Deals

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

Having the first drug to market for a disease can pay off enormously, which is why early stage biotech firms make such juicy M&A targets. But most such drugs turn out to be busts, causing pain to all involved. 

It's a lesson investors in Intercept Pharmaceuticals, which is reportedly on the market, should keep in mind. Rumors of would-be buyers sent Intercept shares up nearly 30 percent on Friday. Its lead liver disease drug, obeticholic acid (OCA), has upside potential that is the stuff of dealmaking dreams. But it has more bust potential than many acquirers will find comfortable.

On the Block
Intercept is reportedly chatting with potential buyers, and shares have spiked.
Source: Bloomberg
Intraday times are displayed in ET.

The company has a date with an FDA panel in April to evaluate the drug for approval in a rare liver condition called primary biliary cirrhosis (PBC). But the real prize is a possible first-ever approval in non-alcoholic steatohepatitis (NASH). The liver disease, believed to affect millions of American adults, is growing with the prevalence of obesity. Its market could be worth as much as $35 billion

The allure of finding a NASH drug is obvious; after seeing Gilead make $31.5 billion in two years on its first-to-market drugs for Hepatitis C, the industry is looking for the next big liver treatment. Intercept is the furthest along, enrolling patients in a huge late-phase study of OCA's effectiveness in treating NASH. But competition will be fierce.

Pharma giants including Novo Nordisk, AstraZeneca and Bristol-Myers Squibb have licensed, bought, or developed drugs for the disease. Gilead itself has two different NASH drugs in development. France's Genfit is right behind Intercept, with plans to conduct large phase III trials for its NASH drug.

And a swarm of other companies, big and small, private and public, are in the race to treat the disease. They include Shire, Akarna, Enanta, Galmed, Conatus, Galectin, Ionis, Tobira, and others.    

OCA treated NASH effectively in phase II studies. But results in a small Japanese study released last October were less encouraging. The drug also has some potentially serious safety issues; side effects include a significant increase in the bad kind of cholesterol. That is particularly worrying in a treatment for NASH, which disproportionately affects obese people.

There's a long wait ahead for results that might mitigate such concerns; the company's phase III trial, which is still enrolling patients, will test the drug for 72 weeks.

April's FDA panel will give a hint of how the agency might weigh OCA's safety against its effectiveness. Potential Intercept acquirers -- possibly including Pfizer, Gilead, Bristol-Myers Squibb and Shire -- will likely wait to at least hear what the FDA's experts think, notes Michelle Yee at Wells Fargo.

There are also reasons not to expect widespread early treatment of NASH. The disease is often undiagnosed and difficult to detect. Proving a NASH diagnosis requires a liver biopsy, an invasive and unpleasant procedure, followed by more biopsies to measure the disease's progress. It doesn't always lead to liver damage and may take 10 to 20 years to do so. Patients without symptoms may be reluctant to get jabbed in the liver, and providers may be reluctant to adopt an expensive treatment.

Another big concern for a deal will be valuation. On the one hand, this looks like the perfect time to take a crack at Intercept; its shares have been particularly hard-hit by the broad selloff in biotech since last summer. Even with a bump from buyout rumors, the stock is down 22.87 percent so far this year, down 58.7 percent from the Nasdaq Biotech Index's summer 2015 peak, and down 75 percent from Intercept's March 2014 peak. 

8 Months to Forget
As biotech has tumbled, Intercept has tumbled more. Performance indexed to 100.
Source: Bloomberg

But the company remembers its not-so-distant glory days and has Scrooge McDuck-esque visions of swimming in the revenue of the market's first NASH treatment. It may not be willing to sell for much of a discount.

Potential Intercept acquirers may very well be kicking the tires. But no one’s likely to be driving it off the lot anytime soon.

Correction: Intercept's drug is being tested for treatment of non-alcoholic steatohepatitis (NASH). An earlier version of this story incorrectly referred to NASH as non-alcoholic stearoarthritis.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net