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Is Cara Therapeutics a Buy?

By Alex Carchidi - May 23, 2021 at 6:30AM

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Maybe, if you're itching to speculate.

Investing in a company that's on the verge of being able to sell a drug for the first time is as close as it gets to a slam dunk in the world of biotech. With the clinical trial process in the rearview mirror, a lot of the risks associated with development are in the past, leaving "only" the risks of competing profitably. 

Such is the situation of Cara Therapeutics (CARA -5.59%), which is developing a drug called Korsuva to treat pruritus. You've probably experienced pruritus (at least to a small degree) before, because it's the sensation of itchiness. But, with pathologies like chronic kidney disease (CKD), and chronic liver disease (CLD), itching isn't something that's trivial to relieve with a quick scratch for many patients. It's frequently a severe and pervasive problem that dramatically reduces a patient's quality of life, which is where Korsuva could help.

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Commercialization and juicy milestone revenue are both closer than ever

At a minimum, investors should pay attention to Cara Therapeutics because it's likely on the verge of experiencing recurring revenue for the first time. Korsuva recently concluded its phase 3 clinical trials to treat pruritus in patients with CKD who are on hemodialysis, and it's currently in the process of applying for the final approval from regulators in the U.S. and the E.U. to see if it can move forward with commercialization. If everything goes as planned, the drug could launch in the second half of this year, though profits will need to be split equitably with Vifor Pharma AG. Clinical trials investigating four other indications for Korsuva are also in the works, with two in the middle of phase 2 trials and two about to enter phase 3.

Upon commercialization of Korsuva, Cara will make $50 million per the terms of its agreement with Vifor Pharma. It'll also make up to $240 million in milestone payments as the drug's rollout proceeds in the U.S. The E.U. rollout scheduled for 2022 will be even more lucrative with payments of up to $440 million. Plus, sales revenue will roll in all the while, which could drive its stock higher after the income is reflected in earnings reports. 

At the moment, Cara has a scant $4.89 million in debt and more than $228 million in cash. Management expects that the sum is more than enough to carry the company into 2023 at its burn rate of around $23 million in operating expenses during the first quarter. That means investors probably don't need to worry about their equity being diluted to raise cash anytime soon.

Small patient populations and missed trial endpoints aren't a good look

In my view, there are two problems with Cara Therapeutics. 

The first is that in the U.S., the company estimates that more than 20 million prescriptions to treat pruritus are issued each year. Many of these prescriptions are for corticosteroids, which are inexpensive, ubiquitous, and quite effective at shutting down itching with minimal side effects. Some can also be administered topically to the itchy area, unlike Korsuva, which must be administered as an injection or as an oral tablet, depending on the indication. In other words, the company is going to have to fight for market share against a strong first-line class of medications right out of the gate, and it doesn't have any clear competitive advantage. Plus, that's not even taking other types of pruritus treatments like immunosuppressants into account. 

Then there's the issue of Korsuva's efficacy, which hasn't always been stellar. In late April, Cara reported that its phase 2 clinical trial of the drug for atopic dermatitis had failed to meet one of its primary endpoints as well as one of its secondary endpoints, which tanked its stock. Similar issues with low efficacy and missed endpoints have happened in past clinical trials for other indications like CKD. But it's important to remember that some drugs still make it to market after missing an endpoint throughout the clinical trial process. In this case, unfortunately, the drug doesn't appear to be a panacea for extreme itching, which limits the size of the company's total addressable market and makes clinicians less likely to prescribe it.

The verdict

Given the stiff competition that Cara Therapeutics will face in the pruritus market and the fact that its profits will need to be split with Vifor, it's hard to be enthusiastic about buying the stock. Still, the upcoming catalysts from commercialization and milestone payments could carry investors to a modest victory. 

If you're looking to speculate with a portion of your portfolio, this stock could fit the bill, but in my view there are more promising companies to invest in.

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