Expert Financial Analysis and Reporting

• This deal adds a third leg to the development pipeline at Cytokinetics along with omecamtiv for congestive heart failure and tirasemtiv for ALS.
• My Buy recommendation has been based on the possibility that tirasemtiv will begin a phase 3 in ALS in 2015. Investors had written this product off after a phase 2b disappointment.
• This deal reduces the downside risk if I am wrong on tirasemtiv.
• It also provides the cash resources needed to conduct a phase 3 trial for tirasemtiv without the need for new equity funding or a partner.

 The Astellas Deal is a Major Positive

The announcement of a much expanded collaboration with Astellas centered on CK-2127107 and follow-on skeletal muscle activator compounds adds an important third leg to the product development platform for Cytokinetics. It will also bring the year end cash to an estimated $122 million giving the Company great flexibility and obviating the need for any equity financing in 2015, probably in 2016 and perhaps beyond. Cytokinetics has announced that it will hold a conference call on January 5^th at 8:30 EST in which it will give more details. I suspect that the Company may also announce at that time that it will begin the phase 3 trial of tirasemtiv.

Background on CK-2127107

In October, 2014 Cytokinetics announced the completion of five Phase 1 studies evaluating the safety and tolerability of CK-2127107 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-2127107 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-2127107 in 2015.

The Deal Terms

Cytokinetics will receive cash from this deal in four ways: (1) $30 million as an upfront license fee, (2) Astellas will purchase $10 million of stock, (3) $15 million milestone for advancing CK-2127107 to phase 2 and (4) Cytokinetics expects to receive potentially over $20 million payable by Astellas to reimburse Cytokinetics for planned research and development expenses over the next 2 years.

Cytokinetics also is eligible to receive over $600 million in pre-commercialization and commercialization milestone payments of which over $100 million is payable for CK-2127107 in SMA while the remainder is for other indications. This deal appears to be modeled on the Amgen deal for omecamtiv mecarbil in which Cytokinetics has the option to re-invest these milestones in development expense and increase its share of commercial economics or alternatively receive cash. It will also receive a royalty that is currently undisclosed but probably starts in the low double digits and escalates with sales. Cytokinetics also has an option to co-promote with Astellas and to be reimbursed for some promotional activity. These were all features of the Amgen deal.

What is Spinal Muscular Atrophy (SMA)?

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.

SMA is a severe neuromuscular disease that occurs in 1 in every 6,000 to 10,000 live births each year and is one of the most common fatal genetic disorders. Its symptoms include 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 of SMA from Type I, who have the worst prognosis and a life expectancy of no more than 2 years from birth, to the Type IV, who have a normal life span but with gradual weakness in the proximal muscles of the extremities resulting in mobility issues.

Investment Implications and Price Target Thinking

I think that this deal strikingly improves the investment outlook for Cytokinetics. The basis of my Buy recommendation had been based on my projection that the Company would take tirasemtiv into a phase 3 trial in ALS if the FDA grants a special protocol assessment in which sustained vital capacity would be the primary endpoint. See my report of November 1, 2014.

This deal has a number of important implications. This gives Cytokinetics a third new product in advanced human studies. Omecamtiv mecarbil could begin a phase 3 in congestive heart failure in 2015; this is dependent on the decision by CYTK’s partner Amgen. Tirasemtiv could be entering a phase 3 in ALS conducted by Cytokinetics. CK 2127107 would be in phase 2. The decisions on omecamtiv and tirasemtiv are not “done deals”. There will be some caution by investors until their phase 3 trial plans are formalized, but I give each a high probability of occurring.

The cash infusion brings yearend cash to $122 million. This allows Cytokinetics to conduct a phase 3 trial for tirasemtiv without needing to raise money in the capital markets in 2015 and probably 2016 or alternatively to partner the product. Tirasemtiv is totally owned by Cytokinetics and is potentially a very big product for the Company.

You may recall that there was a strong expectation that the BENEFIT-ALS for tirasemtiv in ALS would be positive and based on this; the stock traded up to $12.99 or a market capitalization of $475 million in April 2014 before the results were released. Disappointing results led to a plunge in the stock over the next few days to $4.50 and it has traded down to the recent price of $3.07 on October 10, 2014 and a market capitalization of $112 million. This suggests that the market attributes great commercial potential to tirasemtiv if it were to be approved for ALS. With the added boost of this Astellas deal, I think that CYTK might get back to $10.00 if tirasemtiv is taken into phase 3.

The other important component of the Cytokinetics investment story is omecamtiv mecarbil which could be a major advance in the treatment of congestive heart failure. I refer to omecamtiv as forgotten, but not gone. It started clinical development in 2005 and the final phase 2 trial that could lead to the pivotal phase 3 trial will be completed by 2Q, 2015. This will result in a go, no go decision on the part of Cytokinetics and its partner Amgen on going forward into phase 3. If the decision is go, given that Amgen is involved, investors will view this as a major value creating event. Omecamtiv mecarbil addresses a great unmet medical need and could have enormous sales potential if approved.

Even though there has been little expectation that tirasemtiv will begin a phase 3 trial, if Cytokinetics decides not to go through with a phase 3 trial, I had thought that there might still be a be a correction in the stock back to the $3.00 -$3.50 range. I think that the Astellas deal reduces the downside risk meaningfully in this event to perhaps $4.00 to $4.50.