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Intercept Pharmaceuticals Inc (ICPT): Reassessing OCA’s Value Proposition and Potential Takeover Valuations

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Background

Shares in Intercept Pharmaceuticals Inc (NASDAQ:ICPT) climbed as much as +31% on February 12th following a report from Reuters citing anonymous sources that the company is considering a sale after receiving interest from potential buyers. In the short term we see ICPT share confined below $130-$137 until the FDA Adcom on April 07th for OCA in PBC. Short term sentiment indicators suggest a pull back is likely or imminent with $118.25 -$120 as minor support, a close below these levels opens up downside to the 20-day moving average at $107.64 currently. Ideal long setup would be waiting for a test and confirmation of one of these support levels, then selling $80-$90 strike put spread (selling higher strike put, buying lower strike put to hedge).

The news source suggested Gilead Sciences, Inc. (NASDAQ:GILD) as a potential suitor. GILD has a demonstrable strategic interest in NASH, and would not surprise us if they were considering ICPT as a takeover target given their internal pipeline already includes 3 assets targeting each component of NASH (simtuzumab/fibrosis, GS-4997/inflammation, multiple FXR agonists/metabolic). Other potential bidders named were Shire (SHPG), Merck (MRK), Abbvie (ABBV), BMY, Pfizer (PFE), AstraZeneca (AZN) and Roche, given these companies have therapeutic overlap with liver/orphan diseases. We note that GILD ranks second only to JNJ in the sector on M&A capacity right now.

ICPT bears would cite the fact that GILD acquired Phenex’s FXR agonists in 2015 rendering ICPT’s lead FXR agonist, obeticholic acid (OCA) a redundant asset for GILD. We disagree, and think there is credence to the idea of GILD acquiring ICPT despite their recent acquisition of Phenex. GILD’s commercial strategy is keenly focused on having multiple assets per drug target to adequately manage their product lifecycle, and Phenex’s FXR agonists are years behind OCA in clinical development representing first-mover advantage for ICPT. GILD historically has demonstrated an ability to act forcefully when acquiring assets that are first and/or best in class (Sovaldi).

With no other biotech’s valuation has the market imposed such a clear “mandate” for M&A than what we have observed with GILD over the past 12-months. It is eerily similar to AAPL in 2013-2014 when both David Einhorn and Carl Icahn began their activism crusades to unleash shareholder value, and indirectly succeeded in doing so. GILD diverges from AAPL though because of their long and consistent track record of returning 50-60% of FCF to shareholders since 2010. Moreover, global investor surveys show that the buy-side wants M&A and not more repurchases.

As a result, we focused our analysis on GILD as a potential suitor for ICPT for several reasons. First, the market wants M&A desperately from GILD. Second, its one of the most cited potential acquirers with any cancer, liver, or inflammation asset. And finally, our own biases, we know GILD better than the others and choose to use it as a template to represent the others.

OCA is Approvable in NASH, but Market Penetration Will be Limited to 20-30%

We cannot deny that ICPT represents one of the few remaining late-stage blockbuster drugs, and while many think OCA will become “more de-risked for an acquirer” if approved in PBC this summer, we do not think a potential acquirer would attribute much additional valuation to NASH from a positive Adcom in PBC. While we believe OCA is an approvable drug in NASH, we are increasingly confident that its use will be restricted to a smaller segment of the market than consensus currently models, and note that our expectation for OCA pricing is dramatically lower than consensus expects and believe the PCSK9 drugs are the best proxy, not the HCV drug class and pricing will play a significant role in...


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