Is Cara Therapeutics a Buy?

The $600 million pharma company is working on a drug with estimated peak annual sales of $500 million.

Maxx Chatsko
Maxx Chatsko
Jan 24, 2019 at 12:08PM
Health Care

The morbid reality of the opioid epidemic is all around us. About 30,000 people die in the U.S. each year from overdoses involving opioids; that's 82 people a day, according to the Centers for Disease Control.

The crisis has pushed drug makers to search for abuse-tolerant pain treatments. These are often drugs that selectively target specific opioid receptors in the central nervous system that aren't likely to cause dependence, which is an all too common side effect of opioids like morphine, oxycodone, and hydrocodone that primarily target the mu-opioid receptor, known as the gateway to addiction.

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Cara Therapeutics (NASDAQ:CARA) is developing a single asset belonging to a novel class of drugs called kappa opioid receptor agonists. In addition to bearing the "abuse-tolerant" label, the drug candidate has avoided other common side effects associated with traditional opioids, such as nausea, sedation, and respiratory depression. The little pharma company has impressed Wall Street in recent years but still trades at a market cap of only $600 million. Should opportunistic investors consider the stock a buy?

The therapeutic approach

Cara Therapeutics is developing its CR845 drug in five different indications. However, each clinical trial is evaluating the drug candidate's potential to selectively target kappa-opioid receptors as a way to treat either pain or pruritus, a technical term for itching.

Investors are most excited about the drug candidate's potential in chronic kidney disease-associated pruritus (CKD-aP), a severe form of itching some dialysis patients suffer from. It may seem like a niche area, but an estimated 270,000 Americans suffer from the condition. Analysts think the drug candidate, branded as Korsuva in this indication, could generate over $500 million per year in peak sales.

The market opportunity, coupled with solid midstage trial results, allowed Cara Therapeutics to de-risk the drug candidate's development and potential commercialization by inking a deal in May 2018 with Vifor Fresenius Medical Care Renal Pharma (VFMCRP), a joint venture between Vifor Pharma Group and the largest dialysis provider in the U.S. Fresenius Medical Care. In other words, it's a great partner for Korsuva.

Cara Therapeutics collected $70 million in upfront payments from this endeavor. It also stands to receive royalties on all sales and up to $470 million in additional milestone payments. And that's just for an injectable formulation of Korsuva. The small-cap company owns the rights to all other uses of CR845. That includes an oral formulation of Korsuva for CKD-aP and chronic liver disease-associated pruritus, in addition to intravenous and oral formulations of CR845 for post-operative pain and chronic pain, respectively.  

By the numbers

As a development-stage company with all its value wrapped up in its lone pipeline asset, Cara doesn't have much to report in terms of revenue or income. However, investors can consider the company's cash position and cash burn.

The $600 million company finished September 2018 with $206 million in cash, cash equivalents, and marketable securities. That was bolstered by $92 million in net proceeds from a stock offering in July 2018.

Regarding cash burn, the company generated $2 million in operating cash flow in the first nine months of 2018, but only after accounting for deferred revenue related to performance obligations from the agreement with VFMCRP. In other words, the company believes it's due some portion of the $470 million in milestone payments very soon, so it's accounting for that as deferred revenue, which is reported as a liability and so it's factored out of the operating cash flow figure.  

Cash is cash no matter how it's generated. While investors are surely pleased that Cara Therapeutics has de-risked the development of Korsuva and its overall pipeline, perhaps it's more telling to look at operating losses. In the first nine months of 2018, the business lost $53 million from operations, a greater loss than the $44 million loss in the same period last year. Considering its strong cash position and potential to receive additional milestone payments in the near future, the balance sheet is not likely to be a source of risk. 

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Should you add Cara Therapeutics stock to your portfolio?

After hitting some turbulence in December, Cara Therapeutics gained just 6% in 2018 but then recovered some ground in January. The promising pharma company trades at a market cap of just $600 million.

If the development of Korsuva and CR845 proves successful, the company will become worth more than its current valuation. But because it's entirely dependent on a single asset, failure in the clinic would make the company worth far less than its current valuation. This is the ultimate binary stock dilemma; it could really go either way and we just don't know yet.

The upside is attractive at a market cap of only $600 million, especially considering Korsuva would hit the ground running with immediate access to roughly 38% of U.S. dialysis treatment centers if it earns marketing approval. Investors aware of the risk might not lose sleep over opening a small position in the business right now. Why not have a little fun with a potential multibagger?

Check out the latest Cara Therapeutics earnings call transcript.