Cara Therapeutics Inc (CARA)

[OttomanRosendahl]

Cara Therapeutics: Major Upside Potential

Sep. 12, 2016 7:30 AM ET|

Summary

Today we do a deep dive on Cara Therapeutics, a rare small-cap that is part of both the Biotech Forum and Insiders Forum portfolios.

The company has many positive traits, including upcoming milestones, insider buying, a solid balance sheet, downside technical support and an attractive risk/reward profile.

The stock could double just by getting to half some of the analyst price targets proferred on the stock recently.

In today's deep analysis, we look at a rare small-cap name that I hold both within my Biotech Forum and Insiders Forum portfolio, as this small biopharma focusing on pain management has a very attractive risk/reward profile at its current trading levels as well as heavy insider buying in 2016. It also has myriad traits I look for before adding a small stake in a developmental concern, including a solid drug candidate(s), upcoming milestones, good balance, strong analyst support, and the stock appears significantly undervalued with a positive risk/reward profile. If the stock can get to just halfway to recent analyst price targets, substantial gains lie ahead.

Company Overview

Cara Therapeutics (NASDAQ:CARA) is a Connecticut-based emerging biotechnology company with just over a $150 million market capitalization. The company came public two and a half years ago and is currently priced just below $6 a share. Shares have sold for north of $20.00 within the past year. They have also developed a hard downside technical support around $5, making this an asymmetrical upside play.

Cara is focused on developing novel therapeutics to treat human diseases associated with pain, inflammation and pruritus. The company possesses near-term clinical development opportunities combined with proprietary approaches to developing first-in-class novel therapeutics.

Cara's most advanced compound, CR845, is currently undergoing clinical testing for acute pain and pruritus. This patented compound possesses analgesic, anti-inflammatory and anti-pruritic activities appropriate for multiple therapeutic applications. In addition, the company aims to develop a future pipeline of first-in-class molecules at novel analgesic and anti-inflammatory targets using its proprietary drug screening technology.

Pipeline

As stated above, Cara's primary drug candidate is CR845, which is in mid- to late-stage trials for treatments in three distinct areas. Numerous milestones should be hit in 2016, which will be discussed in a section below. CR845's primary benefit is that unlike currently marketed opioids, this new compound does not produce inhibition of intestinal transit (ileus), does not induce life-threatening respiratory depression, nor does it elicit signs of addiction or euphoria.

The compound was in a Phase 3 trial for a treatment for acute post-op pain before a recent clinical hold was placed on the trial earlier this year. This caused the stock to crater, which continues to have created an advantageous entry point (more on that in a separate section below). The hold was lifted in late April, with two of the three dosage levels remaining in the trial. The highest dose was discarded for now due to some very mild side effects. The company is currently in the middle of recruiting patients to restart this trial. Post-op pain treatments is roughly a $9 billion annual market in the United States. Obviously, just a small percentage of that market would be a significant potential revenue and earnings stream for Cara.

To add some color to the opportunity, management has stated in a recent conference call: "With the recent increased regulatory focus from CDC, the FDA itself and NIH to kappa prescription opioid abuse and associated deaths and the increasing physician and media focused to the novel approach is to chronic pain, we believe CR845 has a significant potential to provide an alternative approach to traditional new opioids and deliver effective pain relief in the absence of abuse, misuse and addiction, as already indicated by our established human abuse liability data."

The company is also testing an oral version of CR845 for acute and chronic pain. It plans a multiple-dose Phase 2b study in OA patients in the second half of this year, which will be an upcoming milestone when it commences. The study will include 330 patients randomized across three CR845 tablet strengths and a placebo arm at 15 sites across United States. An oral CR845 Phase 2a study in osteoarthritis patients ("OA") showed in December of last year that CR845 exhibited a dose-related reduction in main baseline pain score to the end of the two-week treatment period, with up to an approximate 34% reduction for the highest dose group.

Finally, in the third quarter of last year, Cara provided data from its Phase 2 trial, where CR845 treatment resulted in statistically significant reductions in both the primary endpoint of worse itching or pruritus in uraemic pruritus ("UP") and dialysis patients as well as secondary endpoints assessing quality of life measurements in these patients. This is an unmet need in the market, with no approved treatments either in the United States or Europe for UP. The next step is a two-part Phase 2/3 adaptive design in haemodialysis patients exhibiting moderate-to-severe uremic pruritus which just commenced in late June.

Clinical Hold

The stock started the year at around $15.00 a share, then tanked soon into 2016. The primary cause driving it down is that the company, in February, announced a critical Phase 3 trial has been placed on clinical hold following a limited number of patients reaching a pre-specified stopping rule related to increases in serum sodium concentrations to the mild to moderate hyponatremia level that is greater than or equal to 150 Millimoles Per Litre. To put in perspective, the normal range expected in this population without treatment is 135-145 Millimoles Per Litre. The trial will continue at the lower dosage levels that have shown to be effective, and is in recruitment stage. If results of this trial are eventually successful, as expected, this should be a substantial positive catalyst for the company and the stock.

Balance Sheet

Cara ended the second quarter with $84 million in cash, cash equivalents and marketable securities. Management continues to expect that its existing cash and cash equivalents and available-for-sale marketable securities as of June 30, 2016 will be sufficient for the company to fund its operating expenses and capital expenditure requirements through the end of the first quarter of 2018, without giving effect to any potential milestone payments under existing collaborations. In addition, the fact that Cara's market capitalization outside its cash position is under $70 million means it is potential cheap acquisition even with a substantial premium.

Analyst Commentary and Insider Buying

When the stock fell apart thanks to the clinical hold in mid-March, a director bought almost $2 million in new shares. A beneficial owner did the same. This is nearly three percent of the outstanding float and a big vote of confidence. This confidence will be rewarded in a big way if analysts are anywhere close to correct on their recent views on the company. Recently, Cantor Fitzgerald, Needham and Canaccord Genuity have all reiterated Buy ratings on the stock, with price targets ranging from $18 to $30 a share. I take particular comfort in the Buy rating and $23 price target from Needham, since it comes from a five-star ranked analyst (TipRanks)

Outlook

Cara Therapeutics looks clearly oversold based on its past share price, analyst price targets and the size of addressable markets for the company's primary drug candidate. It also has funding in place for all key trials, upcoming milestones and a strong belief in its future by management, based on insider buying. The stock seems to offer a very positive risk/reward profile at current trading levels.

Note: To celebrate my 50th birthday and the kickoff of the NFL Season, The Biotech Forum will be giving away free two-week trials to the second-most-subscribed-to service of over 60 in the Marketplace throughout the weekend and through the final gun of Monday Night Football.

Thank You & Happy Hunting

Bret Jensen

Founder, Biotech Forum

Disclosure: I am/we are long CARA.

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.


http://seekingalpha.com/article/4005559-cara-therapeutics-major-upside-potential?auth_param=1dbdf8:1btd4gv:ccddf7ea29a2010fa99169d35787f294&dr=1&utoken=fde862ed26167c3db5259c54d35b862b