Novartis Closes The Year With 2 Head-Scratchers

| About: Novartis AG (NVS)
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Cue quizzical eyebrow raising at two deals announced by Novartis (NYSE:NVS) yesterday. First was the acquisition of an eye disease researcher, adding a novel mechanism of action in a therapy area that many assume the pharma giant is looking to exit.

Then a second transaction saw Novartis pay $50m for an option over Conatus’ (NASDAQ:CNAT) Nash candidate, emricasan. The trigger for a full licensing deal is the start of a phase IIb trial in decompensated cirrhotic patients, which must happen by the end of October next year; with Conatus management insisting it knows no reason why this would not happen on time, the reason for delaying a full-blown deal is far from clear.

On a conference call, Steven Mento, chief executive of Conatus, shed little light on the matter, despite numerous questions from analysts. He pointed out that emricasan, a pan-caspase inhibitor, was one of only two candidates in clinical development for Nash cirrhosis, and as such, the phase IIb study investigating this population, Encore-LF, was a “very important” trial.

The company now plans to use a composite clinical endpoint for the study rather than surrogate measures, and this has all been discussed with regulators, Mr. Mento said, although he would disclose no further details. He did suggest, however, that should a trial of this design be successful, it would raise the prospect of a faster route to full regulatory approval.

“This is why we want to maintain the timelines to initiate this trial and get data as soon as possible as it could effectively eliminate subsequent required studies to look at clinical outcomes associated with a surrogate endpoint. So it is an important study for us and Novartis,” he said.

Still, he also went on to say that Encore-LF was chosen as the trigger simply because it was the only trial of a four-study phase IIb program yet to start. Should the full deal commence the San Diego company will continue to run the program, with Novartis paying half the costs.

The Swiss company will take over the project from phase III, and Conatus stands to receive up to $650m in development, regulatory and commercial milestones. It will also be able to access a $15m loan note, bank another $7m should Novartis take a full license next year, and decide further down the line whether to co-commercialize in the US.

Emricasan phase IIb program

Trial name

Patient population

Enrolment

Duration

Key endpoints

Trial ID

Encore-LF

Decompensated Nash cirrhosis

TBD

48 wks

Undisclosed composite clinical endpoints

TBD

Encore-PH

Nash cirrhosis with portal hypertension

240

24 wks

Hepatic Venous Pressure Gradient

NCT02960204

Encore-NF

Nash fibrosis

330

72 wks

Nash Clinical Research Network histology

NCT02686762

POLT-HCV-SVR

Post transplant HCV-SVR with fibrosis or cirrhosis

60

Two yrs

Ishak Fibrosis Score

NCT02138253

Much emphasis on the call was placed on the potential to combine emricasan with Novartis’s FXR agonist, LJN452. Should this be pursued Novartis will lead and pay for the development. However, with data unlikely to emerge until 2018 from the single-agent studies, the real potential in emricasan will take time to elucidate.

Indeed, underwhelming results to date have been responsible for suppressing Conatus’ valuation, despite its activity in the red-hot Nash space. Before today, the company was worth $49m, little more than its September 30 cash balance of $31m. This meager sum could plausibly explain the hefty option fee – the company needed to bolster its cash balance quickly before starting the full phase IIb program, avoiding the risk of not being able to fund it to completion.

Conatus shareholders will have to hope that Novartis was not moving to corner an asset in a competitive process while continuing to look around in the meantime. Or that the “other things” vaguely alluded to in the 8-K with regards to the trigger decision turns out to be more significant than just an issue of timeliness of the Encore-LF trial.

Looking for deals

The other deal Novartis announced, the acquisition of Encore Vision, is more of a strategic than a financial puzzle, as no terms were released.

The Texan company’s main asset is EV06, a mid-stage topical treatment for presbyopia – the age-related near-sightedness that affects more than 80% of adults over 45. Encouraging results were generated in a placebo-controlled phase I/II trial of 75 patients; the drug works by softening the gradual stiffening of the lens of the eye, a major cause of presbyopia.

Given that this condition can be solved by wearing glasses, this drug would seem to hold the potential to be hugely disruptive. That or a massive challenge for Alcon’s marketing department.

Clearly, this approach still has far to travel. But it suggests the Novartis mothership has not totally given up on Alcon.