Seeking Alpha: Conatus Has A Clearer Path, But It's Long And Uncertain

The past year was a tough one for companies focused on treating liver disease, but Conatus (NASDAQ:CNAT) had an especially bad year. The shares fell almost 60% as investors grew increasingly concerned about the company's drug emricasan, particularly with respect to just how reliable or meaningful the data collected so far are with respect to real-world efficacy.

Emricasan seems to have clinical activity, but it is still very much an open question as to whether it is effective enough to halt the progression of cirrhosis and spare people with this life-threatening condition a liver transplant or worse. Unfortunately, investors are in for a relatively long wait before more clinical clarity is achieved, and in the "time is money" world of biotech, Conatus investors are likely looking at substantially more dilution before a clinical approval is attainable.

If Conatus can demonstrated a place for emricasan in even just a single-digit percentage of cirrhosis patients, it is not hard to arrive at over $2 billion in peak revenue and even a huge amount of anticipated dilution would still support a fair value above $6 today. That said, Intercept (NASDAQ:ICPT) and Genfit (OTCPK:GNFTF) have proved quite a bit more with their drugs and are undervalued in their own right. It is certainly possible that the success of Intercept/Genfit and/or other companies targeting liver disease will shrink the pool of eligible patients for emricasan, but frankly the biggest issue today is establishing whether or not the drug is effective and which patients stand to benefit the most.

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Conatus Has A Clearer Path, But It's Long And Uncertain

Seeking Alpha: Intercept Pharmaceuticals Weighed Down By A Troubling Trifecta

Once a darling of the biotech space, Intercept Pharmaceuticals (NASDAQ:ICPT) has seen investors flee from the shares in droves, pushing it down close to 50% from my last article on the company and leading to a significant underperformance to its primary NASH-driven comparable Genfit (GNFT.PA) (OTCPK:GNFTF), which has fallen almost 20% over the same time period.

Investors have had a lot to mull over since the beginning of summer. Both Intercept and Genfit have produced mixed clinical trial results that have required further explanations from management, and both are subject to the questions and risks over pricing for drugs that could be given to millions of patients. More specific to Intercept, there are valid concerns now about safety, efficacy, competition, and market potential for its lead drug, and investors aren't happy about the uncertainty.

I still believe that Intercept's lead drug OCA is active and safe in primary biliary cirrhosis (PBC) and likely to demonstrate approval safety and efficacy in nonalcoholic steatohepatitis (NASH). I also believe, though, that there are meaningful questions about true market potential and that Genfit could be a more significant competitor (albeit not necessarily on an apples-to-apples basis).

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Intercept Pharmaceuticals Weighed Down By A Troubling Trifecta

Seeking Alpha: The Math Could Get Weird, But Intercept Pharmaceuticals Looks Too Cheap

Whether it was a "sell the news" reaction or legitimate disappointment in the size and scope of the Phase III NASH study, Intercept Pharmaceuticals (NASDAQ:ICPT) shares sold off to the tune of 16% on Tuesday when the company revealed its plans for further development of obeticholic acid (or OCA) in NASH. Calculating the value of any pre-revenue biotech requires a lot of assumptions (and I'm well aware of the "garbage in, garbage out" risk), but I continue to believe that the market is undervaluing what could be a platform company in liver disease.

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The Math Could Get Weird, But Intercept Pharmaceuticals Looks Too Cheap

Seeking Alpha: Is Intercept Pharmaceuticals Building The Next Great Specialty Franchise?

As great as Alexion (NASDAQ:ALXN) has shown itself to be with its orphan drug Soliris for rare kidney ailments, Intercept Pharmaceuticals (NASDAQ:ICPT) may be establishing a similar path in the until-recently overlooked world of liver disease outside of hepatitis C. Intercept's lead compound OCA appears to have broad utility as an anti-inflammatory, anti-fibrotic liver treatment and the efficacy in nonalcoholic steatohepatitis (or NASH) may unlock potential akin to that of new HCV treatments.

It is important to point out, though, that there is a lot of risk in biotech investing and particularly in companies where the expectations are almost solely built around a single product. Making matters worse, there is considerable uncertainty as to the true number of potential patients for many of the diseases Intercept is targeting, to say nothing of uncertainty regarding competition, pricing, and clinical endpoints for clinical trials. Despite these risks, I believe Intercept ought to be trading closer to $420 today and even then I consider the underlying assumptions to be quite conservative.

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Is Intercept Pharmaceuticals Building The Next Great Specialty Franchise?