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Expert Financial Analysis and Reporting

Cytokinetics: Comments on Sharp Price Decline After 2Q, 2015 Conference Call (CYTK, Buy, $6.28)

Key Points

  • The reasons for my buy recommendation on CYTK as detailed in previous reports remain the same. There was nothing on the 2Q, 2015 call that I had not known for some time.
  • The sharp rise in the stock before and the sharp fall after the 2Q call is consistent with my hypothesis that there is widespread manipulation of small stocks by a group of collaborating hedge funds although I have no objective proof of this.

Peculiar Stock Action

The stock of Cytokinetics behaved very strangely over the days leading up to the second quarter conference call on Thursday July 30th and then immediately after the call. On July 8th, the stock closed at $6.09 and then traded steadily up to a $7.40 close on July 28th. The only noteworthy news during this time was that the VITALITY-ALS phase 3 trial of tirasemtiv in ALS had begun, but this event was widely expected and can’t explain the 22% move in the stock over this three week period.

Also, emerging biotechnology stocks as a group were not strong over this time. An important reason for this group weakness was a comment by the CEO of Eli Lilly that their stock prices were in a bubble. Despite this lack of company specific news and a poor backdrop for the group as a whole, on July 28th the stock moved up significantly to $7.40 two days before the call only to crash to $6.09 on July 30th, the day of the 2Q conference call.

Management was Puzzled over the Stock Behavior

I listened to and read the transcript of the conference call to determine if management had issued some kind of new, negative comment that led to the weakness. I then spoke with management to see if they had an explanation for the sharp price decline. They expressed surprise at the stock behavior other than to note that they had seen similar stock trading patterns around previous conference calls, i.e. an increase in price before the call and a decline afterwards. They were at a loss to explain the price behavior.

Questions on Why VITALITY-ALS Does not have Special Protocol Assessment Status

In going over the conference call, the one issue that drew meaningful comment from analysts in the question and answer session was why Cytokinetics does not have a Special Protocol Assessment (SPA) for the VITALITY-ALS phase 3 trial. I note that the Company has said for several months that it would not have an SPA so this definitely is not a new issue. An SPA is a declaration from the FDA that a planned phase 3 trial's design, clinical endpoints, and statistical analyses are acceptable for FDA approval. This suggests that if the primary endpoint is reached the product will probably be approved, but it is not a contractual guarantee from the agency.

Results of the phase 2b BENEFIT-ALS trial of tirasemtiv in ALS failed to reach the primary endpoint of ALSFRS-r. However, results for the secondary endpoint of SVC, the most important indicator of respiratory function, were strikingly positive. SVC is carefully followed during the course of treatment for ALS as an important predictor of disease progression because ALS patients usually die of respiratory failure. Most ALS patients know their ALS score like their social security number. SVC scores are also relied upon by physicians to plan for and insurers to reimburse treatment of ALS patients from diagnosis through hospice. SCV is an extremely important measure in ALS, but it has never been the primary endpoint of an ALS trial.

After consulting with key opinion leaders, Cytokinetics felt that SVC might be a more meaningful primary endpoint than ALSFRS-r for a new phase 3 trial. The Company then entered into months long discussions with FDA and EMA on the design of the phase 3 trial which has become VITALITY-ALS. These discussions allowed CYTK an insight into how the regulatory agencies would view SVC as an endpoint and what kind of secondary endpoints would be important.

Management said that based on conversations with FDA and EMA there is no question in the minds of these agencies that an improvement of SVC demonstrates that a drug is having a meaningful effect on slowing the progression of ALS. However, CYTK has repeatedly stated over the last several months that the FDA and EMA do not view SVC as an approvable endpoint by itself. They will also want to see that any improvement in SVC is supported with statistically positive results or positive trends in secondary endpoints including improvement for the three respiratory questions in the ALSFRS-r scale, time to other interventions and time to respiratory failure. Hence, VITALITY-ALS doesn’t meet the criteria for an SPA. I first heard management say this late last year so that it is not new news. See for a detailed listing of the secondary endpoints.

The Company has designed VITALITY-ALS to have SVC status at the end of 24 weeks to be the primary endpoint as opposed to ALSFRS-r at 12 weeks for BENEFIT-ALS. It will then continue to follow the patients on a blinded basis for an additional 24 weeks (48 weeks in all) to get a good read on the secondary outcome measures. It is hard for me to fathom that a significant improvement in SVC would not be accompanied by improvement in the secondary measures.

Things to Worry About

Let me emphasize that in the BENEFIT-ALS trial the primary endpoint of ALSFRS-r was not achieved. While there was strong statistical significance for SVC, four other secondary endpoints did not reach statistical significance. This is obviously worrisome.

However, I think that there were major contributing factors to this. First of all, I think that using 12 weeks to measure an effect on the ALSFRS-r scale and other measures may have been too short a period of time to capture a change in the disease. ALS leads to inexorable declines over a 2 to 5 year period from diagnosis until death, but a period of 12 weeks might not be enough time to capture the difference between drug and control. This short period of time could also have led to a placebo effect for control patients because APSFRS-r is largely based on subjective questions and may also not be enough time to see other changes in the disease. I think that the 48 weeks duration of VITALITY-ALS will give a much better insight into the clinical effect of tirasemtiv. Again, I do not see why an improvement in SVC would not be accompanied by improvement in secondary measures.

Also, I think that side effect issues with tirasemtiv were not well handled in BENEFIT-ALS leading to higher dropouts of patients on the drug than may be seen in VITALITY-ALS. This was to the detriment of the trial because dropouts are included in the final analysis as failures. I also think that the troublesome side effect issues that are not uncommon with tirasemtiv could have had a negative effect on measurement of ALSFRS-r since many of the questions in that scale pertain to quality of life.

Was The Stock Manipulated?

For those of you who have followed my writing you will understand that I believe that there is widespread manipulation of stock prices by hedge funds using naked shorting practices. I have no objective evidence, but the observable evidence for manipulation is overwhelming. See my report Illegal Naked Short Selling Appears to Lie at the Heart of an Extensive Stock Manipulation Scheme.

Here is my hypothesis on what went down for CYTK. Using coordinated trading a group of hedge funds started in early July to manipulate the stock upward and give the appearance of a strong move that would draw in traders and other investors. This allowed the short sellers to establish shorts and illegal naked shorts.

They may also called analysts who follow CYTK and who would be on the 2Q conference call to raise doubts about the SPA issue even though this was not new news. The questions on the SPA could provide the pretext for a shorting attack. I am not accusing any Wall Street analysts of being involved in this scheme. I think the questions on the SPA are pertinent and should be discussed, but I think one or more analysts may have been manipulated to emphasize the SPA issue and cause some investor uncertainty.

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  1. Mr. Smith – It looks as if four of the five secondary endpoints in the VITALITY trials are respiratory or SVC components. So it would seem that if the primary endpoint if achieved, these four would likely follow suit. I am not up to speed with the BENEFIT trial, but I thought the primary endpoint involved achieving results for a more general spectrum of the ALS Functional Rating Scale (not SVC related) than the secondary ALFRS endpoints this time in the VITALITY study. From a lay person’s standpoint, I was assuming the drop in stock price resulted from investors realizing that CYTK would have to meet the primary endpoint and ASLFRS (secondary endpoints) that they failed to reach last time. But again, aren’t these secondary ALFRS endpoints in VITALITY different than the primary ALSFRS endpoints were in the BENEFIT trial? If this is correct, I am thinking there might be some misunderstanding about the secondary endpoints, which caused concern. I hope this makes sense and I may be way off base.

  2. The trial will first have to hit the SVC endpoint. The FDA will then look at the totality of data in deciding whether to approve. This will include ALSFRS-r but more particularly the three questions on the 12 question ALSFRS-r scale that relate to respiration. Some of the secondary point may be hit and others missed. In the end, it will be a judgment call. My basic reason for hoping that this trial will be successful and lead to approval is the extremely important role that SVC plays in disease management. Obviously, the trial is not a slam dunk.

  3. Thanks for the very informative answer Mr. Smith.


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