Intercept Pharmaceuticals (ICPT) Stock: Too Risky To Buy Now

Introduction

Intercept Pharmaceuticals (NASDAQ:ICPT) announced its second quarter earnings results two weeks ago, revealing that it intends to resubmit Ocaliva’s NDA for NASH by the end of the year. This is welcome news to many long-time Intercept holders, as they have been waiting for the resubmission ever since the FDA first denied the application in 2020. Also due soon, by the end of this quarter, are results from its REVERSE trial, which is evaluating Ocaliva as a NASH compensated cirrhosis treatment. Shares have since traded upwards by ~30% as of the time of writing. Enthusiasm has begun to bubble up again as these two binary events loom, but is optimism misplaced?

Whether or not REVERSE will yield a successful outcome is uncertain, as NASH cirrhosis is more difficult to treat; the livers are more damaged; and the market is much smaller than the market for NASH Fibrosis. About 5-12% of those with NASH go on to develop NASH cirrhosis, and REVERSE looks at a subgroup of cirrhosis patients – those with compensated cirrhosis (meaning asymptomatic cirrhosis).

The outcome of this trial will be important and will provide more clarity, but not critical in the same vein as the FDA decision. All eyes will really be on the FDA’s upcoming decision, as it represents the largest market and will give perspective as to how stringent the FDA will be when it comes to approval.

I am skeptical that this update about the company’s resubmission plans does much to alleviate the fundamental issues that have plagued Intercept for the past eight years. Namely, it does not add enough color on Ocaliva’s NDA resubmission prospects – nor does it add much information regarding the new data Intercept is submitting in its NDA.

With the company’s PBC sales flattening, much of Intercept’s future value is dependent on the decision making of the FDA. If it were to approve Ocaliva as a NASH treatment, Intercept would easily become a multi-bagger. But if not, then Intercept would have to go back to the drawing board yet again.

Thesis

I believe that it would be unwise to bet on approval; simply not enough has changed between this NDA and the last NDA to warrant a changed opinion from the FDA. New data and analysis produced by Intercept does not add much to the picture, and Intercept has not released the full CRL letter. So it is impossible to exactly discern what the FDA wants to see. Given the safety profile of Ocaliva – and the black box label which comes with it as a PBC treatment – there is great reason to believe that the FDA will think cautiously when considering Intercept’s NDA. If I had to bet on it, I would say that the FDA will either reject the NDA outright or grant conditional approval contingent upon a safety trial; either outcome would be disastrous for Intercept.

But there is no need to bet on this outcome; not even Intercept knows what will happen. Even if you are bullish and convinced that Ocaliva’s benefits outweighs its risks – that the company will be successful in commercializing Ocaliva – it would still be more prudent to build a long position after the FDA’s decision and not prior to it. You lose out on some investment gains, but you successfully de-risk your investment thesis by a significant margin. Until the FDA decides its course of action, I would tentatively give Intercept a sell-rating.

Financials

Looking over its last earnings report reveals both bright and dim spots. On the bright side, Intercept’s balance sheet is rock-solid. It has about ~$65 million in cash and cash equivalents on hand with another ~$346 million in liquid debt securities. And the company only saw a net loss of $7.5 million, a decrease YoY from $11.1 million in Q2’21.

Net revenues rose slightly too, with PBC sales increasing YoY by a small margin. Total non-GAAP adjusted sales came out to be $100.4 million while U.S sales clocked in at $71.8 million. During the same quarter last year, sales were $96.6 million and $68.2 million for those respective categories.

A dimmer interpretation of this slow growth is that Ocaliva is close to reaching peak revenues in the PBC market – which would be unfortunate considering how Intercept has not reached profitability yet. Intercept has never been profitable, despite Ocaliva being approved for PBC since 2017. The company selling its international rights to Ocaliva for only ~$450 million shows that management is not confident in its ability to squeeze more growth from international markets, in my view.

One somewhat concerning aspect of the balance sheet is the high amount of debt. At the moment, Intercept has about $713 million in debt, most of which is comprised of 2023 and 2026 convertible notes.

	Value	Maturity Date *Unless Converted/Repurchased/Redeemed	Conversion Rate	Conversion Price
2026 Convertible Secured Notes	543,370,000	February 15, 2026	47.7612	$20.94
2026 Convertible Unsecured Notes	69,492,000	May 15, 2026	9.2123	$108.55
2023 Convertible Unsecured Notes	107,727,000	July 1, 2023	5.0358	$198.56

Click to enlarge

Source: Table Constructed By Author, Information Drawn From Q2’22 10-Q Filing

Conversion rates for these notes vary wildly, but the good thing is that the conversion dates for most of the notes are in 2026, giving the company time to make that price-point. Not so good is that the conversion prices are somewhat high compared to the current share price. The largest tranche of notes, the 2026 secured convertible notes, has a conversion price of ~$20.94 – which is only about ~17% higher than the current share price as of the time of writing.

Even if the stock does appreciate 17%, it is unlikely that a majority of investors would choose to convert their loans into equity unless Intercept clears the NASH regulatory hurdle: there is no incentive for debt-holders to convert their stakes into equity positions unless the future is meaningfully de-risked; having their investment in the form of debt gives them a layer of protection in exchange for less upside.

Many investors see high conversion prices as a good thing, since they want to see minimal shareholder dilution. In this case, it may not be so good. If Intercept is unable to meaningfully lift its stock price or grow its revenue, this debt could prove to be an existential burden for the company. Sales from PBC alone won’t cut it as a revenue solution – Intercept needs regulators to unlock the NASH market if it wants to overcome its debt. No unlock may mean that shareholders don’t get diluted by conversion, but it would also create solvency issues for Intercept; the bill will eventually come forward in one way or another.

Right now, Intercept has enough cash to buy valuable time for itself. But eventually, that debt will either be converted or has to be paid off. And currently, Intercept does not have enough cash on hand to pay off its debt in full. The only way the company can meet its obligations, short of conversion, is by selling more shares or refinancing its debt. Neither the capital markets or creditors would give Intercept favorable financing options if it tries to negotiate without Ocaliva’s approval for NASH in hand. Short of approval, this debt represents a major threat to the future of Intercept.

Ocaliva Faces Long Odds

A core component of my skepticism towards Intercept is that I believe Ocaliva faces long odds for FDA approval. In 2020, the FDA rejected Intercept’s Ocaliva NDA for NASH, informing them that the “predicted benefit… remains uncertain.” Much of this uncertainty stems from Ocaliva’s modest efficacy and unbalanced safety profile.

On the efficacy side, Ocaliva only hit one of the two primary endpoints in REGENERATE, which was the phase three trial evaluating Ocaliva as a NASH treatment. Both the 10 milligram and 25 milligram dosage of Ocaliva managed to demonstrate a statistically significant improvement over placebo with the fibrosis reduction endpoint, but neither dosage achieved statistical significance over placebo with NASH resolution – the other endpoint.

For the fibrosis endpoint, it should also be noted that the 10 milligram arm showed a p-value of only 0.0446, just barely passing the hurdle for what the FDA considers statistically significant. The higher dosage, 25 milligrams, had a stronger p-value of 0.0002. Another important aspect to consider is that there were serious safety concerns that appeared dose-dependent. 28% and 51% of those in the 10 milligram and 25 milligram arm respectively reported pruritus – also known as chronic itching – compared to just 19% in the placebo arm. ~9% of those in the 25 milligram arm had to discontinue treatment because of pruritus. Higher incidences of biliary/hepatic adverse events were observed in the 25 milligram arm compared to placebo too, but this increase was not statistically significant. Dose-dependent reductions in HDL cholesterol, known as the good cholesterol, was observed in this trial as well as other trials too.

For those with high levels of cholesterol or cardiac issues, this is a big deal. One unfortunate aspect of NAFLD/NASH is that both conditions are tied to cardiovascular disease; there exists medical literature closely linking the two. There is little doubt in my mind that the FDA considers this aspect of the safety profile when weighing the risks and benefits of Ocaliva.

Intercept’s rebuttal against these concerns would be to cite longer-term data and new analysis from REGENERATE. On the safety side, the company has collected more information on REGENERATE participants through long-term follow-up to supplement the safety data it already has; everything new appears to corroborate the previously established safety profile.

Using a different analytical method, Intercept also analyzed the trial again to find that the results were slightly better than they seemed at first glance. Instead of having one doctor analyze biopsy slides, they used a consensus based approach where they had three doctors analyze every slide.

2019 Original Analysis Data	10 MG	25 MG	Placebo
Fibrosis Improvement	17.6% p= <0.0446*	23.1% p= 0.0002	11.9%
NASH Resolution	11.2% p= 0.0184*	11.7% p=0.1268*	8.0%
Pruritus	28%	51%	19%
2022 New Analysis Data
Fibrosis Improvement	14.1% p=not given*	22.4% p=<0.0001	9.6%
NASH Resolution	6.1% p=not given*	6.5% p=not given*	3.5%
Pruritus	33%	55%	24%
* Symbol Indicates Statistical Insignificance

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Source: Table Constructed By Author

I am doubtful that the FDA will take this new analysis very seriously. For one, even though it shows better results on the margins, it is still largely an echo of the original REGENERATE data. When it comes to NASH resolution, the data looks even worse now. Having two more pairs of eyes to assess the biopsy slides seems largely redundant. No new trial was conducted. No previously unknown benefits were unveiled. And nothing seems to have fundamentally changed between now and 2020, when Ocaliva was first rejected.

Conclusion

If Intercept were to release the complete response letter it received in full and draw a direct line from what the FDA indicated was necessary to what it has done since, then I would be more optimistic about the company’s actions. At the moment though, there is no certainty that this is what the FDA needed from Intercept.

The management team will be upbeat and optimistic about its resubmission prospects, but take that lightly. At this point, Intercept has crossed the Rubicon and is past the point of no return. But there is no reason for existing or prospective shareholders to take that gamble with the company. Even if you believe in Ocaliva as a future NASH treatment, it would still be more prudent from a risk management perspective to open or add to your position after the FDA announces its decision.

FDA decisions are inherently unpredictable, and mixed data does not make it any easier; the safety profile is questionable, efficacy modest and we do not have insight as to what the FDA precisely wants. There is too much that we do not know, and for that reason, I would give Intercept a sell-rating until more information comes out.