Intercept Pharmaceuticals (ICPT) on Monday morning announced the sale of 1.73 million shares of common stock (2 million with underwriter’s over-allotment) in a deal that at current market prices will gross almost $65M for the drug developer. PropThink outlined the Short thesis on Intercept and its lead candidate obeticholic acid (OCA) in April. Intercept develops OCA as a treatment for relapsed/refractory Primary Biliary Cirrhosis, a small patient population that has many investors thinking Intercept will be the next orphan drug success story due to its ability to price OCA at a high premium. But a number of experts have indicated to us that a cheap and generic alternative already exists for refractory Primary Biliary Cirrhosis — a class of drugs known as fibrates. You can read more in our original report, but we believe that not only is the market for OCA smaller than many anticipate, but the novel drug will also be competing with an effective and far cheaper treatment option, one that’s already been in use off-label for years. In addition, Intercept insiders have been selling stock in the $30-range, suggesting that those who know the company best are willing to bet that ICPT has found its top.
Here’s what we wrote to PropThink’s Premium Subscribers last Thursday:
Intercept (ICPT): Expected To Raise Capital Next Week
We consider Intercept a fundamental short based on a number of major risks to its lead candidate obeticholic acid (OCA), but we remain flat on our call that we made in mid-April (see report here). Yesterday, the company filed a new S-1 form with the SEC to commence a capital raise “as soon as practicable”, suggesting that a deal is imminent. We’ve heard the deal is coming next week so there will be plenty of supply in ICPT, and a significant discount could be necessary to get the deal done. More shares outstanding should substantially increase liquidity in the name, therefore, a focus on the risk that we pointed out in our report (that generic fibrates may be just as effective and much cheaper than OCA) could start to gain some real traction in the story. We also note that after speaking with more doctors, primary biliary cirrhosis, the condition that OCA treats, is a tiny patient population. Notice the insider sales in the $30 range over the last month, from both Board members and management. In other words, those that know the company best believe that ICPT is ready to be sold. Given the questionable fundamental outlook, imminent financing, and management selling, getting short here may make sense.
Although we have yet to see the deal’s pricing, 2 million new shares creates over 10% dilution for existing shareholders. Also, recall that the lock-up period on shares in Intercept’s IPO expired in early April — note that selling has been the prevailing sentiment since. We suspect that early investors are making a slow exit in realization that ICPT will have an uphill battle to fight once it takes OCA to market. In our view, Intercept’s valuation fails to capture the risks to its lead candidate.
In connection with ICPT, PropThink has taken a short position.
