield of 0.0%. This is an effort by
Intercept to grow its capital and wait for drug commercialization before paying out dividends.
Investment Thesis
As of right now, my recommendation is to hold on ICPT, and to keep an eye on recent news
regarding Intercept’s drug trials of OCA treatment. I propose a green-light model to investors.
Should OCA get approved for PBC treatment in February 2016, then investors will have the
green light to buy Intercept and expect high gains. However, if the drug does not pass the trial and
fail, then investors will have the green light to short Intercept and also expect good returns. I
believe that OCA will be approved for PBC treatment in February, and therefore I predict that
there will be a soar in stock price in the next 6-9 months. Because Intercept jumped to about $500
over the passing of Phase 1, then I believe that Intercept will also obtain that price if the OCA
drug gets approved. Over the next 2-5 years, Intercept will continue its goals to get OCA
treatment approval for treating NASH. If they can accomplish this, and get the approval for PBC
treatment, Intercept will see incredible gains over the coming months, and will become a
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