CONATUS PHARMACEUTICALS INC. (NASDAQ:CNAT) Files An 8-K Entry into a Material Definitive Agreement

Item 1.01. Entry into a Material Definitive Agreement.

Option, Collaboration and
License Agreement

On December 19, 2016 (the Execution Date), Conatus
Pharmaceuticals Inc. (Conatus) entered into an Option,
Collaboration and License Agreement (the Agreement) with Novartis
Pharma AG (Novartis) for the global development and
commercialization of emricasan, Conatus first-in-class, orally
active pan-caspase inhibitor. Under the Agreement, Novartis will
make an upfront payment of $50 million to Conatus within five
business days of the Execution Date.

Conatus has granted Novartis an exclusive option (the Option) to
collaborate with Conatus to develop products containing emricasan
either as a single active ingredient (Emricasan Only Products) or
in combination with other Novartis compounds for liver cirrhosis
or liver fibrosis (Combination Products), including but not
limited to Farnesoid X receptor agonists that Novartis is
currently developing for the treatment of chronic liver diseases
(collectively Emricasan Products), and upon exercise of the
Option, Conatus will grant Novartis an exclusive, worldwide
license to Conatus patent rights relating to emricasan to develop
and commercialize Emricasan Products for the treatment, diagnosis
and prevention of disease in all indications in humans. The
Option is exercisable upon, among other things, Conatus providing
notice to Novartis of the initiation of its planned Phase 2b
clinical trial in decompensated nonalcoholic steatohepatitis
(NASH) liver cirrhosis subjects (the ENCORE-LF Trial), which
initiation is expected in the second quarter of 2017. The Option
expires on October 31, 2017. Following Novartis exercise of the
Option (the License Effective Date), Conatus will receive $7
million, subject to certain usual and customary closing
conditions, including required anti-trust approvals.

Conatus is eligible to receive up to an aggregate of $650 million
in milestone payments over the term of the Agreement, contingent
on the achievement of certain development, regulatory and
commercial milestones. Novartis will be required to pay to
Conatus tiered royalties ranging from the high-teens to the
high-twenties as a percentage of net sales of Emricasan Only
Products and tiered royalties ranging from the high-single digits
to the mid-teens as a percentage of net sales of Combination
Products, subject to reduction in certain cases. Conatus may
elect, after the initiation of the first Phase 3 clinical trial
for an Emricasan Product, to enter into a co-commercialization
agreement with Novartis under which it would receive up to 30
percent of the commercial profits less the same percentage of the
commercial losses (the Profit and Loss Share) for Emricasan
Products in the United States. In the event Conatus so elects to
enter into a co-commercialization agreement with Novartis, the
net sales used to determine the amount of commercial milestone
payments Conatus is entitled to receive from Novartis will be
reduced by the Profit and Loss Share, Conatus will not receive
royalties for sales in the United States and the royalties for
sales outside of the United States will be reduced to the
mid-teens to the low-twenties as a percentage of net sales of
Emricasan Only Products and the mid-single digits to the
low-teens as a percentage of net sales of Combination Products.

to the Agreement, Conatus is responsible for completing its (i)
ongoing ENCORE-PH Phase 2b trial in primarily compensated NASH
subjects, (ii) ongoing POLT-HCV-SVR Phase 2b trial in subjects
with reestablished liver fibrosis, post-orthotopic liver
transplant, due to hepatitis C virus who have a sustained viral
response, (iii) ongoing ENCORE-NF Phase 2b trial in NASH fibrosis
and (iv) planned ENCORE-LF Trial (collectively the Phase 2b
Trials). In the event the costs of the Phase 2b Trials and
related development work between the Execution Date and the
License Effective Date differ from the agreed upon budget by the
parties, Novartis will reimburse Conatus for any additional costs
or Conatus will credit any amount under budget to Novartis future
costs for the Phase 2b Trials. After the License Effective Date,
Novartis and Conatus will share the costs of the Phase 2b Trials
equally. Conatus expects the upfront and license option exercise
payments and the cost-sharing under the Agreement to fund Conatus
ongoing operations through 2019. Novartis will be responsible for
Phase 3 development of Emricasan Only Products and all
development for Combination Products, and Novartis has agreed to
use commercially reasonable efforts to develop and commercialize
Emricasan Products.

Upon the License Effective Date, Conatus and Novartis will
establish a Joint Steering Committee composed of senior personnel
from each of Conatus and Novartis to oversee the collaboration,
development and commercialization of the Emricasan Products. In
the event of a change of control of Conatus, Novartis has the
right to disband the Joint Steering Committee and all
decision-making power otherwise assigned to the Joint Steering
Committee will be assigned solely to Novartis.

to the Agreement, for the period from the Execution Date until
the earlier of five years after the first commercial sale of an
Emricasan Product in the United States or major European market
or ten years from the Execution Date, Conatus has agreed not to
develop in any pivotal registration clinical trials or
commercialize any pan-caspase inhibitors in liver disease. For
the period from the Execution Date until five years after the
first commercial sale of an Emricasan Only Product, Novartis has
agreed not to develop in any pivotal registration clinical trials
or commercialize any pan-caspase inhibitors for the diagnosis,
prevention or treatment of disease in all indications in humans.

Under the Agreement, Novartis will have a right of first
negotiation prior to any offer by Conatus to any third party for
future pan-caspase inhibitors that Conatus may develop or acquire
for the treatment of liver diseases or for certain retained
pan-caspase inhibitors, provided that any license or
collaboration that Conatus enters into or proposes to enter into
must be on terms and conditions in the aggregate no more
favorable to such third party than those last offered to
Novartis.

With Conatus written consent, Novartis may sublicense the rights
granted to it by Conatus in the United States and in any major
European market. In the event Novartis sublicenses its rights
under the Agreement in the United States or a major European
market, Novartis is required to pay Conatus a certain percentage
of all amounts paid to Novartis to the sublicense, with certain
exceptions. Novartis may sublicense the rights granted to it by
Conatus in all other territories at any time and in its sole
discretion, provided that the sublicense complies with the
applicable provisions of the Agreement. Novartis is also required
to pay all milestone and royalty payments on net sales of
Emricasan Products made by sublicensees.

If Novartis has not exercised the Option during the designated
option period, the Agreement will expire. If Novartis exercises
the Option, unless terminated earlier, the Agreement will remain
in effect on a product-by-product and country-by-country basis
until Novartis royalty obligations expire. Both parties have
certain termination rights in the circumstances of an uncured
material breach or insolvency by the other party. Novartis has
certain termination rights in the event of a mandated clinical
trial hold for any Emricasan Only Product. Additionally, after
the License Effective Date, Novartis has the right to terminate
the Agreement without cause upon 180 days prior written notice to
Conatus. In such event, the license granted to Novartis will be
terminated and revert to Conatus, and Novartis will transfer any
ongoing trials for the Emricasan Only Products to Conatus and
will cease development of the Emricasan Products. In the event
Novartis terminates the Agreement due to Conatus uncured material
breach or insolvency, the license granted to Novartis to the
Agreement will become irrevocable and Novartis will be required
to continue to make all milestone and royalty payments otherwise
due to Conatus under the Agreement, provided that if Conatus
materially breaches the Agreement such that the rights licensed
to Novartis or the commercial prospects of the Emricasan Products
are seriously impaired, the milestone and royalty payments will
be reduced by 50 percent.

Additionally, the Agreement contains customary representations,
warranties and covenants by Conatus and Novartis. Each of Conatus
and Novartis is required to indemnify the other against all
claims arising or resulting from the indemnifying partys
negligence or willful misconduct or breach of any covenants,
warranties or representations in the Agreement, except to the
extent that such claims arise from the breach, negligence or
willful misconduct of the party seeking indemnification.

Investment Agreement

Concurrently with the entry into the Agreement, Conatus and
Novartis entered into an Investment Agreement (the Investment
Agreement) whereby Conatus agreed to sell and Novartis agreed to
purchase, convertible promissory notes (the Notes) in one or two
closings (each a Closing), for an aggregate principal amount of
up to $15 million. Each Closing will occur at a date and time
designated by Conatus, subject to the satisfaction of certain
closing conditions, but must occur prior to December 31, 2019.

The maturity date of the Notes will be December 31, 2019. The
Notes will bear interest on the unpaid principal amount at a rate
of 6 percent per annum from the date of issuance. Conatus may
prepay or convert the Notes into shares of Conatus common stock,
at its option, until December 31, 2019. Novartis may convert the
Notes into shares of Conatus common stock upon a change of
control of Conatus or termination of the Agreement in its
entirety. If converted, the principal and accrued interest under
the Notes will convert into Conatus common stock at a conversion
price equal to 120 percent of the 20-day trailing average closing
price per share of the common stock immediately prior to the
conversion date. Upon the occurrence of certain events of
default, the Notes require Conatus to repay the principal amount
of the Notes and any unpaid accrued interest.

The foregoing description of the Agreement, the Investment
Agreement and the form of Note, and the transactions contemplated
thereby, does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the complete text of
the Agreement, the Investment Agreement and the form of Note,
which will be filed with the Securities and Exchange Commission
(the SEC) as exhibits to Conatus Annual Report on Form 10-K for
the year ending December 31, 2016.

Item 5.02. Departure of Directors or Certain Officers;
Election of Directors; Appointment of Certain Officers;
Compensatory Arrangements of Certain Officers.

On December 19, 2016, Shahzad Malik, M.D. resigned from the Board
of Directors (the Board) of Conatus. Dr. Maliks decision to
resign from the Board did not result from any disagreement with
Conatus concerning any matter relating to its operations,
policies or practices. In connection with this resignation, to
Conatus bylaws, the Board voted to decrease the size of the Board
from seven to six members. The Board appointed James Scopa as the
chair of the Audit Committee to replace Dr. Malik as the Audit
Committee chair. The Board also determined that Mr. Scopa
qualifies as an audit committee financial expert as that phrase
is defined under the regulations promulgated by the SEC. Further,
the Board appointed Daniel L. Kisner, M.D. as a member of the
Audit Committee.

Item 7.01. Regulation FD Disclosure.

On December 19, 2016, Conatus issued a press release announcing
the Agreement and the Investment Agreement. A copy of the press
release is attached hereto as Exhibit 99.1 and is incorporated
herein by reference.

In accordance with General Instruction B.2. of Form 8-K, the
information in this Item 7.01, including Exhibit 99.1, shall not
be deemed filed for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended (the Exchange Act), or otherwise
subject to the liabilities of that Section, nor shall it be
deemed incorporated by reference in any filing under the
Securities Act of 1933, as amended, or the Exchange Act, except
as expressly set forth by specific reference in such a filing.

***

This Current Report on Form 8-K contains forward-looking
statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. All statements other than
statements of historical facts contained in this Current Report
on Form 8-K are forward-looking statements, including statements
regarding: the timing of the exercisability of the Option; the
initiation of the ENCORE-LF trial in the second quarter of 2017;
payments and events contingent on Novartis exercise of the
Option, including eligibility to receive payments related to
development, regulatory and commercial milestones and royalties;
and the sufficiency of financial resources to fund Conatus
emricasan development through 2019. In some cases, you can
identify forward-looking statements by terms such as may, will,
should, expect, plan, anticipate, could, intend, target, project,
contemplates, believes, estimates, predicts, potential or
continue or the negative of these terms or other similar
expressions. These forward-looking statements speak only as of
the date of this Current Report on Form 8-K and are subject to a
number of risks, uncertainties and assumptions, including:
Conatus ability to successfully enroll patients in and complete
its ongoing and planned clinical trials; the Option being
exercised by Novartis and Novartis continuing development and
commercialization of emricasan; Conatus reliance on third parties
to conduct its clinical trials, including the enrollment of
patients, and manufacture its clinical drug supplies of
emricasan; potential adverse side effects or other safety risks
associated with emricasan that could delay or preclude its
approval; results of future clinical trials of emricasan; Conatus
ability to obtain additional financing in order to co-
commercialize emricasan or develop other compounds; and those
risks described in Conatus periodic reports it files with the
SEC. The events and circumstances reflected in Conatus
forward-looking statements may not be achieved or occur and
actual results could differ materially from those projected in
the forward-looking statements. Except as required by applicable
law, Conatus does not plan to publicly update or revise any
forward-looking statements contained herein, whether as a result
of any new information, future events, changed circumstances or
otherwise.

Item 9.01. Financial Statements and Exhibits.

(d) Exhibits

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