Expert Financial Analysis and Reporting

Introduction

The Cowen conference in Boston is going on this week. I consider Cowen to have the best and broadest coverage of biotechnology on Wall Street. I am listening to webcasts from numerous companies this week at their annual healthcare conference. Cytokinetics presented on Monday March 8 and then Amgen held a dinner for investors that evening. I was not invited to that dinner, but one of my trusted contacts took notes on what Amgen had to say about omecamtiv. I would caution that my information from Amgen is second hand. However, I have high confidence in its accuracy.

Key Points from the Cytokinetics Presentation

For the most part, there was nothing new presented on omecamtiv, tirasemtiv and CK 107 with one dramatic exception. The Company said that in the COSMIC-HF study over 24 weeks they saw decreases in heart systolic and diastolic volumes and also decreases in systolic and diastolic diameters. In congestive heart failure, the badly damaged heart enlarges (becomes larger and flabbier) as it works harder to pump blood. This can lead to life threatening arrhythmias. The effect that omecamtiv had in COSMIC-HF is called remodeling. Essentially, this data suggests that omecamtiv is reversing the damage of congestive heart failure, not just improving symptoms.

Key Points from Amgen Dinner

During the dinner, Amgen said that the phase 2 data on omecamtiv are the "best ever seen in CHF" and that the drug's ability to reverse negative remodeling could be a “game changer”. This drug has been in development for over 10 years and this has caused some investors to write off omecamtiv. The shorts point to no decision having been made to move the drug into phase 3 as evidence that Amgen is unexcited about the drug and will probably give it back to Cytokinetics. Both Amgen and Cytokinetics now seem to be indicating that the decision to move into phase 3 is highly, highly likely. I would expect the decision by mid-summer or earlier.

What Might the Phase 3 Trial for Omecamtiv Look Like and What Might be the Timelines?

Obviously, no details on the phase 3 trial(s) have been put forward. However, I think that we can look at the details of the phase 3 trial of Novartis’ Entresto to get a meaningful insight. The FDA designated this as a breakthrough drug and clinical data suggests superior outcomes to ACE inhibitors and ARB’s which are cornerstone components of standard of care. Investor expectations are that this could be a $5 to $10 billion or more product. Let me anticipate your question. Omecamtiv and Entresto work by different and complimentary mechanisms of action. They would likely be used be used in combination.

The efficacy and safety of Entresto was evaluated in the largest clinical trial ever conducted in heart failure, the Phase III PARADIGM-HF study. This enrolled 8,400 patients with chronic heart failure (NYHA class II–IV) and systolic dysfunction (left ventricular ejection fraction ≤ 40%). Patients received Entresto or enalapril (each twice daily) in addition to current best treatment for a median duration of 27 months. The key results of the trial were:

• Entresto demonstrated clinically relevant and statistically significant superiority to enalapril, reducing the risk of CV death or heart failure hospitalization (the primary endpoint) by 20%. This result was consistent across the subgroups examined.
• Entresto also improved overall survival by 16 percent compared with enalapril, driven by a lower incidence of CV death.
• The most common adverse events occurring in patients taking Entresto (≥5%) were hypotension, hyperkalemia, cough, dizziness and renal failure.

PARADIGM-HF was initiated in December 2009, and in March 2014 the Data Monitoring Committee confirmed that patients given Entresto were significantly less likely to die from CV causes and that the primary endpoint had been met, which led the Committee to recommend that the trial be stopped early. The key takeaway is that it took a little over four years from the beginning of the Entresto trial to report topline results and five and one half from the beginning of the trial to gain approval. If we use PARADIM-HF as a rough indicator of the timelines for a phase 3 trial of omecamtiv mecarbil and if we assume that the trial begins in 3Q, 2016, we could see topline results in 4Q, 2020 and approval in 1Q, 2022.

Investment Thesis

If Amgen is correct in suggesting that omecamtiv is a game changer in congestive heart failure and assuming that there are no as yet undetected side effect or efficacy issues that would result in a trial failure, I think that we are looking at a drug with $5 to $10 billion of peak sales (similar to Entresto) possibly in 2027. Cytokinetics has the contractual rights under certain conditions to receive up to 50% of US profits and 20+% royalties on foreign sales. What does that mean to Cytokinetics market value? I think that the market might value omecamtiv revenues at five times peak sales of $5 to $10 billion in 2027 or $25 billion to $50 billion. Assuming that Cytokinetics realizes 40% of this market value and Amgen 60%, the contribution to Cytokinetics market value could be $10 to $20 billion. This compares to a current market valuation of $256 million so this would represent a 40 to 80 times increase in value over a decade.

The downsides to the omecamtiv story are the very long timelines before topline results, possible approval and commercialization and of course, possible failure of phase 3 to replicate the COSMIC-HF results. Peak sales are a decade or more away and it could be 2020 before topline results are available. This is a long time to wait. Importantly, Amgen will foot much of the development costs while CYTK has the option to convert milestone payments into funding development costs in return for a greater share of profits. This means that CYTK probably does  not have to raise any money to fund clinical development of omecamtiv. This is a very, very important and positive investment consideration.

There are two other important parts of the Cytokinetics investment story. The Company controls all rights to tirasemtiv for ALS. I believe this is a blockbuster drug with $1+ billion sales potential. In addition, topline results for CK 107 in spinal muscular atrophy are expected in 4Q, 2016 or 1Q, 2017: this product is partnered with Astellas. See Cytokinetics: An Update Based on CEO Robert Blum’s Comments at BIO CEO Conference on February 8, 2016 and other reports on my website for more detailed information on tirasemtiv and CK-107.

My view is that the current stock price of Cytokinetics is attractive based on prospects for tirasemtiv without any contribution from omecamtiv or CK 107. Similarly, I feel that the current stock price is attractive based on prospects for CK 107 without any contribution from omecamtiv or tirasemtiv.  This is one ov the very top, late stage pipeline stories in biotechnology and yet  it is valued like an early stage company. If this Company were somehow private and was then brought public. I think that the market capitalization would be in the $750+ million range or more as compared to $256 million. Past issues and problems have created a perception and valuation gap of huge proportions.