CAPScall of the Week: Intercept Pharmaceuticals

For years, satirical late-night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. congressional districts and its representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.

That's why I've made it a weekly tradition to examine one seldom-followed company within the Motley Fool CAPS database and make a CAPScall of outperform or underperform on that company.

For this week's round of "Better Know a Stock," I'm going to take a closer look at Intercept Pharmaceuticals (NASDAQ: ICPT  ) .

What Intercept Pharmaceuticals does
Intercept Pharmaceuticals is a clinical-stage biopharmaceutical company focused on developing treatments aimed at chronic liver diseases. Specifically, Intercept differentiates itself through the utilization of its proprietary bile acid chemistry. The company's lead compound, known as obeticholic acid, or OCA, recently initiated phase 3 trials for primary biliary cirrhosis and has received orphan drug status from the Food and Drug Administration for this disease, which could ultimately expedite its review process and grant it seven years marketing exclusivity from the date of approval -- assuming it gets approved, of course! OCA is also being tested in a number of other indications.

In Intercept's most recent quarter, the company reported only $405,405 in licensing revenue while racking up a comprehensive loss of $10.5 million. Since inception, Intercept has an accumulated deficit of $128.7 million.

Whom it competes against
The allure of Intercept is that its OCA is angled at treating an aspect of PBC that currently has no FDA-approved treatment.

Geared as a secondary line of treatment, Intercept has geared OCA to snatch up patients who have an inadequate response to, or are unable to take, ursodiol, the only drug currently approved to treat PBC. Ursodiol was originally developed by Actavis (NYSE: ACT  ) (previously Watson Pharmaceuticals) but has since lost its exclusivity, with Lannett (NYSEMKT: LCI  ) gaining FDA approval to market generic versions of the drug in 2008. In the true sense of the word, Intercept has little direct competition as long as ursodiol intolerance exists in some patients.

The only direct competitor is Galectin Pharmaceuticals, a microcap biotechnology company that only received the OK from the FDA to begin human clinical trials for GR-MD-02 in March. That hasn't stopped Aegis Capital from coming down critically on Intercept, though, with Aegis commenting that, "OCA is unlikely to reverse liver fibrosis and that its safety profile may prove inferior to that of Galectin's GR-MD-02." 

The call
After carefully reviewing the prospects for Intercept Pharmaceuticals, I've decided to join the majority and make a CAPScall of underperform on the company.

The primary reason to be skeptical of Intercept is the same reason I'm often skeptical of clinical-phase biotechnology companies: It has no FDA-approved product, and it could be at least two years at the earliest before it does. In the meantime, Intercept has lost $128.7 million in the nearly 11 years since it began its operations and has financed its activities through dilutive secondary offerings. Two weeks ago, the company completed a 1.7 million share offering at $33.01 that helped raise approximately $53.3 million. While great news with the stock hitting new highs, more dilutive offerings should be expected with profitability still years away.

In addition, I have some skepticism surrounding OCA based on the small patient subset in phase 2 trials. Don't get me wrong, the 59-patient pool taking OCA demonstrated incredible results. Primarily, the reduction of alkaline phosphatase (AP) in the liver, an enzyme associated with liver disease progression, of 45% and 38% with the 10mg and 50mg doses compared to 0% with the placebo gives investors encouraging data to nibble on. But, phase 3 trials often bring with them the disappointment of considerably more tame results across a great subset of the population. This phase 3 trial is also going to be geared toward safety and longevity effects, which the phase 2 trial really didn't touch on. I'm not saying OCA has given any indications of being unsafe, but rather than investors are wrongly allotting a premium valuation to Intercept before the data is in.

Unless Intercept is able to hit all of its intended indications with OCA I simply can't see how today's valuation is justified.

It's no secret that biotech stocks have been soaring recently, but the best investment strategy is to pick great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" not only shares stocks that could help you build long-term wealth, but also winning strategies that every investor should know. Click here to grab your free copy today.