Conatus Pharmaceuticals (NASDAQ:CNAT)

CAPS Rating: 4 out of 5


Player Avatar zzlangerhans (99.85) Submitted: 2/3/2014 5:07:01 PM : Outperform Start Price: $9.68 CNAT Score: -41.70

Here's a great idea for a business plan. Put together a biopharma company based on a hot preclinical platform. Sell out to big pharma for hundreds of millions before running a single clinical trial. Then after big pharma shelves the whole program because of a possible cancer signal in mice, buy the whole thing back for your new company for pennies on the dollar and start redeveloping it. Put the whole cancer thing to rest with a few more preclinical studies, go public, and start running clinical trials. Presto, that's Conatus.

Things aren't quite that cut and dried, of course. Conatus's IPO didn't exactly take off, with the stock closing below the IPO price of 11 on the first day of trading and declining as low as 6 in December 2013 when it seemed every other biopharma stock was taking off. Then came the Intercept effect in January - Intercept stock rips after they halt their NASH trial for efficacy on an interim analysis, and every other NASH-related stock takes off as well. Why that is, I'll never understand. If anything, Intercept's success should have depressed stock of companies developing NASH therapeutics of completely unproven efficacy. But there you go, that's how speculation works.

Conatus spiked over 14 at the height of its Intercept carryover, but has since been in a declining trend as early momentum traders pass off their shares to bagholders and the biopharma sector sags. I'm a latecomer to the stock, having only added it to my database last week, but I find it interesting at a market cap of 150M. Midstage clinical trials of caspase protease inhibitor emricasan are in progress for acute-on-chronic liver failure and alcoholic hepatitis, and clinical development of emricasan for NASH may kick off in the near future. Conatus has 60M in the kitty after a moderately unsuccessful IPO and what appears to be a well-controlled burn.

Conatus probably isn't a good pickup as the money tide is flowing away from spec biopharma. There's still quite a gap to fill back to 6. On the other hand, once the market correction has run its course and Conatus's share price stabilizes or begins to reverse, it does appear to sport an attractive risk/reward profile for the mid-to-long term.

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