Cytokinetics (NASDAQ:CYTK) has completed its second meaningful deal in two weeks. Today they announced a deal with Astellas (OTCPK:ALPMY) and on June 12, they announced a deal that allows Amgen (NASDAQ:AMGN) to develop omecamtiv mecarbil in Japan. Today's deal brings in $16 million as an upfront milestone and the Amgen deal brought in $15 million as an upfront. Hence the company has raised $31 million of upfront fees in this two week interval. In addition, Amgen bought $10 million of stock at a price of $1.18 per share; this was 8.5 million shares. Altogether, Cytokinetics has raised $41 million in two weeks. I estimate that the cash balance at the end of the second quarter will be about $91 million. Based on the recent quarterly operating cash burn, this gives the company about two years of cash.
There is a knee-jerk reaction from some investors that partnering deals are non-dilutive because no shares are issued and equity financings are dilutive because shares are issued. Neither is necessarily the case. Partnering can be enormously dilutive because a substantial portion of future operating profits, often more than half, are given away. For a company dependent on one product, this is like giving away half the company. Moreover, the company may lose full or partial control over development plans to a somewhat less motivated partner.
A good collaboration is one in which the company trades away product rights or development rights that it cannot bring to fruition on its own. For example, Cytokinetics could not develop omecamtiv in Japan on its own, so there is no actual dilution. The deal with Astellas is similarly non-dilutive because Cytokinetics is licensing product rights that it could not have obtained on its own due to lack of manpower, infrastructure and cash resources. I will touch on this shortly.
The deal with Astellas in addition to the $16 million of upfront fees also will provide $24 million to support cash burn on research. This is a two year collaboration that will focus on the development of skeletal muscle activators. This is in contrast to omecamtiv which focuses on cardiac muscle activation and tirasemtiv which focuses on neuromuscular activation as in ALS. Cytokinetics did not have the resources to bring along this program in a timely fashion so I consider the deal also to be non-dilutive.
The Astellas collaboration will focus on the development of CK-2127107, the company's third product in clinical trials, and related pre-clinical compounds. Disease targets were not precisely delineated, but comments from the company suggest that there could be programs to address muscle wasting caused by diseases like cancer and HIV and loss of muscle strength due to aging. Cytokinetics is eligible to receive over $450 million in pre-commercialization and commercialization milestones plus royalties.
The most positive aspect of these two deals is that CYTK now has the cash needed to hold on to tirasemtiv rights for a longer period of time. The phase IIb trial results of tirasemtiv will be available late this year. At one point, it looked like CYTK might have to strike a partnering deal before then. Now the company can hang on to rights for a much longer period of time and potentially through phase III and commercialization. This greatly enhances the value of tirasemtiv to shareholders.
I consider these deals as being incremental positives to my analysis which led to my initial recommendation of CYTK on March 25, 2013.
There are some upcoming events that investors should be aware of. Results from ATOMIC-AHF have been accepted for presentation during a Hot Line Late Breaking Trials Session at the European Society of Cardiology Congress 2013 in the August 31 to September 4 time frame. Full data from the phase IIb tirasemtiv trial in ALS should be available at year end. Data on oral omecamtiv mecarbil from the COSMIC-HF trial will be reported in 1H, 2014.
The company has also announced a one for six reverse stock split. This obviously has no effect on the value of holdings. If you own 600 shares at $2.00 you now own 100 shares at about $12.00. The value of the holdings in each case is $1,200. The higher stock price makes the company's cosmetically more appealing to institutions.
Disclosure: I am long CYTK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.