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Expert Financial Analysis and Reporting

Cytokinetics: Discussion of Financing Deal with Royalty Partners (CYTK, Buy, $11)

Terms and Implications of This Deal

Cytokinetics announced that it had concluded a deal to sell a portion of the future royalty stream on omecamtiv to Royalty Partners, perhaps the leading purveyor of this type of financial instrument. Omecamtiv is partnered with Amgen and recently entered the phase 3 GALACTIC HF trial which will enroll around 8000 patients. Topline data reasonably should be available in mid-2021.The deal with Amgen specifies that Cytokinetics will receive a double digit royalty on worldwide sales of omecamtiv that increases with the level of sales and tops out at over 20%. Under the terms of the original deal, Cytokinetics has the option to increase the economics of the deal originally signed with Amgen if they elect to co-fund phase 3 development costs.

Cytokinetics has opted to exercise this co-fund option to the maximum extent possible which will require an investment (not all at once) of $40 million. The deal with Royalty Partners is intended to fund this $40 million, Royalty Partners will receive a royalty of 4.5% of omecamtiv sales. In other words, if the royalty on omecamtiv, which varies with sales level, were 15.0% Cytokinetics would receive 11.5% and Royalty Partners 4.5%. In the event that the launch of omecamtiv is delayed beyond expectations, which are not specified, the Royalty Partners royalty could increase to up to 5.5%

Royalty Partners will pay Cytokinetics $90 million for this royalty stream. It will also buy $10 million of stock at a price $11.42 so that CYTK will receive $100 million. This is $60 million in excess of the $40 million needed to co-fund the GALACTIC HF trial. As a result of the co-funding, Cytokinetics will receive an additional 4.0% royalty on sales. This almost entirely offsets the 4.5% royalty that will be paid to Royalty Partners. Very importantly, Cytokinetics is not giving up any of the $600 million of potential milestone payments from Amgen to Royalty Partners. There is another benefit from this extension of the deal in which Amgen will help set up and fund a CYTK sales effort in the US directed at certain institutions.

Deal Is Meaningful Positive for Shareholders

This is a good deal for stockholders as witnessed by the favorable market reaction. In addition, this provides substantial external validation from Royalty Partners. You don’t part lightly with $100 million some four years before results from a phase 3 trial are known. Obviously, with this type of investment, a considerable amount of due diligence on public and non-public information was undertaken. Here is what Pablo Legorreta, Royalty Pharma’s Chief Executive Officer had to say. “We are pleased to be partnering with Cytokinetics on this important new approach to heart failure, which remains a significant unmet medical need. The science behind omecamtiv mecarbil is highly novel and represents a potential paradigm shift in the management of heart failure.”

For a more detailed discussion on my investment thinking on Cytokinetics, see my report of November 4, 2016 Cytokinetics: My Relative Market Value Analysis Suggests that the Stock Should be Selling at More Than $20 (CYTK, Buy, $8.95.




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