Expert Financial Analysis and Reporting

Overview of COPD

Cytokinetics announced today that it is beginning a phase 2 trial of CK-2127107 in chronic obstructive pulmonary disease (COPD). The trial is being conducted by CYTK’s partner Astellas. COPD usually is caused by long time smoking and has two main forms: (1) chronic bronchitis, which is characterized by a long-term cough with mucus and (2) emphysema, which involves damage to the lungs over time. Most COPD patients suffer from a combination. The disease causes a shortage of breath and current therapies like bronchodilators and steroids address inflammation and obstructions in the lungs with the intent of making breathing easier.

Market Opportunity

This is a very large market as 14 million U.S. adults have been diagnosed and the disease is believed to be underdiagnosed. This market has produced blockbuster drugs, the most prominent of which is Glaxo’s Advair which did about $7 billion of global sales in 2015. Advair is a combination of a bronchodilator and a steroid.

In addition to breathing issues, patients with COPD also suffer from significant exercise intolerance due to metabolic abnormalities that produce weakness in limb muscles. CK-107 in phase 1 studies has been shown to increase skeletal muscle force production in response to nerve input and to delay the onset and reduce the amount of muscle fatigue. This suggests that during repetitive muscle stimulation, CK-107 may improve muscle function and physical performance in people with COPD.

The mode of action of CK-107 addresses an entirely different disease symptom than Advair and other current treatments for COPD. If it is effective, it would be used in combination with current therapies. Because this is a unique treatment approach to COPD, there are no currently marketed drugs that CK-107 can be benchmarked against. However, the sheer number of patients addressed and the commercial success of products like Advair suggests that this could be a significant market opportunity.

Trial Design

This trial is a crossover study that will enroll 40 patients. A patient will first receive placebo for 14 days and after a washout period of 14 days, participants will then receive CK-107 for 14 days. Hence each patient is his own control. The primary endpoint is the change from beginning of placebo or drug over 14 days in Constant Work Rate (CWR) endurance time. There are also a broad number of secondary measures  CWR is a rate exercise testing method that is commonly used to assess effectiveness of therapeutic interventions in chronic obstructive pulmonary disease. According to ClinTrials.gov, data collection date for the primary outcome measure should be completed by July 2017 which suggests that the topline data will be announced in 3Q, 2017.

Investment Significance

This is CYTK’s third drug being studied in randomized trials. We are awaiting the announcement that omecamtiv will begin phase 3 trials in congestive heart failure. CEO Robert Blum recently suggested that this announcement will come in weeks or months. The phase 3 VITALITY-ALS trial of tirasemtiv in ALS is scheduled to complete collection of data in July 2017 suggesting topline data in 3Q, 2017.

Cytokinetics currently has a market valuation of $440 million based on fully diluted shares. I have maintained that the potential for either omecamtiv alone or tirasemtiv alone justifies this valuation level. If so, CK-107 is assigned no value. I could argue that success in the phase 2 trial of CK-107 might also justify a good part the current valuation level.

I continue to be perplexed by the market’s lack of enthusiasm for the stock. There seems to be a paradox in the market that companies that have been around for a long period of time (Cytokinetics came public in October 2005) are sharply discounted. I hypothesize that if CYTK were a private company that was doing its initial public offering now that there would be unbridled enthusiasm for the stock and I could see the market valuation being twice the current level.

It could be the case that omecamtiv, tirasemtiv and CK-107 will all fail in their key regulatory trials. The gods of clinical trials are cruel. However, I think ultimate success for any one of these drugs would produce significant upside over time from current levels and that success in all three programs would produce asymmetric, explosive upside. Hence, my buy recommendation.