$CARA Form 10-K

Overview

Introduction

We are a clinical-stage biopharmaceutical company focused on developing and commercializing new chemical entities designed to alleviate pain and pruritus by selectively targeting kappa opioid receptors. We are developing a novel and proprietary class of product candidates that target the body’s peripheral nervous system.

We commenced operations in 2004, and our primary activities to date have been organizing and staffing our company, developing our product candidates, including conducting preclinical studies and clinical trials of CR845-based product candidates, and raising capital. To date, we have financed our operations primarily through sales of our equity and debt securities and payments from license agreements. We have no products currently available for sale, and substantially all of our revenue to date has been revenue from license agreements, although we have received nominal amounts of revenue under research grants.

Product Development Pipeline

The current status of the development of our product candidates is as follows:

I.V. CR845 for Treatment of Acute Postoperative Pain

Our most advanced product candidate, I.V. CR845, demonstrated significant pain relief and a favorable safety and tolerability profile in three randomized, double-blind, placebo-controlled Phase 2 clinical trials in patients with acute postoperative pain, without inducing many of the undesirable side effects typically associated with currently available pain therapeutics. In addition, in the fourth quarter of 2014, we successfully completed a Human Abuse Liability, or HAL, trial of I.V. CR845 in which I.V. CR845 met the primary endpoint of demonstrating statistically significant lower “drug liking” scores as compared to the approved schedule IV opioid, pentazocine. We believe that the totality of results from the HAL trial are supportive of the potential for CR845 to be the first non-scheduled or low (Schedule V) scheduled peripheral opioid for acute pain.

In September 2015, we initiated our Phase 3 clinical trial program for I.V. CR845 in postoperative pain with the dosing of the first subjects in an adaptive pivotal trial in patients undergoing a range of abdominal surgeries. This trial is a multi-center, randomized, double-blind, placebo-controlled, parallel-group adaptive design trial with repeated doses of I.V. CR845 or placebo administered both prior to and following abdominal surgery in male and female patients. The trial protocol initially included three dose levels of I.V. CR845 (1.0 ug/kg, 2.0 ug/kg and 5.0 ug/kg), which were compared to placebo with an interim conditional power assessment to identify optimal doses to be used to complete the enrollment of this trial.

In June 2016, we modified the trial protocol and resumed the trial as a three-arm trial, testing two doses of CR845 (1.0 ug/kg and 0.5 ug/kg) versus placebo, based on a safety review by us, the trial’s Independent Data Monitoring Committee and the FDA of unblinded safety data from the first 90 patients dosed. The safety review was conducted in response to a clinical hold that the FDA placed on the trial in February 2016 and removed in April 2016 following the safety review. The clinical hold was based on a pre-specified stopping rule related to elevated serum sodium levels of greater than 150 mmol/L that was included in the clinical trial protocol.

Based on previous guidance from the FDA, we believe we will require 1,500 total exposures to I.V. CR845, including all Phase 1, Phase 2 and Phase 3 trials, prior to submitting a new drug application, or NDA. We believe our planned clinical trials and our clinical trials completed to date will result in a sufficient number of drug exposures to support an NDA.

Oral CR845 for Treatment of Osteoarthritis

We are also developing an oral version of CR845, or Oral CR845, for acute and chronic pain. In August 2015, we advanced our tablet formulation of Oral CR845 into a Phase 2a clinical trial in patients with osteoarthritis, or OA, of the knee or hip. The Phase 2a trial was a single-blind, randomized, multiple ascending dose trial designed to evaluate the safety, pharmacokinetics, or PK, and effectiveness of oral CR845 tablets dosed over a two-week treatment period in OA patients experiencing moderate-to-severe pain, defined as >4 on an 11-point NRS at baseline.

In December 2015, we announced positive top-line results from this Phase 2a trial. The results showed a dose-related reduction in mean baseline pain score up to 34% after two weeks, with statistically significant reduction in mean rescue medication for the top 5.0 mg dose group of approximately 80 percent. In this trial, all four tablet strengths were observed to be safe and well tolerated.

The Phase 2a trial established therapeutic doses and a dosing regimen for a larger randomized, double-blind, placebo-controlled Phase 2b trial, which we initiated during the third quarter of 2016. The Phase 2b trial is a trial of three tablet strengths of CR845, 1.0 mg, 2.5 mg and 5.0 mg, dosed twice-daily over an eight-week treatment period in approximately 330 OA patients experiencing moderate-to-severe pain across the United States. The primary efficacy endpoint is the change from baseline at week eight, with respect to the weekly mean of the daily pain intensity score using an NRS. Secondary endpoints include change from baseline in the WOMAC, the Patient Global Impression of Change, or PGIC, and amount of rescue medication used. We expect to report top-line data in the second quarter of 2017.

I.V. CR845 for Treatment of Uremic (Chronic Kidney Disease-Associated) Pruritus

CR845 has exhibited anti-pruritic, or anti-itch, potency in standard preclinical models. In July 2015, we reported positive top-line efficacy results from a Phase 2 proof-of-concept trial of I.V. CR845 for the treatment of uremic pruritus, a systemic condition with high prevalence in dialysis patients, for which there are no approved therapeutics in the United States. We observed that I.V. CR845 demonstrated statistically significant results on the primary endpoint of reducing worst itch intensity as well as the secondary endpoint of quality of life improvements. We also observed I.V. CR845 to have a favorable safety and tolerability profile in the trial.

In June 2016, we initiated a two-part Phase 2/3 adaptive design trial of I.V. CR845 in dialysis patients suffering from moderate-to-severe uremic pruritus. Part A of the trial, is a randomized, double-blind, placebo-controlled trial in 160 patients of three doses of I.V. CR845 (0.5ug/kg, 1.0 ug/kg and 1.5 ug/kg) administered three times per week after dialysis over an 8-week period. Part B will be a randomized double-blind placebo-controlled trial in up to 240 patients of one optimized dose of I.V. CR845 administered three times per week after dialysis over a 12-week treatment period. The primary endpoint will be reduction in worst itching scores from baseline values measured on a standard NRS alongside secondary quantitative quality of life endpoints. We expect to report top-line data from Part A of this trial in the first quarter of 2017.

See Part I, Item 1, Business – Our Product Candidates in this Annual Report on Form 10-K for a more detailed discussion of our clinical trials.

Collaborations with Maruishi and CKD

To date, we have entered into two license agreements relating to the development of CR845.

In April 2013, we entered into a license agreement with Maruishi Pharmaceutical Co., Ltd., or Maruishi, in Japan, under which we granted Maruishi an exclusive license, or the Maruishi Agreement, to develop, manufacture and commercialize drug products containing CR845 in Japan in the acute pain and uremic pruritus fields. We and Maruishi are each required to use commercially reasonable efforts, at our respective expense, to develop, obtain regulatory approval for and commercialize CR845 in the United States and Japan, respectively. In addition, we have provided Maruishi specific clinical development services for CR845 in Maruishi’s field of use.

Under the terms of the Maruishi Agreement, we received a non-refundable and non-creditable upfront license fee of $15.0 million and are eligible to receive up to an aggregate of $6.0 million in clinical development milestones and $4.5 million in regulatory milestones. In August 2014, we received a clinical development milestone payment of $0.5 million upon completion by Maruishi of a Phase 1 clinical trial in Japan related to CR845 in acute post-operative pain. In October 2015, we received a $1.7 million milestone payment (net of contractual foreign currency exchange adjustments of $0.3 million) related to the initiation by Maruishi of a Phase 2 clinical trial of CR845 in Japan for uremic pruritus. We are also eligible to receive tiered royalties, with percentages ranging from the low double digits to the low twenties, based on net sales of products containing CR845 in Japan, if any, and share in any sub-license fees. In addition, in connection with the Maruishi Agreement, Maruishi purchased 2,105,263 shares of our Junior A Preferred Stock for $3.80 per share, for an aggregate purchase price of $8.0 million, which shares were automatically converted into 842,105 shares of common stock upon the closing of our initial public offering in 2014.

In April 2012, we entered into a license agreement with Chong Kun Dang Pharmaceutical Corporation, or CKD, in South Korea, under which we granted CKD an exclusive license, or the CKD Agreement, to develop, manufacture and commercialize drug products containing CR845 in South Korea. We and CKD are each required to use commercially reasonable efforts, at our respective expense, to develop, obtain regulatory approval for and commercialize CR845 in the United States and South Korea, respectively.

Under the terms of the CKD Agreement, we received a non-refundable and non-creditable upfront license fee of $0.6 million and are eligible to receive up to an aggregate of $2.3 million in clinical development milestones and $1.5 million in regulatory milestones. We also issued 173,611 shares of our Junior Preferred Stock to CKD in consideration for $0.4 million, which shares were automatically converted into 69,444 shares of common stock upon the closing of our initial public offering in 2014. During 2012, we received $0.6 million, net of foreign taxes, from CKD upon the achievement of clinical development milestones under the CKD Agreement. During the year ended December 31, 2015, we met the milestone criteria, as set forth in the CKD Agreement, for completion of a Phase 1b trial of Oral CR845 in the United States and for completion of a Phase 2 trial of CR845 in uremic pruritus patients in the United States, respectively. As a result, we received milestone payments totaling $0.6 million (net of South Korean withholding tax) from CKD. We are also eligible to receive tiered royalties with percentages ranging from the high single digits to the high teens, based on net sales of products containing CR845 in South Korea, if any, and share in any sub-license fees.

Components of Operating Results

Revenue

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the near future. Substantially all of our revenue recognized to date has consisted of upfront payments under license

Research and Development (R&D)

To date, our R&D expenses have related primarily to the development of CR845. R&D expenses consist of expenses incurred in performing R&D activities, including compensation and benefits for full-time R&D employees, facilities expenses, including laboratory build-out costs, overhead expenses, cost of laboratory supplies, clinical trial and related clinical manufacturing expenses, third-party formulation expenses, fees paid to contract research organizations, or CROs, and other consultants, stock-based compensation for R&D employees and non-employee consultants and other outside expenses. Our R&D expenses also include expenses related to preclinical activities, such as drug discovery, target validation and lead optimization for CR845 and our other, earlier stage programs.

R&D costs are expensed as incurred. Non-refundable advance payments for goods or services to be received in the future for use in R&D activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed. Most of our R&D costs have been external costs, which we track on a program-by program basis. Our internal R&D costs are primarily compensation expenses for our full-time R&D employees. We do not track internal R&D costs on a program-by-program basis.

R&D activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. Based on our current development plans, we presently expect that our R&D expenses will continue near their current level through 2017. However, it is difficult to determine with certainty the duration and completion costs of our current or future preclinical programs and clinical trials of our product candidates, or if, when or to what extent we will generate revenues from the commercialization and sale of any of our product candidates that obtain regulatory approval. We may never succeed in achieving regulatory approval for any of our product candidates.

The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors including:

� per patient trial costs;

� the number of patients that participate in the trials;

� the number of sites included in the trials;

� the countries in which the trial is conducted;

� the length of time required to enroll eligible patients;

� the number of doses that patients receive;

� the drop-out or discontinuation rates of patients;

� potential additional safety monitoring or other studies requested by regulatory agencies;

� the duration of patient follow-up; and

� the efficacy and safety profile of the product candidate.

In addition, the probability of success for each product candidate will depend on numerous factors, including competition, manufacturing capability and commercial viability. We will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of each product candidate, as well as an assessment of each product candidate’s commercial potential.

General and Administrative

General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in executive, finance, accounting, business development and human resources functions. Other significant costs include facility costs not otherwise included in R&D expenses, legal fees, insurance costs and fees for accounting and consulting services.

Other Income

Other income consists of interest and dividend income earned on our cash, cash equivalents, marketable securities and restricted cash and realized gains and losses on the sale of marketable securities.

Benefit from Income Taxes

The benefit from income taxes relates to state R&D tax credits exchanged for cash pursuant to the Connecticut R&D Tax Credit Exchange Program, which permits qualified small businesses engaged in R&D activities within Connecticut to exchange their unused R&D tax credits for a cash amount equal to 65% of the value of the exchanged credits.

Results of Operations

Comparison of the years ended December 31, 2016, 2015 and 2014

                                                                 Year Ended December 31,
                                              2016                           2015                        2014
                                                                Dollar amounts in thousands
                                                          % change                       % change
License and milestone fee revenue          $       -           -100 %      $  1,710            466 %    $   302
Collaborative revenue                              -           -100 %         2,093             -5 %      2,201
Clinical compound revenue                          86           100 %            -            -100 %        674

Total revenue                              $       86           -98 %      $  3,803             20 %    $ 3,177

License and milestone fee revenue consists of (1) for the year ended December 31, 2015, $1.1 million of the $1.7 million milestone payment earned in September 2015 under the Maruishi Agreement, which was attributable to the previously delivered license, and $0.6 million from the two milestone payments earned by us under the CKD Agreement in July and September 2015 and (2) for the year ended December 31, 2014, $0.3 million of the $0.5 million milestone achieved under the Maruishi Agreement, which was attributable to the previously delivered license.

Collaborative revenue

Collaborative revenue for the year ended December 31, 2015 consists of $0.6 million of the $1.7 million milestone payment earned in September 2015 under the Maruishi Agreement, which was attributable to the fully-delivered R&D services deliverable, and $1.5 million of revenue that had been deferred upon entry into the Maruishi Agreement. Collaborative revenue for the year ended December 31, 2014 includes $2.2 million of revenue that had been deferred upon entry into the Maruishi Agreement.

Clinical compound revenue for the years ended December 31, 2016 and 2014 includes $86 thousand and $674 thousand, respectively, from the sale of clinical compound to Maruishi.

Research and Development Expense



                                                              Year Ended December 31,
                                            2016                        2015                        2014
                                                            Dollar amounts in thousands
                                                       % change                    % change
Direct clinical trial costs               $ 37,257           175 %    $ 13,560            34 %    $ 10,099
Consultant services in support of
clinical trials                              1,860            86 %         999            -8 %       1,091
Stock-based compensation                     1,301            21 %       1,073           208 %         349
Depreciation and amortization                  839            88 %         447             6 %         422
Other R&D operating expenses                 7,996            56 %       5,142            65 %       3,107

Total R&D expense                         $ 49,253           132 %    $ 21,221            41 %    $ 15,068

For the year ended December 31, 2015 compared to the year ended December 31, 2014, the net increase in direct clinical trial costs and related consultant costs primarily resulted from increases totaling $5.4 million resulting from the I.V. CR845 Phase 2/3 adaptive study in patients with uremic pruritus and the Phase 2a Oral CR845 study in patients with OA, as well as a net increase of $1.4 million of CR845 drug manufacturing costs. Those costs were partially offset by decreases totaling $4.0 million in clinical trial costs in connection with the I.V. CR845 HAL trial and the Oral CR845 Phase 1a/1b trials, which were completed in 2014. There was also a net increase of $0.6 million for toxicology studies. The increase in stock-based compensation expense mostly reflects an increase in the number of option grants, in part as a result of growth in employee headcount. The increase in other R&D operating expenses was primarily the result of an increase in payroll and related costs associated with R&D personnel, recruiting costs and the cost of meetings and travel.

                                                                  Year Ended December 31,
                                                2016                        2015                        2014
                                                                Dollar amounts in thousands
                                                           % change                    % change
External research and development expenses:
I.V. CR845                                    $ 23,244           155 %    $  9,149            24 %    $  7,369
Oral CR845                                      15,873           194 %       5,402            24 %       4,371
Internal research and development expenses      10,136            52 %       6,670           100 %       3,328

Total research and development expenses       $ 49,253           132 %    $ 21,221            41 %    $ 15,068

General and Administrative Expense



                                                                Year Ended December 31,
                                             2016                        2015                        2014
                                                              Dollar amounts in thousands
                                                         % change                    % change
Professional fees and public/investor
relations                                   $ 2,032              8 %    $ 1,883              6 %    $ 1,773
Stock-based compensation                      1,499              4 %      1,441             41 %      1,022
Depreciation and amortization                   626             60 %        392              9 %        361
Other G&A operating expenses                  5,076             25 %      4,054             34 %      3,025
. . .