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Summary

  • Conatus' sell-off represents an opportunity for considerable near-term price appreciation as shorts begin covering before Thursday's earnings announcement.
  • Roth Capital Analysts have a $23 CNAT price target that is almost triple the current price.
  • Conatus shares are currently trading below IPO levels of almost 1 year ago, despite past positive phase 1 and 2 studies.

Conatus (NASDAQ:CNAT) is an incredibly undervalued and often misunderstood biotech company that is developing a drug for multiple liver indications, including, but not limited to. acute chronic liver failure and non-alcoholic steato-hepatitis, better known as NASH.

There are several recent market conditions that have conspired to drag the CNAT stock price back to long-term support levels. Conatus stock started selling off in sympathy with NASH peer ICPT and was then caught up in a general biotech sector sell-off that has dragged shares lower than the July 2013 IPO price of $11. We believe that is about to change however as shares are poised to appreciate heading into 3/27 earnings announcement as short-sellers begin covering. Short-sellers hate being caught short when companies announce positive pipeline developments. Conatus has two current phase 2 studies in progress with the results of the ACLF study due out anytime 1H 2014. Any positive development could send shares surging, as happened back in January, when the low-float stock ran well in excess of 100% in a single day.

In the past, shares traded as high as $15.67 before retreating, as shares sold short increased, as did profit-taking by short-term momentum traders. Conatus has a small float of 7 million shares, so moves both up and down can be extreme.

Conatus trades at a great discount to its NASH peers with a modest market cap of only $143 million, compared to Intercept Pharmaceuticals' (NASDAQ:ICPT) market cap of $7.18B and Genfit's (ALGFT) $569 million. From the investors we have spoken to, we believe Conatus suffers from low exposure due to its pipeline candidate being in an earlier stage of development as well as misconceptions regarding the circumstances under which partner Pfizer sold the drug rights back to Conatus.

Conatus is targeting a very large market. Roth estimates there are 150,000 patients that suffer from ACLF in the US and EU and with a $25k price tag and 35% peak penetration that ACLF is a $1.3 billion opportunity.

The NASH market is also a very large market. NAFLD (non alcoholic fatty liver disease) is considered the most common form of chronic liver disease in adults in the U.S, Asia and Europe. In the U.S, the estimated prevalence of NAFLD is 20-30 percent of the adult population.

Intercept CEO Mark Pruzanski told the J.P. Morgan Healthcare Conference in San Francisco that the number of NASH patients could be as many as 6 million adults in the U.S alone. It is also expected to become the leading cause of liver transplants. The NASH market for treatments could be bigger than that of hepatitis C.

NASH is a progressing form of NAFLD. Although the exact cause is unknown, it is most frequently observed in people who are obese, have type 2 diabetes, and about 20-80 percent have hyperlipidemia.

Emricasan (Conatus' lead drug) has been shown to statistically significantly and consistently reduce key bio-markers ALT and CCk18 that have been implicated in causing both acute chronic liver failure and NAFLD/NASH.

Emricasan was developed in 1993 by two highly respected scientists researching apoptosis. They are Robert Horvitz, an MIT biology professor, and John C. Reed, of the Burnham Institute. They founded Idun pharmaceuticals after big pharmaceutical companies rejected apoptosis technologies as too risky. In 2002, Horvitz won the 2002 Nobel Prize in medicine and physiology for discoveries concerning genetic regulation of organ development and programmed cell death. For many in the biotechnology industry, the Nobel Prize validated Idun's credibility. Idun (most of same management here at CNAT) was eventually sold to Pfizer for $298 million, with the key to that sale being Emricasan.

  • Emricasan is a First-in-Class, orally active pan-caspace protease inhibitor that reduces activity of a full family of enzymes involved in liver damage. It has shown to be effective regardless of the cause of the liver disease - viral infection, alcohol, obesity and auto-immune disease - all of which increase caspace activity leading to liver disease.
  • It addresses key underlying mechanisms of liver disease damage. Caspaces 2,3,6,7,8,9 and 10 are known to drive apoptosis, and Caspaces 1,4 and 5 drive inflammation.
  • In experimental models of NASH, Emricasan inhibited apoptosis, fibrosis and inflammation.
  • Caspases are the key agents that cause cell death. They exist in most of our cells as inactive pre-cursors known as zygomen that kill the cell once activated.

When Conatus acquired Emricasan back from Pfizer in 2010, it was on clinical hold in the US after Pfizer scientists observed inflammatory infiltrates in mice in pre-clinical study. Pfizer performed additional pre-clinical studies attempting to characterize the nature of the infiltrates, but did not conduct a formal carcinogenicity study to evaluate whether or not the infiltrates progressed to cancer. These infiltrates observed in mice were not observed in any other species. In 2008, Pfizer stopped work on the program.

After acquiring Emricasan back from Pfizer, Conatus conducted a thorough internal review of Emricasan studies, commissioned several independent experts to review the data and, based on guidance from the FDA, conducted a 6 month carcinogenicity study in the tg.rasH2 transgenic mouse model, which is known to be pre-disposed to tumor development. This study which was completed in 2012 found there was no evidence of turmorgenicity in Emricasan. In January 2013 the clinical hold on Emricasan was lifted.

Conatus was founded by the executive management of Idun pharmaceuticals following its sale to Pfizer. Steven J. Mento, Ph.D., the president and co-founder of Conatus, was also the president of Idun Pharmaceuticals. The chief medical officer at Idun was brought on to be the chief program officer at Pfizer.

Clinical trials to date:

  • Six phase 1 trials conducted in the US, EU and Asia (predominantly healthy individuals)
  • 4 Randomized placebo controlled phase 2 trials conducted in the US and EU (included patients with liver disease due to a variety of causes, with emphasis on HCV infection. The phase 2 studies showed statistically significant and sustained reductions in elevated levels of ALT and cCk18.

In a previous phase 1 trial data reported at 64 meeting of the American Association for the Study of Liver diseases meeting in Washington DC on Nov 1 2013, Emricasan was administered to 15 healthy volunteers at a dose of either 25mg single dose or 25mg twice daily for 10 days as part of a 24 day drug to drug interaction study with cyclosporine. This dose was shown in prior clinical trials to provide near maximal reduction of elevated cCk18 and serum transaminases in HCV patients. In this trial, blood samples were taken on day 0 and on study days 1, 17 and 24. Both drug levels and cCk18 were measured at each time point. Emricasan had no effect on the cCk18 levels in healthy volunteers at any point in the trial. Drug exposure was consistent with previously reported blood levels.

Emricasan is currently in 2 phase 2 trials, one in acute on chronic liver disease and the other in non-alcoholic steato-hepatitis (NYSEARCA:NASH). Results are due out in second half of 2014. The phase 2 in ACLF is a 60 patient-28 day PK study with results out in the 1 half of 2014.

ACLF is an unmet medical need. Patients with chronic liver failure receive an acute insult which increases the risk of multiple organ failure. Current intervention involves treating the underlying cause of the acute event and support for failing organs.

The phase 2 in NAFLD/ NASH in patients with non-alcoholic fatty liver disease, or NAFLD including NASH is a double-blind placebo controlled trial enrolling 40 patients at 4 US clinical sites. Patients will be randomized 1:1 to receive either 25 mg of Emricasan or placebo orally twice daily for 28 days and will then be followed for another 28 days. The primary endpoint is a reduction of elevated levels of key bio-markers implicated in NAFLD/NASH.

Conatus is a small-cap stock that can be quite volatile and faces regulatory risk like any other biotech. The potential rewards are enormous as are the risks. If the drug does not progress to approval the company valuation would decline considerably as the company has no revenues.

Conatus like all Small-Cap stocks will always have a risk of dilution, but this is minimal with Conatus, as the company is well-funded from the IPO.

Financials

As of the third quarter of 2013, net loss was $3.3 million, compared to $2.6 million for the third quarter of 2012. Net loss for the nine months ended Sept 30, 2013 was $10.5 million compared to $6.3 million for the comparable period in 2012.

As of September 30, 2013, cash, cash equivalents and marketable securities were $59.6 million, compared to $8 million at December 31, 2012. Company believes they have enough cash to achieve all the near-term milestones.

Source: Conatus: An Undervalued Biotech With A Looming Short Squeeze