Expert Financial Analysis and Reporting

Investment Thesis

Omecamtiv is one of the Most Exciting Drugs in Development in all of Biopharma

The primary driver of the investment thesis on Cytokinetics is the potential use of omecamtiv in the treatment of heart failure. I believe that this drug potentially is a major advance in the treatment of this disease which affects several million people in the US and could become part of standard of care. If so, it probably has sales potential well in excess of $10 billion. Cytokinetics has partnered this drug with Amgen in the US under terms that could enable CYTK to receive close to half of operating profits; in the rest of the world it will receive significant royalties. I realize that my opinion on omecamtiv may not overly sway investors, but they should be greatly encouraged by what Amgen’s then head of R&D had to say about omecamtiv in 2016 when Amgen was determining whether the drug should be advanced into a phase 3 trial. (See my March 2016 report- Amgen’s R&D Chief Expresses Great Optimism about Omecamtiv Mecarbil for Treating Congestive Heart Failure.) Dr. Sean Harper said:

“Amgen has shown the phase 2 data to heart failure experts from all around the world. It has been quite unique in his experience to see such a uniformly enthusiastic response to the phase 2 data. In one way or another each expert has essentially said that they see this as the most compelling heart failure data set of all the drugs they have ever seen.”

Amgen and Cytokinetics have gone on to put their money where their mouths are as they initiated the huge, 8000+ patient, GALACTIC-HF phase 3 trial which I estimate will cost several hundreds of millions of dollars. This trial began enrollment in October 2016 and they have now completed enrollment of 90% of patients. This trial is scheduled for an interim look by the Data Monitoring Committee (DMC) in 1H, 2019 that is primarily intended to determine if there are any safety issues that might cause concerns.

It is unlikely that there will be safety issues as the DMC has consistently reviewed unblinded data since the beginning of the trial and has not seen any safety issues that would lead it to recommend changes in the conduct of the trial. CYTK says it is also unlikely to provide any definitive information on efficacy at this still early date. There is another interim look scheduled for 2020 that is intended to provide an insight into efficacy and final topline data could be released in 2021, although this is an event driven trial so that precise timing is not possible. Hence, we have some time to wait to determine if the very encouraging signals of efficacy seen in phase 2 trials are replicated in GALACTIC-HF.

Reldesemtiv also has Huge Potential

Cytokinetics has a second molecule, reldesemtiv, in advanced development in amyotrophic lateral sclerosis (ALS) and spinal muscular atrophy (SMA) which also has enormous commercial potential if approved. This drug does not address the underlying causes of these diseases, but rather improves muscle function which could improve quality of life and possibly could extend life by improving respiratory function in the case of ALS. It will be used in conjunction with other treatments. If successfully developed in ALS, it would potentially be used in most patients with ALS. In prior reports, I have estimated US sales potential of $1 billion.

The key stock price event for Cytokinetics in 2019 will be results from the FORTITUDE-ALS phase 2 trial of reldesemtiv. This is a randomized trial enrolling about 450 patients which should report data in 2Q, 2019. Success in this trial would almost certainly result in starting a phase 3 trial that would be the basis for approval. Cytokinetics has not broached the issue, but if results are sufficiently positive in FORTITUDE-ALS, the FDA might conditionally approve the drug as ALS patients and caregivers are desperate for any drugs that might help them. If FORTITUDE-ALS is an unequivocal success, my intuitive judgment is that the stock could double to about $12 or so. If it is an outright failure, I think the stock might decline to $5 or so but would then gradually recover based on the potential for omecamtiv and a burgeoning pipeline of unique drugs based on an in-depth understanding of muscle biology, a technology in which Cytokinetics appears to be the world leader. There are all kinds of in-between scenarios. For the record, I think that the trial has a reasonable chance of reaching its primary end point of slowing the rate of decline in slow vital capacity (SVC). More on this later.

Reldesemtiv has also completed a phase 2 trial in spinal muscular atrophy. As in the case of ALS, it does not address the underlying genetic causes of this disease, but rather improves quality of life. CYTK and its partner Astellas have essentially reached an agreement with the FDA that six minute walking time is an appropriate endpoint for a potentially registrational trial. The partners are now conducting a Phase 1 study of reldesemtiv in healthy volunteers designed to assess whether higher doses than were evaluated in the Phase 2 study may result in higher plasma concentrations with acceptable side effects. Data from this study is expected 2Q, 2019 and could lead to the start of a phase 3 registrational study in late 2019 or 2020.

Investors have witnessed a spectacular success with Biogen’s Spinraza in SMA. It was approved in December of 2016 in the US and achieved sales of $854 million in 2018 and was approved in Europe in May of 2017 and achieved foreign sales of $871 million in 2018. Investors are also eagerly anticipating the 2019 approval of Novartis’s gene therapy AVXS-101 in SMA. It is important to understand that if successfully developed, reldesemtiv would be used in combination with these drugs as it produces an important and differentiated benefit.

Unique Technology Base Has Been Extremely Productive in New Drug Development

Cytokinetics has built a technology platform in muscle biology that is highly productive and is creating new product opportunities beyond omecamtiv and reldesemtiv. A recent new drug candidate is CK-274, a wholly-owned cardiac myosin inhibitor (omecamtiv is an activator), which is in early development for treatment of hypertrophic cardiomyopathy, a disease which affects 1 out of 500 Americans. The first and ongoing study of CK-274 is a double-blind, randomized, placebo-controlled multi-part single and multiple ascending dose clinical trial to assess safety and tolerability. CK-274 is intended to be used to raise additional capital through a potential collaboration similar to those with Amgen and Astellas. Management says they are continuing to make progress towards a potential deal which we might hear about in 2019.

AMG 594 is a fast follower to omecamtiv which was discovered under a joint research program with Amgen. A phase 1 study is now underway and is being conducted by Amgen in collaboration with Cytokinetics to assess the safety and tolerability of AMG 594 and its potential to increase cardiac function. In 2019, results are expected that may enable further development plans.

In terms of preclinical research, CYTK will continue research activities under the joint research program with Astellas directed to the discovery of next-generation skeletal muscle activators. They also expect to continue work on other muscle biology-focused research, including the expansion of research activities beyond the contractility of muscle towards the energetics growth and metabolism of muscle. This sounds interesting.

How Can This Stock Be Priced So Cheaply Relative to Other Emerging Biotechnology Companies?

Cytokinetics has a market value of about $340 million and had a cash position of $191  million at the end of 2018 which gives CYTK a 24 month runway that the Company says will see it through the release of the efficacy data readout on omecamtiv in 2021. Given the phase 3 status of omecamtiv and phase 2/3 status for reldesemtiv in ALS and SMA, I find this valuation amazingly low within the universe of emerging biotechnology companies. In my judgment, the potential for reldesemtiv in either ALS or SMA could more than justify the current valuation and I think that the potential for omecamtiv is much greater than reldesemtiv.

In addition, Cytokinetics has a dominant leadership position in muscle biology which is under-appreciated. In contrast to oncology where hundreds of companies compete to develop niche products, Cytokinetics has no peer company that I am aware of. At this point in time. CYTK has not achieved regulatory approval for any product so that by this key measure, its technology base in not yet validated. However, approval of omecamtiv and/or reldesemtiv would provide this validation. At that point, the burgeoning pipeline of CYTK as evidenced by CK-274 and AMG-594 would be accorded great value whereas currently it is pretty much ignored by Wall Street. 

Why the lack of interest? I think that many investors are fatigued by the long development period for omecamtiv that began in 2005 and for which efficacy data in the phase 3 trial is still one or two years away. There was also a phase 3 trial failure in an ALS trial of the forerunner drug to reldesemtiv which was tirasemtiv. The latter failed in a phase 3 trial, which CYTK believes was probably due to patients being unable to tolerate side effects and remain on tirasemtiv through the trial. Later in this report, I go through a more in-depth discussion of reldesemtiv and tirasemtiv. My analysis suggests to me that there is more than a reasonable possibility that the FORTITUDE-ALS trial will be successful. The current stock price seems to have priced in only a very small or even chance for success

Against this backdrop, it is just hard to light a fire under investors. I think that if Cytokinetics were just coming public with this pipeline and its cash position that it would be an incredibly hot IPO that might well come public at double or triple the current level. Markets are not always efficient and this seems even more pronounced with emerging biotechnology stocks. Needless to say, I retain my Buy recommendation.

Summary of Catalysts for 2019 and Potential Impact on Stock Price

Cytokinetics has guided to the following catalysts for omecamtiv in 2019:

• CYTK and AMGN expect to complete enrollment of patients in GALACTIC-HF and to conduct the first interim analysis for futility in 1H, 2019. My expectation is that the recommendation from the data monitoring committee will be just to continue the trial. I don’t think that this will have much of an impact on the stock.
• They have just begun enrollment in METEORIC-HF, a second trial that is aimed at showing a positive effect on quality of life which will use six minute walking distance as the primary endpoint. This trial will conclude at roughly the same time as GALACTIC-HF. I do not expect this ongoing trial to have any effect on the stock in 2019. This is not to say that the trial is unimportant.

For reldesemtiv, the 2019 catalysts are:

• Results from the FORTITUDE-ALS trial in ALS are expected in 2Q, 2019. As I discussed earlier, if the trial is an outstanding success, I think the stock could double to about $12. If it is an outright failure, I think the stock might decline to $5 or so but would then gradually recover based on the potential for omecamtiv. This is the pivotal stock price event in 2019.
• Cytokinetics and its partner Astellas are discussing with the FDA, the trial design for a registrational trial in SMA. The primary endpoint is likely to be six minute walking distance. The companies are completing a phase 1 trial that will examine the safety profile with higher doses than used in a phase 2 trial completed in 2018. I think that a registrational trial could begin before the end of the year, but I do not expect it to have much of an impact on the stock.

Other catalysts in 2019 are:

• For CK-274, data is expected from the Phase 1 study in healthy subjects in 2Q, 2019. CYTK is looking for a collaboration on this drug that is comparable to those with Amgen and Astellas and could be completed in 2019 or 2020.
• For AMG 594, they expect that Amgen will continue conducting the Phase 1 study throughout 2019. A phase 2 trial could begin later this year or in 2020.
• In preclinical research, CYTK expects to continue research activities under its joint research program with Astellas directed to the discovery of next-generation skeletal muscle activators throughout 2019.
• They also expect to continue other muscle biology-focused research, including the expansion of research activities beyond the contractility of muscle towards the energetics growth and metabolism of muscle.

Key points of FORTITUDE-ALS Trial of Reldesemtiv in ALS

Design of FORTITUDE-ALS Trial

FORTITUDE-ALS (Functional Outcomes in a Randomized Trial of Investigational Treatment with reldesemtiv) is a phase 2 trial. Reldesemtiv is a second generation drug that follows tirasemtiv. Around 450 ALS patients from centers in the US, Canada, Europe, and Australia were randomized in 1:1:1:1 ratio to receive a twice-daily oral dose of either 150mg, 300mg or 450mg reldesemtiv or placebo for 12 weeks. The primary efficacy endpoint is the change from baseline in the percent predicted slow vital capacity (SVC) at 12 weeks.

Secondary endpoints include:

• slope of the change from baseline in the mega-score of muscle strength measured by handgrip dynamometry
• change from baseline in the ALS Functional Rating Scale – Revised (ALSFRS-R)
• incidence and severity of treatment-emergent adverse events (TEAEs) and
• plasma concentrations at sampled time points during the study

In addition, exploratory endpoints will be measured including:

• the effect of reldesemtiv versus placebo on self-assessments of respiratory function made at home by the patient with help as needed by the caregiver
• disease progression through quantitative measurement of speech production characteristics over time
• disease progression through quantitative measurement of handwriting abilities over time
• change from baseline in quality of life (as measured by the ALSAQ-5) in patients on CK‑2127107.

Background on the Primary Endpoint of FORTITUDE-ALS

Vital capacity is a measure used in the management of ALS to assess the strength of respiratory muscles and, as a predictor of disease progression and survival; it is used in clinical practice to make intervention decisions, such as initiation of non-invasive ventilation, feeding tube placement and palliative care. Vital capacity can be measured via slow vital capacity (SVC) or forced vital capacity (FVC). Slow vital capacity, is a lung volume measurement as measured by spirometry. The measurement is taken over a minimum of four tidal breaths. The patient is instructed to inspire slowly and maximally then exhale slowly and maximally.

Vital capacity measures the amount of air expelled from the lungs after a maximum inhalation and is used to assess the strength of the skeletal muscles responsible for breathing (e.g., the diaphragm). Vital capacity is often expressed in terms of the percentage of the normal value predicted for the individual patient’s sex, age, and height; i.e., percent predicted vital capacity.

Cytokinetics has enrolled nearly 2000 ALS patients in its clinical trials. This extensive experience has afforded the Company an important insight into how the disease progresses and what are the best ways to measure this. Based on this experience they have concluded that slow vital capacity is the best measurement and further that on average SVC decreases by 2-3 percentage points per month. Furthermore they conclude that slowing this decrease by 1-2 percentage points per month results in significant medical benefit and the study is accordingly powered to show statistical significance if this rate of improvement is achieved.  

Can Reldesemtiv Succeed Where Tirasemtiv Failed?

Reldesemtiv is a second generation fast skeletal muscle troponin activator that is a follow-on to tirasemtiv, which was investigated a similar ALS patient population. In the phase 2 BENEFIT-ALS trial tirasemtiv showed a statistically significant increase in SVC. This was then followed by the phase 3 VITALITY-ALS trial in which 377 patients were randomized to tirasemtiv and 188 to placebo. The primary endpoint was change from baseline in slow vital capacity evaluated at 24 weeks. FORTITUDE-ALS has the same primary endpoint but is evaluated at 12 weeks instead of 24.

VITALITY-ALS did not achieve its primary endpoint. Dr. Jeremy Shefner, the lead investigator, attributed the failure to non-serious side effect issues that caused a meaningful number of tirasemtiv patients to drop out of the study. The most common side effects included dizziness, nausea, fatigue, and trouble sleeping and weight loss. Most who dropped out discontinued the drug relatively early in the trial and most often were on the highest dose.  In looking at people who stayed on drug, CTYK says investigators saw results in SVC not dissimilar to what we saw in BENEFIT-ALS, which basically had everybody on drug.

The level of dropouts confounded the ability to evaluate efficacy and safety in the primary, intent to treat analyses of VITALITY-ALS. Additional analyses of those patients who were able to tolerate tirasemtiv were encouraging as they suggested there was a slowing of the decline in SVC. On this basis, Cytokinetics and Astellas believed that this provided support for the continued investigation of fast skeletal muscle troponin activators in ALS. Based on results from phase 1 studies, Cytokinetics believes that reldesemtiv may be more effective and better tolerated than tirasemtiv. If so, it will decrease the number of patients who drop out due to drug related side effects and increase the chances for success. Another positive for the trials is that they are conducting FORTITUDE-ALS largely in the same centers using the same assessments and assessors.

In FORTITUDE-ALS, management says they are seeing a different pattern of drop-outs, as patients do not appear to drop out as early or as much for adverse events as they did with tirasemtiv. They seem to drop out more or less randomly throughout the course of the study and often with adverse events that probably reflect disease progression more than drug intolerance. This encourages CYTK that reldesemtiv is a much better tolerated drug.

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