ICPT - Intercept Pharmaceuticals: Alfasigma Pays Premium For M&A Deal That Suits All Parties

2023-09-26 15:35:33 ET

Summary

• Intercept Pharmaceuticals, the developer of liver disease drug Ocaliva, has agreed to be acquired by Italian Pharma company Alfasigma in an all-cash deal worth approximately $800 million.
• Intercept faced challenges securing approval for Ocaliva to treat nonalcoholic steatohepatitis (NASH), but the acquisition offers a 27% premium to its IPO price and an 82% premium to yesterday close.
• The deal is seen as a good opportunity for Alfasigma to establish a presence in the US market and expand its gastroenterology and hepatology portfolio.
• After rejection in NASH in 2020 and 2023, Intercept management likely wished to move on - while Alfasigma will likely believe Ocaliva's approval in PBC can be upheld, and the drug can be profitable.

Investment Overview

In October 2012, Intercept Pharmaceuticals ( ICPT ) completed its initial public offering ("IPO") of 5m shares priced at $15 per share, raising ~$75m to fund development of a then Phase 3 stage liver disease drug, Ocaliva - obeticholic acid, or "OCA" - a "first-in-class agonist of the farnesoid X receptor" according to the company.

Almost exactly 11 years later, Intercept has accepted a buyout offer from privately held Italian Pharma concern Alfasigma to be acquired in an all-cash deal for $19 per share - an 82% premium to its closing price on September 25th, and an overall deal value of ~$800m.

The past decade has seen Intercept achieve many highs and lows, and share price highs and lows, but given that management ultimately failed to achieve its major goal of securing an approval for OCA to treat nonalcoholic steatohepatitis ("NASH"), investors will probably be delighted to see a takeover deal done at a 27% premium to IPO price.

A Brief History Of Intercept - NASH Rejection, Ocaliva's Conditional Approval In PBC

When I last covered Intercept in a note for Seeking Alpha back in June, the company had just been handed its second rejection of Ocaliva by the Food and Drug Agency ("FDA") - an outcome that was wholly expected. Intercept had submitted its second New Drug Application ("NDA"), requesting approval in NASH in December 2022, and the FDA had subsequently convened an Advisory Committee meeting ("AdComm") to discuss approval with members of its Gastrointestinal Drugs Advisory Committee ("GIDAC"), which took place in May 2023.

The FDA outlined numerous concerns around approval of a 25mg dose of Ocaliva, most notably around safety - hepatotoxicity, risk of cholecystitis and bile duct stones/sludge, risk of onset of diabetes, dyslipidemia, and pruritis - which led to the AdCom voting against approval. As summarized in an Intercept press release :

12 of 16 voting-eligible advisors vote "no" (with two abstentions) on question, "given the available efficacy and safety data, do the benefits of OCA 25 mg outweigh the risks in NASH patients with stage 2 or 3 fibrosis?"

15 of 16 voting-eligible advisors vote to "defer approval until clinical outcome data from trial 747-303 are submitted and reviewed, at which time the traditional approval pathway could be considered"

In 2016, Ocaliva had been granted an accelerated approval for primary biliary cholangitis ("PBC"), in combination with ursodeoxycholic acid ("UDCA") in adults with an inadequate response to UDCA or as monotherapy in adults unable to tolerate UDCA.

PBC is a rare liver disease caused by "autoimmune destruction of the bile ducts that transport bile acids out of the liver, resulting in cholestasis", according to Intercept's 2022 annual report , which adds that:

As the disease progresses, it causes progressive liver damage marked by chronic inflammation and fibrosis. Despite its rarity, PBC is the most common cholestatic liver disease and is among the leading indications for liver transplant among women in the United States. Disease progression in PBC varies significantly, with median survival in untreated patients estimated to be 7.5 years if symptomatic at diagnosis and up to 16 years if asymptomatic at diagnosis

According to research, PBC affects ~290k people in the US - 90% of whom are women. Ocaliva secured its approval based on its Phase POISE clinical trial, completed in 2014, in which a once-daily 5mg and 10mg Ocaliva dose met the primary endpoint of:

achieving a reduction in serum alkaline phosphatase ("ALP") to below a threshold of 1.67 times the upper limit of normal ("ULN"), with a minimum of a 15% reduction in ALP level from baseline, and a normal bilirubin level after 12 months of therapy.

The percentage of patients meeting the POISE trial's primary endpoint was 10% in the placebo group, 47% in the 10 mg Ocaliva group and 46% in the Ocaliva titration group (both dose groups p < 0.0001 as compared to placebo) in an intent-to-treat analysis.

ALP is a "a liver enzyme that is a key biomarker of the disease pathology". After its "accelerated" approval, a process by which drugs can be approved based on a "surrogate endpoint" in order to fill an unmet medical need, Intercept was required to complete a Phase 4 confirmatory study, COBALT, which ultimately failed to meet its primary endpoint, owing to "challenges in enrolling and maintaining a placebo-controlled post-marketing study in a rare disease setting", management says.

As such, Ocaliva still does not have a full approval to treat PBC, although Intercept management remained hopeful that this would be granted in 2023, based on a combination of real-world evidence and COBALT data. If the full approval is not granted, Ocaliva could be withdrawn from the market in the US - although that is no longer Intercept management's problem, thanks to the Alfasigma deal.

In the PBC indication - where Ocaliva remains the only FDA-approved second-line treatment - Intercept has generated annual revenues of $252m, $234m, $261m, and $286m between 2019 - 2022, although earnings from continuing operations in those 4 years were $(312m), $(218m), $(101m), and $(68.2m). In short, Intercept has been a heavily loss-making company - its accumulated deficit as of Q2 2023 stood at $2.2bn.

This is largely due to the money spent attempting to secure an approval for Ocaliva in NASH - so long as Alfasigma avoids going down the NASH approval route, it's quite possible the Pharma could realize a decent net profit from sales of the drug - provided it secures a full approval.

Why The Alfasigma / Intercept Deal Is Good For Intercept

It seems pretty clear that Intercept management was more interested in securing an approval in NASH than in marketing and selling Ocaliva in the PBC indication, and with that possibility now ruled out - to all intents and purposes - management, led by President, Chief Executive and Director Jerry Durso, are likely delighted to have found a buyer for the business so quickly.

As soon as Ocaliva was rejected in NASH for the second time - the first rejection having occurred in June 2020 - Intercept management issued a press release confirming that it will "discontinue all NASH-related investment", and also reduce its workforce by "approximately one-third", in a push to make the company profitable by 2024.

The company had already sold its ex-US commercial operations - Ocaliva is approved for PBC in European Union, the United Kingdom, Canada, and other jurisdictions - to Advanz Pharma, in a $405m deal, and although Intercept has been developing a second asset - INT-787, a next-generation FXR agonist, that is "16-fold more water soluble than OCA", it seems as though it was NASH or bust for the management team, and the challenge of making the company profitable was not as appealing.

For a long time, Intercept was arguably leading the "NASH Dash" i.e. the race to be the first company to secure an approval in a disease indication offering a potentially double-digit billion revenue opportunity as a reward. In December 2019, when the company's first NDA was accepted by the FDA, the stock price was riding high, trading >$120, but it has been pretty much downhill ever since.

In short, 3 years after its first NASH Prescription Drug User Fee Act ("PDUFA") date - the date the FDA rules on whether to approve or reject a drug for commercial use - resulted in the dreaded Complete Response Letter ("CRL"), outlining reasons for rejection, the receipt of a second one probably took its toll on management, who must have been only too pleased to agree to Alfasigma's takeover bid.

Why The Alfasigma / Intercept Deal Is Good For Alfasigma

In a press release announcing the takeover, Alfasigma Chairman Stefano Golinelli stated:

Today's proposed acquisition is aligned with our strategy to build presence in the U.S. market, with a focus in our core gastroenterological area while adding another important asset to our innovation pipeline.

Francesco Balestrieri, CEO of Alfasigma, also commented:

Intercept represents a compelling fit with Alfasigma's core business areas of gastroenterology and hepatology, and we believe that the transaction represents a transformational opportunity for both companies.

In short, the opportunity to acquire a triple-digit million selling asset within the US market has a significant amount of appeal for a European Pharma looking to establish a foothold in the US, and paying just ~$800m for an asset that Intercept has guided to achieve $320m - $340m of revenues in 2023 must feel like an excellent deal to Alfasigma management.

Whilst there is a tangible risk that Ocaliva could lose its authorization in the US, which would be a disastrous outcome for Alfasigma - and it should also be noted the FDA added a contraindication warning to Ocaliva's PBC label in 2021, after observing "25 cases of serious liver injury leading to liver decompensation or liver failure associated with Ocaliva in PBC patients with cirrhosis" - there are some potential revenue accretive opportunities in play also, and after completing its risk assessment, Alfasigma must have concluded the good outweighs the bad.

The good includes a combination therapy of OCA and bezafibrate indicated for the treatment of PBC. Bezafibrate is a peroxisome proliferator-activated receptor ("PPAR") agonist, and in June this year Intercept revealed that a Phase 2 study had shown that:

the combination of OCA 5-10 mg and bezafibrate 400 mg was effective in normalizing multiple biochemical markers associated with PBC-induced liver damage

Management added that:

By the fourth quarter of 2023, we expect to have necessary data, which will include analyses from both Phase 2 studies, in addition to Phase 1 and preclinical data, to request an end-of-phase 2 meeting with the FDA. Our longer-term goal is to develop and seek regulatory approval for an FDC regimen in PBC.

Securing approval in this indication would mean cementing Alfasigma's monopolistic control of second line PBC treatment, and likely also extend the patent protection of the new drug, keeping generic versions of Ocaliva out of the market. Intercept has been fending off generic competition for some time, and Alfasigma will doubtless also be wary of their entry into the market, priced much cheaper than the original drug given copycat versions can be created with a fraction of the R&D expense.

To summarize, if Alfasigma can protect its new drug from generic competitors, and partner it with bezafibrate, the company will be paying $800m for a >$300m per annum selling drug, which by biotech standards is very good value for money - for context, Pfizer (PFE) recently paid $5.4bn to acquire Global Blood Therapeutics, whose only approved drug Oxbryta - indicated for Sickle Cell Disease - earns revenues of ~$250m per annum.

Alfasigma even gets a "next-generation" drug to develop if it wants to, and so long as it avoids the massive R&D expenditure involved in a push for NASH approval, there is a good chance it can transform Intercept's business into a profitable one.

Concluding Thoughts: Shareholders & Stakeholders Will Want This Deal To Go Through

According to today's press release issued by Intercept, "the members of the Board of Directors of Intercept participating in the decision have unanimously approved the transaction", and Alfasigma will commence a cash tender offer to acquire all shares immediately.

There are still some hurdles to be overcome, as discussed by Intercept:

The closing of the tender offer will be subject to customary conditions, including the tender of shares which represent at least a majority of the total number of Intercept's outstanding shares of common stock and the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act. Upon successful completion of the tender offer, Alfasigma would acquire all shares not acquired in the tender offer through a second-step merger for the same consideration that the tendering stockholders will receive in the tender offer.

The two companies expect the deal to go through this year, and Intercept's stock will no longer be listed once the deal is complete. It seems unlikely that Intercept shareholders will protest - the offer represents an 82% premium to yesterday's closing price, and the highest traded price since April, when the NASH approval opportunity was still in play.

There will doubtless be some regrets, given the opportunity the company once had in front of it, but it's hard to argue that the NASH approval is anything other than a memory now, and with management keen to secure a sale, and no other obvious bidders emerging other than Alfasigma, the opportunity to complete a quick sale seems to suit all parties.

Back in 2016, it was rumored Swiss Pharma giant Novartis ( NVS ) was considering a bid for Intercept. Back then, shares traded at ~$125 per share. 7 years on, however, and with still no drug approved to treat NASH, $19 per share seems a fair price to pay for a company that is downsizing, faces several threats to future sales of its lead and only asset of note, and reported $414m of cash, current debt of $110m, and long term debt of $223m as of Q2 2023.

For Intercept and its management team, once hurtling towards the finish line in the multi-billion dollar "NASH Dash", there will doubtless be regrets, but if it's now time for the pipe and slippers, I believe management can exit knowing that it has not materially let down long term shareholders, and exhausted every avenue in its attempt to secure that elusive, historic NASH approval.

For further details see: