Follow Us GraphicFacebook IconTwitter IconLinkedIn Icon
Search Graphic

Expert Financial Analysis and Reporting

Cytokinetics: Update and Reiteration of My Buy Recommendation (CYTK, $5.54, Buy)

Investment Thesis in Brief

By the end of 2015, Cytokinetics (CYTK) will have tirasemtiv in a phase 3 trial in ALS and might also have omecamtiv in a phase 3 trial in heart failure. There is no financing overhang as the Company has $118 million of cash which can last for over 20 months. This could see the Company through the release of topline results for the tirasemtiv phase 3 which I expect in late 2015 or early 2016.

In terms of the outlook for the stock in the immediate future I am not sure. The phase 3 trial of tirasemtiv will start any day and the upcoming R&D analysts’ day on May 12th will focus on this trial and could stoke up interest in the drug and the stock. On the other hand, the start of a clinical trial often has little impact on a stock. If Amgen decides to go forward with a phase 3 trial of omecamtiv later this year, I think there would be a very strong upside reaction as there is little expectation that this will occur. The comfortable cash position suggests there is no concern about the need to do for a financing under distress. I continue with my buy on the stock.

So how should investors value the stock? Absolute values of biotechnology stocks are very difficult to judge because of the many uncertainties involved in drug development. I often rely on relative valuation measures. Cytokinetics has a market capitalization of about $370 million. With other companies in phase 3 development with one promising drug, we often see market capitalizations of $500 to $800 million; I can argue that tirasemtiv alone could lead to such upside potential. I can make a similar argument for omecamtiv alone providing the COSMIC-HF trial is successful. Moreover, CK-107 and other potential drugs that could arise from the Astellas collaboration could be worth half this much. The sum of the parts suggests that Cytokinetics could sell at $1.2 billion to $2.0 billion based on these three products if: (1) tirasemtiv is advanced into phase 3 (almost a certainty), (2) omecamtiv is successful in COSMIC-HF (reasonable probability) and (3) CK-107 goes into phase 2 (almost a certainty).

I am postulating two potential price targets one year out. I think that if it is announced later this year that omecamtiv will be taken forward into a phase 3 trial by Amgen and Cytokinetics that the stock could double from this level to a market capitalization of $800 million (or more) and a stock price of $14. I think that the odds favor omecamtiv moving into phase 3. If omecamtiv is abandoned by Amgen, there could be a sharp immediate impact on the stock. However, after that passes the stock could recover based on hopes for tirasemtiv and trade meaningfully above current levels, perhaps in the $8 to $10 range as a guess.

Investment Overview

Unique Technology Platform

Cytokinetics has a promising technology platform based on an understanding of muscle biology which leads to the ability to aid contractility of muscles. Its lead products address such diverse diseases as heart failure, ALS and SMA (an orphan disease with similarities to ALS) in unique ways that improve quality of life and may extend survival. I find it refreshing to look at this Company which has such a unique approach to drug development. This is in contrast to oncology where there are so many drug development efforts aimed at the same tumor types that it is very hard to determine the medical impact and commercial opportunity of the many approaches.

Extensive Phase 1 and 2 Testing

The Company is also unique in the thoroughness of clinical research it has done as it has completed over 50 phase 1 and 2 trials on its drugs. Most biotechnology companies because of time and cost constraints often leap into pivotal phase 3 trials without a thorough understanding of the properties of their drugs that comes from extensive phase 1 and 2 testing. This is much less the case for Cytokinetics.

One and Possibly Two Drugs in Phase 3 by Early 2016

By the end of 2015 or early 2016, it is probable that the Company will have tirasemtiv (ALS) and omecamtiv (heart failure) in phase 3 trials. The extensive clinical testing that these drugs already have undergone provides an unusually good insight into how they may improve these disease states and their side effect issues. While this does not guarantee that the phase 3 trials will be successful (the gods of clinical trials are cruel), I think that the probability for success has been maximized. In addition, phase 2 trials for a third drug, CK-107, will begin in 2H, 2015 for SMA.

The initiation of clinical trials even at the phase 3 level may not always be a stock moving event because it is the results of the study that are key. It could be different for the upcoming phase 3 trial of tirasemtiv in ALS and omecamtiv in heart failure. Tirasemtiv failed to reach its primary endpoint in a 683 patient BENEFIT-ALS trial. However, the information gained in this trial was invaluable in defining a clear path forward to a new phase 3 trial in ALS. BENEFIT-ALS showed clear benefits in prospectively defined measures of respiratory function that will be the primary endpoints for the upcoming phase 3. If the phase 3 trial can duplicate the results that were seen in BENEFIT-ALS, tirasemtiv will almost certainly be approved for ALS. The trials should start in early May 2015 and we should know the phase 3 results for tirasemtiv in late 2016 or early 2017.

The collaboration with Amgen on omecamtiv has been an exercise in frustration for Cytokinetics and investors. Amgen has been extremely cautious and careful in phase 1 and 2 development. This is understandable because omecamtiv affects the contractility of the heart in a novel way that increases cardiac output without putting greater stress on the heart. However, all past attempts to do this have resulted in increasing the workload and stress on the heart which increases the risk of cardiac arrhythmias; heart failure patients have hearts that are already considerably damaged and enlarged and are more subject to cardiac arrhythmias.

Investor Uncertainties About Tirasemtiv and Omecamtiv

Amgen undoubtedly feared that in a large phase 3 trial, they could actually cause more deaths with omecamtiv due to arrhythmias. For this reason, Amgen has moved very slowly as the first human was dosed in 2005. This drug has been closely studied for over ten years. I think that if Amgen elects to go forward in phase 3 development that it will be a strong positive for the stock. It means that one of the best drug research organizations in the world after ten years of research believes that there is a good probability that omecamtiv will be shown to be safe and effective in treating heart failure. The final hurdle for omecamtiv to clear is the completion and reporting of phase 2 results for COSMIC-HF for which results should be available by yearend.

The failure of tirasemtiv in the BENEFIT-ALS trial and the tortured development course for omecamtiv has created a schism in the investment community. Some interpret this as showing that the technology has failed. I am in the opposite camp that believes that the data underlying tirasemtiv and omecamtiv is unusually strong and augurs well for success in phase 3. I am struck by the valuation of Cytokinetics which is about $370 million. Familiarity has bred contempt. I think that if Cytokinetics were a private company with this type and quality of data that it might come public with a much higher valuation of perhaps $600 to $900 million (entirely subjective).

Very Solid Financial Situation

The other issue to address in the investment thesis is the cash position. The Company ended 1Q, 2015 with $118 million of cash. According to management, this will fund operations for 20 months taking the company up to or past the release of phase 3 results for tirasemtiv. However, this guidance does not take into account substantial payments from Amgen and Astellas that would be received if certain milestones are met. In particular, I think that a decision to move omecamtiv into phase 3 development could generate a $50 million or so payment in early 2016. The key takeaway point is that there is no need for the Company to do a financing under distress during the period we are waiting for the phase 3 results for tirasemtiv.

Should Cytokinetics Do A New Tirasemtiv Phase 3 Trial?

Cytokinetics announced on April 22, 2014 that the BENEFIT-ALS trial failed to reach the primary endpoint of slowing progression in the rate of decline of function for ALS patients as determined by the ALSFRS-r scale. The failure of a clinical trial, while crushing, does not always mean that the drug is ineffective. Failure can be due to the trial design, dosing of the drug, incorrect powering of the trial and other issues. Sometimes a careful analysis of the results of a failed trial can point the path forward for another trial that may be successful and Cytokinetics believes this is the case with tirasemtiv.

In BENEFIT-ALS, tirasemtiv resulted in a meaningful reduction versus placebo in the rate of decline of slow vital capacity (SVC), which was a secondary endpoint of that study. SVC is a measure of respiratory function that is universally used to make important clinical decisions and prognosis in the treatment of ALS patients. ALS patients know their SVC scores like most people know their social security numbers. Tirasemtiv showed statistically significant decreases in the rate of decline of SVC as compared to placebo in all prespecified sub-groups. Following discussions with neuromuscular and pulmonary specialists and regulatory authorities, Cytokinetics felt that SVC might be a more appropriate primary endpoint for a new phase 3. Regulators are likely to also require secondary endpoints relating to respiratory function that validate SVC.

Will Regulators Accept an ALS Trial Endpoint Other Than ALSFRS-r?

The FDA and other regulatory agencies for some time have considered ALSFRS-r to be the one validated primary endpoint that should be used for ALS trials. However, no significantly sized phase 2 or 3 trial has ever been successful using ALSFRS-r as the primary endpoint. This could be attributed either to the difficulty in treating the disease but perhaps it is a problem with the endpoint itself at least in the context of 24 weeks of treatment. Cytokinetics believes this to be the case and has had detailed discussions with regulatory agencies about using a different primary endpoint.

Cytokinetics has had extensive meetings with the FDA and EMA to discuss the findings of BENEFIT-ALS and to discuss the possibility that they could change the primary endpoint of the trial to SVC instead of ALSFRS-r. Regulatory agencies do not give contractual guarantees that they will approve a drug if it reaches the endpoint of a study. This is true even with a Special Protocol Agreement. However, detailed interaction and guidance from the regulators can give a Company an understanding of how regulators probably will view an endpoint and whether the drug might be approved if that endpoint is reached. Cytokinetics has reached the point that it believes that the regulators will accept slow vital capacity or SVC as an endpoint, but there is no guarantee.

The Phase 3 Trial of Tirasemtiv Will Soon Be Under Way

The Company announced on its quarterly conference call on April 30 that the phase 3 trial of tirasemtiv in ALS would enroll its first patient about the time of its analysts’ R&D day on May12. If successful, this trial supported by the phase 2b BENEFIT-ALS trial could be the basis for approval in ALS. The design of the phase 3 trial will be discussed in detail at the upcoming R&D day, but there are some things that we know already. Obviously, it will be a randomized trial like BENEFIT-ALS, but there will be major differences. Importantly, patients will be treated for 48 weeks instead of 24 and ALSFRS-r will not be the primary endpoint in the trial, which is a critical change.

The phase 3 will use nearly all of the centers that enrolled patients in BENEFIT-ALS. This gives Cytokinetics a very good insight into each center's ability to recruit and enroll patients. This combined with knowledge of the trial design creates good forecasting ability on the time it will take to enroll the trial. It is their expectation that the study could complete enrollment in six to nine months. With the first enrollment about to take place, this means that the last patient could be enrolled somewhere between October of 2015 and January of 2016. The last patient will complete the trial one year after enrollment so that the last patient should complete the trial in October of 2016 January of 2017. It generally takes about one or two months to lock the data base and analyze the data. This suggests that we could see topline results in the November 2016 to April 2017 time frame.

The objectives of the trial will be to assess measures of respiratory function, including SVC which will be the likely primary endpoint as measured at 48 weeks of treatment. SVC will need to be supported by favorable results from other functional assessments of respiratory and other skeletal muscles. ALSFRS-r will certainly be a secondary endpoint.

Side Effect Issues of Tirasemtiv Can Play a Major Role in the Phase 3 Trial

It was known going into the BENEFIT-ALS trial that dizziness was an issue that could cause patients to drop out of tirasemtiv therapy. To mitigate this risk, there was a run-in period in which patients received a daily dose of 125 mg twice per day for a week. If patients could tolerate this dosage which is half of what is thought to be the most effective dose of 250 mg twice a day, they could be enrolled in the trial. This run-in period was intended to prevent randomization of the minority of patients who can’t tolerate even this starting dose.

Based on prior experience, management expected that about 40% to 50% of those patients started on tirasemtiv would experience a dizziness that was usually mild. They further beleived that in most patients the dizziness would go away if the patient continued on. They lost 16% of patients in the lead in phase before they could be randomized which underlines the seriousness of the dizziness side effect. Of much greater concern was that even after randomization, they lost just under 10% of the patients receiving tirasemtiv. ALS trials are notorious for dropouts because the disease itself creates so many quality of life problems. However, three times as many tirasemtiv patients dropped out as those on placebo.

The goal of BENEFIT-ALS was to start with the minimum dose of 125 mg BID, increase the dosage to 175 mg BID and eventually get all patients to what was expected to be the optimal dose of 250 mg BID. However, of those who completed the study about half of them were on 250 mg BID, a quarter was on 175 mg BID a day and a quarter were on 125 mg BID today. Based on this distribution of doses, once patients got past week four or five, the dropout rates between placebo and tirasemtiv were pretty much the same.

In the new phase 3 trial, the run-in period using the 125 mg twice a day dose will be extended to two weeks rather than one week. This could help investigators and patients make better decisions about whether they can tolerate whatever adverse experiences they may be having given the possibity (probability) that they will diminish over time. They also will be less aggressive in dosing to reach 250 mg BID.

There was also nausea and some weight loss issues in BENEFIT-ALS that resulted in quality of life issues in addition to dizziness. Because the ALSFRS-r scale is pretty much a quality of life scale, this could have worsened results. These side effect issues were not addressed in BENEFIT-ALS but will be in the new phase 3 with drugs and dietary measures.

Omecamtiv Issues

COSMIC-HF Trial Is Gating Factor to Begin Phase 3

Investors are now awaiting the results from COSMIC-HF. This is a phase 2, double-blind, randomized, placebo controlled, multicenter clinical trial designed to assess the pharmacokinetics and tolerability of omecamtiv mecarbil in patients with stable chronic heart failure and left ventricular systolic dysfunction. It is important to understand that

COSMIC-HF was not designed with a pre-specified primary clinical efficacy endpoint. The primary purpose is to assess safety tolerability and pharmacokinetics and the effects of longer term treatment.The mechanism of action is very well defined for omecamtiv. There is little question that it can improve cardiac output in heart failure patients. The key issue is whether it can be given safely over a long period of time and this is the goal of COSMIC-HF. Because of this, it was very encouraging that the data monitoring committee reviewed cumulative safety and pharmacokinetic data from COSMIC-HF and recommended the study proceed without change. The gating factor for beginning a phase 3 is the completion of the COSMIC-HF. Patient enrollment was completed in the first quarter and over 275 patients or nearly two thirds of those enrolled in the study have already completed the 20 week duration of dosing that is used in the trial.

Plans Are Underway to Start a Phase 3 If No Issues Arise in COSMIC-HF

Cytokinetics has said that in anticipation of completing COSMIC-HF, it and Amgen are collaborating on clinical and non-clinical development activities as well as regulatory and other planning activities preparatory to a phase 3. In addition Cytokinetics recently convened a meeting with experts in matters of reimbursement and market access to discuss pharmacoeconomic considerations associated with novel heart failure therapeutics to help inform on the phase 3 clinical trial design.

Investors Are Not Expecting an Efficacy Signal But There Could Be One

COSMIC-HF affords the first glimpses into the effect of prolonged treatment of omecamtiv in enlarged hearts that are found in heart failure patients. The heart size is determined by measuring end-systolic and end-diastolic diameters using echocardiograms. All patients in COSMIC-HF have echocardiograms at baseline and again at 12 and 20 weeks following randomization. These echocardiograms may provide quantification of changes in cardiac shape and function which could be predictive of long-term clinical outcomes. This could provide an upside surprise for investors as there is little expectation of seeing any clinical benefit in COSMIC-HF.

Collaboration with Amgen Has Been Extended

Another potentially encouraging insight into what Amgen will decide to do with omecamtiv was that during the first quarter Cytokinetics and Amgen agreed to extend the joint research program directed to next generation cardiac sarcomere activator compounds. Terms of the amendment to the company's collaboration provided for Amgen’s continued sponsorship with Cytokinetics scientists for 2015 and potential additional milestone payments payable by Amgen’s to Cytokinetics for compounds that may arise out of the collaborative research.

CK-107 Overview

Cytokinetics and its partner Astellas are planning a phase 2 clinical trial later this year of CK-107 in SMA, which is an orphan disease that is one of the most common fatal genetic neuromuscular disorders responsible for infant death. As in the case of ALS, the premise is that direct activation of skeletal muscle may address neuromuscular weakness that characterizes SMA and improve key functional parameters including breathing. Our phase 2 trial will look at pharmacodynamic end points in patients with SMA.

The target SMA population for enrollment is those who survived adolescence with the disease but may have gradual and progressive weakness in the muscles of the extremities causing mobility problems and other functional limitations. Few treatment options exist for these patients, resulting in a high unmet need for new therapeutic options. This approach to developing CK-107 in patients with SMA would be complimentary to gene therapy approaches being investigated by other companies.

Financial Position

Cytokinetics ended 1Q, 2015 with $117.5 million in cash, cash equivalents and investments which can fund over 20 month of going forward net cash burn. This guidance includes estimated costs for the phase 3 on tirasemtiv in 2015 and 2016. It does not include any  expectations relating to potential milestone payments that could be payable in 2015 and 2016 for both omecamtiv and CK-107.


Tagged as , , , , + Categorized as Company Reports


You must be logged in, or you must subscribe to post a comment.