Expert Financial Analysis and Reporting

Investment Overview and Thesis

Investment Overview

Cytokinetics reported 2Q, 2017 sales and earnings results on Wednesday, August 2 but this was relatively unimportant. The stock price is driven by investors’ assessments on clinical progress of three late stage pipeline products: omecamtiv mecarbil (for congestive heart failure) and tirasemtiv (for amyotrophic lateral sclerosis or ALS) are in phase 3 pivotal trials and CK-107 is in phase 1/2 trials in four different disease states. Briefly on the financials, CYTK reported a loss of $29 million in the second quarter and currently has a $332 million cash position which management indicates can carry the Company through 2H, 2019. The Company has a very solid balance sheet that can support development of its three lead drugs without raising capital in 2017 and 2018.

For the balance of 2017, the outcome of the pivotal phase 3 trial (VITALITY-ALS) of tirasemtiv in ALS will be the critical determinant of the year end stock price. The Company expects to report topline results in 4Q, 2017 (my guess is November) and then to present much of the full data set at the Motor Neuron Disease Association’s international conference (ALS/ MND) in Boston during December 8 to 10. I continue to believe that there is a very good chance for success. The end point of the trial is slow vital capacity (SVC). In the earlier phase 2b BENEFIT-ALS trial this proscribed endpoint was achieved with a p-value of <0.0001 and the trial design and baseline patient characteristics of the two trials are comparable. The outcome of this trial will have a dramatic effect on the stock price. My guess is that if the stock is trading at $13 at the time of the topline release that success could catapult the stock price to $21 or perhaps much more. A disappointing outcome could drop the stock to $7. Importantly, in the latter case, I would be a strong buyer based on the prospects for omecamtiv mecarbil alone.

Omecamtiv mecarbil is partnered with Amgen (profits will be split roughly 50/50 in the US with double digit royalties internationally) and is involved in the pivotal phase 3 trial GALACTIC-HF. This is a massive trial that is enrolling 8,000 patients in 500 sites in 25 countries. The clinical timelines for this trial are long as I expect final results in 2021 although there could be an interim look in 2019 or 2020. So there may be no meaningful clinical trial results until perhaps 2021. I assign a high probability of success in this trial and believe that it will be a major advance in the treatment of congestive heart failure. Amgen’s head of R&D Sean Harper agrees with that assessment. He said that Amgen has shown the phase 2 data to heart failure experts from all around the world. Dr. Harper said that 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. For more detailed comments you may want to refer to my report; Amgen’s R&D Chief Expresses Great Optimism About Omecamtiv Mecarbil for Treating Congestive Heart Failure . This article is free content available on my website, SmithOnStocks.com.

The third drug in development is CK-107 which is second generation follow-on to tirasemtiv with an improved side effect profile; tirasemtiv is difficult to tolerate for some patients at higher doses. A key data readout on a phase 2 trial in spinal muscular atrophy (SMA) will occur in 1Q, 2018 and I am anxious to see the results. CK-107 is also in a phase 2 trial in amyotrophic lateral sclerosis (ALS), chronic obstructive pulmonary diseases (COPD) and elderly adults with limited mobility. The results from a 400 patient trial in ALS are expected in mid-2018. Clinical success in any one of these four indications would lead me to the conclusion that CK-107 also has blockbuster potential like omecamtiv mecarbil and tirasemtiv.

Thoughts on Price Target

Cytokinetics compelling investment characteristics for an emerging biotechnology company. Omecamtiv mecarbil and tirasemtiv are in phase 3 and each has billion plus sales potential and CK-107 could be seen as having comparable potential. I have published reports that look at the potential impact on the stock from either omecamtiv mecarbil or tirasemtiv alone. These reports are Estimating a Potential 2025 Price Target of $220 Based Only on the Potential for Tirasemtiv  and Ignoring Omecamtiv Mecarbil and CK-107  and Estimating a Potential 2025 Price Target of $172 Based Only on the Potential for Omecamtiv Mecarbil and Ignoring Tirasemtiv and CK-107 . Access to these reports requires a subscription to my website SmithOnStocks.com. Obviously, I believe that success in either VITALITY-ALS for tirasemtiv or GALACTIC-HF for omecamtiv could make Cytokinetics stock a home run. CK-107 has not yet produced compelling clinical data in any of the four disease indications being studied. Successful development in any one of the four could produce a blockbuster. If all three drugs are successfully developed, there is enormous upside potential.

I do want to add a necessary note of caution, Even though the phase 2 data for omecamtiv mecarbil and tirasemtiv is very encouraging, there is still a meaningful risk that these results may not be replicated in phase 3. This could be due to some unanticipated property of the drugs, problems with the trial design, and execution issues in the trial and so on. This remains a high risk/ high reward investment and if you are inexperienced in biotechnology investing and not willing to incur a meaningful loss in the quest for asymmetric upside, I recommend you look elsewhere.

Recent Price Action

The stock declined by $1.50 (10%) following the release of earnings on August 2 and the subsequent conference call. I cannot identify any issue discussed on the call that could be the cause of the decline. I have no concrete evidence buy my strong suspicion is that there was some manipulation of the stock on the part of market makers and hedge funds. I may be too cynical, but over and over I see trading like this that runs counter to what might be anticipated that benefits a select few who are in on the game. This is all done at lightning speed using high frequency trading, dark pools, illegal naked shorting and posting misinformation on social media websites among other tactics.

Short term market manipulation is one of major profit centers for hedge funds and market makers. In the long run, fundamentals determine price and I think that CYTK has explosive potential. In the short term it may be the case that computer algorithms can set the price at planned levels for the benefit of an inside group. I have seen this before with CYTK and wrote about it on April 18 in this report  Cytokinetics: Comments on the Upside Move Today  The stock at that point ran from $11.90 on April 17 to $17.00 on April 27 with the only news being that the Company was to be added to the S&P 600 small cap index. Such manipulation has become endemic to stock movements in emerging biotechnology and other stocks. Investors just have to steel themselves to this and remain focused on fundamental events that ultimately determine stock price.

Conference Call Highlights

Tirasemtiv

Cytokinetics is conducting a pivotal phase 3 trial of tirasemtiv in ALS called VITALITY-ALS trial. The Company expects to release top-line data in Q4, 2017. It is highly likely that full results will be presented at the ALS/ MND (Motor Neuron Disease Association) meeting in Boston during December 8 to 10. Topline results are likely to be reported a few days or weeks before then.

VITALITY-ALS has a similar trial design and is enrolling patients with the same baseline characteristics as the earlier phase 2b BENEFIT-ALS. BENEFIT-ALS missed its primary endpoint which was reduced rate of decline of the ALSFRS-r scale. The FDA has required ALSFRS-r to be the endpoint of all previous ALS trials and no trial has successfully achieved this endpoint. This has led many key opinion leaders to question the use of this scale and look to other measures of ALS disease progression as trial endpoints.

The primary endpoint of VITALITY-ALS is change in slow vital capacity (SVC) from baseline to 48 weeks. This was a proscribed secondary endpoint of the earlier phase 2b BENEFIT-ALS trial at an earlier 24 week time point. In that trial the end point was reached with a p-value of <0.0001. Cytokinetics did not seek a Special Protocol Assessment (SPA) for this trial, but believes that the FDA will accept this endpoint (there is no guarantee) if other measures on the ALSFRS-r scale related to respiration improve alongside SVC.

To this end, CYTK amended the statistical analysis plan for VITALITY-ALS. They elected to prioritize the analyses of two pre-specified secondary endpoints: (1) the change from baseline in the ALSFRS-R respiratory subdomain (3 of 12 components) which relate to breathing and (2) the slope of the change from baseline in muscle strength. This decision was based on feedback from key opinion leaders and a review of the blinded aggregate event rate in VITALITY-ALS. The respiratory components deal with dyspnea, orthopnea and noninvasive ventilation.

Because both of these endpoints are viewed as especially clinically meaningful by ALS clinicians, regulatory authorities and payers, CYTK wanted to ensure that both would be formally analyzed and thus elevated them in the statistical hierarchy of pre-specified secondary endpoints which will be tested following what they hope will be a statistically significant result on the primary efficacy endpoint. This is the change from baseline to 48 weeks in slow vital capacity.

In addition to VITALITY-ALS, the Company is also conducting VIGOR-ALS which is an open-label extension trial of tirasemtiv for patients who have completed VITALITY-ALS. More than 90% of patients who completed VITALITY-ALS elected to enroll in the open-label extension. A significant number of patients in VIGOR-ALS are choosing to up-titrate to the maximally permitted dose of 250 milligrams twice a day which is encouraging for the tolerability of tirasemtiv.

Omecamtiv Mecarbil

The Japanese omecamtiv study in acute heart failure recently produced positive results similar to COSMIC-HF in terms of safety and efficacy; this provided additional validation to the positive results reported in that study. It reached its pharmacokinetic primary endpoint and also showed statistically significant improvements in systolic ejection time which was the secondary efficacy endpoint of the trial. This was the gating factor for enrolling Japanese patients in the phase 3 GALACTIC-HF trial already underway in the US and Europe. Cytokinetics and its partner Amgen are now proceeding to enroll sites in Japan. CYTK is eligible to earn a $10M milestone payment from AMGN upon the first dosing of a patient.

GALACTIC-HF is an enormous trial that already has activated 500 sites in more than 35 countries with planned enrollment of 8,000 patients. According to ClinTrials.gov the trial is scheduled for completion in 1Q, 2021 so that topline results might not be available until mid-2021. Management was asked during the conference call about the potential for an interim analysis. They commented that it is premature to speculate as it is early in the enrollment phase. However, it is conceivable to have enough events to enable interim analyses in the 2019-2020 time frames.

Cytokinetics is also planning a second phase 3 trial designed to examine the effects of omecamtiv mecarbil on exercise tolerance and cardiac function in heart failure patients. This trial will be conducted by Cytokinetics in collaboration with Amgen, but will be primarily funded by Amgen. Potential approval is hinged to the results of GALACTIC-HF; this will be a supportive trial.

Management stated that it expects to continue research activities under its joint research program with Amgen directed to the discovery of next-generation cardiac muscle activators. I would not be surprised to see an IND filed on a new agent in 2017.

CK-107

CK-107 is the next generation follow-on to tirasemtiv. It is being tested in four different clinical indications with the lead being spinal muscular atrophy (SMA). The second trial is being conducted by Astellas is in chronic obstructive pulmonary disease (COPD). Recently, the companies began two additional phase 2 trials in elderly adults with limited mobility and patients with ALS.

The first cohort of the SMA trial has already been enrolled and a second cohort began enrolling four months ago. Enrollment has been slower than expected due to the higher than expected rate of screening failure due to the Hammersmith Functional Motor Scale Expanded or HFMS-E inclusion criteria. Since the Hammersmith score is not commonly used to assess adolescents or adult patients, these data are not available for prescreening and it is challenging to assess the patient's functional ability by telephone.

CYTK does not believe that the slow enrollment is due to the recent introduction of Biogen’s new drug Spinraza. (These drugs work through a different mechanism of action and would be complementary in treating SMA). They feel that the availability of Spinraza has led many of the older SMA patients to reconnect with their local clinic to learn more about the new treatment and clinical trial options and that this has been a positive CK-107.

They now have 17 sites activated and are nearly midway through enrolling the number of required patients in cohort 2. The Company is indicating that enrollment should be complete in coming months and anticipates a topline data release in 1Q18. CYTK just received notice that the Office of Orphan Products Development of the FDA granted orphan drug designation to CK-107 for the potential treatment of spinal muscular atrophy.

Cytokinetics and Astellas recently announced the start of a Phase 2 clinical trial of CK-107 in patients with ALS called FORTITUDE-ALS. This trial will enroll 400 patients in the US and Canada. The primary efficacy endpoint will be change from baseline in the percent predicted SVC at 12 weeks. Secondary endpoints are measures of muscle strength as well as change from baseline in the ALSFRS-R. They are also incorporating new exploratory endpoints focused on self-assessments of respiratory function and disease progression through quantitative measurement of handwriting and speech, utilizing novel digital applications.

Additionally, Astellas recently began a Phase 1b clinical trial of CK-107 in elderly adults with limited mobility. This trial will enroll approximately 60 subjects between the ages of 70 and 89 and assess the effect of CK-107 on skeletal muscle fatigue measured by change in baseline versus 14 days of treatment in the sum of peak torque during isokinetic knee extensions. This trial will also assess the effect of CK-107 on physical performance via a short battery of physical performance tests including stair-climbing and a 6-minute walk.

Financial Issues

CYTK raised approximately $100 million during the second quarter which was in addition to the $100 million raised in Q1 2017 from the royalty monetization deal on omecamtiv with Royalty Pharma. The $100 million raised in Q2 2017 included an $83 million public stock offering underwritten by Morgan Stanley, $12 million from the completion of an at-the-market offering and $11 million from the exercise of warrants originating in a 2012 financing. As a result, CYTK ended the second quarter with $332 million in cash, cash equivalents and investments which represents over 24 months of going-forward cash burn based on current financial guidance.

Upcoming Milestones and News                  

The key milestone for tirasemtiv and indeed for the entire company is the reporting on pivotal phase 3 data for tirasemtiv in VITALITY-ALS in 4Q, 2017. The Company will also continue to enroll patients in VIGOR-ALS.

For CK-107, they expect to complete enrollment of Cohort 2 of a Phase 2 clinical trial in patients with SMA in 2017 and the release of data in 1Q, 2018. Enrollment will continue is the three other indications-ALS, COPD and elderly patients with limited mobility. The 400 patient phase 2 trial of CK-107 in ALS- FORTITUDE-ALS- could report out in mid-2018.