Intercept Pharmaceuticals' Above $300 -- More Mega Millions On The Way?

Anyone following the stock of Intercept Pharmaceuticals  (NASDAQ:ICPT) closely cannot help but get dizzy. After racing from $72 to $497 last week, the stock corrected sharply this week--trading below $250 early in the week, before recovering nicely to above $300 in the last two days.

Does this mean that the correction is over? Are more mega millions on the way for the company’s shareholders?

We cannot say. What we can say is that this is a highly speculative stock for investors who have faith in the company’s prospects.

Intercept Pharmaceuticals develops innovative treatment for chronic diseases likeobeticholic acid, a bile acid analog (OCA), which is in Phase III clinical trials for the treatment of primary biliary cirrhosis; in Phase IIa clinical trial to treat portal hypertension; in Phase IIb clinical trial for the treatment of nonalcoholic steatohepatitis; and in Phase IIa clinical trial to treat bile acid diarrhea.

That certainly sounds like a very promising compound, and last week it performed unexpectedly well in a clinical trial, sending the company’s stock soaring -- as this development makes it very likely that the compound will receive FDA approval.

As one of commentators observed in a previous piece:

“People bid up stock for market potential. Stock trading is speculative in nature and nothing is pure black and white in the Bio-tech world. I think you need to understand some fundamentals of the statistics and clinical trials before you can comment on the likelihood of FDA approval. Currently, what investors perceived is based on 5% type I error rate. The actual error rate is much much smaller than 5%, given the fact that the phase II clinical trial was stopped much earlier than designed.”

Even so, before rushing to buy the stock at these levels, investors should understand three things:

First, we are still talking about a drug that is very likely to win FDA approval, not a drug that has already received approval.

Second, even if OCA passes the FDA test, it must subsequently pass the market test. Investors have to look no further than the fate of Dendreon’s drug PROVENGE and Affymax ’s drug OMONTYS, neither of which performed well in market tests.

Third, even if OCA passes both the FDA and the market test, at the current market valuation, the company is valued close to 7 percent of the value of  Amgen  Inc., which has been around for more than three decades and has several blockbuster stocks in the market.

A valuation such as this makes Intercept Pharmaceuticals hardly a bargain, even if it successfully passes the FDA and the market test. That’s why I’ll still stay away from the stock.