(Reuters) - Large drugmakers with piles of cash are on the hunt for promising medicines being developed by small companies to treat NASH, a progressive fatty liver disease poised to become the leading cause of liver transplants by 2020.

The eventual market for the complex disease, formally known as Non-alcoholic Steatohepatitis, is forecast to be $20 billion to $35 billion as populations with fatty diets increasingly fall victim to a condition with no approved treatments.

With intense competition and pricing pressure eroding sales of medicines for diabetes, rheumatoid arthritis and other lucrative disease categories, and an already crowded field for developmental cancer drugs, big pharma sees NASH as an enormous new market for future profit that will accelerate a wave of deal making.

"We are actively looking on the outside for opportunities... to complement our internal program," Morris Birnbaum, chief scientific officer for internal medicine for Pfizer PFE.N, told Reuters.

Pfizer currently has three early-stage drugs in the clinic aiming to block or reverse fat accumulation in the liver. “We believe that even though we’re a bit behind, we still might come out with the best-in-class molecules,” Birnbaum said.

Bristol-Myers Squibb BMY.N also confirmed it is looking for additional assets to enhance its internally-developed NASH drugs. It presented promising data for its lead NASH candidate at the big European liver meeting in Amsterdam that ended on Sunday.

“It’s early days, but keep your seatbelts fastened,” said Dr. Scott Friedman, dean for therapeutic discovery at Mt. Sinai Hospital in New York and one of the world’s leading liver disease experts.

Estimates for the prevalence of NASH in nations with fatty diets range from 5 to 20 percent of the population with up to 15 million potentially affected in the United States alone.

Driven by the obesity and diabetes epidemics, the disease guarantees an enormous pool of patients for decades, making it a prime target for deals for promising therapies for NASH and its consequences - advanced fibrosis and liver-destroying cirrhosis. The very early stages of many of the drugs, and the complicated nature of the disease itself, pose risks for drug developers and their investors alike.

But the upside potential is still enticing to Raghuram Selvaraju, managing director and senior healthcare analyst at Rodman and Renshaw. He calls NASH one of the hottest spaces in the healthcare sector.

“We anticipate that there will be more transactions, more licensing deals from big pharma involving emerging biotechnology companies,” he said.

A researcher in a file photo. REUTERS/File

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GILEAD A PIONEER

Just a few years ago, Gilead Sciences GILD.O was the lone large drugmaker talking about NASH. It was undeterred after its most advanced anti-fibrosis candidate failed, striking deals with two small companies to acquire additional NASH programs.

Liver disease experts were impressed last year by Phase II data from a Gilead-developed drug that demonstrated fibrosis regression after just six months.

Allergan AGN.N became a top NASH contender with its acquisition of Tobira Therapeutics and a deal with private Akarna Therapeutics on the same day last year.

Other big drugmakers with licensing deals or options on future deals in the space include Novartis NOVN.S, Merck & Co MRK.N, Bristol-Myers and Johnson & Johnson JNJ.N.

While many of the drugs in development are two-to-five years from reaching the market if they get that far, betting on the feverish deal activity gives investors a chance to profit near term.

Many small companies developing drugs with a wide variety of approaches across the disease spectrum do not have partners. They include Intercept Pharmaceuticals ICPT.O, Galectin Therapeutics GALT.O, Genfit GNFT.PA and Galmed Pharmaceuticals GLMD.O, all with a chance to be among the first to market, as well as Enanta PharmaceuticalsENTA.O, Durect Corp DRRX.O and little-known U.K.-tradedTiziana Life Sciences TILST.L with assets much earlier indevelopment.

Galectin, which expects key data in December, has commenced preliminary partnership discussions, its chief operating officer told Reuters.

Len Yaffe, who runs the StockDoc Partners healthcare fund and has long followed the liver disease space, said investors with tolerance for risk could do well to buy shares in several small-cap and micro-cap companies with promising NASH drugs in early development. He said if any one has stellar data, or lands a deal, the payoff could be considerable.

When Allergan announced the $1.7 billion deal for Tobira, for example, that company’s shares jumped from under $5 to over $30.

Yaffe, who had singled out Tobira to investors prior to its acquisition, said the Durect drug “looks incredibly promising as it relates to inflammation and fibrosis.”

Enanta has the advantage of cash flow from its hepatitis C partnership with AbbVie ABBV.N to fund its NASH program.

“You want to bet on companies that can survive even if they don’t get a partnership this year or next year,” Selvaraju said.

Enanta Chief Executive Jay Luly said companies in earlier stages of development may have an advantage over the first wave of experimental treatments as regulators’ thinking on clinical trial goals and what makes an approvable product in such a new market evolves.

“When we get there, the development pathway could be not only more clearly defined, but more simplified,” Luly said.

MANY SHOTS ON GOAL

Drugmakers are taking a wide range of approaches to treat the complex disease, given multiple health issues among NASH patients that contribute to the liver damage, such as heart disease and diabetes.

There are drugs targeting inflammation to prevent or reduce fibrotic scarring. Some address lipid regulation to reduce liver fat, while others attempt to directly halt or reverse fibrosis. And some companies are testing diabetes treatments to assess their ability to also improve NASH.

“The big sea change from two years ago - apart from an increased number of players - is a fairly rapid acceptance of the fact that we’re going to be seeking combination therapies since it’s a disease that involves multiple pathways,” said Mt. Sinai’s Friedman.

“In the end, whatever the mechanism is, it needs to yield decreased fibrosis,” he said, noting that progressing fibrosis is what ultimately causes serious health consequences.

The knowledge that multiple drugs will be needed for therapeutic combinations to treat NASH, and that most experimental drugs fail, are big drivers for deal activity. Drugmakers are looking to improve chances of success by amassing numerous experimental drugs for their NASH programs. Some experts said drugs that target late-stage fibrosis and cirrhosis, where the risk of cancer and liver failure is highest, are likely to gain earliest acceptance from insurers.

That fits the strategy of tiny Conatus Pharmaceuticals CNAT.O, whose shares more than doubled when it signed a $50 million collaboration deal with Novartis. Conatus is targeting end-stage disease with the goal of preventing transplants.

But given the millions of potential patients and expense of treating advanced disease, there should be incentive for insurers to embrace medicines that target earlier stage NASH as well.

“There’s still a major role for drugs that work on the front end,” said Dr. Arun Sanyal, a leading liver disease expert whose Virginia Commonwealth University lab discovered the compound being developed by Durect. “One size will not fit all.”