CARA Stock Forecast: Why Cara Therapeutics Stock Soared 43%

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Why CARA Stock Spiked

Investors got a big surprise earlier this month when Cara Therapeutics Inc (NASDAQ:CARA) announced a new distribution channel for the “Korsuva” drug, which is currently pending approval from the U.S. Food and Drug Administration (FDA). The reaction was huge.

CARA stock soared by nearly 43% afterward, making it one of the sector’s best performers in May.

Here’s the backstory.

Cara Therapeutics spent the last few years developing treatments for people who suffer from kidney diseases. There are more than 30 million of them in the U.S. alone, and many of them deal with chronic pain and itching that significantly lowers their quality of life.

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These conditions intensify when patients are put on dialysis. Korsuva is a non-addictive opioid that helps manage that pain without leading to addiction, which is why this drug became a hot property among biotech firms. It can genuinely help people.

Another company, Vifor Fresenius Medical Care Renal Pharma Ltd., recognized Korsuva as a game-changing opportunity. (Source: “Cara Therapeutics and Vifor Fresenius Medical Care Renal Pharma (VFMCRP) Enter into Ex-U.S. Licensing Agreement to Commercialize KORSUVA Injection in Dialysis Patients with Pruritus,” Cara Therapeutics, May 23, 2018.)

This should hardly come as a surprise, given that Vifor owns a majority stake in Fresenius Medical Care AG & Co. (NYSE:FMS), the largest kidney dialysis company in the world.

In other words, Fresenius and Cara Therapeutics deal with the same patients.

There are—I hate myself for saying this word—synergies between the two firms. Some clever executive at Vifor’s headquarters in Switzerland obviously saw the overlap from a distance, because the two firms met to discuss a huge co-marketing campaign for the Korsuva drug.

The end result? A $540.0-million deal between Fresenius and Cara Therapeutics.

Chart courtesy of StockCharts.com

A Few More Details

If Korsuva is approved by the FDA, Fresenius will pay Cara Therapeutics $470.0 million in milestone rewards.

A small portion of that sum—$30.0 million—will be awarded for getting over regulatory hurdles, while the remainder—$440.0 million—will be awarded for sales accomplishments.

And that’s not all.

Fresenius will pay Cara Therapeutics $50.0 million upfront, provide a tiered royalty program for Cara’s drugs, and buy $20.0 million worth of CARA stock at $17.00 apiece.

Total Value: $540.0 million.

According to Cara’s President and CEO Derek Chalmers, this deal will leverage Frenesius’s “commercial expertise” to “provide significant momentum for adoption of KORSUVA injection.”

“Importantly,” he added, “we continue to retain all rights to KORSUVA/CR845 in other indications.” (Source: Ibid.)

What I find interesting is that Cara Therapeutics stock is currently trading at $15.64, which is less than what Fresenius was willing to pay as part of the deal. This doesn’t make any sense. Why would traders push the CARA stock price below a predictable price point?

My guess is that technical traders took over the price action. I scoured blogs and forums for a whiff of fundamental reasoning behind the slump, but all I could find were silly posts about the 50-day simple moving average and its contrast with the 200-day simple moving average.

It’s hogwash. Traders are simply trying to find an edge in this market. In the short run, that might hurt the CARA stock price, but I doubt it will have any effect on the long-term direction.

How to Think About the Cara Therapeutics Stock Forecast

We can talk about discounted cash flows and intrinsic value all day, but the real question is about FDA approval. Cara Therapeutics is only guaranteed $50.0 million in cash and $20.0 million in equity. The rest is contingent on future performance.

So let’s talk about FDA approval.

Cara’s initial attempt at this drug failed because it relied on oral administration. The new version, which requires injection, passed a Phase 2 clinical study with flying colors.

Researchers wanted to see if a majority of respondents felt better after using Korsuva. They gave the treatment to one group and a placebo to the other. From those who received the actual treatment, 64% reported improvements related to pain and itchiness. Meanwhile, only 29% of the placebo group reported an improvement.

What does this mean? Well, it strongly suggests that the Korsuva drug works. And, by extension, it implies that Cara is likely to pass the FDA approval and get its drug on the market.

Analyst Take

Based on the contract’s details, I think CARA stock has a lot of upside left to explore. But if you’re not convinced, let me add a final point.

Cara Therapeutics has roughly $78.8 million in the bank, according to its Q1 earnings report. (Source: “Cara Therapeutics Reports First Quarter 2018 Financial Results,” Cara Therapeutics, May 9, 2018.)

The company also made a net loss of $17.0 million, which is the kind of cash burn you should expect from a biotech company. (Since all the R&D expenditure is leveraged up front.)

That means Cara won’t have to issue new shares.

Think about it: Cara received a $50.0-million windfall in the form of cash and equity, meaning it won’t have to raise more funds to keep itself in business.

It won’t, in other words, have to dilute the ownership of existing shareholders.