Founded in 2016, Ceteris Paribus is A student-led economics and finance publication at Davidson College.

NASH Research Piques Investor Interest

by Noah Constantine


         Nonalcoholic Steatohepatitis (NASH) is a nonalcoholic liver disease, affecting more than three million Americans per year. As of right now, there are no treatments for NASH other than behavioral changes, such as diet and weight loss. However, with a substantial patient base, there is a large market for any sort of treatment that could alleviate the problem. Analysts project that the market for such a remedy would immediately exceed $2 billion annually, with much more upside as awareness for the disease increased. As one would expect, biotech and pharma companies are making substantial efforts to get involved in the space, with the hope that recent advancements might lead to an approved drug by 2018. Smaller, niche biotech firms that have been shown promising signs through clinical trials are becoming prime M&A targets for the larger pharma companies, who have shown they are willing to pay incredible premiums for companies with promising NASH treatments.

         In September, Allergan, one of the world’s largest pharmaceutical companies, bought Tobira Therapeutics. Tobira is a small pharma company, specializing in treatments for NASH and other liver diseases. They have had several promising rounds of clinical trials, and are considered one of the leaders in the NASH treatment space. Prior to Allergan’s acquisition, they had been trading at around $4.75 per share, but Allergen paid over $29 per share, with contingency premiums reaching almost $50 per share. Allergen paid a minimum of a 500% premium for Tobira, with a potential premium of around 1500% depending on if certain benchmarks are reached. This incredible price illustrates both the commitment that larger companies have to the NASH space, as well as the competitive nature of acquisitions in the market. Analysts and those close to the situation, say that Gilead, another leader in the pharmaceutical market, was also bidding for Tobira, which contributed to the premium that Tobira ultimately commanded.

         Since missing out on the Tobira acquisition, there has been significant investor pressure for Gilead to make a splash into the NASH market. They have two drugs in the pipeline, but they are substantially behind in the space. Investors and analysts alike worry that if Gilead simply sticks to their own, in-house, NASH drugs, that they will be too slow and miss out on the first mover advantage. Additionally, Gilead is very cash rich right now. While they probably have the financial means to acquire a large pharmaceutical competitor, their CEO has expressed a desire to acquire smaller companies whose areas of focus align with that of Gilead’s. This combination makes Gilead a very likely suitor in the NASH space, and introduces some very interesting merger-arbitrage trading options. While this type of speculative trading is very risky, the potential rewards are massive (as seen by the premium Allergan is paying for Tobira). There are several very interesting, smaller companies to watch in the coming months, as potential targets for Gilead, as they look to beef up their NASH treatment area. Below are brief summaries of a few of the top acquisition targets for Gilead in the NASH space. (Note: Stock prices are as of 11/3/16, 12:30PM EST)


Intercept (ICPT -- $100.86): Intercept Pharmaceuticals is considered one of the leaders in the NASH space, and has also produced other successful medications for liver diseases. Their main product, Ocaliva, was recently approved for treatment of PBC, which is projected to have a market of around $160 million annually. Ocaliva is also being tested for the treatment of NASH. There have some been mixed results in the trials, but they are further along in the process than most companies, and considered to be 1-2 years ahead of Gilead in their development. Recently, the company has been experiencing sharp declines in stock price, dropping from over $170 a share down to under $130 in the past month, on the news that one of there expedited phase 3 trials had poor results. The company is claiming that a longer trial will produce better results, but this remains to be seen. As a potential acquisition target, ICPT is very interesting. While the poor results might dissuade buyers, the sharp price decline is making them a much more realistic target. Additionally, investors seem to be exhibiting preference towards ICPT because of their size, reputability, and their other successes. ICPT has very expensive options, but I think a straddle play here is very interesting.

Galmed (GLMD -- $2.92): Galmed is a much smaller, less established company than ICPT, but they have been registering good results recently. In September, they announced that they had formed a partnership with UCSD to commence their phase 1/2a trials for their NASH treatment, known as Aramchol. Additionally, following this partnership, they announced that they had raised around 5 million to help in their development of Aramchol. GLMD is also a very cheap company – their market cap is only around 42 million. This makes them a very easy target for Gilead, and would better align with their intentions of having a series of small acquisitions. Additionally, it is important to note that while this company is very small, Galmed is on the radar of the bigger pharma players and investors. Aramchol has shown good promise thus far.

Endonovo (ENDV -- $0.09): ENDV is very different from both GLMD and ICPT – instead of focusing on chemical remedies for NASH, they specialize in non-invasive, bioelectronics devices. This is a drastically different approach, and they are one of the only companies to attempt this. While it clearly isn’t being valued as highly the other companies, it has a much easier pathway to regulation (no FDA approval needed) making it very appealing to bigger companies. Additionally, their treatment method is not restricted to NASH – the majority of the work they are doing can be applied to other inflammatory conditions. This company is tiny, but they are unique, they have some advantages, and they are on the radar of bigger companies, which makes them appealing to investors.


         All three of these companies have both serious appeal and risk attached. It is impossible to predict which will be acquired, or if there will even be an acquisition. However, the pharmaceutical industry is seeing a large number of M&A transactions right now, so it seems reasonable to assume that there will be some movement. If any of them receive positive news on a trial, their stock will jump like crazy. If Gilead or another pharma giant decides to pursue one of them, the premiums could be huge. If there ends up not being an acquisition, the stocks might drop a little, but way less than the potential reward of hitting on one of these companies. Obviously this isn’t the type of deal where one should allocate a significant part of their portfolio, but I think there are enough factors pointing towards an acquisition or breakthrough that they are worth the risk, in a small capacity.

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