Conatus Pharmaceuticals Inc. (CNAT)

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some jensen love

http://seekingalpha.com/article/4036727-biotech-forum-daily-digest-trump-dings-biotech-now-conatus-pharmaceuticals

Company Overview:

Conatus Pharmaceuticals (NASDAQ:CNAT) is small biopharmaceutical concern based in California that came public in the second half of 2013. The stock currently has a market capitalization of approximately $130 million and trades at around $5.00 a share. Conatus main asset is emricasan. This compound is a first-in-class, orally-active protease inhibitor designed to reduce inflammation in the liver by interfering with certain biochemical pathways and is being targeted at NASH, which is potentially a huge market given this is predicted to be the primary cause of liver failure by 2020.

Game Changing Deal:

As can be seen in the chart above, Conatus has largely disappointed investors over the years thanks to the lack of progress in their pipeline and to this point a lead product candidate "emricasan" that has not yet lived up to its original promise.

However, on December 20th, drug giant Novartis (NYSE:NVS) came to its rescue in a major way with an unexpected collaboration deal. In the transaction, Conatus received $50 million in an upfront payment. Novartis will also pay for half of Phase 2 development of Emricasan and 100% of the Phase 3 development costs.

Conatus will further receive $7 million following the exercise of the license option and may borrow up to $15 million from Novartis in the form of convertible promissory notes. It is also eligible for future milestone payments and tiered single- to double-digit royalties on net sales of combination products containing emricasan.

Outlook:

To put the magnitude of this deal in proper perspective, the market cap of Conatus prior to this deal being announced was right at $50 million or the amount of the upfront payment Novartis agreed to. After news of the deal, the stock spiked from under $2.00 a share at the time to the deal to eventually reached $6.00 a share, before some recent profit taking brought the shares down to just above $5.00 a share again.

Helping this rise was improved analyst commentary. Since the deal was announced, five analyst firms have either initiated or reiterated Buy ratings on Conatus with price targets proffered ranging from $7.00 to $26.00 a share, a very wide range. Although the Novartis deal certainly helps the outlook on Conatus, it is still a high risk/high reward "tier 4" stock. Its future is tied to Emricasan's development to treat NASH, a space which has seen many failures to this point.

Although I still hold my stake in Conatus, I used the spike in the shares to sell some calls with a $7.50 strike price against most of the position for a lucrative premium. This helps mitigate the risk in my holding and I don't see the shares making a big move from current levels in the short term as we are many quarters from seeing progress on Emricasan. The next key trial readouts against NASH are not due to 2018. I offer up this option strategy and take on Conatus to others than may hold the stock.

Thank You & Happy Hunting

Bret Jensen

Founder, Biotech Forum

Disclosure: I am/we are long AGN, ABBV, CNAT, GILD, MNTA.

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.