Expert Financial Analysis and Reporting

Overview

Cytokinetics was founded 22 years ago and has not deviated from its initial business model that is based on an understanding of muscle activation and inhibition in cardiac and skeletal muscle. Finally, the company may be poised for the commercial introduction of its lead drug, omecamtiv. Even by biotechnology standards, the development of omecamtiv has been long. It is a classic illustration of the long timelines involved in drug research. While omecamtiv accounts for most of the current valuation of the stock, the company has several other drugs in the pipeline. I am not going to discuss these in this note, but they constitute a formidable pipeline.

• reldesemtiv has completed a large, randomized phase 2 trial in ALS and is poised to begin phase 3 trials in ALS and potentially spinal muscular atrophy (SMA)
• CK-274 is in a phase 2 trial for hypertrophic cardiomyopathy
• AMG 594 is a follow-on to omecamtiv and is in phase 1
• CK-271 is a pre-clinical follow-on to CK-274
• CK-601 is a pre-clinical follow-on to reldesemtiv

In addition to omecamtiv, there are five clinical programs underway. By 2025, the goal is to have three drugs approved and five additional programs in the clinic. All eyes are now focused on the release of top line data for its lead drug omecamtiv in the phase 3 GALACTIC-HF trial in advanced heart failure. Success in this trial would greatly enhance investor interest in the pipeline which currently contributes very little to the stock market valuation.

Omecamtiv began human clinical studies in 2005. Incidentally, that was the year that I first called on the company. At the time, the lead product was an oncology drug which ultimately failed in clinical studies. From day one, I was intrigued by the mechanism of action of omecamtiv. Almost all other heart failure drugs have been repurposed from treating another disease, notably hypertension. Omecamtiv is differentiated from current drugs with a unique mechanism of action. It increases cardiac output by increasing the period of cardiac muscle contraction. There are other drugs like digitalis and milrinone that increase cardiac output by causing the heart to contract with more force. This has proven very effective in improving cardiac output, but that mechanism of action also increases the workload of the heart and can cause life threatening arrythmias. Even with this deadly side effect, many patients elect to receive these drugs because they experience such a dramatic improvement on their quality of life. The data from phase 1 and 2 clinical trials indicates that omecamtiv does not increase the workload of the heart while increasing cardiac output. This is the compelling attribute of the drug.

The key issue for success is whether the GALACTIC-HF trial does indeed demonstrate that omecamtiv can improve cardiac output without these life threatening side effects. We will soon find out. In conjunction with its partner Amgen, CYTK has conducted the pivotal phase 3 trial GALACTIC-HF  (started four years ago) which has enrolled over 8000 patients. Management has guided that topline data will be released in 4Q, 2020. So, what are the chances for success and what does this mean commercially?

Interim Results from GALACTIC-HF

Based on an extremely extensive phase 1 and phase 2 programs, there is ample evidence that omecamtiv can increase cardiac output over several weeks or months. The question to be answered in GALACTIC-HF is whether it can be used safely and if it has durability of effect over a much longer period of time. This is what GALACTIC-HF is intended to answer along with its medical significance in treating heart failure. There have been two interim looks at the trial by the Data Monitoring and Safety Board (DMSB) that provide meaningful information on the trial.

A first interim look was reported on March 22, 2019 to determine if there were safety issues that would mandate that the trial should be shut down. The DMSB recommended that the trial continue which is highly reassuring in regard to safety. The second interim look was reported on February 22, 2020 to look at whether the trial should be stopped for futility; again, the DSMB recommended continuing the trial suggesting that there is durability of response. The DSMB also had the opportunity to stop the trial if it had already successfully met its endpoints, but didn’t do so. However, this  does not necessarily mean that the trial had not met its endpoints. This second interim look is so close to the completion of the trial in 4Q, 2020 that the DSMB reasonably might have concluded that letting the trial run its course could provide much valuable data on secondary and tertiary endpoints. Stopping the trial early might interfere with obtaining and interpreting data on these endpoints, which are important to understanding the role of omecamtiv.

At the request of Amgen and Cytokinetics, on May 8, 2020 the FDA designated omecamtiv for fast track approval. This is a process designed to facilitate the development, and expedite the review of drugs to treat serious conditions and fill an unmet medical need. The purpose is to get important new drugs to the patient earlier. A drug that receives Fast Track designation is eligible for some or all of the following:

• More frequent meetings with FDA to discuss the drug's development plan and ensure collection of appropriate data needed to support drug approval
• More frequent written communication from FDA about such things as the design of the proposed clinical trials and use of biomarkers
• Eligibility for Accelerated Approval and Priority Review, if relevant criteria are met
• Rolling Review, which means that a drug company can submit completed sections of its Biologic License Application (BLA) or New Drug Application (NDA) for review by FDA, rather than waiting until every section of the NDA is completed before the entire application can be reviewed. BLA or NDA review usually does not begin until the drug company has submitted the entire application to the FDA.

Recent Stock Performance

The designation by the FDA of Fast Track Approval status on May 8, 2020 coupled with the earlier encouraging interim looks has triggered a major rally in the stock since the stock hit a low of $8.75 on March 8, 2020. It nearly doubled to $15.76 on May 8 and following the announcement on May 8 of FDA fast track designation, it reached a high of $22.22 on May 18. At the time of this writing, it is selling at $20.97.

What to Look for in GALACTIC-HF Clinical Results

This is all very encouraging, but until the final results are reported and analyzed, there remains considerable uncertainty. Even if the trial is successful in meeting its endpoints, the medical and scientific community will still have to assess how meaningful the data is. This will be done by looking at the primary endpoint of time to cardiovascular death or first heart failure event; and the secondary endpoint of time to cardiovascular death. Management feels that a 10% to 20% reduction in risk on the primary endpoint and 10% to 15% on the secondary endpoint would be medically meaningful and position omecamtiv as part of standard of care in advanced heart failure patients. Of course, the medical and payor communities would have to make their own judgments.

METEORIC-HF is a Complementary Phase 3 Trial

Amgen and Cytokinetics are also conducting a second phase 3 trial called METEORIC. This a trial designed to assess quality of life for heart failure patients through assessing their exercise tolerance. These patients suffer from serious shortness of breath that inhibits routine daily functions such as walking. This is different from the outcomes measures used in GALACTIC HF, but could be extremely meaningful in how physicians, patients and payors see the drug. METEORIC-HF will read out next year but only data from GALACTIC HF will be the basis of an NDA filing. The companies hope to have data available at the time of the drug launch in 2021, but it won’t be part of the initial label.

Commercial Potential

There is no comparable drug to omecamtiv in heart failure. Because its mechanism of action is unique, it should be complimentary to the numerous branded and generic drugs used in heart failure. This is suggestive that it could be added to standard of care. Heart failure is one of the major causes for hospitalization in the US and the goal for omecamtiv is to reduce the number of costly hospitalizations. If it can do this, its availability should be welcomed by the medical and payor communities.

The most recent major drug launch in advanced heart failure was Novartis’s Entresto. This product is an improvement on and competes with ACE inhibitors which were initially approved for hypertension and then found extensive use in heart failure. Entresto is not nearly as unique as omecamtiv promises to be. The product was approved in 2015 and started slowly causing many analysts to declare it a failure. However, sales reached $1.7 billion in 2019 and 1Q, 2020 sales were $569 million so that peak sales are now projected at $4 to $6 billion in 2025 or so. It is not as differentiated and unique in the treatment of heart failure and is not a comparable product to omecamtiv, but these Entresto sales numbers may be indicative of the commercial opportunity. My view is that omecamtiv is medically more significant and would enjoy wider use and correspondingly greater sales.

With the Amgen collaboration, Cytokinetics is potentially eligible for $300 million of milestone payments tied to events before commercialization and another $300 million tied to commercial sales achievements. Cytokinetics will receive a royalty as a percentage of sales that starts in the high teens and advances to the low twenties as sales grow. CYTK sold off a royalty stream equivalent to 4.5% of worldwide sales  to Royalty Pharma, This suggests that on the first $1 billion of sales that the royalty received by CYTK could be 18% or so leading to royalties of about $180 million which would fall directly to pretax income. Assuming a tax rate of 25%, this would translate into $135 million after tax. CYTK currently has 59.7 million shares outstanding and with milestone payments from Amgen may not need to raise more capital. However, let’s arbitrarily assume that they do issue another 10 million shares bringing the share count to 70 million.

With these assumptions, the royalties from the first $1 billion of sales would contribute $2.00 per share to CYTK and each additional $1 billion of sales would contribute that more incrementally. If we assume a launch in 3Q, 2021 and then hypothesize that omecamtiv takes the same sales track as Entresto so that it reaches $1.7 billion of sales in 2025 or 2026, the contribution to Cytokinetics from omecamtiv royalties could be around $4.00 per share at that time. Placing a 20 P/E on this EPS contribution would result in an $80 valuation from this factor alone. In a favorable scenario, the pipeline promise would also add considerable to value. There is much potential upside if things work out as we hope and I could see the stock selling at $100 per share if the scenario works out in accordance with my assumptions.

Cytokinetics invested $40 million into the phase 3 program and that affords them the opportunity to co-promote omecamtiv in the US. Amgen will essentially fund the build-up and operation of this sales force and is also picking up other costs like cost of goods sold and certain marketing expenses. From an investor standpoint this is important because it means that while omecamtiv is in its early launch phase that Cytokinetics will not be shouldering the costs of building a sales force infrastructure and paying for it. Meanwhile the royalties flow straight to pretax as just described. Hence. Considerable net income levels will be reached much sooner than is normally the case in a new product launch.