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Expert Financial Analysis and Reporting

Cytokinetics: Takeaways from Recent R&D Day and Reiteration of Buy (CYTK, $6.14, Buy)

Investment Overview

I find the recent stock weakness in Cytokinetics perplexing. The Company has a market value of about $300 million which seems extremely low relative to other biotechnology companies. Generally companies with meaningful drugs in phase 3 development have market capitalizations of $500 million or more. Cytokinetics has two very meaningful drugs: tirasemtiv will start phase 3 in ALS any day now and there is a high probability that omecamtiv will start phase 3 in congestive heart failure in 2016. A third drug, CK-107 will start phase 2a trials in 2H, 2015 in the orphan disease, spinal muscular atrophy.

I continue to think that Cytokinetics has one of the highest reward risks in emerging biotechnology company universe. I will shortly go through my thinking that suggests that tirasemtiv’s potential in the US alone could be worth $40 per share in 7 to 8 years. Beyond this is foreign commercial potential for tirasemtiv, worldwide potential for omecamtiv and additional value for CK-107.

Importantly, the Company has a strong cash position. Cytokinetics ended the first quarter with $117.5 million in cash, cash equivalents and investments which represents over 20 month of going forward net cash burn based on its 2015 guidance. This guidance includes the estimated cost of a planned phase 3 for tirasemtiv in 2015 and 2016. It does not include any estimate for milestone payments from Amgen for omecamtiv or Astellas for CK-107 which could be substantial.

This note goes over some of the highlights from Cytokinetics recent R&D day. There was nothing in the presentation that I was not aware of or surprised by. My key takeaways on tirasemtiv and omecamtiv are highlighted by bullet points in this note.

Price Target Thinking on Tirasemtiv

Tirasemtiv is about to begin a phase 3 trial that will begin soon and could report topline results in mid-2016. Based on the results of the 711 patient BENEFIT-ALS we have a controlled data set that shows that tirasemtiv achieved statistically significant improvement in slow vital capacity (SVC) in virtually all prospectively defined sub-groups. In the new phase 3 trial, SVC will be the primary endpoint supported by other measures of respiratory improvement. The probability for success is high although by no means guaranteed. We should see the topline results of this phase 3 trial in mid-2016. If successful, this data in combination with results from the phase 2b BENEFIT-ALS trial should be sufficient for approval in 2H, 2017.

There is very significant market potential. There have been no drugs approved for ALS since Riluzole in 1995and the ALS community is desperate for new therapies. Riluzole is marginally effective and may improve survival by three months in some patients although the data supporting this is weak. Despite this, it is estimated that Riluzole is used by 2/3 of the 25,000 ALS patients in the US. Let’s say that tirasemtiv produces a positive effect on SVC which is a surrogate for survival as most ALS patients die from a respiratory issue. Orphan drugs can be priced at anywhere from $100,000 to $300,000 depending on their effectiveness in the disease. Let’s assume that tirasemtiv is priced at $50,000 and penetrated half of the market. This would lead to sales of $625 million in the US.

Based on valuations as a multiple of sales the stock market could value these sales at a multiplier of up to 10 times sales, but let’s use a multiple of 5 times sales to inject some conservatism. This would result in a market capitalization $3+ billion based only on US sales of tirasemtiv. There are currently 50 million fully diluted shares outstanding and it is possible that milestone payments for omecamtiv and CK-127 and a partnering deal for tirasemtiv outside of the US would obviate the need for issuing any more shares, but let’s assume that there are 75 million shares outstanding in seven or eight years when tirasemtiv sales in the US might hit $625 million. This means that the price per share would be $40 per share before taking into account any value from foreign sales of tirasemtiv and any sales of omecamtiv and CK-147. I know that tirasemtiv could fail, but when I look at the incredible upside I keep scratching my head as to why everyone else is so smart and I am so dumb. The reward/ risk ration just seems so favorable.

Takeaways on Tirasemtiv from Cytokinetics R&D Day

I have presented in bullet point form some of my key takeaways from the Cytokinetics R&D Day. These primarily relate to the design of the phase 3 trial.

  • The design of the phase 3 trial will start with a two week run-in period in which patients are given 125 mg of tirasemtiv. The intent is to weed out patients who can’t stand the side effects of tirasemtiv before they are enrolled in the trial. Those who can tolerate the side effects will be randomized to tirasemtiv or control. In BENEFIT-ALS the run-in period was one week with 125 mg BID.
  • In BENEFIT-ALS the intention was to get patients to a dose of 500 mg per day which was thought to be the most effective dose. Patients were titrated from 250 mg per day to 375 mg after one week and then to 500 mg after another week. In the phase 3, they will be titrated at two week intervals. Also, if they have problems with side effects when titrated to a higher dosage they will be returned to the last tolerated dose. In BENEFIT-ALS the improvement in SVC did not correlate with dose.
  • Half of the patients on tirasemtiv will stay on tirasemtiv at the end of the trial and half will change to control. This will give an insight into the effect of continuing patients chronically on tirasemtiv.
  • The entry criteria for the trial are that patients must be within two years of diagnosis of ALS. They must have an SVC of 75%. In BENEFIT-ALS some patients had SVC as low as 50%. In BENEFIT-ALS patients with a higher baseline SVC achieved a better improvement.
  • The primary endpoint will be change in SVC from baseline to 24 weeks which is satisfactory for regulatory approval if successful. However patents will be kept on the drug to evaluate the effect on other measure such as time to ventilation and other measures of respiratory function such as orthopnea and dyspnea. The FDA will likely require that some or most of these secondary outcomes are positive and support the primary SVC endpoint.
  • The expected decline in SVC is about 3% per month according to the Proact data and this was also seen in the BENEFIT-ALS trial. The study will be powered on the expectation that patients in the control arm will experience a decline in SVC in the control arm of 3% per month. The baseline for SVC will be about 75% so that at the end of 24 weeks the control patients would be expected to have an SVC of 57%.
  • The lead investigator for BENEFIT-ALS was Dr. Jeremy Schefner and he will be the lead investigator on the new phase 3 trial. He speculates that tirasemtiv could improve muscle function in the diaprapgh similar to how exercise improves muscle tone in other skeletal muscles. If so, tirasemtiv could improve respiratory function and improve overall survival.

Omecamtiv’s Potential Role in Congestive Heart Failure

There is a great unmet medical need for a drug that can improve cardiac output through a new mechanism of action and improve treatment of congestive heart failure (CHF). CHF is a life threatening condition that can result from heart attacks or prolonged hypertension. While simplistic, it is useful to compare the cardiovascular system to a pump (the heart) and the pipes (blood vessels). CHF is a condition in which the heart is not pumping enough blood because it has been damaged and the pipes or blood vessels are clogged up making it harder to pump blood through them. Blood can pool in the body causing shortness of breath, swelling in the limbs and exercise intolerance. An already damaged heart muscle is asked to pump harder. This causes the heart to enlarge and become flabby and increasingly less functional. This downward spiral in heart function eventually leads to death.

Congestive heart failure has a very profound health effect on individuals and a concomitant effect on national healthcare spending. It occurs in 2.4% of the US population (primarily older patients) and because of the aging baby boomer population this percentage will increase. It is a chronic disease that patients may live with for some years but short term exacerbations often lead to acute hospital stays. It is the most frequent cause of hospitalization for people over 65 in the US and there are about 1 million hospitalizations and discharges from the hospital in which CHF is determined to be the primary cause. There are an additional 1 million hospitalizations in which CHF is listed as a secondary cause.

The cost to the health care system for a hospital visit of a Medicare patient is constrained by that program’s cost containment regulations to $10,000. Non-medicare patients can cost up to $30,000 to treat. About 18% of CHF discharges are readmitted in 30 days and it is estimated that this costs Medicare $15 billion each year. It is estimated that if effective drug therapy could prevent readmissions, Medicare could save $12 billion per year. It is this unmet medical need that is the goal of omecamtiv. Readmission within 30 days can be a major problem for hospitals as Medicare will not pay more fees beyond those for the original admission. A hospital can be on the hook for $10,000 or more of additional costs. There is a discussion about extending this period to 60 days. If omecamtiv in its clinical trials can establish that it can meaningfully reduce hospital readmissions, it should quickly gain formulary acceptance.

The Need for New CHF Drugs: The Opportunity for Omecamtiv

Any drug that can help patients stay alive and remain out of the hospital and reduce length of stay and costs of hospitalization would be deemed a significant breakthrough. The morbidity and mortality associated with congestive heart failure dwarfs that of most cancers. If a patient is discharged today after hospitalization, there is a 28% chance of dying within six months and they have a 30% to 40% chance of being readmitted to a hospital within six months. There is the opportunity to do better with safer and more effective medicines.

Patients entering the hospital are choked with the blood pooling in the extremities and organs and are short of breath. Acute therapy in the hospital is aimed at reducing the amount of fluids with diuretics which cause the patient to excrete more water in the urine. A variety of well-known anti-hypertensive agents are used to help dilate the blood vessels. This is effective therapy in both the hospital and outpatient setting.

The missing element in the current treatment regimen is a drug that can make the heart safely pump more blood. Digitalis is a naturally occurring substance found in the Foxglove plant that has been used to treat the symptoms of CHF by increasing the contractility of heart muscle. More recently a class of drugs called phosphodiesterase inhibitors, the best of which is milrinone, has been introduced to therapy that does the same thing. The mechanism of action of digitalis and milrinone causes the heart to contract with more force. In an already badly damaged heart, this increase in oxygen consumption and increase in calcium can cause life-threatening irregular heart rhythms. Even though these drugs probably lead to decreased time of survivial, many patients and physicians are willing to take the risk because their quality of life improves so dramatically with their use.

Pharmaceutical companies have spent many years trying to develop a drug that increases the amount of blood that the heart pumps with each beat without dangerous side effects. The mode of action of omecamtiv is that it can increase the stroke volume (amount of blood pumped) and ejection fraction (amount of blood ejected from the left ventricle) without increasing the oxygen consumption (measure of how hard the heart is working) and ejection fraction with each beat. It is hoped that this will avoid the life threatening side effects of digitalis and milrinone. Essentially, omecamtiv causes the heart to contract longer and without the violent contractions that are the mechanism of action of digitalis and milrinone. If omecamtiv is found to be effective without limiting side effects, it can have a profoundly positive effect on CHF outcomes and lead to a major reduction in healthcare spending.

Takeaways  On Omecamtiv from Cytokinetics R&D Day

  • Omecamtiv has been in clinical development for ten years. Amgen and Cytokinetics have generated an enormous amount of data on the drug. They understand the drug’s mechanism of action very well and have determined the blood levels of the drug that are necessary to get the desired pharmacological effect in short term studies. One issue is whether the product has a durable effect in humans over a long time course; we know that it does in animals. The second question is whether it has limiting side effects over a longer course of therapy.
  • Despite the long period in which omecamtiv has been in clinical development, the now concluding COSMIC-HF trial will be the first that gives a meaningful insight into the question of durability of effect and side effects with longer use. The issue of safety may have already been determined as the Data Monitoring Committee on an interim analysis recommended that the trial continue without any changes. This suggests there have been no troublesome side effects.
  • The results for COSMIC-HF will be made known probably late in 3Q, 2015 or early 4Q, 2015. There is no primary efficacy endpoint such as survival or reduced re-hospitalizations for heart failure patients. The trial would have to be larger and longer and indeed these may be the goals of phase 3. So don’t look for a binary event.
  • There could be some information on efficacy as ultrasound images on patients could show if the improvement expected in cardiac output leads to a beneficial remodeling of the heart. If so, this would be a surprise.
  • Barring some unexpected and unanticipated shot from the blue, Cytokinetics expects that the decision to move into phase 3 is highly likely although it can’t speak for Amgen.
  • The decision to move into phase 3 will be made before the end of 2015. There will need to be an end of phase 2 meeting with regulatory agencies and I think that an actual phase 3 trial could begin in 2H, 2016.
  • I think that the most likely reason that Amgen might not proceed is that phase 3 would be the long and costly development process. They may not want to spend the money if they think that other components of their pipeline offer a better opportunity of success and better risk adjusted return.
  • If Amgen were to back out and Cytokinetics could not find a partner to replace Amgen, CYTK could not do a trial with oral omecamtiv alone. However, it feels that the data supports taking the IV form of omecamtiv into phase 3 can could do this on its own or with a partner.

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