Expert Financial Analysis and Reporting

Investment Thesis

Omecamtiv is the Essence of the Investment Thesis

I continue to believe that Cytokinetics is an attractive investment based on the potential for omecamtiv mecarbil, which promises to bring an important new mechanism of action to the treatment of congestive heart failure. If the ongoing phase 3, GALACIC-HF trial (a massive 8,000 patient trial that will likely cost over $500 million) is successful, I think omecamtiv mecarbil could become part of standard of care. Management says that phase 3 efficacy results are expected in 2020 based on current enrollment trends which is somewhat earlier than the expected completion date shown on ClinTrials.com of January 2021. There will be an interim look at results in 2019 and there is some possibility that the trial could be halted at that time if clinical efficacy is shown, but I wouldn’t count on this.

Success with omecamtiv in GALACTIC-HF would lead to a significant advance in the treatment of congestive heart failure and result in billions of dollars of sales. The potential impact on the stock would be huge as I outlined in my March 2017  report- Estimating a Potential 2025 Price Target of $172 in 2025 Based only on the Potential for Omecamtiv Mecarbil.

Investors can derive confidence from Amgen’s enthusiastic comments about the drug. 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 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.”

There is obviously some time to wait for phase 3 results. Importantly, the Company is sufficiently funded to reach the time of the release of these results without the need for an equity financing. Omecamtiv is the key aspect of the Cytokinetics investment thesis and more than sufficient to support buying the stock at current price levels. However, the stock recently has been under pressure due to two news events on its second drug in development reldesemtiv. These were interpreted negatively and have cause substantial weakness in the stock.

Reldesemtiv in Spinal Muscular Atrophy (SMA)

Some investors were looking at the phase 2 data on reldesemtiv in SMA (released on June 16, 2018) to be a positive catalyst for the stock. However, at first look, the data was mixed and somewhat confusing as some measures of efficacy were demonstrated, but others weren’t. Perhaps most concerning at this initial glance was that the drug showed no signal of benefit in improvement on the Hammersmith scale, the primary endpoint that led to the approval of Biogen Idec’s blockbuster drug for SMA, Spinraza.

Management after consulting with key opinion leaders feels that while the Hammersmith scale is a satisfactory endpoint for measuring benefit in infants and children (the initial Spinraza target market), six minute walking distance in more important in the adolescent and adult SMA patients that reldesemtiv is targeting. On this endpoint, the higher dose of reldesemtiv in the trial produced statistically significant results. In contrast to the view of many that reldesemtiv does not work in SMA and will be dropped from development for that indication, management is indicating that it will likely be preparing later this year for a phase 3 trial in adolescent and adult SMA patients with six minute walking distance as the highly probable endpoint.

Some investors are also concerned that there will be no place in the SMA market even if the phase 3 is successful as almost all patients will receive Spinraza and/or potentially exciting gene therapy products down the line. I think this is an incorrect view. The mechanism of action of reldesemtiv unlike these drugs does not address the underlying disease but rather improves the functioning of skeletal muscles. It would be used in combination with these drugs if successfully developed.

The net takeaway that I suggest is that reldesemtiv in SMA is very much alive and will be the subject of a phase 3 trial beginning in 2019.

The FORTITUDE-ALS Trial of Reldesemtiv in ALS

During the 2Q conference call investors were also disturbed by a slower than expected enrollment rate in the FORTITUDE-ALS trial of reldesemtiv. Management announced that target enrollment in the FORTITUDE_ALS trial is more than half completed, but has been slower than they were planning for based on experience in the recent phase 3 VITALITY-ALS trial of tirasemtiv. This was attributed to the introduction of edaravone in the US market; enrollment rates are in line with VITALITY-ALS in Canada where edaravone is not yet available. CYTK is adding sites in Australia and Europe to increase enrollment. See this report for more information on edaravone. This has caused a delay in the anticipated completion of enrollment from 3Q, 2018 to 4Q. Results are expected to be reported in the first half of 2019 as opposed to second half of 2018. Release of this data will be a major event for the stock.

Other Clinical Trials of Reldesemtiv

Astellas completed enrollment in the phase 2 clinical trial of reldesemtiv in patients with COPD and expects to report data in this third quarter. Astellas will also conduct an interim analysis of data from the ongoing phase 1b study of reldesemtiv in elderly adults with limited mobility or frailty also in this third quarter of 2018. At this point, there is little anticipation of any market moving data stemming from these trials in the stock.

CYTK does not Need Equity Financing until after Phase 3 Results for Omecamtiv are announced

Cytokinetics ended 2Q, 2018 with $232 million of cash which represents over 24 months of the forecasted cash runway based on current guidance. They are in the process of developing a strategic plan which will provide an operational and financial roadmap for the next three years. The plan will take into account different scenarios based on potential clinical outcomes over the next 12 months. The principal financial strategy remains to manage cash through the readout of results from GALACTIC-HF without relying on equity financing.

Milestones

Looking out over the next several quarters, the important milestones are:

• Complete enrollment of GALACTIC-HF during the first half of 2019,
• Interim analysis of GALACTIC-HF for futility in 2019,
• Initiate second phase 3 trial of omecamtiv to evaluate effect on exercise performance in patients with heart failure by the end of 2018,
• Phase 2 results for reldesemtiv in patients with COPD in 3Q, 2018 in 3Q, 2018 2018.
• Interim data from a phase 1b trial of reldesemtiv in adults with limited mobility or frailty in Q3 2018.
• Announce plans for phase 3 trial of reldesemtiv in 4Q, 2018,
• Complete enrollment of patients in FORTITUDE-ALS in Q4 2018 followed by results in the first half of 2019.
• Submit an IND in 2018 for next generation cardiac muscle activator under the collaboration with Amgen and plan to initiate Phase I studies in early 2019.
• Advance an unpartnered cardiac sarcomere-directed compound through IND-enabling studies in 2018

Omecamtiv Mecarbil is the Key Fundamental Issue for the Stock Price

This drug offers a unique mechanism for improving the functioning of damaged hearts by improving contractility and pumping performance without increasing the workload of the heart. Most current treatments for congestive heart failure reduce body fluids or widen arteries; both of these mechanisms reduce the workload of the heart. Omecamtiv could add an important incremental benefit for patients and while it has to be shown in trials, would likely decrease mortality and improve quality of life. I would also expect that this would reduce hospital admissions and readmissions for congestive heart failure patients which would have an enormous cost benefit for society.

The phase 3 trial has now surpassed 50% of the planned 8,000 patients. The data monitoring committee has been meeting regularly and has suggested no major changes to the conduct of the ongoing trial. Amgen expects to complete enrollment in the first half of 2019.There is a planned interim analysis for futility in 2019 and then the critical efficacy analysis will be conducted in 2020 so we are not likely to see critical information on efficacy for perhaps two years.

Cytokinetics is also preparing for a second phase 3 trial that should finish at about the same time as GALACTIC-HF. This trial will focus on the potential effect of omecamtiv mecarbil on exercise performance in patients with heart failure, which could distinguish omecamtiv mecarbil from other medicines used for the treatment of heart failure. One would reasonably expect that therapy that increases cardiac performance and function would increase exercise capacity.

Data for Reldesemtiv in Spinal Muscular Atrophy

In 2Q, 2018, CYTK and its partner Astellas reported phase 2 data in adolescent and adult SMA patients. This was a hypothesis generating trial that did not have defined endpoints; the primary goal was to determine potential pharmacodynamic effect of reldesemtiv after multiple oral doses. Safety, tolerability and pharmacokinetics were secondary objectives.

The study results were mixed and some investors might have been expecting data that was clearer cut and encouraging. There was an encouraging increase with dose in six minute walking distance and other measures of respiration and muscle strength after eight weeks of treatment. However, results from the Hammersmith functional motor score was not supportive of a drug effect. The result in the Hammersmith scale was a concern to investors as it was the primary endpoint that led to approval for Biogen’s Spinraza (nusinersen) for SMA in infants and children.

Management was not discouraged following consultation with key opinion leaders who indicated that the Hammersmith scale is directed primarily to evaluating early developmental milestones in infants and small children. It is rarely used in evaluating adolescent and adult SMA patients. Management was encouraged by about a 25 meter increase in six minute walk distance seen with the higher dose used in the trial; this was statistically significant. This was roughly a 10% increase in six minute walk. The quality of life benefit is that this could allow a patient to perform activities of daily living with less fatigue such as walking more quickly through an airport, raking leaves, or simply feeling more confident in leg strength to step on or off a curb.

Based on conversations with KOLs, management believes that six minute walk distance is the most viable assessment for an ambulatory SMA population. They noted that increase in walking distance of this magnitude have been acceptable endpoints for other drugs such as some for pulmonary hypertension. CYTK and Astellas have not yet gone over these results with regulatory agencies. However, management indicated that they hoped to begin to prepare for a potential phase 3 trial later this year. The highly likely endpoint would be six minute walking distance.

There was no plateauing of efficacy in the trial as dose was increased and there were no dose limiting safety or tolerability issues. Encouragingly, the highest dose of reldesemtiv used in this trial was only half what was tolerated by healthy patients in phase 1 trials. This suggests that the dose can be increased in phase 3 and this could lead to increased efficacy.

Management noted that the success of Spinraza and the potential clinical development of gene-directed therapies will likely transform the course of SMA disease progression. However, this does not obviate the need for a drug like reldesemtiv as these patients will almost certainly have residual muscle dysfunction, weakness, and early fatigability. Hence, reldesemtiv would be used in combination with these therapies

Management expects that babies successfully treated for SMA will survive into later childhood, adolescence, and adulthood. They believed that the market for reldesemtiv could be as many as 5,000 to 10,000 ambulatory SMA patients just in the United States alone living longer with their disease, but still with muscle dysfunction and weakness. Therefore, a skeletal muscle activator like reldesemtiv may prove to be an effective complement to SMN-directed therapies. Based on a representative price of $100,000 per year, the addressable market would be $500 million to $1 billion.

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