Expert Financial Analysis and Reporting

Investment Overview

Cytokinetics has three highly valuable pipeline assets whose aggregate value in my view substantially exceeds its current market valuation of $1.4 billion:

• Omecamtiv mecarbil just completed the GALACTIC-HF phase 3 trial in heart failure. The trial met its primary endpoint with a p value of 0.025 and there were no safety issues, but investors were on balance disappointed with results and Amgen ended its long running collaboration to develop the drug. Nevertheless, I think that this drug the potential to reach perhaps $1 billion of worldwide peak sales as I will argue in this report.
• CK-247 has a comparable mechanism of action to mavacamten which successfully completed a phase 3 trial in hypertrophic cardiomyopathy that led to Bristol-Myers acquiring its developer MyoKardia for $13.9 billion. BMY stated at the recent JP Morgan conference that mavacamten has peak sales potential of $4 billion by 2029. Mavacamten should be approved in 2H, 2021 and CK-247 is about three years behind it. CYTK believes that the pharmacokinetic profile of CK-247 could make it best in class. It could also aspire to $1 billion of peak sales and perhaps much more.
• Reldesemtiv for the treatment of ALS is ready to begin a phase 3 trial. However, this will not occur until commercialization and financing plans for omecamtiv are finalized. The potential for success in the phase 3 trial is a concern as a phase 2 trial did not meet its designated endpoint, but CYTK management believes that learnings from that trial provide a good roadmap for designing a phase 3 trial that will be successful. Drug development for ALS has been a graveyard for drug development, but there is a huge unmet need for new therapy and success in a phase 3 trial would result in rapid commercial uptake. In this event, reldesemtiv might have the most commercial potential of the three.

I think that the current market valuation of $1.4 billion could be more than justified by the potential for just omecamtiv or just CK-247 and perhaps just reldesemtiv. Also, the company is reasonably well capitalized with about $500 million of cash. Considering the $13.9 billion purchase price for MyoKardia and the $1.4 billion market value of CYTK, there is also the real potential for Cytokinetics to be acquired. A sophisticated buyer might view the current market value as being very attractive in which many emerging biotechnology companies are priced for perfection.

This report focuses on omecamtiv. In later reports, I will comment on CK-247 and reldesemtiv and this will be followed by a report that discusses valuation in more detail. The stock has very meaningful upside.

Discussion of GALACTIC-HF Phase 3 Trial of Omecamtiv in Heart Failure

Investors were disappointed with the results of GALACTIC-HF. The trial was successful in reaching the primary endpoint, which combined the two measures of time to cardiovascular death and first heart failure event, with a p-value of 0.025. The hazard ratio indicated that there was an 8% reduction in risk for the primary endpoint.

While the primary endpoint was successfully achieved, this was not a robust result. Amgen and Cytokinetics were hoping for a 15% or more reduction in risk as determined by the hazard ratio. Adding to the disappointment, statistical significance was not reached on the key secondary endpoint of time to cardiovascular death and several other secondary endpoints were not reached. After scrutinizing the GALACTIC-HF results, Cytokinetics’ longtime collaborator Amgen opted out of any effort to commercialize the drug in the US and CYTK’s European partner Servier, also opted out leaving CYTK with worldwide rights. (By the way, I estimate that Amgen may have spent $500 to $800 million on the phase 3.) Despite these setbacks, I think that there is a high probability that omecamtiv mecarbil will be approved by regulatory agencies. Here is why.

First of all, GALACTIC-HF was a successful trial with a p-value on its primary endpoint of 0.025 that is meaningfully less than p=0.05 which is the accepted benchmark for statistical significance. The side effect profile was comparable to placebo. This is quite important as the mode of action of omecamtiv results in the left ventricle of the heart pumping more blood and there has been a theoretical concern that this could cause the already damaged heart to work harder which could cause cardiac arrythmias; this was not seen in the trial. So Galactic-HF did check the two primary boxes needed for regulatory approval. There was statistical significance on the primary endpoint and there were no troublesome safety issues.

As key opinion leaders conducted an in-depth analysis of the trial data, they determined that omecamtiv mecarbil had a particularly strong effect in patients who had advanced heart failure with low ejection fractions (the percentage of blood in the left ventricle that is pumped out with each heartbeat). Normal ejection fraction ranges from 55% to 70%. Patients with an ejection fraction less than 40 are generally considered to have impaired heart function and below 35% is serious heart failure. GALACTIC-HF enrolled patients with ejection fractions below 35%. The data shows that omecamtiv demonstrated a greater therapeutic effect as the ejection fraction decreased.

• In patients with an ejection fraction (EF) of 30%, the hazard ratio (HR) was 0% indicating no benefit relative to standard of care.
• At an EF of 25%, the HR was 10% which is a modest improvement.
• At an EF of 20%, the HR was 20% which is impressive.
• At an EF of 15%, the HR was 25% which is highly impressive
• At an EF of 10%, the HR was 30%.
• The hazard ratio for the group of patients with EF ≤28% was 16%. This degree of improvement in this patient group is medically meaningful.

Bear in mind that omecamtiv was studied as an addition to standard of care. The failure to show an improvement in hazard ratio in patients with higher ejection fractions does not mean that omecamtiv is an ineffective drug. Rather, it means that SOC was able to manage the disease and adding omecamtiv did not improve outcomes. Used alone in these patients, it would almost certainly improve their cardiac output and benefit their heart failure. As patients become sicker as evidenced by lower ejection fractions, omecamtiv improved outcomes. Importantly, this analysis of ejection fractions was pre-specified and was not found through data mining. It stands to reason that omecamtiv would have its greatest effect in patients whose impaired hearts can’t pump enough blood as its mode of action is to improve the pumping ability of the left ventricle. This makes complete sense from a biological standpoint.

There is a great unmet need for a drug to be added to treatment of patients with very low ejection fractions as conventional drug regimens often lose their efficacy over time in these patients. Omecamtiv with its unique mechanism of action could be added to treatment as standard of care regimens fail even if there is no compelling reason to add omecamtiv to the treatment of less severely ill patients. I think that omecamtiv has a major role to play in the most severely affected heart failure patients and I think that regulatory agencies will recognize this. Combined with achieving statistical significance on the primary endpoint and a benign side effect profile, this leads me to believe that regulatory agencies will approve the drug.

If Omecamtiv is Approvable, Why Then Did Amgen Throw in the Towel?

Amgen’s decision to abandon omecamtiv (after investing an estimated $500 to $800 million in clinical development) was in my opinion not because it felt omecamtiv was not approvable. While I think that there is a quite meaningful commercial opportunity for omecamtiv in the most severe heart failure patients, this is a considerably smaller commercial opportunity than what Amgen was shooting for, i.e. they anticipated use in the entire population.

In addition, quite recently there has been a considerable step-up in competition in the heart failure drug category with the approval of Entresto and the SGLT-2 inhibitor Farxiga. The SGLT-2 inhibitors are a class of drugs which were developed to treat type 2 diabetes that have shown impressive benefit in heart failure. There are likely to be more drugs of this class coming to market in coming years. Also, the GLP-1 agonist class of type 2 diabetic drugs have also show efficacy in heart failure that will likely lead to approval of several GLP-1 drugs in heart failure. Finally, Merck’s new heart failure dug vericiguat that has a unique mode of action is close to approval. There is going to be a lot of competitive activity in the market place.

Amgen probably calculated that return on investment would be higher with other pipeline assets. Amgen is preparing for two major product launches in the 2021-2022 time frame. A new drug application has been submitted to the FDA for sotorasib for the treatment of patients with KRAS G12C–mutant locally advanced or metastatic non–small cell lung cancer. Also, Amgen announced in November 2020 positive topline results from the Phase 3 NAVIGATOR trial in which  tezepelumab demonstrated a statistically significant reduction in exacerbations compared to placebo in patients with severe asthma. Both drugs have been designated as breakthrough therapies by the FDA and have several billion dollars of sales potential. Even though Amgen is a company with enormous financial and marketing resources, it has a lot on its plate with launches of  sotorasib and tezepelumab in 2021 and 2022. Management probably felt that investments in these two products would have meaningfully greater returns than the impaired opportunity with omecamtiv.

Cytokinetics Approach for Regulatory Filing

Cytokinetics will almost certainly file for regulatory approval and as I have said, the product appears to meet the requirements for approval. The main discussion with regulatory agencies will relate to the labeling for the drug. The benefit of the drug as seen in GALACTIC-HF is in patients with very low ejection fractions. However, this is a secondary endpoint in the trial. Will the agencies go along with labeling that highlights this benefit? It is important that the primary endpoint was met because the FDA has a stated policy that it won’t approve drugs on the basis of a secondary endpoint if the primary endpoint was not reached.

Another compelling reason to approve the drug is that omecamtiv has a superior pharmacokinetic profile to currently used inotropic drugs (they increase the output of blood from the left ventricle) that are used in heart failure such as digitalis and milrinone. These drugs achieve an increase in cardiac output by causing an already damaged heart to contract with more force. This can lead to life threatening cardiac arrythmias and death. Even with this life threatening side effect, these drugs are used to treat a meaningful number of patients. The reason is that the improvement in blood flow results in patients feeling better and being better able to perform normal activities of life. Omecamtiv is an inotropic agent, but as shown in GALACTIC-HF does not have the life threatening side effects of digitalis and milrinone. This constitutes another potential reason for FDA to approve omecamtiv.

The biological effect of omecamtiv in improving cardiac output is like digitalis and milrinone so it is reasonable to speculate that like those drugs, it will improve quality of life, but without life threatening side effects. CYTK has been enrolling patients in a second phase 3 trial called METEORIC-HF. The aim of the study is to assess its effect on exercise capacity in heart failure patients, which is an important determinant of quality of life. If this is demonstrated, it will be another powerful argument for approving omecamtiv. This trial is enrolling 270 patients and is expected to complete and report data in 4Q, 2021.

Timelines for Regulatory Submission and Commercialization

Cytokinetics hasn’t given any guidance for when it will submit an NDA for omecamtiv to the FDA. There is still considerable analysis to be done on the GALACTIC-HF trial and CYTK will also want to provide regulatory agencies with arguments from key opinion leaders as to why omecamtiv may be of unique value in treating more severe heart failure patients with ejection fractions ≤28%. This will take time. It is also unclear how they will handle data from METEORIC-HF. Will they wait for completion of the study or will they go ahead and submit the GALACTIC-HF results and provide the METEORIC results later? As an outright guess the NDA may be submitted in 4Q, 2021 or 1Q, 2022.

Once the FDA receives the NDA, the review team decides if it is complete. If it is not complete, the review team can refuse to file the NDA. If it is complete, the review team then has 6 to 10 months to make a decision on whether to approve the drug. So if things go relatively in line with this, the decision on the NDA could be made in 2Q, 2022 or 3Q, 2022. I want to emphasize that these are outright guesses on may part and I have tried to be conservative. Hopefully, the process will be faster.

The commercialization of omecamtiv will probably require considerable marketing effort given the enormous competition from new drugs. I think that CYTK will need and will seek a collaboration with a larger company with an established marketing structure and significant market resources. It is difficult to determine when or if such a collaboration might be accomplished.

Much of the first year of marketing involves dealing with physician education and gaining reimbursement so that sales are constrained. It usually takes until the second year following introduction for sales to begin to gain traction. This was clearly seen with the launch of Entresto. If this is the case with omecamtiv, it could well be until 2H, 2023 before investors can really gauge its commercial potential.

Addressable Market for Omecamtiv

Cytokinetics has estimated that there are 8 million heart failure patients in the US and more than 2 million have ejection fractions of less than 30. The price of omecamtiv would likely be close to that of Entresto. Cash paying customers purchasing Entresto at its list price pay about $7,400 per year. However, most patients have Medicare, Medicaid or private insurance plans that get significant discounts. I would guess that across all payor groups that the average price might be $5,000 per year. If all of these assumptions are correct the total addressable market in the US for omecamtiv could be as much as $10 billion annually (2 million patients times $5,000). Even a modest penetration of 10% could result in a $1 billion product in the US. Potential in Europe could be comparable.

While the addressable market is large, the competition will be fierce especially in patients whose ejection fractions are higher, say ≥28%. It is likely to be the case that its most important medical niche and commercial opportunity for omecamtiv is in patients with extremely low ejection fractions. At this point, it is really hard to make estimates of sales potential, but intuitively I think it could have peak worldwide sales of $1 billion or more.