What happened

Shares of Cara Therapeutics (NASDAQ:CARA) rose by as much as 22% in pre-market trading today on light volume. The spark?

Cara's shares are responding positively to the news that the biotech signed an ex-U.S. licensing deal with Vifor Fresenius Medical Care Renal Pharma Ltd. (VFMCRP) for Korsuva (CR-845). Korsuva is an experimental drug being assessed as a breakthrough treatment for chronic pruritus (itching) in dialysis patients with advanced kidney disease.  

A man grabbing a pile of hundred dollar bills with both hands.

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So what

As part of the deal, Cara will receive an up-front payment of $50 million, as well as a $20 million equity investment at $17 a share from VFMCRP. The biotech is also eligible for an additional $470 million in regulatory and sales-based milestone payments.

That's quite a haul for a company that ended yesterday with a market cap of less than $400 million, especially in light of the fact that Cara retained Korsuva's all-important U.S. commercial rights -- except in Fresenius dialysis clinics -- in this deal. 

Now what

Cara is presently enrolling patients in a late-stage trial to examine Korsuva's efficacy in hemodialysis patients suffering from moderate to severe pruritus associated with chronic kidney disease. If everything goes according to plan, the company thinks that an approval could come as early as next year.

A regulatory approval -- or perhaps strong late-stage trial results -- could also trigger buyout talks between the two companies. VFMCRP has been extremely aggressive on the M&A front in the past, and this sizable equity stake does seem to lay the groundwork for a future tender offer.

That being said, investors probably shouldn't get caught up in the buyout talk quite yet. Korsuva's late-stage trial won't read out until the third quarter of this year, and there's no guarantee of success. 

This promising biotech stock, though, does arguably merit a deeper look by risk-tolerant investors. Even in the absence of a buyout, after all, Cara's stock should perform exceptionally well if Korsuva hits the mark in late-stage testing later this year.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.