Conatus Pharmaceuticals (CNAT) is an early-stage developer of drugs to treat diseases of the liver with a favorable risk-reward profile, particularly after recent investor selling in the biotech sector has created some nice values.
Investors piled into a number of liver disease stocks late last year, riding the coat tails of Intercept Pharmaceuticals (ICPT) and its NASH (fatty liver disease) drug. Conatus was one of the Intercept beneficiaries, but the stock also took at hit when safety concerns were raised about the Intercept drug. Today, Conatus' market capitalization stands at only $118 million (an enterprise value of around $63 million.) Given the broad potential of Conatus' lead compound, emricasan, the selling appears overdone. Of course, cheap valuations are often deserved, so what makes Conatus different?
Emricasan is a pan-caspase inhibitor Conatus is developing for a number of chronic liver disease indications. A pan-caspase inhibitor can address two mechanisms leading to liver damage: excessive apoptosis (cell death) and inflammation. In general, the preclinical models confirmed emricasan is able to reduce caspase activity, which reduced ALT (biomarker of liver damage), reversed fibrosis, and improved metabolic parameters.
There are currently four indications for which emricasan is being developed: acute-on chronic liver failure (ACLF), chronic liver failure (CLF), post-liver transplant HCV clearance with unresolved fibrosis (POLT-HCV-SVR), and non-alcoholic steatohepatitis (NASH). Emricasan phase II data in ACLF and NASH are expected in the second half of the year and phase IIb trials are expected to start in POLT-HCV-SVR and CLF by the end of 2014. Of these indications, the two largest are ACLF and NASH, both of which are touted by analysts as billion dollar plus market potentials.
Given the preclinical activity and full schedule of clinical trials, why is Conatus valued so low? Concerns have been raised about the safety profile of emricasan. The drug was once owned by Pfizer (PFE), but development was put on hold due to a cancer risk signal. Pfizer then licensed emricasan to Conatus, which ran the needed safety studies to clear emricasan before its IPO. Conatus also got clearance from the FDA to continue emricasan's clinical development. The drug has now been dosed in over 500 individuals without a problem. While the risk of a cancer signal popping up again is certainly something to watch, the lack of evidence to date is reassuring.