Expert Financial Analysis and Reporting

The Investment Thesis Is Based on Three Drugs in Late Stage Development

In partnership with Amgen, Cytokinetics has advanced omecamtiv mecarbil into phase 3 development for congestive heart failure; topline data is projected for January 2021. Without a partner, Cytokinetics has progressed tirasemtiv into a late phase 3 ALS trial; topline data is projected for December 2017. In partnership with Astellas, CK-107 is in proof of concept phase 2 trials for two different indications that should report data in 2017 and will be initiating two additional phase 2 proof of concept trials in 2017. All of these drugs stem from Cytokinetics unique technology base focused on cardiac and skeletal muscle activation. Not only is CYTK the first mover in this technology I am not sure that any other companies that have developed drugs that are in clinical trials having this mechanism of action.

Here are some things to consider:

• In a recent report, I presented my reasoning for establishing a $172 price target for CYTK in 2025 based only on the potential for omecamtiv mecarbil.
• In a similar report, I estimated a price target for tirasemtiv alone in 2025 of $220 per share.
• I want to caution that while these price targets give the appearance of great precision, they represent what I think could occur if the phase 3 trials of omecamtiv mecarbil and tirasemtiv are successful. In the event of success, these price targets are meant to convey a sense of the magnitude of the possible impact on the stock price.
• CK-107 is in the phase 2 proof of concept stage and its value will increase enormously if any of these trials produce encouraging results. I think that if CYTK were to come public just on the basis of CK-107, even at this early stage the promise and uniqueness of the compound might result in a market valuation of $400 million which compares to the current market value of $597 million.
• There can be no guarantee that any of these compounds will be successfully developed, but CYTK has three powerful shots on goal. If any one of these three are successful, this could be a very, very good stock and if all three are successful, it could be an absolute moonshot of a stock.

Key Data Points for 2017

The overwhelmingly most important catalyst for CYTK in 2017 will be reporting of data for tirasemtiv in the phase 3 VITALITY-ALS trial. I expect this data in early December 2017.

In regard to omecamtiv mecarbil, there may be information on enrollment trends in GALACTIC-HF and a phase 2 trial in Japan should report data in 3Q, 2017. The earliest we might see topline data in the critical GALACTIC-HF trial would be in 2020 if an interim look indicated overwhelming efficacy. Otherwise, the topline data is projected for release in January 2021.

Results for both cohorts in the CK-107 trial in spinal muscular atrophy (SMA) should be released in 2H, 2017. This is the second most important catalyst after results from VITALITY-ALS. This trial has a placebo arm so it may give important information on the potential for successfully conducting a phase 3 trial in SMA. There might also be some data in 2017 from the phase 2 trial in COPD that could be important to the stock. The trials of CK-107 in ALS and elderly patients with limited mobility will begin later this year but no data should be forthcoming until 2018.

It is possible that an IND on a new drug could be filed this year and a phase 1 started. CYTK has indicated that its validated research engine may produce upwards of 3 or 4 more INDs over the next few years. One of these is likely to be a follow-up compound to omecamtiv mecarbil which falls under the Amgen agreement.

Investment Credentials

I consider Cytokinetics as having arguably the best pipeline potential of any emerging biotechnology company (roughly defined as having a market capitalization under $2 billion and with no commercial products). It has three distinct drugs with exciting potential in late stage development.

• In partnership with Amgen, omecamtiv mecarbil is being studied in a massive 8000 plus patient phase 3 trial.
• Cytokinetics is conducting a phase 3 trial of tirasemtiv in ALS without a partner.
• In partnership with Astellas, they are developing CK-107 in phase 2 trials in four indications-spinal muscular atrophy, COPD, elderly patients with limited mobility, and ALS.

Importantly, CYTK is well financed. It currently has about $264 million of cash which management indicates will carry the Company through 24 months of operations. Potential milestone payments could add to financial reserves.

Another important aspect of CYTK is that it has a unique technology centered on cardiac and skeletal muscular activation and I am not aware of any competitors in phase 1 development with competing products based on this mechanism of action. Contrast this with oncology where there are literally hundreds of companies competing aggressively in almost every niche area of oncology. With CYTK, one has the usual worry of whether products will be successful in clinical trials, but not the worry that a competitor has a better product.

I have consistently argued that CYTK’s $597 million market capitalization is more than justified by the potential alone of either (1) omecamtiv mecarbil, or (2) tirasemtiv, or (3) CK-107 combined with the emerging pipeline. If I am correct, investors are getting the potential of three blockbuster products for the price of one and not even paying much for just that one.

The biotechnology industry is notorious for the imperfections in the market capitalizations of existing companies as compared to companies that have just recently made their initial public offering. CYTK came public in 2004 and has had its shares of ups and downs. I think that investors feel that not having brought any drugs to market since then means that the technology is questionable. Or perhaps, they just aren’t paying attention. Based on looking at the valuations of other emerging biotechnology companies, I believe that if Cytokinetics were coming public today with its pipeline credentials that it would be priced at well over $1 billion market capitalization or $25 per share.

Omecamtiv Mecarbil, a Potential Breakthrough for Congestive Heart Failure

Following nearly ten years of development in extensive phase 1 and 2 trials (yes you reading that correctly), CYTK and its partner Amgen began a phase 3 trial of omecamtiv mecarbil in 4Q, 2016 called GALACIC-HF. This has been one of the most exhaustive phase 1 and 2 programs I have seen. It has tried the patience of investors (including me) but has produced a vast amount of information important in designing the phase 3 GALACTIC-HF trial. However, Amgen seems very pleased with the data. At the Cowen conference in March 2016, Sean Harper, Executive Vice President of Research and Development for Amgen, said and I quote “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.” See this link for more details on that presentation.

The trial will enroll approximately 8,000 symptomatic chronic heart failure patients in approximately 900 sites in 35 countries who are currently hospitalized for the primary reason of heart failure or have had hospitalization or admission to an emergency room for heart failure within a year prior to screening. The trial is scheduled to report topline data in January 2021. There is the possibility that if an interim look shows overwhelming efficacy that the trial could potentially be stopped in early 2020. For more details on the trial see this link to ClinTrials.gov.

The partners are conducting a phase 2 trial in Japan which requires studies in Japanese patients because that population may respond differently and require different dosing. This phase 2 is mostly focused on safety and pharmacokinetics and is necessary before the phase 3 trial can be expanded to include Japan. Enrollment was completed in 4Q, 2016 and results are expected in 3Q, 2017.

In addition to GALACTIC-HF, the partners are in the planning stages for another phase 3 clinical trial designed to examine the effect of omecamtiv mecarbil on exercise tolerance and cardiac function. This trial will be conducted by Cytokinetics with funding support from Amgen. CYTK hasn’t provided much information on this trial but has promised to provide more detail later this year.

Tirasemtiv, Potentially the First New Drug for ALS in 22 Years<

CYTK is conducting the phase 3, VITALITY-ALS trial of tirasemtiv in ALS by itself. However, Astellas has purchased an option for rights outside of Europe and North America. This trial builds on the experience of an extensive 670 patient phase 2 study called BENEFIT-ALS. The later trial failed to achieve the primary endpoint of improvement in ALSRFS-R but was successful in the prospectively defined secondary endpoint of SVR. No trial has ever been successful in hitting the ALSFRS-R endpoint in a phase 3 ALS trial. There has been strong support in the investigative community for using SVR as the primary endpoint and indeed SVR is the primary endpoint of VITALITY-ALS. If tirasemtiv is as effective on the SVR endpoint in VITALITY-ALS as it was in BENEFIT-ALS, it is likely that tirasemtiv will be the first new drug approved for ALS in 22 years.

CYTK has also begun an open-label extension of the VITALITY-ALS trial called VIGOR-ALS in which patient who have completed the VITALITY-ALS trial continue on tirasemtiv. The purpose of VIGOR-ALS is to assess the long-term safety and tolerability of tirasemtiv in patients with ALS. The primary endpoint is the incidence of adverse events in this patient population. During the fourth quarter conference call CEO Robert Blum was asked how many patients are electing to go on to the VIGOR-ALS trial. He said that with the exception of one patient who died and another who can no longer swallow a pill, he doesn’t know of any single patient who elected not to continue although he added that there may be some.

Management has indicated that it plans to report the results of VITALITY-ALS at the International Symposium on ALS/MND which will be held in Boston during the December 8-10, 2017 period. Topline results will be reported prior to then, perhaps in the early part of December.

CK-107, the Third Drug in Development

Astellas and Cytokinetics have an extensive partnership to study CK-107 in a broad number of disease states. Like tirasemtiv, it is a skeletal muscle activator; omecamtiv mecarbil is a cardiac muscle activator. CK-107 appears to be an improved version of tirasemtiv, especially in regard to tolerability. Astellas and Cytokinetics share the vision that the mechanism of action will be effective in a broad number of indications in a diverse population of patients with compromised muscle function. The drug currently in phase 2 trial in SMA and COPD and two additional trials in ALS and elderly patients with limited mobility are planned to begin this year. In addition, the companies are collaborating on the pre-clinical development of new and differentiated skeletal muscle activators.

The first indication being studied is a phase 2 trial in spinal muscular atrophy. You may recall that Biogen/ Ionis’s Spinraza (nusinersen) was just approved in December 2016 for this rare disease. Most of the patient’s being treated by Spinraza are under the age of 12 while those in the CK-107 trial are 12 and older so there may not be direct competition for patients. The mechanisms of actions of these two drugs are quite different and will be complimentary so that they would be used in combination. The phase 2 trial of CK-107 is close to completing enrollment. The second cohort using a higher dose will begin enrollment in 1Q, 2017. Data from both cohorts will be released in 2H, 2017 (probably 4Q, 2017).

This trial will be divided roughlybetween patients receiving drug and placebo. The cohorts are divided roughly half and half between patients who are ambulatory and those who are not. Different assessments are used depending on whether the patients are ambulatory with some overlapping. They are looking at both ambulatory and respiratory measures. The goal is to see how the mechanism of action of CK-107 may benefit adolescents and adults with SMA.

Astellas is conducting a phase 2 trial in patients with COPD. This trial began in 2016 and is continuing to enroll patients.

Cytokinetics will begin a phase 2 trial in ALS later this year. This will be at the expense of Astellas.

Astellas will be conducting a phase 2 trial in elderly patients with limited mobility. In 1H, 2017, Astellas plans to conduct a Phase 1b clinical trial to assess the effect of CK-107 in elderly adults with physical frailty and limited mobility. The study will examine the impact of treatment with CK-107 on physical performance. They will have more to say on this trial later this year.

More Drugs are in the Pipeline

A diverse pipeline of novel muscle activators with the validated research engine that may produce upwards of 3 or 4 more INDs over the next few years, while also our later stage drug candidates continue to advance in clinical trial.

Financial Position is Strong

CYTK ended 4Q, 2016 with approximately $164 million in cash and cash equivalents and investments. Subsequently, the royalty deal on omecamtiv with Royalty Pharma and its purchase of stock added $100 million. During the conference call discussing 4Q, 2016 results, management said that funds the Company for the next 24 months.  This guidance takes into account $40 million that CYTK will pay Amgen to expand its economic interest in omecamtiv. Management has suggested that the deal will afford CYTK nearly one-half on US profits in the early years of the launch and will drool somewhat thereafter.

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