Conatus Pharmaceuticals (CNAT) is a biotech stock that should be on everyone's radar this year and next year. It has long-term potential that I believe can make both traders and investors a lot of money. The company's main drug is known as emricasan, which is an oral pan-caspase inhibitor of both apoptosis (programmed cell death) and inflammation. The goal for the drug is to attempt to potentially heal the liver or reverse fibrosis. To accomplish this, the company has deployed a set of trials (4 in total) targeting both NASH fibrosis and NASH cirrhosis. I think that there is plenty of upside left for this company as will be explained below.
First off, to understand what Conatus is dealing with, one must understand the liver. The liver is an important organ in the body. It is responsible for many important functions which include: regulation of lipid and sugar metabolism, production of proteins that are crucial to blood clotting, and being able to purify the blood in the body. One thing that must be noted is that the liver always attempts to heal itself from insults. When fibrosis or cirrhosis of the liver is taking place, collagen fibers are encroached all over the liver. The reason that phenomenon occurs is because the liver is always attempting to heal itself. The problem is that, sometimes, the damage is so severe that there are too many collagen fibers that form. That in turn creates scarring (fibrosis) of the liver. As the fibrosis of the liver gets worse, it ultimately leads to cirrhosis (advanced stage of fibrosis). How can emricasan possibly help in this situation? Well, emricasan inhibits cell death and inflammation in the liver, causing less collagen fibers to form. In turn, that should theoretically allow the liver to heal itself. This may either help halt or reverse fibrosis of the liver. I believe that Conatus is onto something with emricasan treatment. These patients have no other treatment options, other than a liver transplant.
ENCORE Clinical Trials
Why I like Conatus as a biotech investment is because of the four trials it is currently running known as the ENCORE clinical trials. It already reported data from one of the trials for POLT-HCV-SVR. The first thing one must learn in biotech is that multiple shots on goal reduce risk. In other words, a pipeline should have multiple clinical targets so that if one fails, another one still has a chance of succeeding. As I will explain in another section later on, there are additional candidates coming out by the end of the second half of 2018 and beyond. That's why I believe Conatus has good long-term value. The four trials in question are portrayed in the pipeline graphic below:
These clinical trials in question are crucial for the company's future. Each of the clinical trials in question can potentially provide some nice long-term investment value. Of course, that is pending positive clinical data.
One might be asking why I am first discussing the POLT-HCV-SVR. This phase 2b trial just released results a few weeks ago. This trial recruited a total of 60 patients that were cleared of their HCV but were left with fibrosis or cirrhosis of the liver. The trial assessed whether or not 25 mg of emricasan (taken twice daily) would be enough to improve the scarring of these patients' livers compared to placebo. The primary endpoint of the trial was to measure a change in baseline of fibrosis using the Ishak Fibrosis score. The patients in this trial took 25 mg of emricasan twice daily over a 2-year period. Conatus announced results for its phase 2b POLT-HCV-SVR study. After looking at these results, it appears that it was mixed in terms of efficacy. Mixed being that they weren't a complete failure or a complete success overall (more about that below). What I will say though is that with these results obtained, Conatus will likely be able to move on to a phase 3 study for subgroup patient population between F3 to F5 fibrosis. This was the first time that a drug in this patient population showed an anti-fibrotic effect for those treated with a drug. That's because this is the first study ever done in POLT-HCV-SVR patients. Therefore, there is no other study to compare this too. The phase 2b POLT-HCV-SVR study was initiated back in the second quarter of 2014. It enrolled post-orthotopic liver transplant (POLT) patients whose transported livers were damaged by recurrent HCV infection. They were able to clear the infection of HCV with antiviral therapy, but their transplanted livers had residual fibrosis/cirrhosis. The patients ranged on their Ishak Fibrosis score from F2 to F6. Patients were randomized 2:1 to receive 25 mg of emricasan or placebo twice daily for 2 years. Biopsies were taken initially when the patient entered the study, at the one-year mark, and then the 2-year mark. The primary endpoint was looking to see a difference in the amount of responders between the treatment group and placebo at two years biopsy compared with the baseline biopsy. A response in the study was defined as being an improvement or stability in Ishak fibrosis score between F2 to F5 or improvement in Ishak Fibrosis score for patients with baseline scores of F6. The pre-specified goal of the study was a difference of 15% or more in response between treatment with emricasan and placebo. What I will point out right away is that when looking at the overall population the study failed. After looking through the data, the culprit was the 3 patients in the F6 group (most advanced cirrhosis and sick patients). What happened in that group was that somehow the placebo performed better than emricasan. If you were to take out those 3 patients with Ishak Fibrosis score of F6, the study would have met on the primary endpoint. What do I believe may have been the cause for a high placebo rate? It’s possible that the 3 patients in the F6 group experienced an anomaly in which the liver may have recuperated on its own. The company will reveal more data at a later time, and my hope is that this will be cleared up. Despite this issue with the F6 population, Conatus can move on to the next stage of testing based on a subgroup analysis of F3 through F5. That's because the F3 through F5 group was still superior over placebo by a wide margin. It was shown that patients with F3 advanced fibrosis to F5 early cirrhosis were able to respond better when taking emricasan compared to placebo. The emricasan group had a strong response rate of 95% or 19 out of 20 patients (F3 through F5) after 2 years of treatment. On the other hand, the placebo group for F3-F5 had a response rate of 58.3% (7 out of 12 patients). That makes a difference in percentage points of 36.7% with a response rate p-value of p <0.02. Conatus will likely move on to the next study and could do so with the subgroup of F3 through F5 fibrosis patients. The data was pretty good. I wouldn't say phenomenal but good enough to where Conatus can potentially move on to a phase 3 study with this subgroup population. It could either do so with emricasan alone, or in combination with its partner Novartis (NYSE:NVS).
The next clinical trial in question that I will discuss will be the phase 2b ENCORE-PH trial. This trial is set to recruit a total of 240 NASH cirrhosis patients with severe portal hypertension. The primary endpoint of the study will be the HPVG mean change from baseline at week 24. This is the next near-term catalyst that I have high hopes for. The reasons why believe the trial will succeed is because of the way it was designed. First of all, the trial is testing three doses of emricasan. These doses of emricasan are 5 mg, 25 mg, and 50 mg against a placebo. Just a side note here, the beauty of emricasan is that it is a safe drug to take even at higher doses. I like this three-pronged approach to test out multiple doses for one study. Having this many doses gives the clinical trial a greater chance of success. Secondly, management recruited patients in such a way where clinical success was already observed in an open label phase 2 portal hypertension trial. The key result from another trial was that emricasan achieved a reduction in HVPG in NASH cirrhosis patients with portal hypertension. The significant results were observed in those NASH cirrhosis patients with an HVPG baseline measurement equal to or greater than 12 mmHg. With positive results observed here, it makes sense that the phase 2b trial, ENCORE-PH, was established to only recruit patients with an HVPG equal to or greater than 12 mmHg. Especially, since we just saw that Emricasan works for a subpopulation of the POLT-HCV-SVR patients. Emricasan’s mechanism of action has been somewhat proven in my opinion. This trial is set to read out in the second half of 2018. Positive data here could cause the stock to double to $7 per share or higher bringing in a gain of 100% or more. Of course, that’s only if the results are positive. A negative readout could cause the stock to be cut in half. The risk/reward here is appealing for this approaching catalyst.
The ENCORE-NF phase 2b trial has already recruited a total of 330 patients. More about the trials recruitment will be explained below. The trial recruited patients with confirmed NASH CRN fibrosis stage 1 to 3. The primary endpoint of the study is improvement in fibrosis by at least one stage versus placebo without worsening of steatohepatitis using NASH CRN. Conatus in this situation chose to use two doses compared to placebo. It chose to treat patients with 5 mg of emricasan and 50 mg of emricasan. One can argue both ways about using one lower dose and higher dose for such a trial. I'm on the fence that this is a huge positive. That’s because management have stated that 5 mg of emricasan should be enough to improve patients with NASH fibrosis. The 50 mg dose was put in place just to see what a higher dose could achieve. This is a good trial design, because it allows for the higher dose to act as a cushion. That is just in case the 5 mg dose does not achieve its goal, then the 50 mg dose of emricasan might. This is another good trial design by the management team. There has been some good preliminary phase 2 data from the company in NASH fibrosis. In March 26, 2015, Conatus announced results from a phase 2 trial treating patients with non-alcoholic fatty liver disease (NAFLD). There was even a subset of patients that had non-alcoholic steatohepatitis (NASH). The trial met its primary endpoint in that patients treated with 25 mg of emricasan twice per day for 28 days saw a statistically significant reduction in alanine amino transferase (ALT) in the liver of these patients. Reductions from baseline in ALT at Day 28 in the emricasan treated group was 39%, compared to 14% in the placebo group (p <0.05, statistically significant). Does all this sound a little overwhelming? That's because, in order to understand this data, one has to know what ALT means. ALT is a liver enzyme produced by cells in your liver. It is one of the many enzymes produced by the liver that helps regulate important functions such as metabolism and breaking down proteins. Elevated levels of ALT infer that a person's liver is damaged. That's because ALT is only present inside the liver, but when damage occurs, it leaks into the bloodstream. An ALT test is performed to see if there are elevated ALT enzymes in the blood. The drawback for an ALT test is that it doesn't show how badly damaged the liver fibrosis/cirrhosis is. At least this test tells the doctor that a problem exists in the liver. In any case, it is highly encouraging that 25 mg of emricasan given to patients twice daily for only 28 days was able to reduce ALT levels by 39%. Whether this translates to a reduction of fibrosis in the ENCORE-NF trial remains to be seen, but keep in mind that this correlation of reduced ALT levels is highly encouraging. This trial is expected to release results by the first half of 2019. This will act as another catalyst with the potential to boost the stock higher.
This is the last trial I will be discussing in Conatus's pipeline. I must take the time to say that I saved the best for last. That's because I consider this trial to be more crucial than all the others. Not because this has more significance over the other trials, hardly. It is because this is the trial that depended upon the partnership with Novartis. Novartis was waiting for this phase 2b trial to be initiated, before it determined if it wanted to take the option to license emricasan. That is the stipulation Novartis made to sign the license agreement. The partnership with Conatus and Novartis will be discussed in detail below. This phase 2b trial is set to recruit up to 210 patients with decompensated NASH cirrhosis. Patients are split into three different dosing groups. They are set to take 5 mg of emricasan, 25 mg of emricasan, or placebo. This trial will be assessed for a total of 48 weeks, with a follow-up phase of 2 weeks. I consider the ENCORE-LF trial as the "holy grail" study. There is a reason why Novartis wanted to see this trial begin before it took the option to license emricasan for NASH fibrosis and NASH cirrhosis. I believe that it was because of ad-hoc analysis data that was released by Conatus. It showed that NASH cirrhosis patients with a MELD score equal to or greater than 15, achieved statistical significance when taking emricasan compared to those who only took placebo (p < 0.003 MELD score) after only 3 months. MELD stands for Model for End-Stage Liver Disease, and it measures mortality risk in cirrhosis patients. Emricasan even saw other statistically significant measures compared to placebo in the chart below.
I'm still inclined to believe that Novartis liked what it saw with respect to these results in cirrhosis patients. That's why I believe it chose to partner with Conatus. I know this can't be considered final conclusive data because it was ad-hoc analysis data. Still, this could have been the reason why Novartis made a deal, which included an upfront payment of $50 million to the company with a potential for it to earn $650 million pending positives milestones.
Significance of Novartis Partnership
I briefly touched up on the partnership above that was established between Conatus and Novartis. The current news is that Novartis has already chosen to take the option to license emricasan. For starters, I like small-cap biotechnology stocks that have partnered with big pharma. That's not a guaranteed win, but my opinion is that a big pharmaceutical company will not partner with a small-cap biotech if it doesn't believe in its prospects. Having said that, it is not the only reason why I believe Novartis probably partnered with Conatus. The other reason is that even in higher doses of emricasan, there were no dose-limiting toxicities or drug related adverse events. That is very good for a drug such as emricasan that has to combat against NASH cirrhosis and fibrosis. Especially, considering that to this day there are no currently approved FDA therapies for these indications. So, how does Novartis play into the role of emricasan being safe and well tolerated when given to patients? That's because Novartis has its own NASH drug, an FXR agonist. Novartis' drug is a non-bile acid FXR agonist. The Global Head, Drug Development and Chief Medical Officer of Novartis Vas Narasimhan has stated this:
"We believe that collaboration is key to developing the best possible treatments that are urgently needed for NASH patients"
That's because Novartis and Conatus believe that combination treatments are the future for therapies of NASH fibrosis and cirrhosis. Novartis has already partnered with Allergan (AGN) and initiated a phase 2b trial testing the drug cenicriviroc in combination with Novartis's FXR agonist. How does this play into Conatus? This can act as a potential catalyst for Conatus. I'm not inclined to know when a combination trial between emricasan and Novartis's FXR agonist could begin, but there is a possibility that such a trial could be announced at any moment. The reason why I state that is because I don't believe that Novartis will want to wait until 2019, when Conatus releases ENCORE-LF results, to determine if a combination study should be initiated. I'm more inclined to believe that a combination trial of emricasan and an FXR agonist is in the works. Other parts of the collaboration include these benefits:
Shared cost - This means that Conatus will only be responsible to only pay 50% of all phase 2b costs. Novartis will pay for the other half, and that's a really good thing for any small-cap biotech company
Full phase 3 costs paid for - This is where Novartis will be responsible to pay the full cost of all phase 3 trials. If all these programs reach phase 3, Conatus will not be responsible to pay a dime on any of them. The whole burden of cost will be on Novartis
Potential payoff - This is where Conatus can earn a significant amount of development, regulatory, and commercial milestones. The amount of payment isn't small either. The total payoff pending all the milestones are met is worth up to $650 million
Double-digit royalty sales - If emricasan makes it to the market, the single agent therapy will allow Conatus to earn up to double-digit tiered royalty sales.
Single-digit royalty sales - If emricasan is properly developed as a combination therapy with Novartis's drug, then Conatus is eligible for single-digit tiered royalty sales
Shared wealth - Conatus has left itself in good shape with respect to this deal. It has the option to co-commercialize emricasan in the United States if it chooses to do so. Depending upon the liver disease market, it has the option to obtain additional profit, and that is a major positive
Conatus is still building its pipeline, and it has other programs that use emricasan in the clinic. It wants to add additional compounds to flesh out its pipeline. The new products from the pipeline could be shown by the second half of 2018. This provides another catalyst type opportunity. There is no guarantee that announcing a new pipeline will move the stock, but it will be highly welcomed news anyways. I like Conatus for many reasons, but one of them is the ability for emricasan to work in other indications. If you take a look at Conatus' slides (page 28 of the slide presentation), you will note that emricasan has already shown to work in pre-clinical models of: Lung fibrosis, colorectal cancer, heart disease, kidney disease, primary biliary cholangitis, and CNS diseases as well. The first question you will ask is, if Conatus has already established a deal with Novartis on emricasan, how can it still develop these other compounds? That's because, according to the deal with Novartis, the license was for emricasan for the four indications of NASH cirrhosis and NASH fibrosis only. The way the deal was set up was that Conatus still retains the right to develop emricasan for other indications. The new pipeline is still a mystery, because it has yet to be announced. Adding 2 to 3, or maybe more compounds to the pipeline will only serve to help the company. In addition, it further reduces investor risk.
One thing to note is that Conatus is financially sound. It has already received an upfront payment of $50 million for its deal with Novartis, on top of an additional $7 mil for Novartis licensing emricasan. All that is left now is that Conatus will have to see if it can achieve all the milestone payments which will eventually total $650 million. The other good news is that should most of the ENCORE trials succeed, Novartis will be 100% responsible for paying their respective phase 3 costs. Conatus will not need to put a dime towards any of these phase 3 trials. Conatus now has enough cash to last until the end of 2019. That means there is no near-term risk of dilution.
There is a trade opportunity setup for Conatus Pharmaceuticals. One thing that will be learned in the biotech industry is that most companies tend to run up into clinical data. That means that I expect Conatus to start to run up into data, which is set to be released in the second half of 2018 for the ENCORE-PH study. There is no concrete date, but I expect the stock of Conatus to start a run-up sometime in July, possibly earlier. It all highly depends on the excitement and belief in whether or not there will be a positive outcome of the ENCORE-PH study. Another short-term catalyst could come before the end of 2018, where Conatus will announce its pipeline expansion. Traders playing the binary event of the phase 2b ENCORE-PH data read out should do so with some level of protection, just in case the trial ends up missing the primary endpoint of the study. Conatus trades with a market cap of $104 million, and I believe that there is further upside. I mean it is cheap considering that it has three more shots on goal that target larger markets. Even if only one of the ENCORE trials noted above succeeds, the company will eventually trade much higher compared to the current share price of around $3.50 per share. The ENCORE-PH trial will report data sometime in the second half of 2018. As far as ENCORE-NF and ENCORE-LF, those trials are expected to read out results in the first half of 2019 and second half of 2019, respectively.
Potential catalyst for new pipeline expansion, expected to be released by second half of 2018
Possible initiation of combination trial between emricasan and Novartis's FRX agonist at any moment (this is more speculative as the timing of such a trial is not known but remains a huge possibility)
ENCORE-PH trial data to be read out second half of 2018
ENCORE-NF trial data to be read out by first half of 2019
ENCORE-LF trial data to be read out second half of 2019
The final verdict is that Conatus Pharmaceuticals is a great buy at its current price at $3.50 per share. Traders and investors can benefit should there be a run up into the 2b trial readout for ENCORE-PH in the second half of 2018. Another strategy that I must mention is that taking profit is key to being successful investor in the biotech space. One thing you will learn in the biotechnology space is that there is never a guarantee for positive trial results. Always take some profit off the table, even if it is only 25% of what you earned in profit from trading the stock. If the trial succeeds, you still have a good sized position in play to hold for the long-term. If it fails, you won't feel as bad because you have taken some profit of the table. I consider this a win-win scenario. Whichever way the result come out, you still end out on top with some profit. The risk here is that the ENCORE-PH trial could end up failing. In that case, the downside could be 50% or more. Based on the positive results in a subgroup analysis for the POLT-HCV-SVR study, I believe that the ENCORE-PH study will also show positive data. With three more shots on goal and an expanding pipeline, I believe there is a lot of upside of 100% or more during the second half of 2018.
This article is published by Terry Chrisomalis, who runs the Biotech Analysis Central pharmaceutical investment research service on Seeking Alpha Marketplace. If you like what you read here and would like to subscribe to my Service, I'm currently offering a two-week free trial period for subscribers to take advantage of. My service offers deep dive analysis of many pharmaceutical companies throughout the biotech sector. Come see for yourself if my service is right for you.
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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.