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The Conatus Novartis Partnership And The Long-Term Value

|Includes: Conatus Pharmaceuticals (CNAT), NVS

On December 19th, 2016, Conatus Pharmaceuticals (CNAT) announced an option, collaboration and license agreement with Novartis AG for the global development and commercialization of emricasan. For a slightly different view, you may wish to also view Novartis' announcement.

About Emricasan

Emricasan, is a first-in-class, orally active pan-caspase protease inhibitor designed to reduce the activity of human caspases, which are enzymes that mediate inflammation and programmed cell death (apoptosis). Apoptosis is a highly regulated biological process involved in maintaining normal tissue equilibrium - it tells cells when it is time to die. Conatus believes that reducing excessive levels of cell death and inflammation will place the body's cell death mechanisms back into equilibrium. By reducing the activity of caspase enzymes, Conatus believes that emricasan will interrupt the progression of liver diseases in humans, regardless of the original cause.

Novartis Partnership - Key Points


  • Conatus has granted Novartis an exclusive option to collaborate with Conatus to develop products containing emricasan either as a monotherapy or in combination with other Novartis compounds for liver cirrhosis or liver fibrosis.


    • In the announcement, there is reference to a Novartis owned FXR agonist. We believe this to be Novartis' previously acquired LJN452, which was previously referenced as Novartis' lead NASH candidate.
  • The option allows for Novartis to acquire a worldwide license to Conatus' patent rights thereby allowing it to commercialize and develop ermricasan products for all indications in humans.


    • This has the potential to be a big win for Novartis as there are so few companies seeking to get into NASH cirrhosis. With a target on early and mid-stage NASH (and assuming good emricasan data), Novartis might be the first with the potential to treat the full spectrum of NASH (Early stage Nash, NASH Fibrosis, and NASH Cirrhosis).
  • Under the Agreement, Novartis will have a right of first negotiation prior to any offer by Conatus to any third party for future pan-caspase inhibitors for the treatment of liver disease.
  • Conatus has the potential to earn tiered royalties that range from the high-teens to the high-twenties as a percentage of net sales for monotherapy and tiered royalties ranging from the high-single digits to the mid-teens as a percentage of net sales of combination therapy.
  • Near-term financial infusion of $50 million will occur with an additional option to secure $22 million - with $15 million coming from one or two closings of promissory notes (maturity date of Dec. 31, 2019) and $7 million coming with Novartis' exercise of the option (option expires Oct. 31, 2017 - To arrive at this decision, we assume that Novartis will be examining: animal data involving combination therapy' and reasonable progress in Conatus' clinical program).
  • Conatus has the potential to receive up to an aggregate of $650 million in milestone payments over the term of the agreement, but that is contingent on a number of currently unknown milestones. The structure of the milestones and payments have not been disclosed.
  • Part of the agreement lists Conatus as responsible for completing its ongoing ENCORE-PH, POLT-HCV-SVR, ENCORE-NF, and the planned ENCORE-LF Trial. However, Novartis will fund 50% of the costs of these trials after the option is exercised. The real win for Conatus is that, if the option is exercised, Novartis will assume full responsibility for emricasan's Phase 3 development and all combination therapy development.
  • The option is exercisable upon Conatus' initiation of its ENCORE-LF trial currently expected in Q2-2017. The ENCORE-LF Trial involves patients suffering from NASH cirrhosis and portal hypertension. These are late-stage NASH patients who clearly have severe illness.
  • Lastly, this agreement allows for Conatus to develop other caspase inhibitors and other preclinical compounds (not liver related).

Initial Market Impact

Conatus' stock price closed at a whopping $1.91 on December 19th, 2016. Just after the announcement details were released, the stock shot up ~208% to $5.90 before leveling off in the $4.40-$4. 50 range. After-hours volume surpassed 1.3 million shares. Simple arithmetic would tell an investor that based on the cash infusion, a single Conatus stock is currently worth ~$4.85. However, investors shouldn't price a stock for what it is worth today, but for what it will be worth tomorrow. In the short-term we will see momentum investors jump in and out of this stock. We anticipate price fluctuations as investors attempt to gauge the real value of this partnership agreement. With this in mind, we would like to remind our readers that Conatus is a stock for the long-term investor. "Management has made it clear that it will not make very short-term decisions to pump the value of the stock. Instead, management is focused on driving value with a long-term strategy in mind. Thus, this stock is not for the short-term investor." We believe that this statement still stands true. Management will not move to make major adjustments on short-term downward trends.

Our Thoughts

Back in July we wrote, "it is clear … that Conatus will need to obtain capital to pay for the ENCORE program, whether through financing or partnering. Thus, we believe it highly likely that Conatus will choose to partner sometime in the near future." Although we were right in predicting that a partnership was a must, we were wrong (something we accepted as a real possibility) in asserting that Conatus would hold out an indication or territory for itself. We believed something was coming, but we didn't know when it would occur or just how large it would be. "It is still too early to determine whether the licensing deal will be a series of small deals or a single large one." This agreement exemplifies the patient and diligent work of the management team. Many have ranted that management is too slow or that the data for trials is too far out. Management has weathered the criticism with poise and class and brought us to this point in time where Conatus has built a runway toward success.

















Conatus Pharmaceuticals - Emricasan (Caspase Inhibitor) - Milestones
ENCORE Trials - The are a set of Phase IIb trials that each explore a different indication. With robust results, it is possible for Conatus to successfully file for FDA or EU approval. These trials are made to support the design of the Phase III trials. The first results arrive in the first half of 2018.
ENCORE-PH - Portal Hypertension - Patients with severe portal hypertension (NYSE:SPH) that were cleared of Hepatitis C (HCV-SVR) or have NASH cirrhosis. The primary endpoint is a reduction of HVPG (Hepatic Venous Pressure Gradient)
Phase IIb ENCORE-PH- 160 Pts, 25 mg 2x/day, 6 Months

Top-line Results

ENCORE-AC - Alcoholic Cirrhosis with SPH - Patients will be "abstinent alcoholics" with liver cirrhosis. The primary endpoint is a reduction of HVPG.
Phase IIb ENCORE-AC - 60 Pts, 25 mg 2x/day, 6 Months


ENCORE-XT - Extension for ENCORE-PH and ENCORE-LF - The endpoints include: safety & efficacy, clinical outcomes, and quality of life. Patients of this trial will remain blinded until a clinical event occurs or until the patient leaves the trial.
Phase IIb ENCORE-XT - 25 mg 2x/day, 18+ Months


ENCORE-LF - Liver Function - NASH Cirrhosis + Clinically Significant Portal Hypertension (CSPH) - Pts have compensated cirrhosis and portal hypertension, and treatment will examine the long-term impact of treatment. The ongoing liver cirrhosis trial results will inform the design decisions (e.g. sample size). The endpoints include: MELD or CPT to measure mortality risk in patients with liver disease; biomarkers (e.g. bilirubin, albumin). In light of results from the liver cirrhosis trial, Conatus may redesign this trial so that it qualifies as a Phase III trial (may include transplant free survival).
Phase IIb or Phase III ENCORE-LF - Dosing TBA, 18+ Months


ENCORE-NF - NASH Fibrosis - NASH patients with fibrosis, but not cirrhosis, are measured according to the NASH CRN Histological Scoring System. The primary endpoint involves a biopsy based change in the fibrosis score.

Based previous studies in HCV patients, Conatus management expects the 5 mg dose to be as effective as higher doses in fibrosis patients. The 50 mg dose is being positioned for patients with cirrhosis and the 5 mg dose for patients with fibrosis.

Phase IIb ENCORE-NF - 330 Nash Fibrotic Pts, 5 mg or 50 mg

2x/day, 18+ Mos

Top-line Results

HCV Fibrosis Recurrence Post-Transplant (POLT-HCV-SVR)

These patients have fibrosis in their transplanted liver after being cleared of a hepatitis C viral infection. The primary endpoint is the change in the Ishak Fibrosis Score. This has an orphan designation.

Phase IIb Efficacy (60 Pts) - 25 mg 2x/day, 24 months

Top-line Results

Completed Trial
Liver Cirrhosis (NYSE:LC)

Mild to moderate liver cirrhosis patients. The aim is to halt progression that leads to liver failure. The results, which include the MELD score, will be crucial to handicapping Conatus' present development strategy. Some of the patients suffer from NASH.

Phase II Proof of Concept (80 Pts) - 25 mg 2x/day, 3 months

Top-line results for double-blind, placebo-controlled first stage reported in January 2016; top-line results for open-label second stage reported in May 2016. Additional analyses

2H-2016, 2017


(At the time this post was written, one or more BioWatch staff held a position in CNAT)

This blog post is being shared with explicit permission from The Biotech Watcher

Disclosure: I am/we are long CNAT.

Additional disclosure: Do your own due diligence