Conatus: What's Next For This Small-Cap Potential NASH Play?

Summary

• The stock of potential NASH development concern Conatus Pharmaceuticals plunged some 30% in trading on Thursday.
• The trigger for the decline was a trial setback for the company's primary drug candidate Emricasan.
• However, the company has several other "shots on goal" as well as a big collaboration deal with drug giant Novartis.
• We profile post-trial analyst opinion, upcoming milestones and how this small-cap could fare after these disappointing trial results in the paragraphs below.

The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge.” ― Daniel J. Boorstin

Thursday was not a good day for shareholders of Conatus Pharmaceuticals (CNAT). The shares plunged some 30% on the trading day. The trigger for the decline was disappointing trial results from a key candidate in this "Tier 4" concern's pipeline.

Specifically, the company's primary drug candidate Emricasan had an unsuccessful POLT-HCV-SVR proof-of-concept clinical trial (Phase 2B) in liver transplant patients with fibrosis or cirrhosis. The company did say that the data for a subgroup of patients where this endpoint is most relevant supported "further evaluation."

So where does this leave investors in this small "Tier 4" concern?

Source: Company Website

First, it is important to remember that this was one of several trial milestones due to hit over the next year or so. The next reading should be top line Phase 2 data for NASH Cirrhosis that should be out in the back half of 2018.

In addition, the analyst community has not given up on Conatus despite this setback. Here's a sampling of analyst opinions that have surfaced since this disappointing data came out. Oppenheimer reissued their Outperform rating yesterday and cut slightly its price target on Conatus to $14 from $16 previously. This is what Oppenheimer's analyst had to say about his view on CNAT after these study results.

Despite the lack of clarity around F6 patients in POLT, we remain optimistic about the next catalyst for CNAT which is top-line results for the Ph2 NASH study, ENCORE-PH, in 2H18. We believe the POC established for Emricasan anti-fibrotic activity in POLT provides confidence for ENCORE-PH because this study also includes fibrotic and cirrhotic patients. As it is the leader of caspase inhibition, we believe CNAT presents a unique opportunity for investors to participate in the potential of a broadly applicable treatment for liver diseases including NASH."

H.C. Wainwright also lowered its price target from $17 to $15 yesterday while maintaining its enthusiasm on the name and buy rating. Here's what Wainwright's analyst had to say about the company's post-trial prospects.

In our view, the share price drop is an over-reaction to the top-line POLT miss, as we believe: 1) investor expectations were fairly low; and 2) investor focus is primarily on the expected 1H19 readout of ENCORE-LF (we and others have long regarded POLT as a niche “wild card” opportunity).”

Others Chime In:

I posted a poll on my Twitter handle on the future of Conatus as well as its stock after the shares plunged yesterday. Here are the results (informal as they may be):

23% - Beginning of the End

44% - A Buying Opportunity

21% - Too Early to Tell

12% - A Major Setback

As you can see, opinions vary widely. More importantly, the company has an important collaboration partner on this program with Novartis (NVS) which made a substantial upfront payment to become Conatus' development partner on this program and also is on the hook for significant milestone payments and royalty payouts should Emricasan development lead to success.

I have a decent stake in Conatus which fortunately was completely hedged with covered calls when this news hit. I have a full stake in this developmental concern. Therefore, I do not plan to add to my position at this time. If I was looking to establish a new position or add exposure to this name, I would probably choose to do so with a Buy-Write order.

Nor will I be selling as the company has several "shots on goal" left and has trial milestones upcoming over the next year which could improve sentiment on the stock.

The company ended 2017 with approximately $75 million in cash and marketable securities on the balance sheet. The fourth quarter saw just over $13 million in spend on R&D and other operational costs. Management provided this guidance on its fourth quarter conference call.

The company believes that current financial resources, together with the anticipated reimbursements for 50% of the costs for the four ongoing clinical trials, without including any potential milestone payments under the Novartis collaboration, are sufficient to maintain operations through top-line results from all four Phase 2b clinical trials by the end of 2019, as well as to fund initial pipeline expansion activities."

After yesterday's sell-off, the stock has an approximate market cap of $125 million which seems more than cheap on a longer term basis given the company's cash on hand and the potential of Emricasan.

Facts do not cease to exist because they are ignored.” ― Aldous Huxley

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Analyst’s Disclosure: I am/we are long CNAT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.