Expert Financial Analysis and Reporting

Catalysts for 2015

During the conference call on February 12, 2015 discussing 4Q, 2014 results Cytokinetics discussed key catalysts for 2015 which are as follows:

• A phase 3 trial of tirasemtiv in patients with ALS will start in 2Q, 2015
• Cytokinetics expects enrollment of patients in the expansion phase of COSMIC-HF to conclude in this first quarter of 2015
• Results from the phase 2b COSMIC-HF trial which is the gating factor for the decision to begin a phase 3 will be announced in 2H, 2015
• The first Phase 2 trial of CK-107 will begin in patients with spinal muscular atrophy in 2H, 2015.

Investment Thesis

On April 25 2014, it was announced that the BENEFIT-ALS phase 2 b trial of tirasemtiv failed to reach the primary endpoint of slowing the rate of decline in ALS patients as measured by the ALSFRS-r scale. In ensuing months, this crushed the stock driving it from $12.99 on April 24 just before the release of results to a low of $3.07 on October 10, 2014. However, history has taught that results from a phase 2 trial do not always accurately predict the ultimate success or failure of a drug. Design and execution of clinical trials is an imperfect science and drug developers must weigh the complete body of evidence from a trial, not just topline results, to determine if additional clinical trials could define a clinically meaningful role that would lead to regulatory approval.

Cytokinetics (CYTK) carefully analyzed BENEFIT-ALS and determined that data demonstrated a striking effect on respiratory function. Because most ALS patients die of respiratory failure, Cytokinetics concluded that this could be the basis for the primary endpoint for a phase 3 trial in ALS. Because the FDA has required ALSFRS-r to be the endpoint in all recent ALS trials, most investors were uncertain or skeptical that the agency would agree.

Management announced on a conference call on February 12, 2015 that they will move tirasemtiv into a phase 3 trial that will begin in 2Q, 2015. They laid out the analysis that had been done on BENEFIT-ALS and then presented to regulators. Based on feedback from regulators, they believe that the FDA and MAA (the European equivalent of FDA)) will accept measures of lung function as a primary endpoint (this is discussed in greater detail later). In the BENEFIT-ALS trial, a prospectively defined measure of lung function- Slow Vital Capacity or SVC- showed extremely strong evidence of effect. While the final word is yet to come, if the agencies accept SVC as the primary endpoint in a phase 3 trial, the likelihood of success in a phase 3 trial would seem to be very high.

At the October 2014 low of $3.07, investors had written off tirasemtiv as a failed drug. The only value in the stock was attributed to omecamtiv mecarbil, a drug for chronic heart failure, which is partnered with Amgen. This is potentially a very important drug, but its development has been painfully slow. In March of 2014, omecamtiv began the expansion phase of an important phase 2 trial that must be successful if it is to progress to phase 3. In addition, in September the Company had a cash position of $82 million which raised concern that there would have to be a financing in 2015. Since September, perceptions have had a dramatic swing to the positive.

Cytokinetics management has demonstrated coolness and tenacity in the face of disappointments. They persisted with a careful analysis of tirasemtiv as was just discussed. Then unexpectedly, in late 2014 they announced a promising collaboration with Astellas on CK-107, another novel drug arising from their novel muscle contractility technology platform. This added positive new elements to the investment equation. CK-107 will be advanced into phase 2 trials in 2H, 2015 adding a third important drug to the pipeline. The collaboration with Astellas also was a major validation of their unique muscle contractility technology which holds the promise of developing more novel drugs beyond omecamtiv, tirasemtiv and CK-107.

The Astellas deal importantly included upfront payments and along with equity investment brought pro forma cash to $128 million at the beginning of 2015. Taking into account, the costs of a phase 3 trial of tirasemtiv, the Company now has enough cash to fund the burn rate over 24 months. For an emerging biotechnology company, Cytokinetics has an extremely strong balance sheet to support its clinical development plans.

This balance sheet analysis does not take into account potential milestones from Astellas and Amgen which could be very substantial. Cytokinetics has previously provided information that suggests that from the Amgen deal, it could receive up to $300 million in pre-commercialization milestones tied to events such as beginning of phase 3, successful completion of phase 3 leading to a regulatory submission and ultimately approval. These payments are obviously weighted toward the later events, but all of these milestones could be reached by 2019 under the assumption that omecamtiv is approved. Management has suggested that the Astellas deal could be of similar importance and I am guessing that CK-107 could also be approved in 2019. In this optimistic scenario, Cytokinetics could benefit from $600 million of cash infusion over the next four years from milestones if both drugs are successful in their clinical trials and approved.

Omecamtiv has been forgotten but not gone and it is advancing toward the conclusion of the phase 2 COSMIC-HF trial in 2H, 2015. If this trial is successful, Cytokinetics and its partner Amgen will advance the drug into phase 3. This decision should be known by late 2015 or early 2016 and would be a major catalyst. It would bring a substantial infusion of cash in the form of a milestone payment and the validation that Amgen believes in the drug and is willing to invest large sums in a phase 3 clinical trial.

I believe that investors will conclude as I have done that there is an excellent chance that tirasemtiv will be successful in phase 3 and I have previously suggested that it has peak sales potential in ALS of over $1 billion. I think that we will see phase 3 results for tirasemtiv in 2017. As a rough guess, if current phase 2 clinical trials are successful and they proceed to phase 3, I think that we could see phase 3 results for both omecamtiv and CK-107 in 2019. I view CK-107 as having similar potential to tirasemtiv and omecamtiv as much larger.

I also want to re-emphasize that there is definitely no need for a financing in 2015, probably not in 2016 and possibly never. Remember that in an optimistic case, milestones from omecamtiv and CK-107 could bring in $600 million by 2019.  There is no financing overhang. Sometimes this issue is more important to the stock price than product issues.

Drug development is fraught with risk and no matter how promising they may now be viewed, tirasemtiv, omecamtiv and CK-107 all could fail. This is just the nature of biotechnology investing. In looking at the potential fundamental risks to the stock, the most significant near term risk would be disappointing results in the COSMIC-HF trial in late 2015. Expectations for results are mixed, but failure to move into phase 3 would be a disappointment that would have a significant effect on the stock price. Because tirasemtiv and CK-107 are just moving into clinical trials, topline results for these drugs will come in 2017 for tirasemtiv and for CK-107 in 2016 so there is no clinical risk in 2015.

Price Target Thinking

I continue with my Buy recommendation. As previously noted, enthusiasm for tirasemtiv drove the stock to a high of $12.99 in April of 2014 and then hopes for the product were dashed by disappointment in the BENEFIT-ALS trial. I watched very closely as management dug into the trial results and began to signal that there was a path forward for tirasemtiv using SVC as a primary endpoint. I agreed and I wrote numerous reports recommending the stock last year when it was trading in the $3.50 to $4.50 range; tirasemtiv going forward into phase 3 was the expected catalyst.

The prospects for approval for tirasemtiv appear much better now than just before BENEFIT-ALS results were released. With the current market capitalization of $390 million I think that prospects for tirasemtiv alone makes the stock attractive. Adding in the possibility for success with omecamtiv and CK-107, the very strong financial position and the continuing expansion or product development from its core muscle contractility technology, I think that the stock has excellent potential.

So how should investors value the stock? Absolute values of biotechnology stocks are very difficult to judge because of the many uncertainties involved in drug development. I often rely on relative valuation measures. Cytokinetics has a market capitalization of about $390 million. With other companies in phase 3 development with one promising drug, we often see market capitalizations of $500 to $800 million; I can argue that tirasemtiv alone justifies this level of valuation. I can make a similar argument for omecamtiv providing the COSMIC-HF trial is successful. Moreover, CK-107 and other potential drugs that could arise from the Astellas collaboration could be worth half this much. The sum of the parts suggests that Cytokinetics could sell at $1.2 billion to $2.0 billion based on these three products if tirasemtiv is advanced into phase 3 (almost a certainty), omecamtiv is successful in COSMIC-HF (reasonable probability) and CK-107 goes into phase 2 (almost a certainty).

I am postulating two potential price targets one year out. I think that if it is announced later this year that omecamtiv will be taken forward into a phase 3 trial by Amgen and Cytokinetics that the stock could double from this level to a market capitalization of $800 million (or more) and a stock price of $14. I think that the odds favor omecamtiv moving into phase 3, but if omecamtiv is abandoned by Amgen, there could be a sharp immediate impact on the stock. However, after that passes the stock could recover and trade meaningfully above current levels, perhaps in the $8 to $10 range as a guess.

Tirasemtiv

Lessons Learned from BENEFIT-ALS

The Company consulted with neuromuscular and pulmonary experts both in the United States and abroad after the failure of BENEFIT-ALS. From these consultations, they concluded that the results provided compelling evidence that tirasemtiv may preserve pulmonary function in patients with ALS. They thought that this important clinical benefit could be the basis for a phase 3 trial that would lead to regulatory approval. In the trial, they had prospectively defined a secondary endpoint called slow vital capacity (SVC) that is a critical measure of respiratory function.

SVC is an indicator of the strength of the skeletal muscles responsible for breathing. There is a consensus among key physician opinion leaders (KOLs) that the rate of the decline in pulmonary function as measured by SVC strongly predicts mortality. In a clinical setting, patients with ALS are evaluated in a variety of ways, however respiratory function is especially important to assess because patients with ALS usually die from respiratory failure.

In clinical practice, referrals to hospice, recommendations regarding feeding tube placement and prescription of noninvasive ventilation are all based on SVC measurement. Third party payers also make decisions about funding such interventions based on SVC. The absolute level of SVC and the rate of decline are very important to patient care. ALS patients know their SVC scores like most people know their social security numbers.

SVC is measured by inserting a tube into the patient’s mouth and having them take a deep breath and exhale normally. A spirometer determines the amount of air exhaled (in liters). An algorithm is then used to compare this reading to what would be expected from a normal person with comparable physical characteristics such as sex, weight, age, etc. The most striking result of BENEFIT-ALS was that treatment with tirasemtiv resulted in a strongly, statistically significant reduction versus placebo in the decline of SVC at each assessment over 12 weeks of double blind treatment. As is shown in the following table, there was strong statistically significant improvement in SVC at all measured time points in the trial.

Slow Vital Capacity	Placebo (n = 210)	Tirasemtiv (n = 178)	All (N = 388)
  Baseline (% Predicted, mean ± SD)	89.7 (17.2)	85.7 (19.3)	87.8 (18.3)
  Time Point	Changes from Baseline (Least Square Mean ± Standard Error)		p-value
  Week 4	-3.89 (0.62)	-0.99 (0.68)	0.001
  Week 8	-5.81 (0.68)	-2.85 (0.77)	0.004
  Week 12	-8.66 (0.80)	-3.12 (0.90)	<0.0001
	Slope of decline (Percentage Points per day)
  Week 0 to Week 12	-0.0905	-0.0394	0.0006

Further analysis showed that there was a powerful and consistent statistically significant effect on all but two of 16 pre-specified sub-groups. Furthermore, the lesser decline in SVC on tirasemtiv versus placebo persisted undiminished at one and four weeks after the last dose of double blind study medication demonstrating the durability of the effect of tirasemtiv on SVC.

Inability to tolerate the side effects of tirasemtiv in BENEFIT-ALS was a significant problem that led to a meaningful number of patients dropping out of the study. The side effect issue had been anticipated and patients were given tirasemtiv at a dose of 125 milligrams twice a day for a week before they were randomized to either tirasemtiv or placebo. The objective was to determine if patients could tolerate side effects and remain in the trial. With perfect hindsight, management thinks that the one week period was too short. As a result, some patients who could not tolerate the side effects or were not prepared to cope with them dropped out shortly after beginning the trial. More time may be needed before randomization in the phase 3. In addition, there was no plan for using other medications to help patients cope with side effects, which tend to go away or diminish with time.

Phase 3 Trial Design

After a thorough analysis lasting over a half year, Cytokinetics recently met with the FDA to discuss results from BENEFIT-ALS and to discuss how this supports a next step phase 3 program. They similarly met with representatives from EMA, the European counterpart to the FDA. These interactions are still ongoing, but based in part on their feedback; CYTK has decided to move into phase 3. The feedback from consultants, market research and regulators aligns in an actionable manner and underscores the importance of respiratory functions for patients with ALS.

The phase 3 trial is going to be designed to confirm the effects that were seen with SVC in the BENEFIT-ALS trial. There are a number of ways of looking at SVC. Perhaps the most important is the absolute change in SVC from baseline. They also will look at the slope of decline in SVC which in other clinical trials has been seen to be a 3% decline per month and may also determine if SVC falls below a certain threshold. In addition to SVC, they will also examine other clinically meaningful measures of respiratory function such as those contained in the ALSFRS-r scale.

Because the effect on SVC was so striking the trial won’t need to be as big as the 650 patient BENEFIT-ALS trial. However, the trial will need to be longer than the 12 weeks of treatment to determine the duration of effect and to correlate improvements and decline of SVC with other respiratory parameters. The length of the trial will be longer than BENEFIT-ALS to give an insight into duration of effect or slowing of effect.

The company expects that there will be a correlation between improvement in SVC and other respiratory measures on quality of life and potentially survival. They will be monitoring parameters that reflect this but the study will not be designed to demonstrate statistical significance on mortality.

ALSFRS-r will be monitored as a secondary endpoint as it is an excellent tool for measuring progression of the disease over a longer period of time; the 12-week treatment period in BENEFIT-ALS may have been too short for this scale to measure a meaningful change. Also some of the 12 components of that scale that are subjectively measured on a scale of 0 to 4 relate to quality of life and may have been negatively affected by the side effect issues of tirasemtiv which lessen over time.

The effect on the need for mechanical ventilation will also be measured. Patients coming into BENEFIT-ALS had a baseline SVC of between 85% and 90% of predicted normal. Historical experience in other studies suggests that SVC tends to decline on average about 3 percentage points per month. Mechanical ventilation often starts at 50% of predicted normal so that for patients in BENEFIT-ALS this would have taken about 12 months; however the trial only ran for three months.

Special Protocol Assessment

It has been my expectation that Cytokinetics would seek a Special Protocol Assessment (SPA) for the phase 3 trial. Management has not confirmed this in one way or another. They have not made a final decision on an SPA and won’t do so until the protocol is finalized. There are advantages and disadvantages to an SPA. A big advantage is that the FDA would agree that SVC would be an acceptable primary endpoint instead of ALSFRS-r. There are however disadvantages in performing the statistical analysis. Management has not said directly, but I get the sense that they feel that regulatory agencies are comfortable with SVC as an endpoint and they won’t need an SPA. I now feel they won’t ask for an SPA.

They are now close to finalizing the protocol. This is something that is relatively straight forward from where they are today based on information gleaned from regulatory authorities and consultants. It won’t take much time to finalize the protocol. Hence, the company has given guidance that the phase 3 will begin in 2Q, 2015.

Cost and Length of the Phase 3 Trial

While the final protocol is not in place, the Company suggested that the total cost of the trial would be in the range of $25 million to $50 million. They did not speculate on the length of time that will be necessary to complete the trial and release topline results. This depends on the length of the trial and I am certain that it will be more than the three months in BENEFIT-ALS. I am guessing a year. If so, it may require one year after the last patient is enrolled to obtain the data on the last patient treated. After that it often takes three months or so to collect and analyze the data. I am guessing that the time to topline data will be two to two and one-half years which would bring us to 2Q, 2017 to 4Q, 2017.

Omecamtiv Mecarbil

COSMIC-HF is a phase 2b trial that is evaluating oral omecamtiv in patients with chronic heart failure. It is a double-blind, randomized, placebo-controlled, multicenter clinical trial that is designed to assess the pharmacokinetics and tolerability of omecamtiv mecarbil over 20 weeks of treatment. The trial is too short to determine efficacy in a chronic disease like heart failure so that there is no clinically meaningful primary endpoint. The expansion phase of this trial has now over 400 patients out of an intended 450. Over 150 patents have completed 20 weeks of dosing and the remainder is expected to complete dosing in 3Q, 2015. Topline results are expected in 2H, 2015.

In COSMIC-HF, investigators are determining whether omecamtiv can maintain target plasma concentrations and exposures with oral dosing over the course of 20 weeks with no limiting safety issues. Durability of effect over 20 weeks will be measured by multiple echocardiographic parameters. In numerous phase 1 and 2 trials of shorter duration, clear biologic effects that should translate into clinical benefit have been demonstrated over and over. Amgen and Cytokinetics hope to confirm what they know and love about this drug based on shorter duration studies in terms of effects on systolic ejection time and stroke volume, ejection fraction and to see that other echocardiographic parameters are maintained as the drug is dosed for longer time periods in the chronic heart failure population.

The trial remains blinded to Cytokinetics, but there have been several interim looks by the Data Monitoring Committee; it recommended that the trial should continue without change. Because there are no clinical endpoints, the DMC obviously was not able to make a recommendation on futility. Hence the decision to move forward was based only on safety. Based on the interminable phase 1 and phase 2 trials of omecamtiv, I think that we all believe that the drug has a biological effect that should translate into clinical benefit. The unresolved issues relate to the safety profile of the drug and duration of effect. The fact that the DMB has seen actual data from 150 patients treated for 20 weeks is an encouraging indicator that there are no safety issues. It is harder to determine if this says anything about duration of effect.

Results from COSMIC-HF will be evaluated in conjunction with the previously reported ATOMIC-AHF which was a trial of intravenous omecamtiv in acute heart failure. Data from these two trials will be the determinants for whether to proceed to a phase 3 trial. Amgen and Cytokinetics are jointly engaging in manufacturing, regulatory, clinical and commercial development activities based on the assumption that omecamtiv mecarbil may proceed to phase 3 in 2016. The ultimate decision will be made by a joint development committee with members from Amgen and Cytokinetics. The data from the ATOMIC-AHF supports progression of phase 3 but they also have to see COSMIC-HF.

If the decision is made to progress to phase 3, the trial will probably begin in 1H, 2016. The length of the trial will depend on the primary endpoint that the FDA will accept. If the agency wants survival data, it will be a very long trial. The companies are hoping that the FDA will accept an endpoint such as reduction in re-hospitalization which could make for a shorter trial. The trial is likely to require the enrollment of thousands of patients. As an out and out guess, I think that we could see topline results in late 2018 or 2019 if FDA does not require survival as a primary endpoint. Cytokinetics is offering no guidance on this.

The Astellas Deal on CK-107

Background

In October, 2014 Cytokinetics announced the completion of five Phase 1 studies evaluating the safety and tolerability of CK-107 and certain other Phase 2 readiness activities. These were all part of the development plan in the original collaboration of Cytokinetics and Astellas. These studies met their goals of safety and tolerability. Additionally, muscle contractility was proportional to dose and plasma concentrations suggesting a clinically meaningful effect. All of these results were seen in healthy volunteers. Additionally, the companies developed an oral formulation for phase 2 studies.

The results were the basis for this new agreement in which Astellas has exclusive rights to co-develop and commercialize CK-107 and other fast skeletal troponin activators in non-neuromuscular indications and certain neuromuscular indications. Cytokinetics will begin a phase 2 trial in spinal muscular atrophy (SMA) with CK-107 in 2H, 2015.

Astellas Deal Terms

Cytokinetics announced an expansion of its collaboration with Astellas on December 23, 2014. The deal expansion led to a cash infusion of $55 million in the form of a $30 million upfront payment, a $15 million milestone for the decision to advance to Phase 2 and a $10 million equity infusion. In addition, CYTK will be reimbursed $20 million for R&D spending in 2015 and 2016. The terms in total are comparable to those of the Amgen deal which will provide $600 million in pre-commercialization and commercialization milestone payments and royalty rates escalate with sales.

The Amgen agreement on omecamtiv included the option to use milestone payments to co-fund development. The Astellas agreement for CK-107 in SMA and other neuromuscular indications probably constructed similalry. If this option is exercised, Cytokinetics’ share of the economics from the commercialization of CK-107 can be increased up to near a 50/50 profit share. Astellas would also reimburse Cytokinetics with certain expenses associated with commercial activities.

What is Spinal Muscular Atrophy?

CK-107 is a next generation skeletal muscle troponin activator following on the heels of tirasemtiv. Cytokinetics will conduct the first phase 2 trial in patients with spinal muscular atrophy (SMA). It is a severe neuromuscular disease that occurs in one of every 6 to 10,000 live births each year and is one of the most common genetic disorders in neonates that can result in death.

SMA manifests in various degrees of severity as progressive muscle weakness resulting in respiratory and mobility impairment. There are four types of SMA, named for time of the initial onset of muscle weakness and related symptoms: Type I infantile, Type II Intermediate, Type III Juvenile and Type IV Adult onset. Life expectancy and disease severity varies by type from Type I patients, who have the worst prognosis and a life expectancy of no more than two years from birth, to the Type IV patients, who have a normal life span but with gradual weakness that develops in the proximal muscles of the extremities resulting in mobility problems.

Few treatment options exist for these patients, resulting in a high unmet need for new therapeutic options to address symptoms and modify disease progression. Cytokinetics believes that direct activation of the skeletal sarcomere by CK-107 could address muscle weakness that characterizes SMA and demonstrate effects on key functional parameters.

I have never dealt with any products that target SMA and will need to do more research on the disease state. Few treatment options exist for these patients, resulting in a high unmet need for new therapeutic options to address symptoms and modify disease progression. Cytokinetics and Astellas appear to have a strategy to use the SMA indication as a quick path to regulatory approval and commercialization. Other neuromuscular indications beyond SMA will also be targeted.

Financial Issues

Cytokinetics ended 4Q, 2014 with approximately $83 million in cash. They then received $45 million from Astellas in January so that the effective cash position at the beginning of 2015 was $128 million. This represents about two years of anticipated cash burn without accounting for any potential milestone payments from Astellas and Amgen.

Financial guidance was issued for 2015 which projects cash revenues of approximately $40 to $43 million, cash R&D expenses in the range of $55 to $58 million and cash G&A expenses in the range of $15 million to $18 million. It incorporates the expense of the beginning of the phase 3 trial of tirasemtiv.

 

Potential Other New Products to Come

The Company has referred to pre-clinical development efforts with unspecified products that are parts of the collaborations with Astellas and Amgen. These include next generation follow-up compounds to omecamtiv and CK-107. There are also unpartnered compounds that relate to muscle contractility and metabolism in muscle that may be applicable to other disease states. This raises the possibility on one or more Astellas type deals emerging in the next four years.

Tagged as CK-107, cytk, Cytokinetics, Omecamtiv, tirasemtiv + Categorized as Company Reports