ICPT - Intercept: Narrowed Market Concentrated Strategy (Rating Upgrade)

2023-08-03 18:45:41 ET

Summary

• Intercept Pharmaceuticals' Q2 earnings reveal 17% growth in revenue and focus on Ocaliva for treating PBC, discontinuing NASH development.
• Despite strong revenue growth and promising Ocaliva expansion, concerns include substantial debt and lingering efficiency issues.
• I revise my recommendation for Intercept from "Sell" to "Hold," recognizing positive strides but also noting ongoing challenges.

Introduction

Intercept Pharmaceuticals ( ICPT ) develops and markets treatments for non-viral progressive liver diseases, utilizing bile acid chemistry to create Ocalivaliva, approved for treating primary biliary cholangitis [PBC] in adults.

In my previous analysis of Intercept Pharmaceuticals, I reaffirmed a "Sell" recommendation due to the uncertain trajectory for NASH treatment, Ocaliva. Despite successes in non-viral liver diseases, the GIDAC's vote against Ocaliva's benefits for NASH, along with a decision to defer approval pending further trial data, dimmed immediate prospects. While the deferral was not a rejection, the financial implications and the potential impact on commercialization plans and stock prices warranted caution. I emphasized that unless the 747-303 trial data were overwhelmingly positive, Ocaliva should not be considered a NASH candidate, urging investors to exercise diligence. Since my reaffirmed "Sell" recommendation, ICPT trades 19% lower and the company has since discontinued Ocaliva development for NASH.

Recent developments: Intercept Pharma's Q2 GAAP EPS of -$0.14 beats by $0.38, revenue of $83.72M beats by $4.15M; updates 2023 Ocaliva sales guidance, maintains expense guidance.

The following article analyzes Intercept Pharmaceuticals' Q2 earnings, focusing on growth in Ocaliva sales for treating PBC, discontinuation of NASH development, and a revised recommendation from "Sell" to "Hold."

Q2 Earnings & Balance Sheet Review

In the second quarter of 2023 , Intercept recognized $83.7 million in revenue, a 17% growth from the prior year's quarter. Operating expenses for Q2 were $90.8 million, with selling and administrative costs increasing to $53.3 million due to NASH launch preparations, while research and development expenses dropped to $37.3 million. Interest expense for the quarter was $2.8 million, and the company reported a reduced net loss of $5.8 million compared to $20.3 million in Q2 2022. As of June 30, cash and equivalents stood at $415 million, with the company repaying $109.8 million for maturing Convertible Notes. Intercept updated its 2023 Ocaliva sales guidance to $320-$340 million and lowered its non-GAAP adjusted operating expense guidance to $350-$370 million, expecting a net reduction in annual non-GAAP adjusted operating expenses of around $140 million.

Looking at their balance sheet : Intercept displays a stable short-term liquidity position as of June 30, 2023, with a current ratio of approximately 2.52. However, the company's financials reveal concerns, including persistent operating losses of $38.75 million for the first six months of 2023 and a decrease in total stockholders' equity from $93 million to $67.5 million during the same period. The company's long-term debt, totaling $223.6 million along with ongoing operating losses, may necessitate additional financing (e.g. equity financing) to support long-term growth and stability.

Growth Initiatives

Management's growth initiatives for Intercept in their Q2 earnings call were centered around the continued success and expansion of Ocaliva in treating PBC. Several factors were highlighted to demonstrate this growth:

1. New Prescribers: Five out of ten prescribers for new patients were first-time Ocaliva writers, showing the attraction of new medical professionals to the product.

2. Volume Growth: New prescriptions of Ocaliva grew by 25%, reaching a monthly all-time high, attributed to the successful outreach of the sales force.

3. Patient Satisfaction and Continuity: Approximately 86% of patients reported being satisfied with Ocaliva, with 92% expecting to continue the therapy. This satisfaction was backed by support programs, like Interconnect, and a strong on-time refill rate of 90%.

4. Emphasizing Ocaliva's Impact: Moving forward, the company plans to highlight Ocaliva's benefits on liver biomarkers and demonstrate its ability to slow disease progression. Emphasis will be on the total impact on various biomarkers like AST, ALT, GGT, and total bilirubin.

5. Real World Evidence and Differentiation: Using real-world datasets that demonstrate improved survival, Intercept plans to create awareness of Ocaliva's unique benefits, positioning it strongly against potential competitors.

6. Ocaliva-bezafibrate Combination Program: Looking into combining Ocaliva with bezafibrate to establish best-in-class clinical benefits. Initial data from Phase 2 studies is encouraging, showing the possibility of biochemical remission in more than half of PBC patients.

7. Regulatory and Clinical Updates: The company remains on track for submission of sNDA and continues to progress with proof-of-concept studies evaluating other products like INT-787 in treating severe alcohol-associated hepatitis.

My Analysis & Recommendation

Intercept's Q2 earnings offer a mixed picture that warrants a nuanced analysis, especially in light of the discontinuation of NASH development. On the positive side, the 17% growth in revenue, alongside a reduction in operating expenses and a forecasted net reduction in annual non-GAAP adjusted operating expenses of around $140 million, reflect concerted efforts at cost management and an encouraging expansion in the market for Ocaliva in treating PBC.

The discontinuation of the NASH development, while eliminating a previous uncertainty that weighed on my original "Sell" recommendation, also underscores a loss in potential growth avenue for the company. This decision may reflect a more focused and realistic strategy, concentrating on core strengths like the promising Ocaliva, but it does also narrow the company's potential market reach.

The clear emphasis on expanding Ocaliva's success through strategies such as new prescriber engagement, patient satisfaction, and exploring combinations like the Ocaliva-bezafibrate program, paints a picture of a company shifting to build on proven strengths. Intercept's focus on real-world evidence to differentiate Ocaliva and the ongoing studies like INT-787 show a commitment to innovation within its more targeted therapeutic domain.

However, the substantial debt and the lingering efficiency issues still present challenges. The company's restructuring towards a narrower focus must be executed efficiently to realize its full potential and justify its current valuation.

With the discontinuation of NASH development, the investment picture for Intercept has certainly changed. While there is disappointment in losing a potential growth path, there is also a sense of clarity and perhaps even relief in seeing the company concentrate on areas where it has proven success.

Considering these developments, I am revising my recommendation from "Sell" to "Hold." This change acknowledges the positive strides made in Q2, the promise shown in Ocaliva's market growth, and the sensible decision to discontinue a hopeless project. However, the recommendation also recognizes that there are still challenges ahead, and the company's future growth will depend on successful execution of its refined strategy. Investors should continue to closely monitor Intercept's progress in its core areas and be aware of the inherent risks associated with the company's financial position, particularly in light of its lack of profitability and relative debt burden.

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