It's hard to forecast exactly how a specific stock will perform over just a 12-month period, let alone over five years. This is especially true for smaller biotech stocks, where there's an even greater degree of uncertainty due to the nature of the drug candidate development process.

Cara Therapeutics (NASDAQ:CARA) is one of the more promising biotech stocks on the market due to its leading drug candidate, a kidney disease-related pruritus drug known as Korsuva. However, there's a bit of uncertainty regarding the treatment, especially in light of some mixed clinical trial results.

Let's take a deeper look at Korsuva's results, what this means for Cara Therapeutics, and where the company could go in the next few years.

Female scientist looking into a microscope in a lab.

Image source: Getty Images.

What's behind the hype?

The main driver behind Cara Therapeutics is its lead candidate, Korsuva, which treats a form of chronic itching called pruritus caused by a number of kidney conditions. It's especially prevalent among patients with end-stage kidney disease, with as many as two-fifths of all patients dealing with some kind of chronic pruritus.

At present, 30 million patients in America alone are diagnosed with chronic kidney disease, with at least two million having been diagnosed with kidney-associated pruritus. The most commonly prescribed treatment for kidney-related pruritus are conventional pain drugs, such as opioids and corticosteroids. However, the problem with conventional pain treatments is that many can have significant side-effects from long-term use. Besides addiction, as is well documented in the case of opioids, patients can suffer various complications such as high blood pressure, depression, and vomiting. In the case of corticosteroids, the more severe side-effects include osteoporosis (weakening of the bones), weight gain, various eye disorders, and thinning of the skin. 

Patients and investors alike have a lot to look forward to with Korsuva, especially considering it's relatively symptom-free in comparison to other pain management drugs prescribed today. The difference comes down to how the drug targets the nervous system. Opioids and corticosteroids target the central nervous system including the brain by influencing the production of specific neurotransmitters. Korsuva, on the other hand, targets specific receptors in the peripheral nervous system to provide pain relief without going after the receptors in the central nervous system.

For the most part, clinical results have been positive. However, Cara provided an update on a separate phase 2 trial with Korsuva back in early December which failed to meet its secondary endpoints. Although the study still met its primary endpoints of reducing the average itching severity in patients by at least one point on the WI-NRS (the Worst Itching Intensity Numeric Rating Scale), it failed to hit its secondary endpoint, which was to see an average three-point reduction in the WI-NRS across all patients. In other words, Cara entered the study confident it could see a three-point reduction on average in patients, but wasn't able to achieve this target.

In the end, the setback was still seen as a significant blow, sending Cara's stock plummeting by more than 30% and has still failed to recover at all since the news came out. While Korsuva still has other trials, most notably its phase 3 Kalm study, that have shown positive results, this new development is definitely a mark against Korsuva's previously unblemished clinical record.

Bull scenario #1: A blockbuster in the making

As with most clinical-stage biotech stocks, there's a bull and a bear scenario. Either the company's lead drug candidate flops and the stock plummets -- the bear scenario -- or Korsuva becomes successful and receives approval from the U.S. Food and Drug Administration (FDA) -- the bull scenario.

In terms of that second, more bullish possibility, Cara Therapeutics has a tremendous potential upside should the drug become a success. According to Jefferies analyst Matthew Andrews, Korsuva could bring in over $570 million in peak annual revenue for the company, something that could easily occur within a few years after the drug hits the market. In comparison, Cara's annual 2018 revenue was $13.4 million and its market cap is $747 million.

From a clinical perspective, the results are still pretty strong for Korsuva despite this recent phase 2 trial setback. Korsuva's earlier Kalm-1 trial proved to be a success, with 51.9% of patients reporting significantly less itching compared to the 30.9% of the placebo group. If all goes well in the upcoming Kalm-2 phase 3 trial, the odds still seem good that the FDA will approve the drug's use.

Bull scenario #2: A possible buyout target

Another bullish scenario to consider is that Cara Therapeutics is bought out by another biotech company. This is a pretty common occurrence, and shareholders can expect some of the larger healthcare companies to offer a significant premium to buy the company out. There are many instances where large-cap healthcare giants have bought out smaller biotechs at as much as two to three times the company's market cap, and something similar could happen to Cara.

As for which companies could be potential buyers, there are many companies that might consider acquiring Cara, including Fresenius Medical Care (NYSE:FMS) a major supplier of dialysis equipment to patients who have kidney failure and need medical equipment to artificially clean their blood. Fresenius already has a license agreement with Cara Therapeutics with the aim of marketing Korsuva internationally if the treatment becomes a success.

The idea is that Fresenius could offer Korsuva as a treatment for kidney failure patients on dialysis equipment who have pruritus. It's a match made in heaven business-wise, and it shouldn't come as a surprise if Fresenius makes an offer to buy out Cara to acquire Korsuva, rather than being content with just a licensing agreement.

Bear scenario: Korsuva flops

There's also the possibility that Korsuva will fail. In this regard, the main catalyst to watch out for in the upcoming months is the phase 3 Kalm-2 trial, with its results expected to come out in early 2020. If something's going to pop up that calls into question Korsuva's efficacy or safety, this upcoming phase 3 trial is where investors will find out. 

However, assuming that Korsuva's upcoming phase 3 trial results are relatively in line with its previous Kalm-1 study, Korsuva has an advantage due to the fact that it has no other competing pruritus drugs on the market. With no other treatments available to pruritus patients besides conventional pain management drugs, there's a strong case that the FDA will go ahead with the drug assuming no glaring issues.

While it's unlikely that the drug will end up failing at this point, should it happen, Cara's stock will tank. From then on out, it's anyone's guess as to what will become of the company.

What's most likely?

Despite the recent blow to its otherwise strong clinical track record, the odds still seem to be in Korsuva's favor going forward as investors await further trial results. Should Korsuva end up receiving FDA approval, however, I wouldn't be surprised if Cara receives a buyout offer from another major healthcare company. This could be Fresenius or another industry giant such as Amgen or Pfizer.

While I think this is the most likely outcome, it's also possible Cara will simply continue on independently. With a strong commercialization partnership with Fresenius, there's also a case to be made that Cara can do just fine without looking for a buyer. Either way, Cara Therapeutics seems well poised to succeed in the next few years, assuming nothing unexpected happens with Korsuva.