Last Updated on January 27, 2019 by Sultan Beardsley
Conatus Pharmaceuticals (Nasdaq: CNAT) recently released highly anticipated top-line data from their Encore-PH clinical trial. The study investigated the efficacy and safety of emricasan, CNAT’s lead drug candidate for treating Nonalcoholic Steatohepatitis (NASH). Three doses (5 mg, 25 mg, 50 mg) were tested on patients with severe Portal Hypertension (PH) defined as a hepatic venous pressure gradient (HVPG) ≥ 12 mmHg. Unfortunately for CNAT shareholders the company did not hit their primary endpoint of lowering mean HVPG with statistical significance compared to a placebo. The share price tanked 67% in two days reaching new 52 week lows. However, looking past the missed endpoint the Encore-PH data is promising and one will see a pattern of a significant therapeutic benefit from emricasan. At less than $2 per share, with continued support from big pharma, and upcoming catalysts CNAT is an attractive investment.
Emricasan Provided A Clear Clinical Benefit
As NASH progresses inflammation of the liver worsens, scar tissue accumulates, and cells die off. Luckily, as long as there is a sufficient number of functional cells the liver can compensate for out of commision ones (i.e. compensated cirrhosis). Once this is no longer the case a patient enters decompensated cirrhosis. A HVPG ≥ 12 mmHg is the main causal factor of decompensation events which place patients at a much higher risk of variceal bleeding among other complications. When HVPG crests above 16 mmHg the risk of decompensation, variceal bleeding, and death rise dramatically. Based on data from the 28-day proof of concept (POC) study, Encore-PH, and the post liver transplant study (POLT) Emricasan appears to at least halt the progression of NASH-cirrhosis by decreasing fibrotic activity, if not reversing it.
In the compensated cirrhosis subgroup there is a clear trend of decreases in HVPG ranging from .7-2.8 mmHg across treatment groups. Whereas in the placebo there was a consistent pattern of increases in HVPG (data not shown). If patients with a baseline HVPG ≤ 13 mmHg were eliminated, average portal pressure would be ubiquitously lowered over 1 mmHg, and almost all with statistical significance. For individuals with HVPG≥16 mmHg there was a consistent decrease over 2 mmHG and all doses reached significance.
As discussed earlier, portal pressure above 12 mmHg is associated with an increased risk of variceal bleeding and liver decompensation. Reversing HVPG by 1-2 mmHg can therefore markedly lower the risk of these events for patients in the 13-14 mmHg range. Lowering portal pressure that much would benefit individuals with higher HVPG scores too by halting or reversing NASH progression.
A disadvantage of the Encore-PH trial was its short duration of only 24 weeks. We predict that the 48 week-extension portion of the trial will show further improvements in liver function and positive clinical outcomes. Furthermore, biomarker data and HVPG changes in the POC study support a “real treatment effect” from emricasan rather than a coincidence.
Similar to the pattern in ENCORE-PH, emricasan had the most prominent effects on patients with severe portal hypertension. In fact, the average HVPG for those in the ≥12 mmHg category was above 20%. It’s tempting to claim Emricasan doesn’t work on patients with portal hypertension near or below 12 mmHg, but this would be a mistake. More likely, HVPG is just easier to lower in incidences of extremely high portal pressure because a little decrease in inflammation and cell death is more impactful, whereas a significant change at lower HVPG levels probably requires a longer treatment duration.
cCK18 Biomarker Data
cCK18 is a biomarker linked to fibrosis and apoptosis which was measured in both studies. In the POC study, cCK18 was decreased moderately with significance in the total population and the HVPG≤12 mmHg subgroup. Oddly, it decreased only incrementally without statistical significance in the HVPG≥12 mmHg subgroup. Yet, these patient saw decisively clinically meaningful reductions in portal pressure. What are we to make of this? Extensive experimental research has shown a strong positive correlation between serum cCK18 levels and liver disease severity, apoptosis, and cellular inflammation. A reasonable explanation for this anomaly is that in patients with severe portal hypertension (i.e. as in the HVPG≥12 mmHg subgroup) cCK18 levels were so high and the POC study was so short that only a minute decrease was detected.
In ENCORE-PH, the trend is accentuated in a dose-dependent manner after a 6-month treatment period. The implication is that Emricasan has anti-fibrotic effects, and after a sufficient period of time, a clinical benefit would be seen in the form of decreased portal pressure even in moderate portal hypertension. A longer treatment duration should also demonstrate greater reductions in cCK18 metabolites.
We know from medical research that fibrosis is correlated with NASH progression and rising portal pressure. On that basis, ENCORE-NF should be more successful. The key differences are 1) Encore-NF is 3-years long 2) Does not include decompensated patients 3) The endpoints are easier to hit. Encore-LF could be a positive catalyst as well. In contrast to the other studies it consists exclusively of patients with decompensated cirrhosis. From the decompensated patient subgroup in Encore-PH emricasan appears to at least halt disease progression. Since the primary endpoint in Encore-LF is the frequency of decompensation events from baseline vs. a placebo instead of change in HVPG, and the study is 2 years long, there is a good chance CNAT will prevail.
Evidence of Anti-Fibrotic Effects in The Post Liver Transplant Study
As with ENCORE-PH, a significant treatment effect was not observed in the post liver transplant study (POLT) total patient population. What’s important for investors to realize is that this is not the mark of a failed study. What matters in the scope of drug development is finding a demographic where emricasan has the intended effect. In POLT, that was a subgroup of patients in fibrotic stages F3-F5.
An unambiguous therapeutic benefit (P<.011) was seen in the emricasan group (25 mg) in the F3-F5 subgroup; with a therapeutic benefit being measured as no change in fibrosis staging (stable) or improvement by at least one stage from baseline.
Thirty-three percent of patients in the emricasan group vs. nine percent in the placebo had stable responses. Sixty-two percent had at least one stage of fibrotic regression, whereas forty-five percent had the same response in the placebo. Fibrotic improvement to that magnitude in the placebo is concerning and could be explained, but external factors like diet, lifestyle, and genetics. Notably, only five percent of patients taking emricasan worsened compared to forty-five percent in the placebo. Considering there was nearly double the patient number in the emricasan group makes this even more impressive. Biomarker data from POLT further strengthens an argument for emricasan’s antifibrotic effects.
Caspase 3/7 are known regulators of Apoptosis (i.e. cell death). Through cleavage of intermediate compounds caspase 3/7 promote cellular inflammation, the precursor of fibrosis. Elevated alanine aminotransferase (ALT) enzyme levels are strongly correlated with higher fibrosis scores. Biomarker data shows a distinct trend of lower levels of these proteins compared to the placebo indicating a positive relationship between caspase inhibition by emricasan and improved fibrosis status. Elevated levels of ALT enzymes are associated with activation of cell death. Thus, decreased concentrations seen in POLT corroborates emricasan’s efficacy.
An Unbalanced Patient Population Put Emricasan At A Disadvantage
Analysis of the total patient population shows emricasan was put at a disadvantage. The placebo group had between 6.8% and 9.4% more patients with compensated cirrhosis while emricasan groups had 6.7% to 9.4% more decompensated patients. Additionally, there was 12.4% to 17.6% more medium/large varices in the Emricasan groups than the placebo. More decompensated patients presented Emricasan with a greater disease severity to overcome. Taken together the population structure was such that the placebo group was given advantages emricasan groups were not.
Novartis Is Still On Board
One of CNAT’s biggest assets is financial backing from Novartis Pharmaceuticals (Nasdaq: NVS). In December of 2016 after the POC study results NVS and CNAT signed an Exclusive Worldwide, Option and Collaboration and Licensing Agreement Covering Development and Commercialization of Emricasan.
On December 5th, the same day ENCORE-PH data was released, CNAT converted a promissory note granted to NVS exchanging 2,882,519 shares for $15 million. If you do the math that comes out to around $5.2 per share. A logical implication is that the decision was an indirect signal of Novartis’ continued support in development of Emricasan as a treatment for NASH. In reality though, we learned from an interview with CNAT that this was a business decision. Converting the note on the same day as the data disclosure allowed them to get the best price possible for the near-term and limit dilution. Novartis probably did view the study as a success. The two companies will wait for results from ENCORE-NF and ENCORE-LF and evaluate all available data collectively before making any decisions regarding future trials.
Conatus’s Financial Condition
Conatus has $13.308 million cash on the books as of September 30th, 2018. In total, they have $48.462 million in liquid assets and marketable securities. Liabilities are down roughly 16% in the past 8 months from $28.142 million to $23.760 million. Stockholders’ equity is also down considerably by 33%, which could reflect a ‘wait and see’ attitude by investors.
The greatest expenditures for Conatus have been related to the phase 2b ENCORE series plus a post-treatment observational follow study. However, per the Exclusive Worldwide Option, Collaboration and License Agreement with Novartis, CNAT and NVS split these costs. The majority of said expenses have already been incurred. ENCORE-PH is completed minus the extension follow-up. And remaining ENCORE-NF and LF studies conclude in January and August of 2019, respectively. Until then, observational study costs will be shared equally by Novartis. The key takeaway confirmed by Conatus Chief Executive Officer Dr. Steven Mento is that CNAT has enough capital to fund operations through 2019. Yet, risks do exist investors should be aware of.
The future direction of CNAT’s share price is contingent upon decisively meeting primary endpoints in ENCORE-LF and NF. If either one falters, we are sure to see another sell-off. Worst case scenario would be if ENCORE-NF fails to improve fibrosis by at least one stage. The reason being is this readout comes first. Market sentiment is already skeptical of Emricasan after disappointing ENCORE-PH results. Depending on the stock’s recovery between now and then, we could see new lows. And if ENCORE-LF failed to show a clinically significant difference in decompensation events, the long-term outlook would be bleak. Novartis could consequently reconsider their partnership agreement. Bottom line, the outcomes of these next clinical trial are inflection points. That said, we are optimistic because of the collection of evidence supporting Emricasan’s antifibrotic effects.
CNAT Could Seek Accelerated Approval
Something to consider is whether or not CNAT will seek accelerated approval. In light of the FDA’s draft guidance published last week there are many pieces of criterion CNAT meets. A potential issue we see is that the surrogate endpoint favored by the FDA is change in HVPG.
“Hepatic Venous Pressure Gradient (HVPG) should be qualified by FDA for use as a surrogate replacing liver transplant and death for measuring anti-fibrotic activity in patients with compensated cirrhosis in registration interventional clinical trials.”FDA drug development approval process
The patient population targeted in a phase 3 trial could help or impede the ease of commercialization for emricasan. As we saw in Encore-PH six-months was not enough time to lower HVPG in patients with baseline scores ~12 mmHg. Portal pressure is strongly correlated with fibrosis staging and progression to cirrhosis. If the company targeted non-cirrhotic NASH-fibrosis than they would be facing mild to severe portal hypertension (i.e. 5 mmHg≤ HVPG ≤12 mmHg). In that case they would need at least a year of dosing to sufficiently raise the probability of significantly lowering HVPG. Two to three years would be ideal. The point is that accelerated approval may not necessarily hasten the process for this patient demographic.
Another potential scenario is to target severe portal hypertension (13 mmHg≤HVPG≤30 mmHg). This would enable CNAT to capitalize on accelerated approval by using HVPG as a surrogate endpoint in a 6-month to 1-year long phase 3 study. After that the company could file a new drug application (NDA) and potentially be approved to proceed with a commercial launch in 2021 or 2022.
A third possibility is for CNAT could carry out two concurrent phase 3 studies. One focusing on non-cirrhotic NASH fibrosis and the second on compensated NASH-cirrhosis. They could even include a third phase 3 leg targeting decompensated NASH-cirrhosis.
Although the FDA’s current thinking is that interventional treatments for NASH are best served in non-cirrhotic NASH fibrosis, this does not preclude variant indications from gaining accelerated approval. For example, compensated or decompensated NASH cirrhosis. What is most important is that the endpoints selected are scientifically supported as reliable predictors of clinical outcomes.
Despite missing their primary endpoint, there is still significant potential upside for Conatus. The important thing with regards to ENCORE-PH was a clear pattern of decreasing HVPG among the emricasan treatment groups compared to increases in the placebo. Upon procurement of the remaining data sets due in 2019, CNAT and NVS should have ample insight to optimize a phase 3 clinical study. Nevertheless, there are risks present due to the upcoming data release. If either were to falter more downside would be in store. A crucial box that can be checked off at least for now is that Novartis remains financially committed.
MS Money Moves is bullish on Conatus’s potential appreciation in 2019. Right now, the share price seems to have found a bottom and should rise until finding a new range.
If our analysis of emricasan’s efficacy is accurate, the remaining data readouts should be positive binary catalysts. Our 12-month price target is $5 to $7. Once the ENCORE study series is completed, CNAT has a good chance of advancing to a phase 3 pivotal trial. On a final note, emricasan clearly has significant clinical benefits that should translate to longer life expectancies for people suffering from NASH.
I am/We are long CNAT.
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