The Intercept Snafu

A 50% haircut is no fun for anyone, especially for those who have been heavily tied into it. That’s what has happened for Intercept (ICPT) and is still ongoing. Intercept is a biopharmaceutical company focused on the development and commercialization of novel therapeutics to treat progressive non-viral liver diseases. It is a quite successful company with at least one approved drug in the market, called Ocaliva for the indication of primary biliary cholangitis (PBC). Ocaliva is also being evaluated for potential indications across a variety of additional chronic liver diseases, including a very lucrative indication, nonalcoholic steatohepatitis (NASH). The hope was very high for ICPT, reflected in its stock prices constantly above $100 in the past year. Then a sudden blow hit it without notice.

 

On September 12, Intercept disclosed that it released a "Dear Doctor" letter warning of cases of "about 10 cases" of liver failure and related deaths, a the majority of which were said to have occurred in patients with severe PBC who had been treated with higher-than-indicated doses of Ocaliva. Well, it turned out that the safety risk was more than that as per the FDA, they have received a total of 30 reports of serious liver injury, including 19 deaths –and at least five of the cases occurred in PBC patients with no or mild decreases in liver function prior to initiating therapy. The panic hit the ICPT investors and they dumped its shares like the end of the world, wiping out its market cap by 50% just within days. The question is if this is an overreaction?

 

My initial contrarian feeling was Yes that this was an overreaction. You see, serious liver injury is already noted in Ocaliva’s label although it’s almost certain the recent fatality data will need to be added to the label, even a black box warning. The updated new serious safety risk for Ocaliva will certainly impact on its sales but PBC is a chronic liver disease with no cure and eventually patients will progress to cirrhosis that is fatal unless with liver transplantation. Such patients also have high risk of liver cancer. Given the limited treatment options available for PBC, the company will overcome the short-term setback to gain its market share again soon. But after the second thought, three more significant concerns came up that stopped me from jumping into it immediately.

• The unintended overdose leading to death may trigger a much more severe action mandated by the FDA that could be potentially fatal for the drug. The FDA may mandate a Risk Evaluation and Mitigation Strategy (REMS) for any drug that is deemed to have some specific serious safety concerns. For most of drugs that require a REMS, it only involves the basic requirement that requires the company to update the label and also distributes so-called educational materials that will inform physicians, pharmacists and/or patients regarding the risks involved and how to manage to minimize them. This is not so much a big deal and ICPT has already announced to take such actions immediately. But the real concern is the more stringent measures for drugs that have the risks so severe that the basic label plus education won’t be sufficient per the FDA. Then they may mandate a certification process for health care providers like physicians and pharmacists to study the educational materials and pass a test before they can prescribe a drug. More brutally, it can even go so far to impose a limited supply of the drug to only those who are deemed safe to get access to the drug. If such things happen, the sales of the drug will dive to the hell. What’s the chance for Ocaliva to get such stringent REMS measures? Probably not very high as the initial mandate from the FDA but the risk is still there that I cannot totally discount it.
• As I said, the NASH indication is more lucrative as there is no approved treatment yet and the market is huge for it. The expectation for Ocaliva was high before the snafu but with such a serious fatal risk involved, it will at least slow down its ongoing trials for NASH and may also make it less competitive due to the safety concern.
• Then I saw an interview with the CEO of ICPT. It is no surprise that he was defending their drug but the way he did it was really surprising and unethical. He told the reporter that these patients who died of the overdose were very sick and would die anyway. I almost fell off the chair when I saw this. I must say he is really stupid to say this in public and I’m almost sure that there will be a flood of lawsuits for ICPT in the months ahead.

 

In short, it is still too early to tell whether ICPT has already priced in all the potential risks. It is not a good idea to catch the falling knife even though it could turn out to be a good entry point. Better to let the dust settle before jumping in.