Expert Financial Analysis and Reporting

Investment Background
Cytokinetics and Amgen first presented data from the ATOMIC HF trial at the European Society of Cardiology Congress (ESC) on September 2, 2013. This was a 48 hour dose ranging study in patients who were hospitalized with heart failure. The objective of the study was to determine pharmacokinetic (describes how the body affects a specific drug after administration through the mechanisms of absorption and distribution, as well as the chemical changes of the substance in the body) and pharmacodynamic parameters (effects of drugs within the body and the mechanisms of drug action and the relationship between drug concentration and effect).

The Companies informed investors well before the results were announced that meeting the primary endpoint of reduction of dyspnea (shortness of breath) was not likely to be reached in this trial. The trial started with sub-therapeutic doses in the first cohort of patients and progressed through a second and then a third cohort. For the trial as a whole, the primary endpoint was not reached, but there was statistical significance on this primary endpoint of dyspnea in the high dose cohort at p=0.03. The dose in this group is probably close to what the dose for phase III will be.

The results for ATOMIC-HF were generally positive and supportive of proceeding to a phase III in the opinion of the lead investigators on the trial. An Amgen representative, Sean E. Harper, M.D., executive vice president of Research and Development, was quoted as saying: “Although ATOMIC-AHF did not achieve its primary efficacy endpoint, we are encouraged by the data from this study. Omecamtiv mecarbil is a unique investigational therapy for patients with acute and chronic heart failure. We look forward to the data from the COSMIC-HF study, which together with the data from ATOMIC-AHF will inform our decision on whether to progress omecamtiv mecarbil into Phase 3 clinical trials.”

The overall results were supportive of taking omecamtiv into a phase III if results from the ongoing COSMIC-AHF trial are also supportive; this is also a dose determination study (with the oral dose) with the primary focus on pharmacokinetics and pharmacodynamics. However, there was an unexpected finding in ATOMIC-HF that there were seven myocardial infarctions in over 305 omecamtiv treated patients in the trial as compared to three in the placebo group which had about the same number of patients. Moreover, five of these MIs occurred in the high dose cohort, two in the low dose cohort and none at the middle dose. This imbalance in MIs understandably caused some scrutiny.

Even though there was no expectation among Wall Street analysts following the stock that the endpoint would be reached, as is always the case some bloggers proclaimed that the trial was a failure because it did not meet its primary endpoint and that results on secondary endpoints were mixed. This would probably not have had a great effect on the stock, but the imbalance of myocardial infarctions led to considerable concern and caused the stock to drop 27% from the close before the data was reported to the current price.

Purpose of This Report
At the time of the ESC meeting, there was not much detail on the individual cases of myocardial infarction. However, at the Heart Failure Society of America on September 23, there were more details on the seven MIs in the omecamtiv treated patients with the lead investigator in the trial giving details on each patient. It is important to understand that the myocardial infarctions reported in this trial are based on a rise in troponin levels as measured by a laboratory assay. It is not what most of us think of as a heart attack in which a patient with severe chest pain is whisked away by an ambulance to a hospital.

Troponin is a complex of three regulatory proteins (troponin C, troponin I and troponin T) that is integral to muscle contraction in skeletal and cardiac muscle, but not smooth muscle. Increased levels of troponin circulating in the blood are used as a diagnostic marker for myocardial infarction or death of cardiac tissue. The diagnostic limit beyond which troponin levels are considered to indicate a potential problem is 0.04 ng/ml.

A troponin level of 0.04 is not at all unusual or unexpected in the ATOMIC-HF patient population. The mean score at baseline for both placebo and omecamtiv mecarbil patients was above 0.04. Key opinion leaders suggest that while it cannot be dismissed, readings up to 0.06 are not alarming. As the troponin level climbs to 0.10 or higher the concern heightens. Keep these figures in mind as you go through the next section of this report.

Discussion of the Seven Myocardial Infarctions
There were two myocardial infarctions recorded in the first and lowest dose cohort of patients treated with omecamtiv.

• In one patient, the MI occurred 11 days after omecamtiv was administered. The baseline troponin level was 0.09 which is above the upper bound of normal or 0.04. The peak troponin level was 7.2. Omecamtiv has a half-life of 20 hours in the body so that at the time of this event, there were negligible amounts of drug, if any, in the blood. The mode of action of omecamtiv is causing the heart to contract longer during systole. It is reasonable to think that if it is going to cause a heart attack, it would be at the time or close after administration of the drug. While a delayed effect of the drug can’t be ruled out, it seems that the probability would not be high. My judgment is that this MI was not caused by the drug.
• The second patient had a very high baseline troponin level of 0.07 at the time omecamtiv was given and the peak was 0.35. The involvement of omecamtiv causing an MI in this case can’t be ruled out, but this patient seemed at high risk in that they could be considered to have an MI at the time of entry into the trial.

There were five patients who had myocardial infarctions in the third and highest dose cohort of the trial.

• One patient had an MI at 22 days, long after the administration of the drug. The troponin at baseline was 0.40 and the peak troponin of 1.86. As with the patient in the first cohort with a delayed onset, this MI is not very likely to have been caused by omecamtiv.
• A second patient had an MI at 12 days after drug administration. The baseline troponin was .026 and the peak was .077. Again, this was unlikely to have been caused by omecamtiv.
• A third patient in this cohort had stable troponin levels while being given omecamtiv. He had to undergo coronary angioplasty to treat blocked arteries in the heart, obviously a pre-existing condition. This was three days after omecamtiv administration. After the angioplasty, the troponin levels spiked. The increase in troponin levels was most likely due to the angioplasty as a rise and fall in troponin is common during this procedure. The baseline troponin level was 0.586 and the peak troponin level for this patient was 3.9. The MI was probably due to the angioplasty.
• A fourth patient experienced a peak troponin level of 0.064, not dramatically above the upper level of normal of 0.04. This was at 2 days after administration of the drug. The baseline troponin was 0.024.
• The final patient in this cohort had an increase in troponin level to 0.168 two days after the administration of omecamtiv. The baseline troponin was less than 0.016.

In the placebo group there were three MIs. One occurred at 27 days after the administration of the placebo; his troponin spiked to 55. A second patient had an increase in troponin levels to 0.067 three days after administration of the placebo, his baseline troponin was less than 0.016. The third patient developed sepsis six days after administration of the drug, his baseline troponin was 27.0 and the peak was 55.0.

Heart failure patients are generally at high risk of MIs. The seven patients who experienced an MI as defined by troponin levels above 0.04 in the trial were older and frail. They ranged in age from 63 to 95. These types of patients are at high risk of myocardial infarctions just from their disease state. I note that there are 650,000 deaths from heart attacks in patients over 65 each year (1.5% of the population). There is great risk due to age and this risk is enhanced if the patient has heart failure. The incidence of MIs (not death) in the omecamtiv group was 2.2% and in the placebo group was 1.0%. While this is an apples and oranges comparison, it drives home the point that the ATOMIC-HF group because of their age and heart failure are at very high risk of MIs.

Conclusion on the Importance of MIs
The imbalance of MIs in the omecamtiv group versus placebo and the occurrence of more MIs in the high dose cohort cannot be summarily dismissed. However, there are a number of issues that suggest that this imbalance occurred by chance as result of a relatively small population sample.

There appears to be no pattern to the increases in troponin level in the omecamtiv patients. Three of the seven reported MIs occurred long after the drug levels in the blood had become negligible. In a fourth who was given coronary angioplasty, the increase in troponin levels was probably due to the procedure. Two patients experienced increases in troponin levels that were above the upper bound of normal, but not alarmingly so. The final patient had a high troponin level at entry into the study.

If omecamtiv is linked to MIs, it would be logical to expect that as blood levels of omecamtiv increased, there would be a corresponding increase in troponin levels. An area under the curve analysis showed no correlation. This is quite encouraging.

Omecamtiv acts by causing the heart to contract longer and therefore to pump more blood. The hypothesis behind omecamtiv is that it can do this without increasing the workload on the heart. In other agents that increase the amount of blood pumped by the heart, they do so by causing the heart to contract with more force and thereby make it work harder. This can lead to cardiac arrhythmias that result in myocardial infarctions. If omecamtiv were implicated in causing heart attacks it would likely result from its inducing cardiac arrhythmias.

Very importantly, the incidence of supraventricular cardiac arrhythmias in the omecamtiv patients was 3.3% versus 6.6% in the placebo group. The incidence of supraventricular cardiac arrhythmias in the omecamtiv patients was 5.9% in the placebo group versus 5.6% in the omecamtiv group. Very interestingly, the incidence of occurrence for both types of arrhythmias was lower in the high dose omecamtiv patients in the third cohort than in the low dose patients.

Other Data from ATOMIC-HF Was Encouraging
Systolic ejection time, the echocardiographic signature of omecamtiv mecarbil, increased in a concentration-dependent manner similar to that previously reported in healthy volunteers and stable heart failure patients. The rates of adverse events (AEs), serious AEs, adjudicated deaths and hospitalizations were similar between omecamtiv mecarbil and placebo groups.

Investment Thesis
Cytokinetics has two huge shots on goal with the development of omecamtiv mecarbil for heart failure and tirasemtiv for ALS. The key catalyst for omecamtiv will be the reporting of COSMIC-AHF results probably in 1H, 2014. If positive, I think that Amgen will take omecamtiv into phase III registrational trials. The second key event will be the reporting of topline results from the BENEFIT-ALS trial in ALS, also probably in 1H, 2014.

A successful outcome in either the case of omecamtiv or tirasemtiv could result in significant appreciation in the stock price of CYTK. If both outcomes are positive it could be really exciting and if both are disappointing, I think we could see a dramatic price decline. I cannot guarantee positive outcomes in either case, but I have somewhat more confidence in a positive outcome for omecamtiv given the much more extensive clinical trial experience. My concern with tirasemtiv is that it has shown that it can produce positive results in short term studies, but there is no data on whether the effect can be sustained longer term; this is what BENEFIT-ALS is intended to determine.

I continue to recommend Cytokinetics.

Risks of Investing in Emerging Biotechnology Stocks like Cytokinetics; My Strategy
As with all emerging biotechnology companies, there are divergent views on the promise of Cytokinetics’ (CYTK) technology and the prospects for success in its clinical trials cannot be assured. This is well understood by people with experience in investing in emerging biotechnology companies. However, for those new to this type of investing, there are issues that should be understood. Because of this I am including a discussion of the risk inherent in emerging biotechnology investing in this report.

I want to make clear my strategy for investing in emerging biotechnology. Drug development is a very high risk game. There is a high failure rate in going from what appears to be encouraging phase II exploratory trials or even more significant phase II b trials (as in the case of omecamtiv and tirasemtiv) to larger phase III trials that are necessary for approval. I have not seen any reliable numbers, but as a guess I would think that results seen in more than half of such phase II trials are not replicated in larger studies.

Large and small companies face the same issue. Earlier this year Roche/Genentech (RHHBY.OB) reported that its key drug Avastin, which has annual sales of about $6 billion in other cancer indications, failed to show any survival benefit in two phase III trials of 921 and 637 patient trials in glioblastoma. When a trial fails for large companies like Roche, investors just shrug their shoulders and move on; the stock is modestly or not at all impacted. However, trial failures for an emerging biotechnology company can cause 30% to 50% or even greater instantaneous price drops.

So the question arises why anyone would buy an emerging biotechnology stock. The answer is that this high rate of failure is usually priced into the stocks. This then creates the investment opportunity because with success, the upside can be extraordinary and asymmetric relative to the downside that occurs with failure. Let me give some insight, I recommended Trius in at a price of $5.05 in May 2012 and it was recently taken over by Cubist (CBST) at $13.50. For every $1.00 invested in Trius when I recommended the stock, the investor wound up with $2.67.

But you will point out that there are more failures than successes. Here is the key to my strategy. Let's say that you also invested $1.00 in two other companies whose trials failed and their prices decreased 50% so that the two dollars invested in those companies is worth $1.00. Altogether you have invested $3.00 and you wind up with $3.67. Even being wrong two out of three times can produce acceptable returns. My hope is to do better than one out of three or to hit a real homerun.

The next point that you might raise is how unique is the Trius situation? In the last two years I have had four other recommendations taken over at prices double or triple the price at the time of my recommendation. These were Adolor, Anadys, Inhibitex and MAP Pharmaceuticals. However, I am not really shooting for doubles or triples in stock prices. While I was not covering or recommending Celldex (CLDX) and Pharmacyclics (PCYC), they are examples of much more spectacular homeruns that I am looking for. On October 8, 2008 Pharmacyclics closed at $1.18 and two years later on October 10, 2010 it closed at $7.65. Its recent price was $121. The price of Celldex increased from $2.60 at year-end 2011 to a recent price of $29. I note that these moves were based on investor enthusiasm for drugs that are not yet approved.

It is returns like that of Celldex and Pharmacyclics that I am aiming for in many of my recommendations. This forms the basis for my asymmetric investing strategy in emerging biotechnology. I try to identify companies that I believe have this type of potential. I know that there will be unexpected failures and unexpected successes so I diversify my portfolio taking small positions relative to my money under management. However, I am currently invested in a large number of emerging biotechnology companies so that in the aggregate, my emerging biotechnology portfolio is a very significant part of my overall portfolio.

I sometimes hear from inexperienced investors who have the expectation that every phase II or III trial will work. If you don't understand my investment strategy for emerging biotechnology companies, you should not be reading my articles. I am recommending Cytokinetics on the basis that there is a reasonable chance for success in developing omecamtiv and tirasemtiv. I am not guaranteeing that the trials will work, but if they do Cytokinetics could be a very big winner.