Expert Financial Analysis and Reporting

Introduction

I have shut down the subscription service for SmithOnStocks and have refunded subscription fees for those subscribers who paid their annual subscription fee in the period from August 2020 to February 2021. My payments provider, PayPal, didn’t allow for refunds to subscribers who paid in the March 2020 to July 2020 period. Those subscribers will have to e-mail their address and I will write them a check. See Closing Subscriptions to SmithOnStocks and Issuing Refunds  for details.

I will not be writing in-depth reports any more on SmithOnStocks, but I am not closing down the site. I will continue to publish blogs, but they will be much less comprehensive and less well crafted. Today, I am publishing a report on Cytokinetics, a stock that I have long recommended. You can see that the style is more abbreviated; it is made up of bullet points. I am not sure how many and what type of reports I might write in the future.

Cytokinetics has three key assets in clinical development. Each if successfully developed, might justify the current market valuation of $1.2 billion. Here are some key points on each.

Omecamtiv mecarbil

• The huge 8,500 patient phase 3 trial in congestive heart failure, GALACTIC-HF, was a disappointment. The study successfully reached the primary endpoint of time to cardiovascular death or first heart failure event with a p-value of 0.025 and a hazard ratio of 0.92; 95% CI: 0.86, 0.99. This was a positive but mediocre result. The key secondary endpoint of time to cardiovascular death was not reached; the failure to show a mortality benefit was taken as quite negative. Also, none of the other secondary endpoints were reached.
• The immediate conclusion of analysts was that the drug at best could be approved with a lackluster, non-competitive label and at worst might not be approved at all. In the first case, the commercial potential probably would be quite limited.
• Amgen in the US and Servier in Europe dropped out of collaborations to commercialize omecamtiv.
• As the clinical data was scrutinized, key opinion leaders saw some very encouraging data in a subset of patients with very low ejection fractions who are generally the sickest patients. See this link for more detail.
• This makes biological sense. The unique mode of action of omecamtiv is to allow the heart to pump more blood without causing it to work harder. No other marketed drug acts like this. Patients with the lowest ejection fractions would be expected to benefit the most from this mechanism of action.
• Why didn’t omecamtiv show much benefit in other patients with less severe heart failure, i.e. higher ejection factions? My hypothesis is that current standard of care confers substantial benefit to these patient and that it was difficult for the mode of action of omecamtiv to improve meaningfully on what were already good clinical outcomes.
• In my opinion, there is a clear role for omecamtiv in patients with low ejection fractions. This is not a small market. CYTK estimates that by 2030 the heart failure market in the US will reach 8 million people and that 2 million of these will have ejection fractions of less than 30, the patient population. It is in this latter group that omecamtiv seems to provide a unique and clinically meaningful benefit.
• The current list price of leading drugs for heart failure is about $6,500 per year and discounts and rebates reduce this to perhaps $4,500. Hence the addressable market for omecamtiv in 2030 could be $9 billion in the US.
• Amgen and Cytokinetics were trying for a home run in the GALACTIC-HF trial aiming to show that omecamtiv was of great benefit in all stages of heart failure. The results of the trial were disappointing in this context. The p value was mediocre and importantly there was no benefit in reducing cardiovascular risk and none of the secondary endpoints were reached. However, the trial still met its primary endpoint.
• Will the FDA buy my argument and approve the drug highlighting its benefit in patients with low ejection fractions below 30?
• Just a few years ago, the FDA was rigidly driven by statistical purity and the fact that the primary endpoint in GALACTIC-HF was not specified as low ejection fraction patients would have been a nearly insurmountable hurdle for approval. However, the FDA has become much less rigid recently and COVID has accelerated this. So there is a reasonable chance for approval with an emphasis on low ejection fraction patients.
• Remember that the trial was successful on its primary endpoint. This is very important. This should be sufficient for approval.
• Results of a second phase 3 trial, METEORIC-HF, could be available by late 2021. The purpose of this study is to evaluate the effect of treatment with omecamtiv mecarbil compared with placebo on exercise capacity as determined by cardiopulmonary exercise testing following 20 weeks of treatment with omecamtiv mecarbil or placebo. The outcome of this trial could be a significant factor for the stock Given the unexpected results in GALACTIC-HF, I am uncertain as to how this trial will turn out.
• Cytokinetics will soon have discussions with the FDA to determine what the FDA might consider for approval. If Cytokinetics discloses that it is filing an NDA, it would be a sign that some type of meeting of the minds has occurred and there is a reasonable chance for approval with an emphasis on low ejection fraction patients. This would be a major positive.
• As a guess and in this positive case the NDA could be filed in 2Q, 2021 and assuming a nine month favorable review, approval would be achieved in mid-2022.
• It generally takes about one year after approval to complete reimbursement agreements with major insurers during which time sales are restrained. Hence, it could take until 2H, 2023 to see meaningful sales.
• If the FDA accepts the NDA for omecamtiv. It would set the stage for a collaboration with a larger biopharma company to commercialize the product. This could occur in 2H, 2021 or 2022 and could be a major stock catalyst.

CK-247

• CK-247 has a different disease target of hypertrophic obstructive cardiomyopathy
• There are currently no drugs approved for this indication, but the phase 3 trial of MyoKardia’s mavacamten was very successful. The mavacamten NDA will be filed in 1Q, 2021. I would expect a nine month review pointing to approval in 1H, 2022.
• The technology that led to the development of mavacamten came from Cytokinetics for which it receives a royalty.
• Bristol-Myers Squibb acquired MyoKardia for $13.1 billion and has projected that mavacamten could achieve sales of $4 billion by 2029.
• CK-247 is fast follower of mavacamten. If it is successfully developed and is not meaningfully differentiated, it might achieve 30% to 40% of mavacamten sales. CYTK believes that CK-247 has superior pharmacokinetics that could make it best in class.
• Cytokinetics expects to begin a potential Phase 3 clinical trial of CK-274 by the end of 2021.
• If the phase 3 trial is successful, CK-247 might be approved by late 2024. It is about three years behind mavacamten by my rough estimates, but CYTK hopes that it can narrow this gap.

Reldesemtiv

• A potentially registrational phase 2 trial, FORTITUDE-ALS of reldesemtiv in ALS did not reach significance on its primary end point. However, management stated that learnings from that trial encourage CYTK to go forward with a phase 3 trial. See this link.
• A planned phase 3 trial is called COURAGE-ALS. They are conducting start up activities and may open the trial to enrollment in 2H 2021, subject to what happens with omecamtiv mecarbil and CK-274. A solid collaboration with a larger biopharma company would likely free up cash e resources to allow the conduct of COURAGE-ALS,
• Reldesemtiv doesn’t treat the causes of ALS. It improves contractibility of muscle which improves quality of life. ALS has a large number of different causes, but reldesemtiv would likely be of value in each.
• I think that there is a reasonable chance of success in the phase 3 trial. If it starts in late 2021, we might see topline data in 2H 2023.

Financials

• The cash balance at year end was $501 million.
• The expected cash burn for 2021 is approximately $160 to 170 million.
• The company believes that it has sufficient cash to fund operations for two years.
• CYTK has 64.5 million fully diluted share outstanding. At the current price of $18.79, it has a market capitalization of $1.2 billion. This might seem like a high valuation for a company that has no revenues and is burning $160+ million per year. However, judged against peer, emerging biopharma companies, it is quite cheap given the promise of its three leading assets.

Potential Corporate Developments

• I think that CYTK would like a partner for commercializing omecamtiv. Critical to this will be the acceptance of the omecamtiv NDA and potentially approval. The timing could be sometime in 2022.
• It is possible that the board would have to consider the option of putting the company up for sale in 2022. This all depends on the outcomes for omecamtiv, CK-247 and reldesemtiv. In the case that a positive outcome is seen for each, I would argue that the purchase price might approach or even exceed the $13.1 billion that BMY paid for MyoKardia.