Intercept Seen as Poster-boy for Possible Biotech Bubble

Intercept Pharmaceuticals Inc. (ICPT) shares more than tripled to $275.87 from $72.39, after touching a high of $305, on Jan. 9, and a day later touched an all-time high of $497. Since then they've fallen closer to earth though they still remain in the stratosphere at around $173.

What accounted for the rise last January was investor reaction to the results of Intercept's trial of obeticholic acid, or OCA, as a possible treatment for non-alcoholic steatohepatitis, a fatal liver disease that currently is treated by a liver transplant.

The trial had been sponsored by the National Institute of Diabetes and Digestive and Kidney Diseases, a part of the National Institutes of Health. The NIDDK halted the trial after its primary endpoint had been met.

Intercept co-founder and CEO Mark Pruzanski said at the time that the decision to stop the trial due to OCA "meeting the primary endpoint with such high significance is a major milestone."

He noted that nonalcoholic steatohepatitis, or NASH, "has grown to epidemic proportions worldwide" and had become a leading cause of cirrhosis and liver failure.

New York-based Intercept went public in a $75 million initial public offering in 2012, underwritten by Bank of America Merrill Lynch, Needham & Co. LLC, BMO Capital Markets Corp. and Wedbush Securities.

On Thursday, Intercept reported a third-quarter loss of $35.8 million, or $1.69 a share, on revenue of $445,000.

The loss was larger than the average estimate of $1.10 a share in a survey of five analysts by Zacks Investment Research.

Intercept shares, which are traded on the Nasdaq Global Select Market, fell $74.39, or 30.1%, to $172.59 on Friday after the results were released.

The company also announced that the trial of OCA had been published in the scientific journal, the Lancet.

Intercept's rise had attracted the interest of short sellers and other critics who say the company may be a prime example of a bubble in biotech stocks that began in the fourth quarter of 2013.

Bronte Capital chief investment officer John Hempton said Intercept's investors have been overly excited by the results of the clinical trial.

He noted that Italian scientist Stefano Fiorucci, who pioneered much of the science behind OCA, has been accused of manipulating research results.

In 2012, Italian government officials accused Fiorucci of manipulating images in papers he used to obtain €2 million ($2.49 million) in funding. He was also charged with embezzlement. The scandal led to four retractions of scientific papers, according to the website Retraction Watch.

Hempton said the Fiorucci scandal raises questions about Intercept's findings.

"It's too bad because they've got some good science," Hempton said.

Several of the analysts who follow Intercept counter that the Fiorucci scandal happened several years ago and that the company has done a good job of extricating itself from the matter.

"The company found out that some of the early-stage data had been fudged and they've redone all the early trials independently," said Jim Molloy, an analyst at Summer Street Research Partners in Boston, who rates Intercept a "buy" and has a $650 target. "They no longer employ him."

More importantly, Molloy said Fiorucci was involved in early preclinical work, while Intercept has repeated the studies showing the same results and gone on to do Phase 2 and Phase 3 clinical trials that have shown even more positive results.

"These guys appear to have the first run at a treatment for NASH, which is a death sentence," Molloy said. "You either get a liver transplant or a coffin. Those are your choices."

In the meantime, the markets have had ample time to digest the concerns raised by the Fiorucci episode, analysts argue.

"It attracted a fair share of short interest and naysaying," said Akiva Felt, an analyst at Oppenheimer & Co., who rates Intercept a "buy" and has a price target of $499.

The Fiorucci scandal "is really a non-story," Felt said. "The studies he's accused of falsifying were different than the ones Intercept is doing now.

"The importance of in vitro studies when you have lots of clinical data from Phase 2 trials is not that important. If it was a preclinical company, maybe it would mean something about the prospects of their compound. It's essentially irrelevant and was known about before the company went public."

Moreover, Felt said that concern about the Fiorucci episode isn't what caused Intercept shares to trade down over the last eight months.

He attributed that to a statement by the group that managed Intercept's study, concerning disclosure of a safety concern that OCA increased levels of lipids.

The concern later proved unimportant, Felt said.

OCA is potentially a "multi-billion market opportunity," he said, and that doesn't count its somewhat smaller market opportunity for treating PBC or primary biliary cirrhosis.

OCA has been granted orphan drug status by the Food and Drug Administration as a potential treatment for PBC. Drugs with orphan drug status have a potentially faster approval process.

"When the company went public, the whole story was about PBC," Felt said.

Intercept had been pursuing clinical trials of OCA for PBC because it was a smaller more manageable study. It left the more expensive NASH study to the NIH because it was considered less likely to produce strong results.

But the NIH study of OCA for treatment of NASH "showed terrific results," said Liisa Bayko, an analyst with JMP Securities LLC, who has a "market outperform" rating on Intercept and a price target of $500.

"The data look good," she said. "All the various markers of NASH, not just a few, were seen to reverse. Even fibrosis was seen to reverse. It's not been demonstrated before. It's a pretty big deal. As patients are on it longer, it should show even better results. It's a massive market opportunity."

Intercept has had a cash burn rate of $80 million to $100 million a year, which means the $272.8 million of cash on its balance sheet should last at least three more years.

Intercept's Pruzanski couldn't be reached for comment.

Intercept is, of course, not the only biotech company to see its stock soar on positive clinical trial results.

Puma Biotechnology Inc. (PBYI) went public through a reverse merger in 2011, raising $60 million in a private placement at the time. It later raised $138 million in an underwritten public offering.

Since then, the stock has risen more than sixteenfold to $233.

The stock almost quadrupled on July 23 to $233.43, following Puma's announcement of statistically significant improvement in breast cancer survival in a clinical trial of its investigational drug candidate PB272 or Neratinib.

Intercept "did get tagged as the poster child of a possible biotech bubble, but I don't think Intercept's valuation is in bubble territory," Felt said.

Both Felt and Bayko said the more cautionary tales involve small-cap companies with less institutional followings.

Part of the problem in determining whether biotech stocks are overvalued is that the group often moves in tandem because of their inclusion in exchange-traded funds, Felt said.

"The sector trends on the risk environment," he said. "When it's risk-on it soars and when it's risk-off it falls. I don't worry that I can't justify the price of the names."

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