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Edited Transcript of CNAT earnings conference call or presentation 8-Mar-19 9:30pm GMT

Q4 2018 Conatus Pharmaceuticals Inc Earnings Call

San Diego Mar 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Conatus Pharmaceuticals Inc earnings conference call or presentation Friday, March 8, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alan R. Engbring

Conatus Pharmaceuticals Inc. - Executive Director of IR & Corporate Communications

* Keith W. Marshall

Conatus Pharmaceuticals Inc. - Executive VP, COO & CFO

* Steven J. Mento

Conatus Pharmaceuticals Inc. - Co-Founder, President, CEO & Director

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Conference Call Participants

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* Fang-Ke Huang

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Jay Olson

Oppenheimer & Co. Inc., Research Division - Executive Director & Senior Analyst

* Stephen Douglas Willey

Stifel, Nicolaus & Company, Incorporated, Research Division - Director

* Wing Cheung Yip

H.C. Wainwright & Co, LLC, Research Division - Research Analyst

* Yasmeen Rahimi

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Welcome to the Conatus Pharmaceuticals' financial results conference call. (Operator Instructions) This call is being webcast live on the investor center of the Conatus website at conatuspharma.com. This call is property of Conatus Pharmaceuticals, and recordings, reproduction or transmission of this call without the expressed written consent of Conatus is strictly prohibited. As a reminder, today's call is being recorded.

I would now like to introduce Alan Engbring, Executive Director of Investor Relations and Corporate Communications at Conatus. Sir?

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Alan R. Engbring, Conatus Pharmaceuticals Inc. - Executive Director of IR & Corporate Communications [2]

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Good afternoon. A press release with the company's fourth quarter 2018 financial results was issued earlier this afternoon and can be found in the Investor section of the Conatus website at conatuspharma.com.

During today's call, we may make forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in these forward-looking statements due to risks and uncertainties associated with Conatus' business. These forward-looking statements are qualified by the cautionary statements contained in Conatus' SEC filings, including its annual report on Form 10-K and quarterly reports on Form 10-Q and Conatus' press releases, including today's release on fourth quarter 2018 financial results.

This call contains time-sensitive information that is accurate only as of the date of this live broadcast. Conatus undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call.

Participating on the call today are Steve Mento, President and Chief Executive Officer of Conatus, who will discuss progress and expectations in the company's clinical development programs; and Keith Marshall, Executive Vice President, Chief Operating Officer and Chief Financial Officer of Conatus, who will review the company's financial results. We will then open the call for questions from invited participants.

I would now like to turn the call over to Steve Mento.

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Steven J. Mento, Conatus Pharmaceuticals Inc. - Co-Founder, President, CEO & Director [3]

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Thank you, Alan, and thanks to all participants for joining us today. For anyone developing product candidates in the NASH space, the first quarter of 2019 has brought the competitive market landscape into sharper focus. We feel very good about our progress and our prospects with emricasan across the NASH spectrum as we continue the journey with our collaborator Novartis.

During 2018, we reported top line results from our Phase IIb POLT-HCV-SVR and ENCORE-PH trials. These results provided some key building blocks in the continuing development of emricasan. In the POLT trial, emricasan demonstrated clear, anti-fibrotic treatment effects in the subgroup of patients with advanced fibrosis and early cirrhosis. In the ENCORE-PH trial, emricasan demonstrated clinically meaningful improvements in portal hypertension in the compensated patients at greatest need.

With both trials, we substantially expanded the safety database for emricasan across multiple doses, treatment durations and patient populations. Emricasan continues to have a safety profile similar to placebo. We're excited by the opportunity to build on that progress with 3 additional trials readouts within the next 6 months. First up is ENCORE-NF or NASH fibrosis, with top line results expected in the first half of 2019. This trial enrolled approximately 330 patients with baseline NASH CRN fibrosis scores of F1, F2 and F3. The primary endpoint is a biopsy-based 1 point or greater improvement in NASH CRN fibrosis score compared with placebo at week 72 with no worsening of steatohepatitis.

As we announced last quarter, the primary endpoint will be evaluated and can be achieved in either the F1, F2, F3 population or the F2, F3 population. We and our partner Novartis believe this is the best statistical approach for analyzing the primary endpoint and more importantly, for establishing the most appropriate path forward in these earlier-stage patients.

Next, I'll address ENCORE-LF for liver function with top line results expected mid-2019. We recently announced completion of enrollment in ENCORE-LF, which was designed for approximately 210 patients with decompensated NASH cirrhosis. The primary endpoint is event-free survival with events including all-cause mortality, new decompensation events or a 4 point or greater increase in MELD score. All subjects are offered treatment for a minimum of 48 weeks, but the primary endpoint analysis will occur after reaching an undisclosed target number of events.

We believe an event-free survival endpoint is a potential -- in a potential follow-on Phase III trial could lead to full regulatory approval rather than accelerated approval. Finally, we expect results from the extension phase of the ENCORE-PH trial to readout in mid-2019 as well. We will not be conducting another HVPG measurement at 48 weeks but will be evaluating a range of other metrics, including liver function markers and clinical outcomes.

We believe these results will be helpful in determining the optimal registration strategy. I'll wrap-up today with the announcement of a new program at Conatus, focused on the inflammasome and this -- a exciting selection of our first internally developed product candidate. Inflammasomes are a collection of large, multi-protein structures responsible for the activation of inflammatory responses.

The 6 known inflammasome sub-types, including NLRP 3, detect and trigger immune responses to different stimuli, such as bacterial or viral infections, malignant cells are toxins. Inflammasomes work by generating active Caspase 1 from pro-Caspase 1 when these various stimuli are detected.

The activation of Caspase 1 in turn leads to the production and activation of highly pro-inflammatory cytokines IL-1beta and IL-18. In addition, Caspase 1 initiates pyroptosis, a highly inflammatory form of cell death through the cleavage of gasdermin-D. Excess IL-1beta has been linked to a variety of diseases, including auto-inflammatory diseases, cancer, liver and other gastrointestinal diseases, neurodegenerative diseases and cardiovascular diseases. We believe an effective oral Caspase 1 inhibitor could have impact across a number of inflammasome-related diseases.

To our knowledge, there are no approved small molecules specifically targeted at reducing IL-1beta activation. We have generated a proprietary portfolio of orally active molecules that inhibit inflammasome pathways and the activation of potent inflammatory cytokine IL-1beta. Inhibition of IL-1beta is a clinically validated approach to treating inflammatory diseases with several injectable biologic products using that mechanism of action on the market.

We're announcing today the selection of our first internally developed product candidate CTS-2090. CTS-2090 is an orally active, potent and highly selective inhibitor of Caspase 1. It was purposely -- purposefully designed at Conatus to address chronic diseases involving inflammasome pathways. CTS-2090 is currently in preclinical development and IND-enabling studies with clinical testing expected to begin by the first half of 2020. We look forward to providing future progress reports as we advance with this exciting new compound.

Before we open the call to questions, I'm going to ask Keith to review our financial results for the fourth quarter and full year. Keith?

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Keith W. Marshall, Conatus Pharmaceuticals Inc. - Executive VP, COO & CFO [4]

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Thanks, Steve. Financial results for the fourth quarter and full year 2018 were released after market closed today. Details were included in the press release, so I'll just cover a few highlights on this call. Revenues were $7.4 million for the fourth quarter of 2018 compared with $8.8 million for the fourth quarter of 2017. Revenues for the full year 2018 were $33.6 million compared with $35.4 million for the full year 2017. The decreases in revenues for both periods were primarily due to lower emricasan-related R&D spending, resulting in corresponding lower revenues related to the Novartis agreement, partially offset by the adoption of the new revenue recognition standard.

The net loss for the fourth quarter of 2018 was $3.9 million compared with $4.4 million for the fourth quarter of 2017. For the full year 2018, the net loss was $18 million compared with $17.4 million for the full year 2017.

In December 2018, we exercised our option and converted the entire outstanding principal of $15 million plus accrued and unpaid interest of the Novartis note at conversion price of $5.77 per share. Cash, cash equivalents and marketable securities were $40.7 million at the end of 2018 compared with $74.9 million at year-end 2017.

We are projecting a year-end 2019 balance without including any potential milestone payments under the Novartis collaboration of between $10 million and $15 million.

I'll now turn the call back to Steve.

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Steven J. Mento, Conatus Pharmaceuticals Inc. - Co-Founder, President, CEO & Director [5]

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Thank you, Keith. In the emerging NASH field, we believe emricasan's demonstrated safety and efficacy profile positions it well as a potential single-agent treatment for more advanced disease and a key component of combination therapies for earlier-stage disease. 3 Phase IIb clinical trial readouts in distinct NASH patient populations over the next 6 months will allow us, along with our partner Novartis, to define the best path forward towards initial registration. Advancement of our new selective Caspase 1 inhibitor CTS-2090 into IND-enabling studies marks our entry into an exciting field of inflammasome pathway inhibition and the potential to address a broad set of indications, including auto-inflammatory diseases, cancer, liver and other gastrointestinal diseases, neurodegenerative diseases and cardiovascular diseases.

We have sufficient capital to continue our planned development activities into 2020, and we believe we are on track toward future success.

That concludes our formal presentation. Now I'd like to turn the call over to our operator to moderate the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jay Olson with Oppenheimer.

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Jay Olson, Oppenheimer & Co. Inc., Research Division - Executive Director & Senior Analyst [2]

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I guess, just in terms of your regulatory strategy, what is the ideal timing to approach the FDA for an end of Phase II meeting? You have a lot of data already, potentially enough to design a Phase III study. Do you need to wait for ENCORE-NF and ENCORE-LF? Or could you potentially go to the FDA sooner than that?

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Steven J. Mento, Conatus Pharmaceuticals Inc. - Co-Founder, President, CEO & Director [3]

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Well, obviously, this is a discussion that involves our partner Novartis. And what I can say is what I've said in the past. We collectively believe that it's beneficial to have the broadest database of information before we approach the FDA directly to give us the best opportunity for the right and most comprehensive Phase III development plan for emricasan.

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Jay Olson, Oppenheimer & Co. Inc., Research Division - Executive Director & Senior Analyst [4]

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Okay, understood. And then congratulations on the nomination of CTS-2090. It sounds like there's a lot of different development options on the table. Do you have exclusive rights to CTS-2090? Or does that also belong in the Novartis partnership? And then which of those indications that you mentioned are you leaning towards going after initially?

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Steven J. Mento, Conatus Pharmaceuticals Inc. - Co-Founder, President, CEO & Director [5]

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Thanks for the question, Jay. CTS-2090 is all ours. It is not a part of the Novartis collaboration. So we have freedom to operate with that compound. As far as the clinical indications, obviously, the initial pathway in clinical development for small molecules will be in normal volunteers, but I can tell you that pathways for approval based on the biologic drugs kind of paint the script for an -- for the opportunity. Those drugs have been approved initially in some rare auto-inflammation types of diseases, and that's one option for us to move forward once we get to that level of disease. There are also multiple opportunities in broader auto-inflammatory diseases. We haven't selected those broader opportunities yet, but if you look at the pathways that the biological drugs have taken, we think those are validated pathways and a good way to go.

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Operator [6]

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Our next question comes from Yasmeen Rahimi with Roth Capital Partners.

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Yasmeen Rahimi, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [7]

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Question for you is can you give me a little bit more color on your inhibitors that are targeting inflammasome pathway? There are several by others that are in development. So what is the difference that they have? And can you zoom in a little bit more closer where you want to take this?

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Steven J. Mento, Conatus Pharmaceuticals Inc. - Co-Founder, President, CEO & Director [8]

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Sure. So the -- let's start with the drugs that are already approved. Those are biological drugs and they're targeting specifically IL-1beta with a couple of different mechanisms. Those drugs were approved and have been improved in a pathway that involved autoimmune rare genetic diseases where, unequivocally, IL-1beta, in excess, was a component of the disease. So that's where the marketed drugs are. In the context of the inflammasome pathway, which is -- really, I'll call it the detection system. There are, as I mentioned, a number of different inflammasomes, the one that's garnered most of the attention is NLRP 3. That's upstream of Caspase 1. When it gets a detection signal, it basically forms the inflammasome, which takes pro-Caspase 1 activates it into active Caspase 1. And Caspase 1 is really the protein that not only cleaves and activates IL-1beta and IL-18, but also cleaves gasdermin-D, which is the protein that serves as the pore to allow IL-1beta and IL-18 to get out of the cell. So when you think about the inflammasome pathway, the companies in this space, except for us, are all on the detector side. The approved products are on the end of the road, dealing with the cytokine IL-1beta after its release in the cell. The focal point right in the center is Caspase 1. 2090 is a highly potent, selective Caspase 1 inhibitor. And basically what it does, it's the gatekeeper for all of the inflammasomes, and it's the enzyme responsible for activating and the release of the cytokine. So we're distinctly different from anybody else in the sense that we're looking specifically at Caspase 1 inhibitors and not upstream inflammasomes or the downstream inhibitors of IL-1beta itself.

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Yasmeen Rahimi, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [9]

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Steve, and then a follow-up question on ENCORE-NF. So I mean, we are eagerly awaiting results. Can you kind of remind us again on the powering of the trial and what are your sort of expectation around that is?

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Steven J. Mento, Conatus Pharmaceuticals Inc. - Co-Founder, President, CEO & Director [10]

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The -- as I mentioned, when we first talked about looking at the 2 populations, we're using a statistical method called alpha sharing. So using that method we can hit p 0.05 either the F2, F3 group or the F1, F2 or F3 group and still hit the primary endpoint.

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Operator [11]

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Our next question comes from Edward Nash with SunTrust Robinson Humphrey.

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Fang-Ke Huang, SunTrust Robinson Humphrey, Inc., Research Division - Associate [12]

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And this is Fang-Ke Huang for Edward. And for my question just a follow-up question on the powering assumptions for ENCORE-NF study. And what's your assumption on the dropout rate, and also what's your assumption on placebo effect?

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Steven J. Mento, Conatus Pharmaceuticals Inc. - Co-Founder, President, CEO & Director [13]

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Good question. Placebo effects are going to be what they're going to be. The way we designed this study initially and powered it was based on the results from the FLINT study. So it really looked at about a 15% difference between whatever the placebo rate is and the active rate. I'm sure you're aware that the trials that have readout more recently have a lower placebo rate than the FLINT study. So really think about it as a power to detect about a 15% difference regardless what the placebo rate is.

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Operator [14]

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And our next question comes from Stephen Willey with Stifel.

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Stephen Douglas Willey, Stifel, Nicolaus & Company, Incorporated, Research Division - Director [15]

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I guess, you talked about perhaps having a preference to go to FDA with the totality of all of the ENCORE Phase II data, but, I guess, maybe just given the recent Intercept trial readout, and obviously, I think their plans for registration. Does that, I guess, change the cadence of how you want to structure and how soon you want to get this FDA discussion done? And, I guess, do you get the sense that Novartis shares that same level of urgency? And I guess I'm specifically referencing this notion of being -- engage FDA when there's not yet an approved drug available in this indication?

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Steven J. Mento, Conatus Pharmaceuticals Inc. - Co-Founder, President, CEO & Director [16]

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No, I don't think that your last comment about the -- any necessity to engage the FDA, whether or not there's an approved drug. In fact, in many cases when FDA has approved a drug, they already have a pattern and they already have information available, which you can basically get access to through those meetings. So I don't think that's the issue. I do believe, and I've said that in the past and agree with Novartis on this that we've got a lot of options with emricasan. We can be in a variety of patient populations, early-stage NASH disease, compensated cirrhotics, decompensated cirrhotics, and in order to develop the most effective pathway or either single-agent activity, which is, as I mentioned in my earlier comments, more likely I believe in the later-stage patients or combination therapies, which again I believe, more likely in the earlier-stage patients. The more information you have, I think the best position you are in order to move forward with the most robust Phase III development plan. As you know Steve, these are really long and complicated trials. And I think a little bit more time upfront is time well spent. And again, I don't think there are any issues at all with having someone out there interacting with the FDA and looking towards approval because in the early-stage disease, my belief is you're probably going to need combinations, and those are going to come much later than any initial approval.

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Stephen Douglas Willey, Stifel, Nicolaus & Company, Incorporated, Research Division - Director [17]

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Okay. I guess the question was just kind of more along the lines of just there being an approved drug for an indication for which you're arguably seeking to run a placebo-controlled trial.

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Steven J. Mento, Conatus Pharmaceuticals Inc. - Co-Founder, President, CEO & Director [18]

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Yes, I think I -- it does make challenges different. I -- and I think that if the approved drug had a 90% effective rate, I think it's different than approved drug with lesser grades than that. And remember in the early patient populations you're looking at asymptomatic disease. So I would expect that in the earlier-stage patients it should still be possible to do the appropriately controlled trials. And remember in the later-stage patients we're the only game in time. So there really isn't any competition for those patients. And there aren't any drugs seeking drug approval in the cirrhosis patients that I'm aware of.

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Stephen Douglas Willey, Stifel, Nicolaus & Company, Incorporated, Research Division - Director [19]

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Okay. And then just couple of follow-ups on 2090. Is this a CNS-penetrant compound, out of curiosity?

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Steven J. Mento, Conatus Pharmaceuticals Inc. - Co-Founder, President, CEO & Director [20]

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It's interesting -- it's a very good question. And I'm not in a position to give you that detail of information right now, but one thing I do want to point out in the context of the inflammasome pathways. The cells that most frequently pump out IL-1beta are monocytes and macrophages. So it's not a requirement to have a drug that penetrates the brain for CNS applications. Just something to think about. Really we have to target the cells that are producing IL-1beta in response to the N cells, and those cells aren't necessarily located in the brain.

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Stephen Douglas Willey, Stifel, Nicolaus & Company, Incorporated, Research Division - Director [21]

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Okay. And then I -- just there appears to be quite a bit of Caspase 1 inhibition in certain organ systems. I think like the liver and kidney, and I believe there's been a prior Caspase 1 drug development effort that was discontinued because of liver toxicities. So just kind of curious, if preclinical data you have to suggest that you've got kind of an ample therapeutic window with which to move forward.

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Steven J. Mento, Conatus Pharmaceuticals Inc. - Co-Founder, President, CEO & Director [22]

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Well, actually there were 4 Caspase inhibitors that have been in clinical development. 2 Caspase 1 selective inhibitors; pralnacasan and belnacasan, both from Vertex. 2 pain Caspase inhibitors; emricasan obviously being one of those and Nivocasan from Gilead being the other. In the context of the prior Caspase 1 inhibitors, they were actually taken pretty far into clinical development. Pralnacasan had actually, with Vertex's collaborator Aventis, had began a 400-patient Phase IIb study back in 2003 in rheumatoid arthritis. That trial was discontinued due to a preclinical finding of liver toxicity in a 9-month study in dogs. So clearly something that was drug related not mechanism related. The other Vertex Caspase 1 inhibitor again, went forward pretty far into clinical development was in a Phase IIb trial, which was terminated again, prior to completion, but in this case, it was terminated for what Vertex cited as administrative decision. So no clue as to what the real issues, if there were any, with that particular drug. The Gilead drug, as I'm sure you're aware, had a drug-induced liver toxicity event in a NASH -- in sorry, an HCV patient trial they were doing. With respect to 2090, one of the things we pride ourselves on is not only understanding the mechanism of action but the chemistry. And that's borne out by the safety profile we've seen with emricasan, which is obviously the most broadly studied Caspase inhibitor anywhere. We've used all the information that we've had and experience in Caspase inhibitors to develop what we think is going to be a compound. Not only it has good Caspase 1 selectivity and activity but hopefully will behave appropriately with respect to safety when we get it into clinical trials.

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Operator [23]

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(Operator Instructions) Our next question comes from Ed Arce with H.C. Wainwright.

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Wing Cheung Yip, H.C. Wainwright & Co, LLC, Research Division - Research Analyst [24]

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This is actually Thomas Yip asking a couple of questions for Ed. So first, for patients in the ENCORE-PH extension trial. What average of improvement do you expect to see with the longer treatment period? And how should we look at that data set combined with the 24-week data in ENCORE-PH predefined?

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Steven J. Mento, Conatus Pharmaceuticals Inc. - Co-Founder, President, CEO & Director [25]

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Well, as I mentioned, we are not doing an HVPG in week 48 in that study. So what we're going to be looking at are liver function measurements over the full 48 period, not just a 24 and 48 period, and clinical outcomes. Obviously, as you know we had a subset of patients in the ENCORE-PH trial, those with greater than or equal to 16 millimeters of Mercury at baseline that were particularly receptive to emricasan treatment. Some of the things that we're looking for to see what -- how those patients -- what their outcomes look like relative to patients in the placebo group or patients in -- with lower HVPGs that didn't have the same response.

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Wing Cheung Yip, H.C. Wainwright & Co, LLC, Research Division - Research Analyst [26]

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Okay. Yes, that makes a lot of sense. And can you remind us what percentage of patients of the original 763 chose to roll over to the expansion phase?

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Steven J. Mento, Conatus Pharmaceuticals Inc. - Co-Founder, President, CEO & Director [27]

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We haven't disclosed the actual percentage, but what I have said, and what I'll continue to say, is these patients had to actually be reconsented after 6 months, and the vast majority decided to continue on drug for the additional 24 weeks. So we don't think there are going to be issues with respect to high levels of dropout.

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Wing Cheung Yip, H.C. Wainwright & Co, LLC, Research Division - Research Analyst [28]

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Okay, that sounds good.

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Steven J. Mento, Conatus Pharmaceuticals Inc. - Co-Founder, President, CEO & Director [29]

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And by the way they -- during the extension, stay on their original drugs. If they were on placebo, they're on placebo and on their active drugs. So it should be an interesting readout of the 48-week data.

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Wing Cheung Yip, H.C. Wainwright & Co, LLC, Research Division - Research Analyst [30]

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Okay. So I guess the follow-up on that. So there is no option to go over to the arm, right?

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Steven J. Mento, Conatus Pharmaceuticals Inc. - Co-Founder, President, CEO & Director [31]

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No, there isn't. There is not. They stay on their original, in fact, it remains blinded to the physicians and the patients. They still do not know whether they're on active drug or placebo.

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Operator [32]

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There are no further questions at this time. I will now turn the call back over to Steve Mento for any closing remarks.

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Steven J. Mento, Conatus Pharmaceuticals Inc. - Co-Founder, President, CEO & Director [33]

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I want to thank you all for your participation in today's call and for your continued support of Conatus.

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Operator [34]

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Ladies and gentlemen, this concludes today's conference call. You may now disconnect.