Conatus Pharmaceuticals: An Undervalued Biotech With Intriguing Long-Term Potential

| About: Conatus Pharmaceuticals (CNAT)


As a world leader in caspase protease inhibition, Conatus could change the way the medical world treats liver disease.

After a successful carcinogenicity study regulated by the FDA, Conatus stands on the cusp of succeeding where others have failed.

With more than 80% of outstanding shares held by reputable institutions, downside risk for retail investors is minimized.

In possession of a versatile drug candidate with multiple market implications, Conatus could make a noteworthy impact on a multi-billion dollar market.

The investment world is full of popular adages and often alluded to colloquiums. The likes of Peter Lynch, Warren Buffett, and George Soros are regularly cited for their whimsical and insightful words of wisdom. Generally speaking, nearly every investor, regardless of experience or aptitude, has a favorite phrase which resonates in their mind and comes to life in their employed strategy. It is in this phrase, in this collection of otherwise meaningless words, where an investor often defines their values, their methodology, and their principles. It is in these frequently regurgitated expressions where one is perhaps best capable of summarizing both the type of investor they are, and perhaps more importantly, the type of person they are. Words, after all, are powerful instruments.

There is one such idiom which most seasoned investors have most certainly heard time and time again. Its origins are elusive and often contested, however, most would agree that it was made most popular by the Oracle of Omaha himself, Mr. Warren Buffett. This particular philosophical figure of speech is as follows;

When investing, timing is overrated, whereas time is underrated.

Pretty simple, right? Nothing more than nine words on a page. However, the value in those nine words is, in itself, often underrated. While the vast majority of you have undoubtedly heard that saying, or perhaps a slightly amended version of it, chances are that few of you have ever truly contemplated the simple brilliance of it. Time is on your side; and in combination with ample due diligence, adequate risk assessment, and thorough evaluation, the odds of market success tilt unwaveringly in your favor. After all, attempting to time the market can be a futile endeavor; however, allowing time to lead the market can prove to be a fundamental component of consistent and steady success. Time is, indeed, underrated.

It is with this philosophical premise in mind that this article will present a long-term investment opportunity in the biotechnology space. This presentation will include a detailed history, an even-handed synopsis, an exclusive interview with the company CEO, and forward-looking analysis. For investors capable of employing patience, enduring moderate volatility, and embracing the uncertainty which accompanies scientific innovation, the opportunity presented herein is well worth investment consideration. The company this article will explore is Conatus Pharmaceuticals (NASDAQ:CNAT), and the CEO who will share his insight and competence is Dr. Steven Mento. The company is responsible, the leadership is exceptional, and the potential in the company's lead drug candidate is nothing short of extraordinary.

Who is Conatus Pharmaceuticals?

Conatus is a California-based biotechnology company focused on the development and commercialization of treatments to address liver disease. At first glance, that opening sentence likely sounds generic and uninspiring. It's the type of thing one could read on any web-based company summary. However, take a moment to consider that statement again; most notably, the last two words. What is liver disease? Do you know? It sounds relatively benign and non-specific. Although the truth is that it is anything but. Liver disease encompasses a massive market, and is comprised of a series of life-threatening and debilitating ailments which are largely unresolved by currently available medicinal treatments. What if, instead of simply saying liver disease, we said viral hepatitis, alcoholic hepatitis, autoimmune hepatitis, fatty liver disease, cirrhosis, metabolic syndrome, steatohepatitis, hepatocellular carcinoma, cholangiocarcinoma, or chronic liver failure? What if we continued to build that list and took up the next page and a half of this article listing nothing but the ailments which constituted liver disease? Would it sound more imposing then? Would it grab your attention further? Would it cause you to wonder what the total addressable market for such a disease would encompass? Let's pretend that it would do exactly those things.

In January of 2012, BCC Research (the provider of the image seen below) released a report addressing the growth of the global market for liver disease. The report began with statistics reported in 2009, which estimated, conservatively, that the total market for liver disease across the reporting world was $12.4 billion. That number remained relatively steady for 2010 and 2011. Projections looking ahead to 2016 estimated the market would grow to approximately $14.2 billion. While growth rates outside of Europe and the United States were estimated to be higher leading into 2016, it was still estimated that approximately 37% of that market belonged to the United States alone. Therefore, by 2016, it was estimated that just the domestic market for liver disease would reach approximately $5 billion.

There are two factors to consider here which are pertinent to Conatus. The first factor is that the above referenced report did not include estimated sales or market influence of protease inhibitors (these will be defined in the next section), and the second factor is that these projections have already proven to be short of expectations. According to the American Liver Foundation, the total addressable market for liver disease should exceed the aforementioned projections by at least 10%. The disease is growing, and the need to better treat the disease is growing with it.

Thus, Conatus is, in fact, a California-based biotechnology company focused on the development and commercialization of treatments to address liver disease, however, in the company's lead candidate, emricasan, Conatus separates itself from its competitors. Conatus could revolutionize the way the disease is treated, and if it does, it will be with a drug candidate which has traveled a long and tumultuous road to market.


Over a decade ago, emricasan was nothing more than a pre-clinical stage drug candidate known as IDN-6556. The drug candidate was the property of a small, privately-owned biotechnology entity named Idun Pharmaceuticals. The CEO of that company was a man named Dr. Steven Mento. Assuming you're paying attention, that name should sound familiar (he is the current CEO of Conatus). The drug, which was and is a caspase protease inhibitor, showed exciting promise. Capable of both activating cytokines and preventing physiological cell death, caspases can be controlled by a variety of inhibitors. Protease inhibitors, in general, prevent viral replication and constitute a class of antiviral drugs widely used to treat HIV/AIDS and hepatitis C. The potential for treating a wide spectrum of liver disease manifestations with a similar mechanism garnered a considerable amount of attention.

In 2005, that attention had become so great that Idun Pharmaceuticals was acquired by pharmaceutical giant Pfizer (NYSE:PFE). However, three years after the acquisition, Pfizer abandoned its emricasan program, following multiple failures to address safety issues which concerned the FDA. Two years later, a company named Conatus Pharmaceuticals, led by Dr. Mento, once again procured emricasan back from Pfizer, with the belief that the team which had first developed emricasan (now with Dr. Mento at Conatus) was capable of succeeding where Pfizer had been stalled. After meeting with the FDA in 2011 (more details on this are provided in the interview herein), Conatus took on the task of re-validating the prospects and marketability of emricasan as a potentially impactful treatment for patients suffering from liver disease.

In 2013, following the company's successful addressing of the FDA's concerns, the clinical hold on the drug candidate was formally lifted, and the process of bringing emricasan to market began once again. This time, the process would be led by Dr. Mento and the team which originally developed IDN-6556. Back in the hands of the people who know it best, the potential of emricasan is once again enticing.

The mechanism of emricasan is one which focuses on the underlying foundations of the vast majority of liver diseases; inflammation and physiological cell death. By inhibiting the factors which serve as catalysts for these problems, the complications are, as a result, prevented. Prevention not only aids in isolating the problem at its origin, but also allows the body's autoimmune response to work as expected in its natural course.

Due to the wide-reaching benefits of such an approach, the potential applications of this mechanism are nearly infinite in the liver disease space. Because the treatment addresses the biological sources of so many liver disease ailments, the compound's versatility is arguably it biggest strength. As a result, Conatus currently has multiple Phase II trials ongoing or recruiting, with data expected to be released by the end of the year.

Each of the trials referenced at the Phase II stage are randomized, double-blind, multi-center efficacy studies with no less than 40-60 patients enrolled. In each case, significant data releases or estimated study completion dates are expected between October and December of 2014.

An Interview with Dr. Steven Mento

Below is an exclusive interview conducted with Conatus CEO, Dr. Steven Mento on Friday June 6, 2014. As Dr. Mento is the gentleman originally responsible for the development of emricasan, there is arguably no person on the planet more capable of providing potential investors with valuable insights and applicable information. Therefore, it is advisable that readers put the highest possible value on the information provided below. However, prior to engaging in such, this article owes a bit of gratitude to another Conatus executive.

This interview would not have been possible without the efforts of Mr. Alan Engbring, the Executive Director of Investor Relations and Corporate Communications at Conatus. Mr. Engbring's tireless efforts to facilitate and manage communications amidst conflicting schedules, multiple communication platforms, and varying priorities were nothing short of remarkable. Between both Dr. Mento and Mr. Engbring, this interview was an absolute joy to conduct, and a refreshing break from the bureaucratic dysfunction which all too regularly accompanies such research. If the company's potential is, in any way, reflected by the quality of its people, then the future of Conatus is very bright indeed.

That being said, the following interview consists of the questions asked appearing in bold text and the responses of Dr. Mento appearing below. The interview begins immediately:

First and foremost, Dr. Mento, on behalf of the investor community, myself included, allow me this moment to thank you for taking the time to speak with me today. We recognize the exceptional value of your time, and consider ourselves privileged to currently be in possession of your full attention. That being said; let us begin.

2013 was a transformative year for Conatus, and I would like to start at the event which launched the company's entry into the public markets. The IND for chronic dosing of emricasan in the post-liver transplant population was cleared by the FDA. While it is widely known that this achievement served as the catalyst for the company's IPO in July, it also validated an important scientific triumph. In having cleared the FDA, Conatus successfully resolved the previous issues with the compound, which had led to Pfizer essentially abandoning its emricasan program in 2008. Without divulging any proprietary scientific information, could you elaborate on this breakthrough a bit and further explain its importance to your clinical programs moving forward?

First, I'd like to thank you for the opportunity to share the Conatus story with the members of the Seeking Alpha community. For those who may not know, I was the CEO of Idun Pharmaceuticals, where IDN-6556, later known as emricasan, was initially developed. We sold Idun to Pfizer in 2005, and formed a new company, Conatus Pharmaceuticals, with an in-licensing and product development business model.

In the time since, we have had emricasan back at Conatus, we have been able to resolve, to the FDA's satisfaction, the concerns that arose while the compound was with Pfizer. That resolution enabled clearance of our IND for chronic two-year dosing of emricasan in the immunosuppressed post-transplant population, one of the highest safety hurdles in the sector, and to continue its clinical development to help address the needs of millions of patients with various forms of liver disease.

By way of background: after acquiring Idun, Pfizer undertook preparations to advance emricasan into Phase III clinical testing for post-liver transplant patients. In a pre-clinical dosing study supporting that effort, Pfizer observed inflammatory infiltrates in organs of the particular strain of transgenic mice intended to be used in a planned carcinogenicity study. This led to putting the program on clinical hold. Pfizer performed additional pre-clinical studies attempting to characterize the nature of the inflammatory infiltrates, but did not conduct a formal carcinogenicity study to evaluate whether the infiltrates progressed to cancer. In 2008, Pfizer stopped work on the program and focused on other priorities.

After acquiring Idun in 2010, Conatus conducted a thorough review of the Pfizer studies and commissioned independent experts to review all of the available data. The analysis provided by these experts concluded that these inflammatory infiltrates did not represent pre-cancerous lesions, nor were these infiltrates likely to progress to cancer. These infiltrates observed in mice were not observed in any other species. Additionally, a comprehensive analysis of available literature supported the conclusion that these infiltrates were not likely to be precursors to cancer.

Members of the Conatus team met with the FDA in April 2011 to discuss plans for reinitiating clinical development of emricasan. We proposed conducting a carcinogenicity study designed to reproduce the previously observed findings of inflammatory infiltrates and determine whether they progress to cancer in a transgenic mouse model predisposed toward tumor development. The FDA agreed with the study design, and agreed that if the study reproduced the previously observed inflammatory infiltrates but did not produce cancer, the issue that led to the clinical hold would be resolved.

We successfully completed the carcinogenicity study in 2012. The inflammatory infiltrates were reproduced, and there was no evidence of tumor formation. In summary, treatment with emricasan for 26 weeks did not result in an increase in the incidence of tumors in the transgenic mice. We submitted the results to the FDA in preparation for a meeting in October 2012. The FDA reviewed the data and agreed with the study conclusion. In addition, the FDA has accepted this completed study as one of two carcinogenicity studies required for registration.

We subsequently filed a new IND for emricasan for two-year dosing in post-liver transplant patients, which was formally cleared in January 2013, effectively removing the clinical hold. We expect to begin the second carcinogenicity study, a two-year study in rats, in 2015. We do not expect any further impact from these events on future clinical trials.

Now, as it pertains to the company's clinical programs, Conatus seems confronted with a disproportionate amount of skepticism and negativity. Other financial writers and web-based platforms have been somewhat vocal in questioning why the company is taking a more methodical and judicious approach to developing emricasan in NASH, and these same outlets have interpreted the delay in the Phase IIb trial in ACLF to be a bad omen. Furthermore, the company's valuation seems to indicate that the market isn't yet convinced of emricasan's potential commercial value, and short interest in the stock is considerable. Why do you believe that the market and its advocates seem less than enthused about the prospects of Conatus, and why, when so many other biotechnology companies are so painfully overvalued, do you believe that Conatus is being so undervalued?

I can't speak for the market, of course, but some questions we are frequently asked suggest some common areas of misunderstanding. Our corporate and product development history is not linear. The scientific understanding of liver disease can be complex. Furthermore, the broad-based, systematic nature of our clinical program seems to resonate more with longer-term investors.

First, while our next steps are relatively straightforward, the history of emricasan's development has not been simple, and its complexity may be challenging for some. Understanding the progress from the initial identification and development at Idun, the acquisition and suspension of development by Pfizer, and the acquisition and renewal of development by Conatus requires some effort. While the potential safety matters raised during Pfizer's ownership have been resolved, that component adds another layer of complexity to the story.

It is important to understand that the compound is now back in the hands of the people who initially identified it; our management team's extensive experience positions Conatus as the world leader in caspase protease inhibition. In addition, we hope that the large and growing body of data has dispelled any lingering safety concerns; in multiple pre-clinical models and the 500-plus human patients in these Phase I and Phase II studies, emricasan has demonstrated a solid safety and tolerability profile.

Second, understanding emricasan's mechanism of action and the significance of its effects on the underlying facets of most liver disorders requires understanding the science of liver disease and caspase inhibition. This body of knowledge has expanded tremendously over the years, and it can be challenging for some investors to keep up with it.

Third, the clinical program reflects the potential ability of emricasan to treat patients across a broad spectrum of liver disease, from the NASH/NAFLD patients that are near the healthier end of the spectrum, to ACLF with advanced-stage liver disease. That potential requires a series of clinical trials for each application, which requires an incremental process, with each step through the carefully planned development building on those before and leading to those that will follow.

We run the company and manage the portfolio of programs for the benefit of long-term stockholders; therefore, our approach and status should resonate best with longer-term investors. We believe the short-term segment of the market may have a disproportional impact on the short-term stock performance. For example, the decline in stock price following the company's announced six-month delay in the ACLF trial completion may simply reflect the departure of those whose investing horizon was six months or less. We do not believe it is indicative of the long-term investors' confidence or sentiment.

In having acknowledged the general indicators of market skepticism, I would now like to ask about the significant market support, which exists in spite of the referenced negativity. Conatus is in possession of noteworthy institutional ownership, and that ownership includes the likes of MPM Asset Management, Janus Capital, Blackrock, Putnam Investments, and BlackRock Financial Management. Moreover, the mechanism of emricasan is unanimously agreed by insiders and the scientific community to be a potential breakthrough in the treatment of a broad spectrum of chronic liver diseases. That is a multi-billion dollar addressable market. Thus, my question is this; what is it that these renowned and knowledgeable institutional investors and scientific leaders see in Conatus that the skeptics and opponents are apparently missing? What is it that these experts are able to reconcile regarding the potential of Conatus that other investors and shorts appear oblivious to?

The common links among top institutional stockholders of Conatus include value orientation, long-term outlook, small cap capacity, and healthcare/science focus. These firms have the expertise and investment horizons needed to understand and appreciate investment opportunities like those provided by Conatus. They have the patience to look beyond the next quarter or two. They gauge the company's progress in terms of program development rather than quarterly financials. While we appreciate the liquidity and momentum provided from time to time by investors with a shorter-term focus, the nature of our business model is more naturally aligned with the interests of long-term stockholders. Once they have committed the resources to learning about the technology, evaluating the management team, and understanding the corporate strategy, they invest appropriate portions of their portfolios and conduct periodic progress checks to confirm continuity in the programs.

Next, I would like to ask about the company's financial health and forward-looking flexibility. Over the past two quarters, the EPS results disappointed. The consensus estimate in the fourth quarter was that Conatus would report a loss of 27 cents per share. Instead, the company reported a loss of 33 cents per share. The consensus estimate in the first quarter was a loss of 33 cents per share, compared with a reported loss of 34 cents per share. These disappointments resulted in a bit of a pullback for existing stockholders. Nonetheless, the company's overall financial health appears on solid ground. You ended 2013 with nearly 57 million dollars, and ended the first quarter of 2014 with nearly 52 million dollars in cash, cash equivalents, and marketable securities. This is after raising net proceeds of about 59 million dollars via the company's IPO in July. To me, this indicates a judicious burn rate, fiscal responsibility, and devotion to R&D and clinical endeavors. To what do you attribute the miss on EPS loss, and do you believe that the company's current cash position is sufficient to carry it through current Phase II trials and into eventual Phase III trials?

Short-term metrics like quarterly loss per share are not particularly relevant to a company like Conatus, but the balance of cash and equivalents are. The investment community wants to see a development-stage biotech progress its development programs in parallel with its spending. They want to know whether existing cash balances are sufficient to carry the programs to the next inflection points. They want to know if meaningful data points will be reached before the company needs to raise additional capital. Following our successful IPO, we believe that we are well-funded to near-term milestones.

For a moment, let's get back to the company's lead candidate, emricasan, and allow potential investors and perhaps even existing stockholders to gain a cursory understanding of the compound and its mechanism. Since many retail investors are left to their own devices and may not be in possession of any formal medical or scientific education, can you offer a basic summation of what emricasan does and why its mechanism is so important to liver function and health? Can you make a rather complicated and vernacularly challenging process easier to understand for the average investor?

Sure. Inflammation and apoptosis, which is a form of cell death, are key contributors to the disease process across the entire spectrum of liver disease, irrespective of the initial cause, whether it's a viral infection, drugs or alcohol, obesity or autoimmune events. Regardless of whether liver disease is relatively mild or quite advanced, elevated activity of a family of enzymes known as caspases are implicated in liver inflammation and apoptosis.

Emricasan is a first-in-class oral, pan-caspase protease inhibitor, which means it inhibits caspase activity, which in turn has shown to have a beneficial effect on reducing excessive inflammation and apoptosis. Unlike other compounds being explored in this space, emricasan's mechanism of action has the potential to be broadly effective in liver disease, regardless of the initial cause or severity, because it addresses the underlying mechanisms of disease: apoptosis and inflammation. Treatments for most liver diseases are currently very limited, and no approved drugs specifically target caspases' role in liver damage.

In sticking with emricasan and its potential, I would like to ask a simple question which may be difficult to tie down. I suppose it may be like asking a parent to choose their favorite child, but nonetheless, I think this question has value. Of the major markets where emricasan is currently being targeted, is there one market which Conatus executives and insiders are most excited about? In other words, while ongoing trials obviously indicate faith in the compound across a vast array of chronic liver disease complications, is there any one specific indication which the company is most eager to bring to market? If so, why that indication, and what do you believe is the singular most important impact the treatment could make on sufferers of said indication?

I like your analogy to a parent choosing a favorite child. The beauty of emricasan is the breadth of its potential and its ability to address the full spectrum of liver disease. We don't have to choose a favorite, because we can envision pursuing multiple applications with this single compound. So we like the whole family of opportunities.

By the end of 2014, Conatus plans to have initial results from trials in different indications that span the spectrum of liver disease. The results from these trials will position us to prioritize next steps to advance the indication or indications that provide the greatest value proposition for the company and its investors. We believe the most likely initial indications will be those including sicker patients, as the regulatory pathways are typically more straightforward, the unmet medical needs are typically high, and though populations are smaller, premium pricing opportunities can provide meaningful value. We believe that Conatus would be able to pursue commercialization independently in these populations, and broader indications would potentially follow with a strategic partner.

Adjusting our focus a bit from emricasan and its medical benefits, let's take a moment to focus on investor sentiment. After all, while being a part of supporting innovative treatments is always a plus to biotechnology investors, the primary motivation for investors is to see a return on their investment. Therefore, stockholders like to know that the companies they support have investor interest near the top of their priorities list. So, it starts with this question; are company interests and investor interests aligned at Conatus? How important it is for company executives to create a viable and profitable investment vehicle for stockholders? What sort of indicators exist that can reinforce this relationship between the company and its investors?

The interests of a development-stage company like Conatus are most naturally aligned with the interests of long-term investors. We take the sentiment of, and the feedback from, these investors very seriously. Without continued and repeated support of the investment community, there would be no path forward for program development. We understand that we need to deliver on promises at each step of the process to secure the funding to advance to the next step. Our current status, conducting Phase II trials to evaluate the breadth of opportunities to pursue in Phase III, requires timely release of supportive data. That is our short-term goal in each of our development programs. Only if we can do so will we expect to complete future financing events to continue advancement through the next stage.

In maintaining this focus on investor interests, let me ask you about future financial needs. Given the exuberant costs of trial advancement, as well as the relentless presence of competition in the biotechnology space, investors in the sector always wonder about three things; dilution, partnerships, and buyouts. For small, development-stage companies such as Conatus, these are three things on the radar of every investor. So, looking ahead, what does Conatus see as possibility, and what does it see as probability? Should investors expect dilution down the road? Should investors expect the company to seek out commercialization and marketing partners? Should investors look forward to the potential of a buyout? What direction does Conatus see itself taking, and what are the long-term objectives in such respects?

Certainly, dilution, partnerships, and buyouts are daily realities in the world of biotech. Our goal is not to prevent these realities, but to ensure that their impact offers fair exchange to the investors. Dilution, for example, can be minimized by raising additional capital at the best possible price. That means opportunistic financing's based on positive program developments. With partnerships, that means negotiating from a position of strength by maintaining a sufficient cash balance, managing spending to reach key data points with existing resources, and understanding the company's true potential to ensure fair terms. For buyouts, that means maintaining investor support by open communication, setting realistic expectations for timing and results, and engaging investors in the company's strategic outlook.

Companies are least vulnerable to these issues when they plan appropriately. We believe that we are on the right path.

In closing, sir, I always ask the same question. As it is impossible for any one interview or any one article to completely encompass all matters and facets of a company, I would like to offer you this opportunity to share any insight or information that you think may be valuable to potential stockholders. What would you like to say to the investing public about Conatus, and what do you believe makes Conatus different from other biotechnology investments opportunities? What should investors know about, and why should investors consider, Conatus?

The Conatus team has extensive experience in studying liver disease. Liver disease represents a significant area of unmet medical need, along a broad spectrum of disease severity and causes. Due to its unique mechanism of action, we believe that our lead candidate, emricasan, will have applicability across a broad spectrum of liver diseases, and we are well-positioned as the world leader in caspase protease inhibition. By the end of 2014, we plan to have four ongoing Phase II trials across the broad spectrum of liver disease. We recently had a successful IPO, which makes us well-funded to near-term milestones, and have a strong IP position that offers protection into the late 2020s. We are well-positioned on these key fronts, and I look forward to our continued progress.

A Note Regarding the Interview with Dr. Mento

After each interview, the interviewer always walks away with one inescapable impression. At times, this impression is positive, and at other times, it is negative. Regardless, there is always one lingering thought which resonates for days thereafter. In this case, that impression was one of profound confidence and competence.

Dr. Mento effortlessly answered each question without hesitation. He was unwavering in his conviction, confident in his responses, and sincere in his perspectives. He was honest in his assessments and forecasts, and well-versed not only in his scientific knowledge, but also in the behavior of investors and the reluctance of market response. He understands not only his drug candidate, but also the challenges it faces, and the market which it will, hopefully, one day enter into. He was practical, forthright, patient, and focused. For an investor, he was exactly the type of man one would want to have at the helm of such a company.


Despite the obvious promise which exists in the Conatus pipeline, there is no such thing as an investment free of risk and potential downside. Thus, one must consider the risks and questions which exist for each potential investment.

As this article stated at the open, time is largely underrated. It is the universal driver of innovation and success. However, time also allows for greater exposure to potential complications. After all, the longer one stands outside, the greater the chance of rain. By his own admission, Dr. Mento acknowledges that an investment into Conatus is a long-term position. He himself states that the appeal of the company as an investment vehicle is largely focused on long-term prospects. He goes as far as to say that the company's interests are "aligned with long-term investors." This tells us two things; first, that the company's focus is on bringing the product to market responsibly and in time, and secondly, that the risks associated with that must be acknowledged. As any seasoned biotechnology investor will declare, with each day that passes, there is a cost, an increasing likelihood of competition, and market evolution. Therefore, to be a true "long investor", one must be willing to cope with the process of such.

Next, there is the obvious question that many investors, especially retail investors, will ask. That question is this; if the drug is so great, than why did Pfizer give up on it? That question is a fair one to ask. The easy answer is that the drug isn't great, and that Conatus is wasting its time. If you subscribe to that belief, than this investment obviously is not for you. However, cash is a valuable commodity in the developmental pharmaceutical sector, and sometimes, companies simply opt to commit funding elsewhere. In the event that Pfizer elected to go that route, one could not blame them for it. Furthermore, if it was simply a discretionary decision prioritized by funding allocations, one certainly couldn't draw any empirical conclusions to the negative against emricasan. However, the truth is that, we (the investment community) will never truly know will absolute certainty why Pfizer abandoned its emricasan program. We can only speculate. Depending upon which side of the fence one speculates on could determine just how much risk one feels exists in an investment into Conatus.

Moreover, the CEO himself, Dr. Mento, addressed the fact that dilution is a "daily reality" in the sector, and is therefore possibly applicable in the future for Conatus shareholders. Despite the fact that Dr. Mento went on to say that the goal is "not to prevent these realities, but to ensure that their impact offers fair exchange to the investors," it is, nonetheless, a pending reality. By his own admission, if dilution were to take place, it would likely take place at a time when share price was higher in order to minimize effects on the outstanding share count. While in theory this is fair and equitable, it would nonetheless adversely affect some shareholders whose investment horizon may not be as far out. As a result, any investors contemplating initiating a position in Conatus would have to ask themselves if their horizon is as far down the road as the company's. This question is imperative, as the likelihood of dilution between now and then is, at the very least, possible. Without a partner in place post-Phase II, and functioning under the assumption, for the purposes of this example, that there were no buyout, dilution would likely occur off of PPS highs in the event Phase II results were, in fact, encouraging. Given the costs associated with a Phase III trial, and functioning under the assumption that the current cash position will carry Conatus only through Phase II, this dilution would likely be substantial. If there is no partnership or no buyout, heavy dilution in this scenario would likely be all but certain between December of 2014 and March of 2015.

Lastly, Conatus is largely dependent upon a single drug candidate; emricasan. While its IP library may encompass value beyond such, it certainly would be a devastating blow to the company and to shareholders for current and/or future trials to miss primary endpoints. Therefore, to some extent, an investment into Conatus is essentially an investment into emricasan. That, in and of itself, carries some measurable risk worthy of investor consideration. While the drug obviously had enough promise to attract the likes of Pfizer, and while Conatus has succeeded in clearing the FDA clinical hold, there is still a measurable level of uncertainty in trial success. Even if the company does succeed at the Phase II trials, forecasting success at the Phase III level, without knowing the expectations and parameters of such, is speculative at best.


Originally, this article was set to be submitted and published on Tuesday June 10, 2014. It had intended to emphasize the points that the company was trading with a market capitalization under $100 million and possessed nearly 65% of its valuation accounted for in cash and cash equivalents. It would have focused on how the market was dramatically underestimating both emricasan and Conatus management, and it would have gone into great detail about how once the market caught up with the company, the short-term horizon would provide noteworthy downside protection for investors. Of course, that has since changed.

Quite literally, as the button to submit the article was being pressed, after-hours action at Conatus saw an unexpected 6% spike. Then, in the pre-market on the 11th of June, the run-up continued. By 10:30 in the morning, the price had moved 30% and the argument for "dramatic undervaluation" was now looking more moderate. After reaching out to Alan Engbring that morning, it was determined that nobody knew who was behind the buying. We agreed to let the price settle for the day and see where it took us. After all, this is the equities market, and anything is possible. Was the buying the result of a short squeeze that had been looming? Was it the inadvertent effect of Cyramza, a drug in development by Eli Lilly (NYSE:LLY), failing to meet its primary endpoint? Was it both or neither of these things? It is impossible to say. Biotechnology stocks are not for the faint of heart, and can, at any moment, disrupt the plans of investors or the premise of articles being written by Seeking Alpha contributors (insert irony here).

The point here is that movement in the biotechnology sector can be fast and furious. At times, the price will erupt unexpectedly, and at other times, it will collapse without reasonable cause. Day-to-day action is much less valuable than performance over time. Dr. Mento would agree with that sentiment, as he emphasized the continuity the company maintains with long-term investors. Once again, time, as opposed to timing, is the foundation for stable growth and progressive earnings. Therefore, despite this recent price action, the conclusion of this article remains the same; Conatus offers an excellent long-term investment opportunity.

The company's cash position is strong; certainly strong enough to carry it through all Phase II studies. The presence of institutional investors is noteworthy; constituting well over 80% of outstanding shares. The company's lead candidate, emricasan, has multiple market applications and a plethora of routes to success. There is a lot to like about Conatus, not the least of which is the fact that leadership is responsible, transparent, and highly capable. In a clinical-stage biotechnology company, what else could investors really ask for?

Moreover, the landscape of the sector is evolving. In the last 18 months, the utilization of acquisitions as a means for pipeline expansion has become a preferred method. Large biopharmaceutical companies seem to always have one finger on the trigger, ready to add to their intellectual property and stable of drugs through quick and decisive acquisition. In fact, just this week, Idenix Pharmaceuticals (NASDAQ:IDIX) was acquired by Merck (NYSE:MRK) at a premium of approximately 3:1. It seems that these days, smaller companies with innovative candidates for promising market indications are being purchased by larger pharmaceutical entities with the comparable nonchalance of a Midwestern housewife shopping for groceries. This recent trend has provided companies such as Conatus with multiple pathways to profitability for shareholders. It makes the forecasting of future expectations all the more diverse.

Regardless of where the stock price is today, tomorrow, or the next day, the fundamentals of Conatus will not have changed. Given all the attributes detailed herein and the valuable insights provided by Dr. Mento, the company is enticing for investors for a variety of reasons. Staring down the barrel at a potentially multi-billion dollar domestic market, the company could immediately become an acquisition target at the end of the year, pending Phase 2 data releases. Otherwise, Big Pharma partnerships are certainly a very real possibility. Furthermore, with emricasan back in the hands of its original developers, even going at it alone could mean massive returns down the line. The downside is largely protected by a noteworthy institutional presence, and the long-term upside is substantial. Conatus is undoubtedly an investment vehicle worthy of being added to one's portfolio as a long-term, speculative position with a promising risk/reward ratio. Further due diligence and inquiry by investors is well-warranted, and whether one chooses to buy today, or waits to see a pullback from the June 11 trade activity, the long-term prospects remain the same. Conatus has shown unrelenting effort and scientific innovation capable of leading to significant long-term profits.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.