Special Report: NASH: The Next Breakout Biotech Market

In the world of biotech stocks, investors are more than familiar with things that go boom and bust.

Over the last few years, the hepatitis C (HCV) market has been the epitome of the boom portion of this cycle, as drug companies have scrambled for a piece of this multi-billion dollar segment.

We have seen Merck & Co. (NYSE: MRK) complete a $3.85 billion buyout of Idenix Pharmaceuticals (NASDAQ: IDIX) for its hep C pipeline, and we've watched Gilead Sciences (NASDAQ: GILD) blow expectations out of the water with its wonder-drug Sovaldi.

Gilead wasn't only able to get away with selling Sovaldi at $1,125 a pill, but it absolutely shattered previous U.S. drug sales records back in 2014, raking in $2.3 billion in its first quarter on the market.


For perspective, the previous sales record went to Vertex Pharmaceuticals' hepatitis C drug Incivek at $1.56 billion. The kicker? That's the record for annual sales, meaning Gilead's Sovaldi beat Incivek in a quarter of the time.

All said and done, by the end of 2014, Sovaldi brought Gilead a mind-boggling $10.3 billion on the top line. Considering that figure, it should be of little surprise that anyone who picked up shares of Gilead leading up to Sovaldi's launch has likely made a killing on the stock.

Thanks to the success of a single drug, anyone who picked up shares two years ago is now up more than double on their initial investment.


Of course, with every boom, there usually follows a bust. In the case of Gilead, that bust has come in the form of a heavy 46% discount on Sovaldi now that rivals AbbVie Inc. (NYSE: ABBV), Bristol-Myers (NYSE: BMY), and Merck are all entering the market.

Granted, there's plenty of growth left in the hep C market for all four of these companies to make a killing for the foreseeable future, but the initial buzz around this indication has undoubtedly come and gone.

Fortunately for those of you looking for the next breakout biotech stock, hepatitis therapeutics aren't the only liver disease drugs worth getting excited about.

In fact, the disease we're covering in this report is expected to surpass hepatitis C as the leading cause of liver transplants by 2020 — and it's sure to see a slew of interest from big pharma and investors alike in coming years.

The Next Hep C

Nonalcoholic fatty liver disease (NAFLD) is a condition categorized by excessive fat in the liver of people who drink little to no alcohol. No direct cause has yet to be identified, but it is known that obesity and insulin resistance play strong roles.

While most people are unfamiliar with NAFLD, the disease is actually incredibly common. The National Health and Nutrition Examination Survey (NHANES) recently found a 30% prevalence of NAFLD in the United States.

Most often, NAFLD goes relatively unnoticed, as a liver can remain fatty without disturbing function. However, NAFLD can progress into a far more serious condition known as nonalcoholic steatosis (NASH), a disease characterized by inflammation and irreversible cell death.

Much in the way a heart condition can worsen as years pass, NASH is a disease that progresses over time. Over a 10-year period up to 20% of patients with NASH will develop cirrhosis (healthy tissue being replaced with scar tissue) of the liver, and 10% will die from the disease.


Credit: National Institute of Health

Today, NASH is the third-leading cause of liver transplants in the U.S., with anywhere between 2% and 5% of the general population currently infected.

Since 2001, liver transplants attributed to NASH have increased by an alarming 1,000%. By 2025, it's estimated that more than 25 million Americans will have the disease. For perspective, hepatitis C affects just 3.2 million.

The initial culprit for this rapid increase in NASH is none other than obesity. In the past 10 years alone, the rate of obesity has doubled in adults and tripled in children.


Data & Credit: Center for Disease Control & Mercola

Not only does obesity contribute to the inherent cause of NASH (fatty liver), but it also increases the risk of diabetes and high blood cholesterol, which can further complicate the health of someone with the disease.

Most importantly, there are currently no available therapies approved for the treatment of NASH, which means whoever gets to market first stands to make a considerable amount of money in the process.

It also means investors could see a considerable windfall of profit from what one analyst has recently called “the next big global epidemic” and what CNBC has already dubbed “the next hepatitis C.”

All said and done, the market for NASH treatments is expected to reach $35 to $40 billion by 2025. If you're a biotech investor, you're not going to want to miss out on those profits.

At the time of this publication there are already a number of biotechnology companies working on NASH therapeutics. This includes companies such as Genfit (OTC: GNFTF), Raptor Pharmaceuticals (NASDAQ: RPTP), and Intercept Pharmaceuticals (NASDAQ: ICPT) to name a few.

Among the growing list of NASH biotech companies, we find one company to be particularly compelling. Specifically, we see value in its early clinical trial results as well as its small market cap and tight share structure:

The NASH Pipeline

Islet Sciences (OTC: ISLT)

Islet Sciences (OTC: ISLT) is a tiny development-stage biotechnology firm based in Raleigh, NC. And when we say tiny, we mean it. As I write, the company is trading at a market capitalization of just $16.1 million. Needless to say, this is a high-risk, high-reward play.

As for its niche, Islet Sciences is focused on developing therapeutics and technologies for the treatment and diagnosis of metabolic diseases such as diabetes.

As we've already mentioned, diabetes is one of the primary culprits behind the development of NASH. More specifically, the disease results, in part, from insulin resistance and oxidative stress resulting from accumulation of fat in the liver.

According to the World Health Organization, 347 million people worldwide suffer from diabetes, which is projected to be the 7th leading cause of death by 2030. In the United States, there are an estimated 25.8 million diabetics and another 79 million people with pre-diabetes.

As a consequence, one commonly proposed strategy for stopping NASH is to reduce insulin resistance at the source. With an expertise in metabolic disorders, Islet is one of the companies taking this approach.


Specifically, the company is developing a therapeutic by the name Remogliflozin Etabonate which falls into the group of SGLT2 inhibitors, a new class of oral drugs used to treat type 2 diabetes.

The reason SGLT2 inhibitors are important in regards to diabetes, is because they're responsible for ~90% of glucose re-absorption in the liver.

The proposed clinical advantages of SGLT2 inhibitors include:

  • SGLT2 is expressed exclusively in the kidney
  • SGLT2 function is independent of insulin
  • Low incidence of hypoglycemia
  • Improvement in Fasting Blood Glucose Level (FBG) and Post Prandial Blood Sugar Level (PPBS.)

Each year, the European Association for the Study of the Liver (EASL) holds the International Liver Conference in Vienna, Austria. This year happened to be the 50th anniversary.

As part of the conference, Islet COO Dr. William Wilkison spoke during a presentation titled "Remogliflozin Etabonate Reduces Insulin Resistance and Liver Function Enzymes: Role for Treatment of NASH." Here's the gist of that presentation taken from a recent press release (emphasis mine):

In clinical studies, remogliflozin etabonate was shown to significantly improve insulin sensitivity and beta cell function, as well as reduce body weight and levels of alanine aminotransferase (ALT). In pre-clinical studies, remogliflozin etabonate significantly reduces fat accumulation in the liver and causes a marked reduction in the levels of circulating markers of oxidative stress. Unlike other drugs of its class (SGLT2 inhibitors), remogliflozin etabonate has intrinsic anti-oxidant activity, which may reverse the steatohepatitis and oxidative stress associated with the maintenance and progression of NASH.

The clinical study consisted of 336 treatment-naive subjects with type 2 diabetes and an HbA1c between 7.0% and 9.5%. Subjects were equally randomised to each of the remogliflozin etabonate treatments (50, 100, 250, 500 or 1000 mg twice daily), matching placebo or 30 mg pioglitazone (once daily). At Week 12, remogliflozin etabonate improved insulin sensitivity by 6-33% and beta cell function by 23-43%. Patients receiving remogliflozin etabonate also had significant weight loss (1.4-3.6 kg vs placebo). Importantly, post-hoc analysis of changes in ALT indicated that remogliflozin etabonate-treated subjects with elevated baseline ALT showed statistically significant (p < 0.049) mean reductions of 32-42% at Week 12 as compared to placebo.

Now if you don't happen to be a sciences major, that may sounds like a bunch of gibberish to you. Here's how to best break it down:

  • 23%-43% improvement in beta cell function
  • 6-33% improvement in insulin sensitivity
  • 1.4 kg – 3.6 kg weight loss
  • ALT reduction of 32-42%

As for what exactly this has to do with NASH, here's a statement from Secretary General of the EASL Markus Peck:

NAFLD and NASH are both closely associated with diabetes and obesity, and together are now considered the number one cause of liver disease in Western countries. Consequently there is an urgent need for effective treatment options for these diseases. We know that NASH is due, in part, to insulin resistance and oxidative stress resulting from steatosis. Given the mode of action of remogliflozin etabonate, it could potentially offer benefits when treating patients with both NASH and NAFLD.

Now, the key word here, for all the risk-averse investors out there, is "potentially." Remogliflozin is still in the early stages of phase 2b clinical trials, meaning there's a long way to go before this drug hits the market.

As of the company's latest 10-Q filing, its cash position was at just $23,938 with a burn rate of $1.5 million. What this means is we're almost guaranteed to see dilution as clinical trials progress.

The benefit to this, of course, is getting in early while the stock is still dirt cheap. But remember, this is not a “bet the farm” kind of stock. It's a speculative play you'll only want to dedicate a small portion of your portfolio to.

We currently rate Islet Sciences (OTC: ISLT) a speculative buy under $0.50. Our price target is $1.50.

Until Next Time,

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