Expert Financial Analysis and Reporting

Investment Thesis is Almost Exclusively Driven by Prospects for Omecamtiv Mecarbil

Omecamtiv Mecarbil is a Potential Mega- Blockbuster

Omecamtiv mecarbil is one of the most exciting drugs in development in all of biopharma and is the primary driver of my investment thesis on Cytokinetics. If successful in the ongoing, phase 3 GALACTIC-HF trial, I believe that it would represent a major advance in the treatment of congestive heart failure and would become part of standard of care. If so, it probably has peak 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 double digit royalties. The resulting net after tax profits for Cytokinetics on $10 billion of sales (possible around 2030) could total $750 million.

If we were to apply a P/E of 15 to 20 to these earnings and divide by 80 million shares (currently there are 57 million fully diluted shares outstanding), the stock price would be $140 to $185. Obviously, there is “moon shot” upside potential based if omecamtiv is successful.

I think that the probability for success in the phase 3 trial is reasonably good with the obvious caveat that nothing is certain when it comes to drug development. 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 the hugely expensive GALACTIC-HF 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 their 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.”

Nearing the Finish Line for GALACTIC-HF Results

Amgen and Cytokinetics are nearing the finish line for GALCTIC-HF as the trial recently completed patient enrollment of more than 8,200 patients at over 1,000 sites in 35 countries. Approximately 40% of the patients were enrolled in the U.S., Canada, Western Europe, South Africa and Australasia, 33% in Eastern Europe and Russia, 19% in Latin America, and 8% in Asia. Approximately, 25% of the patients in GALACTIC-HF were hospitalized at the time of randomization which was in accordance with the trial protocol.

In March 2019, AMGN and CYTK received the first input from the trial as the Data Monitoring Committee (DMC) conducted the first interim analysis which included consideration of pre-specified criteria for futility. Upon review of the data, the DMC recommended the trial continue without changes to its conduct. This futility analysis was triggered once a pre-specified number of cardiovascular deaths as stipulated by the trial protocol had occurred. The next input will be the second planned interim analysis which includes an assessment for the potential for superiority over standard of care projected to occur in the first half of 2020.

It is unlikely that there will be safety issues at this second look 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. Interestingly, the interim look scheduled for 1H, 2020 is intended to provide an insight into efficacy and there is some possibility that results will indicate that the trial has successfully reached its primary endpoints. If so, GALACTIC-HF would be stopped and there would be a regulatory filing in late 2020 or more probably early 2021 followed by commercialization in late 2021 or early 2022. It is impossible to judge the probability of this occurring. There are also the possibilities that the trial could be halted for futility (stock could drop to $3) or that the DMC recommends that the trial continue. In the latter case, we would likely see top line results in late 2021 and commercialization in 2023.

I think that there is some expectation on the part of investors that GALCTIC-HF will be stopped early for efficacy in 1H, 2021. If this occurs, I think it would trigger a huge rally in the stock that could perhaps double or triple the price very quickly. The impact on the stock due to a recommendation of the DMC to continue the trial is more difficult to predict. It could be interpreted as slightly positive or slightly negative. My guess and it is a guess is that the DMC will recommend that the trial continue.

METEORIC-HF is a Second Phase 3 Trial

The GALACTIC-HF trial is enrolling sicker CHF patients. Amgen and Cytokinetics are also enrolling a second trial that will be looking somewhat less severe patients. METEORIC-HF, if successful will supplement GALACTIC-HF. It will establish the medical benefit of omecamtiv in less severely ill patients and will also provide data on quality of life which will be important in reimbursement issues.

The design of the trial compares the effect on exercise capacity of omecamtiv mecarbil to placebo as determined by cardiopulmonary exercise testing through 20 weeks of treatment. The patient population is a somewhat different from GALACTIC in that it requires that patients have not been hospitalized. Like GALACTIC-HF, the protocol requires low ejection fractions (less than 35%). In GALACTIC the focus is on in cardiac events and cardiovascular deaths in high-risk patients.

METEORIC-HF will be enrolling less severely ill patients. The objective is to demonstrate an increase in exercise tolerance. They don't want enrolled patients to enter the hospital during the conduct of the study as this would be highly disruptive. So enrolled patients have low ejection fraction, but most probably have not been and are not expected to be hospitalized. The trial is targeting 70 to 90 sites in the U.S. and in Europe and Canada. They will decide on the final number depending on how enrollment begins to emerge. The plan is to complete this trial and have the data available at about the same time as the potential regulatory filing of the data from METEORIC-HF.

Overview of Congestive Heart Failure (See appendix, if interested)

Treatment of Congestive Heart Failure (See appendix, if interested)

Where Omecamtiv Fits Into CHF Treatment (See appendix, if interested)

Financial Position

CYTK ended the second quarter with $175million in cash. Management says that this represents approximately 2 years of forward cash. The guidance is for a burn rate of $85 million to $90 million in 2019 and in the first half of 2019 the cash burn from operations was $50 million. This implies a second half burn of $35 to $40 million and if so, the year-end cash position would be $135 to $140 million. Management has consistently stated that its strategy is to manage its cash prudently through the expected readout of the results from GALACTIC-HF in 2021.

Assuming a $23 million quarterly cash burn, CYTK would exhaust its cash by the end of 1Q or 2Q, 2019. I think that the Company will need to bring in cash before then through some form of debt or equity offering and/or proceeds from partnering. An equity offering, if it occurs, would likely be late this year or early next. Past experience suggests that management likes to be very well financed before major catalysts so that in the event of a failure in GALACTIC-HF it will have adequate resources to develop the rest of its pipeline.

Other Parts of the Investment Thesis

The Technology Base

Cytokinetics has pioneered the pharmacology of muscle function and continues to build a pipeline of drugs that both activate and inactivate the contractility of the sarcomere, a cellular complex which is responsible for muscle contractility. (Omecamtiv is an activator of the cardiac sarcomere that increases contraction). The Company has profound leadership in this biology space. Unlike oncology in which there are literally hundreds of companies competing to develop drugs, there are only a handful in Cytokinetics’ space. CYTK has screened several millions of compounds; profiled thousands of lead compounds; optimized and characterized hundreds of distinct chemical series; and conducted dozens of clinical trials.

Indulge me and let me imagine a hypothetical situation in which Cytokinetics is a private company about to launch an IPO, but there was no omecamtiv so that the IPO was based on the rest of the pipeline as I will shortly address. I would suggest that Cytokinetics would be a very hot IPO and would probably come public at a meaningful percentage of the $725 million current market capitalization. However, I think that the pipeline currently is given little, if any, value.

The success or failure of omecamtiv will probably have a profound impact on how investors view and value the non-omecamtiv pipeline. Success would validate Cytokinetics’ technology and the value I proposed in my hypothetical example could be realized. On the other hand, failure of omecamtiv might cause investors to question or even dismiss CYTK’s technology base and its non-omecamtiv pipeline. Let’s look at the pipeline beyond omecamtiv.

Reldesemtiv in ALS

Management believes that the data announced last March from the FORTITUDE-ALS trial supports progression to a registrational phase 3 trial even though the trial missed achieving statistical significance on the primary endpoint of slow vital capacity. Key opinion leaders when looking at the totality of data are strongly supportive of launching a phase 3 trial. See this link for a discussion of that trial.   CYTK has drafted a protocol synopsis for a phase 3 trial in patients with ALS and is scheduling meetings to ensure that the proposed approach is sound and aligns with regulatory, patient and payer needs. Management said that it will take some time to get this right and that they do not expect to begin the trial until the second half of 2020.

I had originally thought that the phase 3 trial could begin in late 2019 with topline data possibly in 2H, 2021. However, the loose guidance from the Company now suggests that the trial could start in 2H, 2021. If so, topline data might be available in 2H, 2022. In addition to the reasons given above for the delay it might be the case that CYTK does not want to ramp up its burn rate until it sees the omecamtiv trial near completion. It could also be because Cytokinetics is currently in discussions with Astellas to amend the terms of the collaboration agreement on reldesemtiv. This would deal with the level of potential funding, share of commercialization returns and which company would be responsible for development and commercialization

Reldesemtiv in Spinal Muscular Atrophy (SMA)

Cytokinetics says that it has also identified a path forward for a phase 3 trial of reldesemtiv in spinal muscular atrophy based on the data generated in phase 2. The recent introductions of the revolutionary drugs, Biogen’s Spinraza (nusinersen) and Novartis’ Zolgensma, are enabling patients to live longer, but they will still struggle with persistent residual muscle weakness that impacts their ability to perform activities of daily living. Management believes that reldesemtiv will be complementary to these new treatments by addressing this residual muscle weakness.

However, the newness of these therapies is changing standard of care and also what the baseline looks like for patients who would participate in a reldesemtiv phase 3 trial. It is not completely clear what are appropriate endpoints for ambulatory and non-ambulatory SMA patients. CYTK is collaborating with clinical experts in the field as well as patients, advocates and health technology assessors to determine its clinical strategy and study designs. Based on the phase 2 data, they believe that in ambulatory patient’s a six-minute walk test is a good endpoint, but are less clear how they might evaluate the drug in non-ambulatory patients.

Management did not give guidance on the development timeline for SMA, but did say that they need to continue to assess the landscape in SMA and that they believe there may be greater urgency and unmet need in ALS given the lack of effective treatment options. This suggests that the phase 3 SMA trial will begin after the ALS trial or perhaps in 2H, 2022. If so, we might not see topline data until 2024 or 2025.

CK 274

CK-274 is a wholly owned cardiac myosin inhibitor in contrast to omecamtiv which is an activator. This product decreases cardiac contractility and may address the underlying hyper contractility of the cardiac sarcomere in hypertrophic cardiomyopathy (HCM). This is a disease that affects about 600,000 Americans in which the heart muscle becomes abnormally thick (hypertrophies).The thickened heart muscle can make it harder for the heart to pump blood. This is usually not a life threatening disease and patients can expect a normal lifespan. At this point I haven’t done any work to define the addressable market.

Data from a phase 1 study in healthy subjects is expected in 3Q, 2019. CYTK anticipates beginning a phase 2 trial in patients with obstructive HCM in 4Q, 2019. The key things in designing a phase 2 study will be to identify a pharmacologically active dose and characterize the dose response relationship in patients with HCM. The objective is to determine the starting dose and also how to titrate the drug. No guidance on a timeline was given, but my guess is that we could see the results of this phase 2 trial in early 2021 and if positive, a phase 3 trial might begin in late 2021 or early 2022.

AMG-594

AMG 594 is a fast follower to omecamtiv which was discovered under a joint research program with Amgen. In the pharmaceutical industry, it is often the case that in a new novel category of drugs like cardiac sarcomere activators (omecamtiv being the prototype), that three or so drugs will control 85% of the market. Hence, lead drug innovators like Amgen and Cytokinetics try to develop a follow-on product, which is what AMG-594 is intended to be. AMG 594 is said to have differentiated pharmacology from omecamtiv mecarbil, but what this is has not been revealed.

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. Amgen continues to conduct the phase 1 clinical study of AMG 594. This study includes single and multiple ascending dose cohorts to assess safety and tolerability in healthy volunteers and its potential to increased cardiac function. The expectation is that this study will continue throughout 2019. Cytokinetics has been working closely with Amgen to develop a potential phase 2 clinical program.

Appendix

Overview of Congestive Heart Failure

Congestive heart failure (CHF) is a life threatening condition that can result from heart attacks or prolonged hypertension. While simplistic, it is useful to compare the cardiovascular system to a pump (the heart) and the pipes (blood vessels). CHF is a condition in which the heart is not pumping enough blood because it has been damaged and the pipes or blood vessels are clogged up making it harder to pump blood through them. Blood can pool in the body causing shortness of breath, swelling in the limbs and exercise intolerance. This means that an already damaged heart muscle is forces to pump harder. This causes the heart to enlarge and become flabby and increasingly less functional leading to a downward spiral in heart function and eventually death.

According to Wikipedia, about 5.7 million adults in the United States have congestive heart failure. One in 9 deaths in 2009 included CHF as a contributing cause. About half of people who develop CHF die within 5 years of diagnosis. Congestive heart failure has a very profound health effect on individuals and a concomitant effect on national healthcare spending. It is a chronic disease that patients may live with for some years but short term exacerbations often lead to acute hospital stays. It is the most frequent cause of hospitalization for people over 65 and there are about 1 million hospitalizations and discharges from the hospital in which CHF is determined to be the primary cause. There are an additional 1 million hospitalizations in which CHF is listed as a secondary cause.

Any drug that can help patients stay alive and remain out of the hospital or reduce length of stay and costs of hospitalization would be deemed a significant breakthrough. The morbidity and mortality associated with congestive heart failure dwarfs that of most cancers. If a patient is discharged today after hospitalization, there is a 28% chance of dying within six months and they have a 30% to 40% chance of being readmitted to a hospital within six months. There is the opportunity to do better with safer and more effective medicines.

Treatment of Congestive Heart Failure

CHF patients are choked with the blood pooling in the extremities and organs and are short of breath. Acute therapy in or out of the hospital is aimed at reducing the amount of fluids with diuretics which cause the patient to excrete more water in the urine. A variety of well-known anti-hypertensive agents are used to help dilate the blood vessels and make it easier for the heart to pump blood though widened arteries. The missing element in the current treatment regimen is a drug that can make the heart safely pump more blood.

Where Omecamtiv Fits Into CHF Treatment

Digitalis is a naturally occurring substance found in the Foxglove plant that has been used to treat the symptoms of CHF by increasing the contractility of heart muscle. More recently a class of drugs called phosphodiesterase inhibitors, the best of which is milrinone, has been introduced to therapy that does the same thing. The mechanism of action of digitalis and milrinone causes the heart to contract with more force. In an already badly damaged heart, this increase in oxygen consumption and increase in calcium can cause life-threatening irregular heart rhythms. Even though these drugs probably lead to decreased time of survival, many patients and physicians are willing to take the risk because their quality of life improves so dramatically with their use.

Pharmaceutical companies have spent many years trying to develop a drug that increases the amount of blood that the heart pumps with each beat without dangerous side effects. The mode of action of omecamtiv is that it can increase the stroke volume (amount of blood pumped) and ejection fraction (amount of blood ejected from the left ventricle) without increasing the oxygen consumption (measure of how hard the heart is working) and ejection fraction with each beat. It is hoped that this will avoid the life threatening side effects of digitalis and milrinone. Essentially, omecamtiv causes the heart to contract longer and without the violent contractions that are the mechanism of action of digitalis and milrinone. If omecamtiv is found to be effective without limiting side effects, it can have a profoundly positive effect on CHF outcomes and lead to a major reduction in healthcare spending.

 

 

 

 

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