By Ankur Banerjee and Manas Mishra

(Reuters) – Intercept Pharmaceuticals Inc said on Tuesday its treatment in patients with a progressive fatty liver disease showed an improvement in scarring on the organ, taking the drug a step closer to approval and sending the company’s shares surging 25 percent.

Drugmakers are racing to develop a treatment for nonalcoholic steatohepatitis, or NASH, a lucrative market that some analysts project could reach $20 billion to $35 billion as populations with fatty diets increasingly develop the disease.

Intercept tested the treatment, obeticholic acid (OCA), in patients with liver fibrosis, or scarring that can lead to cirrhosis, liver failure and death, due to NASH.

The late-stage study found that a once-daily higher dose of 25 milligram met the main goal of fibrosis improvement with no worsening of NASH after 18 months.

“The topline data we are reporting today support our belief that OCA will become the first approved medicine for those living with liver fibrosis due to NASH,” Chief Executive Officer Mark Pruzanski said in a statement.

Gilead Sciences Inc said last week that a late-stage study of its experimental drug aimed at treating NASH failed to meet its main goal.

Jefferies analyst Michael Yee called Intercept’s data strong. “We believe this is essentially a near best case scenario and expect the stock to be up significantly.”

The study showed that a higher number of patients in the two dosage arms achieved the main goal of NASH resolution with no worsening of liver fibrosis compared with a placebo, but the company said it was not statistically significant.

Analysts said the main goal of fibrosis improvement was likely more important for an approval as well as potential use.

Intercept said it intends to file for regulatory approval in the United States and Europe in the second half of 2019.

While there were no major surprises to OCA’s safety profile or red flags, pruritis, or itchy skin, was on the higher end of what was observed in prior studies, RBC Capital Market analyst Brian Abrahams wrote in a client note.

The company said some patients with pruritis discontinued the trial as required by the trial design.

CEO Pruzanski said on a conference call with analysts that patients with NASH do get through pruritis management, but that was not something the study could answer.

Shares of other NASH treatment developers, including Madrigal Pharmaceuticals and Viking Therapeutics, were slightly lower.

Intercept’s shares were up 17 percent at $129.73 in morning trading in high volumes. More than 1 million shares traded within first 30 minutes of market opening, nearly three times their 25-day daily moving average.

(Reporting by Ankur Banerjee and Manas Mishra in Bengaluru; Editing by Maju Samuel and Sriraj Kalluvila)