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Expert Financial Analysis and Reporting

Cytokinetics: Institutional Investors Give BENEFIT-ALS Potential Results a Vote of Confidence (CYTK, $9.06)

Cytokinetics (CYTK) announced that it has completed an equity offering in which it issued 4.375 million shares at a price of $8.00 that brought in gross proceeds of $35 million and estimated net proceeds of $33 million after underwriting discounts. Underwriters have 30 days to exercise a Green Shoe that would result in an issuance of 15% more shares and raise an additional $5 million. I believe there is a very high probability that the Green Shoe will be exercised and result in the issuance of another 656 thousand shares and bring in an additional $5 million of cash.

After speaking with management, I understand that the genesis of the deal may have been one large investor who was interested in taking a significant position in advance of the reporting of BENEFIT-ALS results in late April or late May. There was evidently a lot of interest from other institutional investors with a like mind that resulted in a strong book. The deal was priced at $8.00, a sharp discount to the closing price of $9.85 on Wednesday, February 19, 2014. However, it should be noted that the closing price one week ago was $8.89 and two weeks ago was $6.85. In this context, the discount appears less drastic.

This deal was marketed under a confidentiality agreement with potential buyers so that there was no pressure on the stock during the marketing period. The deal was announced on Wednesday, February 19 after the market closed and priced before the opening on Thursday, February 20. The stock has traded off to intraday price of $9.06 at the time this note was written

Cytokinetics ended 4Q, 2013 with approximately $80.2 million in cash, cash equivalents and investments, which represented approximately 16 months to 18 months of going forward net cash burn based on 2014 financial guidance. This guidance anticipates cash revenue will be in the range of approximately $19 million to $21 million, cash R&D expenses will be in the range of $50 million to $53 million and cash G&A expenses will be in the range of $15 million to $17 million. This suggests a cash burn of $46 to $49 million in 2014. Without the offering, the 2014 year end 2014 cash balance would have been about $32 million and this cash brought in for this offering will increase this to about $72 million.

The issuance of 5.0 million shares increases the number of outstanding shares from 29.5 million to 34.5 million. In addition, the Company has 7.7 million warrants that are in the money, 4.9 million options and 1.5 million shares reserved for its ATM financing vehicle. This offering increases the number of potential shares (fully diluted) outstanding from 49.5 million to 54.5 million and at the current price of $9.06 this is a market capitalization of $493 million.

I think that the most important takeaway is that some very sophisticated investors want to own the stock before the announcement of BENEFIT-ALS. Why would they do this in a world in which seemingly more phase 2b and 3 results are disappointing than positive? I think that they may be thinking the same way that I am.

The biggest clinical trial event in all of biotechnology for 2014 could be the reporting of phase 2b results from the BENEFIT-ALS trial of tirasemtiv in ALS. I have written an in-depth report on my website that analyzes earlier phase 1 and 2 results for tirasemtiv and how they might be predictive of a positive outcome in BENEFIT-ALS. In addition and extremely importantly, blinded data from 670 patients in the BENEFIT-ALS trial treated through November 2013 was presented in December 2013. My analysis of this data suggests to me that tirasemtiv is having a positive therapeutic effect in BENEFIT-ALS, but until the data is unblinded we can’t know if this is actually the case and whether this is clinically significant.

I have gone through this data in detail in my report and my broad conclusion is that tirasemtiv does have a biological effect that can slow the inexorable decline in physical status of ALS patients. Importantly, it seems to improve respiratory function which is critical as most ALS patients die of respiratory failure or from complications such as infections that stem from use of mechanical ventilators. This is suggestive that BENEFIT-ALS will be successful, but until the data is unblinded we can’t really determine if this is the case.

I believe that the stock of Cytokinetics (CYTK) offers an extraordinarily attractive reward to risk ratio and this is the basis of my recommendation. However, drug development and outcomes of clinical trials are inherently risky investments and you could suffer a quick and significant loss of capital if the BENEFIT ALS trial is a disappointment or fails. An investment in CYTK should be a part of a diversified portfolio that takes such risk potential into account.


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