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Expert Financial Analysis and Reporting

Cytokinetics: With the Stock Up 63% in the Last Seven Trading Days, What Do We Do Now? (CYTK, $8.01, Buy)

  • The strength followed the announcement of a new collaboration agreement with Astellas on CYTK’s unique skeletal muscle activators program
  • This added an important third product to CYTK’s portfolio of products in advanced human trials
  • We may hear on a scheduled January 5 conference call if there is a path forward for a phase 3 trial of tirasemtiv in ALS
  • The infusion of $55 million of cash brings the estimated year end cash position to a very strong level of $122 million
  • The Company has the financial strength to conduct a potential phase 3 trial of tirasemtiv in ALS without an equity infusion or partnering

Recent Stock Strength

Cytokinetics (CYTK) has been on a tear since announcing on December 23, 2014 a collaboration with Astellas (ALPMY). This focuses on CYTK’s third product currently in human trials, CK-212107, which will initially be developed for the indication of spinal muscular atrophy and will be followed by other undisclosed neuromuscular indications. The stock closed at $4.90 on December 22 and soared to close at $8.01 on December 31, a 63% increase in just seven trading days.

In my judgment, the strength in the stock was attributable to:

  1. This investment by a sophisticated corporate partner validates the therapeutic potential of CYTK’s skeletal muscle activator drugs. The failure of tirasemtiv, another skeletal muscle activator, to achieve its primary endpoint in a phase 2b trial in ALS led to investor skepticism on this class of drugs.
  2. This moved CK-212107 into the proof of concept stage on terms in which a good deal of the funding for clinical trials will come from Astellas. The deal is structured similarly to the deal with Amgen on omecamtiv mecarbil so that Cytokinetics may realize up to half of the operating profits and Astellas will fund most of the development. The basic terms of the collaboration were described in this report on my website.
  3. The balance sheet was substantially strengthened. The cash infusion brings yearend cash to $122 million. This gives Cytokinetics the financial strength potentially to conduct a phase 3 trial for tirasemtiv in ALS without needing to raise money in the capital markets or to partner the product. Tirasemtiv is totally owned by Cytokinetics and potentially could be a blockbuster.

My View on the Stock Price Outlook

One of the key points in my standing recommendation of Cytokinetics has been my belief that by yearend 2014 or early 2015, there was a good possibility that tirasemtiv would receive a Special Protocol Assessment from the FDA for a phase 3 trial that will allow CYTK to design a trial with slow vital capacity, SVC, as the primary endpoint. My detailed thinking was described in a November 1, 2014 report.  The extensive new collaboration with Astellas was not anticipated at that time.

The question is where does the stock go from here? The stock has moved up 118% from my November 1st report and it may have to take a breather. There is a rule of thumb that stocks often retrace 30+% of exceptionally strong price movements following positive news and if so in this case we could see a correction to around $6.00 to $7.00. However, I believe that there may be one other important event to come which could be discussed on a conference call scheduled for January 5, 2015.

When CYTK announced the collaboration on December 23, it also announced that it would hold a January 5th conference call. The question is why this call is being scheduled? There is no apparent reason. The terms of the Astellas collaboration were laid out in the press release and I am not sure that there is any reason to go into a more in-depth discussion. I think the purpose of the call may be to announce that the FDA has given a Special Protocol Assessment for tirasemtiv in which it agrees that sustained vital capacity is an acceptable primary endpoint for a trial in ALS. The conference call may be to give timelines and details for the phase 3 trial. I am obviously speculating on this, but CYTK previously has said that it would let investors know about the FDA decision around yearend.

I think that if the FDA agrees to SVC as a primary endpoint that investors will come to believe that there is a high probability that tirasemtiv will be successful in a phase 3 trial and approved for ALS patients. In the previous phase 2b BENEFIT-ALS trial, results in 388 randomized ALS patients showed that tirasemtiv demonstrated a statistically significant improvement in SVC versus placebo with a p value of 0.0006 over the 12 week period of the trial. SVC showed statistically significant improvement of the same magnitude at 4 and 8 week time periods and in almost all sub-groups. These were prospectively defined secondary endpoints. They were very powerful signals of therapeutic effect and I think that most investors will feel that the chances are quite good for replicating these results in a phase 3 trial that will then lead to approval.

There was a strong expectation earlier this year that results for tirasemtiv in the BENEFIT-ALS trial in ALS would be positive and based on this factor, the stock traded up to $12.99 or a market capitalization of $475 million in April 2014 before the results were released. However, the trial failed to reach the primary endpoint based on ALSFRS-r. The disappointment then led to a plunge in the stock over the next few days to $4.50 and it has traded down to a recent price of $3.69 and a market capitalization of $134 million. This suggests that the market attributed great commercial potential to tirasemtiv if it were to be approved for ALS. I am not saying that investors having been burned once will bid the stock back to $12.99 if a new phase 3 trial is begun. However, the renewed potential for commercialization should create significant value for the stock and of course the Astellas collaboration adds a new element to the story.

I am not so great at calling short term price movements and in this case I am not sure how much of the recent move was attributable to tirasemtiv potentially moving into phase 3 in ALS. To the extent that other investors have anticipated as do I that the announcement will be made on January 5th the news could be in the stock and it might trade off after the call. However, if many investors are surprised by the announcement, the stock could have still further upside potential.

Here is how I feel about the stock based on the presumption that tirasemtiv is moved into phase 3 as previously described. I don’t see a lot of downside to the stock if the tirasemtiv phase 3 trial is already figured in given the modest market valuation of about $300 million. On the other hand, if it comes as more of a surprise. We might see the stock continue to strengthen, perhaps even approaching a $12.00 stock price. Based on this I continue with my buy recommendation on the stock and I would also remain a buyer up to $10.00 if the stock strengthens. Above that level, I would have to do some more thinking, but in no case would I recommend taking profits.

I think that the probability is that tirasemtiv will move into phase 3 with SVC as a primary endpoint. This would give the Company three very promising product candidates. Omecamtiv mecarbil could move into phase 3 for congestive heart failure in 2015, tirasemtiv could be in phase 3 for ALS and CK-212107 has emerged as a third important drug. The current valuation of about $300 million seems very modest for this powerful product pipeline. Possibly any one of these drugs might justify this market valuation and any two products would appear to give even more justification.

Let me emphasize that tirasemtiv moving to phase 3 is not yet a done deal and I would expect the stock to settle back to $6.00 to $7.00 as a guess if CYTK says that it is not going forward with tirasemtiv. I would still be a buyer based on the prospects for omecamtiv mecarbil and CK-212107.

January 5th Conference Call

Cytokinetics will host a conference call on January 5, 2015 at 8:30 a.m. Eastern Time. The conference call will be simultaneously webcast and will be accessible in the Investor Relations section of Cytokinetics’ Web site; for further information please go to The live audio of the conference call is also accessible via telephone to investors, members of the news media and the general public by dialing either (866) 999-2985 (CYTK) (United States and Canada) or (706) 679-3078 (International) and typing in the passcode 52398702. An archived replay of the webcast will be available via Cytokinetics’ website until February 5, 2015. The replay will also be available via telephone from January 5, 2015 at 11:30 a.m. Eastern Time until February 5, 2015 by dialing (855) 859-2056 (United States and Canada) or (404) 537-3406 (International) and typing in the passcode 52398702.

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