Seeking Alpha
, stockmatusow (857 clicks)
Long/short equity, deep value, value, research analyst
Profile| Send Message|
( followers)  

Summary

  • Small Cap Developmental Biotechs experience on a regular basis what traders call "binary events," which include Phase clinical data releases, Advisory Committee (ADCOM) recommendations, FDA approval decisions, and more.
  • When a company experiences a negative binary event, its stock price normally plummets, and often times gets oversold because investors and traders overreact.
  • We believe we have identified one such small cap biotech we think should make a nice rebound now and in the future.

Written by Michael Kovar and Scott Matusow

On March 5 of this year, we speculated how there would be a run-up in stock price for Cytokinetics (CYTK) prior to the recent data released last Friday. Indeed, that did occur as the stock went from $10.63 to a high of $13.26, representing what seemed like a solid 25% gain in less than two months. Unfortunately, there is little room for comfort most of the time in the pharmaceutical sector, and the stock was then crushed to the mid four dollar range. This happened in a quick hurry on the morning of Friday, April 25th, when the company reported results from the BENEFIT-ALS trial which was in phase II clinical testing. Cytokinetics reported that tirasemtiv failed the primary endpoint of the study.

Clearly, this is not what shareholders or ALS patients had envisioned or hoped for. Although there might be positive signs in the data, the primary endpoints were not met. Therefore, a fall in stock price was expected because this is the only proprietary drug for Cytokinetics, meaning that it owns 100% of the drug, which provides the company with the potential to reap very large benefits if it's able to successfully bring the drug to market. Looking forward with the company's new valuation, however, we feel the stock has fallen too much and provides a value entry point based on several factors which we will list below.

From our point of view, it is a bit surprising and unwarranted that the market cap for this company has dropped to around $160M. First, with the stock offering in February Cytokinetics would've had about $117 million in cash when combined with the amount reported at the end of December. Obviously, some has been burned in the meantime. But, with a low burn rate in 2013, the company still certainly has a strong amount of cash that will be reported during the Q1 2014 earnings call. Additionally, if the company chooses to move ahead with tirasemtiv, its burn rate will increase significantly. But, it has an ample supply of money on hand to comfortably do this without having to engage another stock offering.

Often times, buying a biotech company after a data failure, and/or FDA rejection is a profitable proposition. In April of 2012, Keryx Biopharma (NASDAQ:KERX) announced that its colon cancer drug perifosine failed its endpoints in a Phase III trial. The stock price took a serious hit, falling from a bit over $5 a share down to near $1 a share, representing about an 80% loss in value in a single trading session. Since then, Keryx has found success when its Phosphate Binder Zerenex showed positive results from its Phase III study in January of 2013. Keryx now has a FDA approval decision date scheduled for Zerenex of June 7, 2014. Since hitting a low of around $1 in 2012, the stock just last month saw an all-time high of nearly $17.50 - a huge gain in just under 2 years. In 2012, the situation looked bleak for Keryx as the stock became grossly oversold. Yet as shown above, it has not only rebounded, but has seen a seventeen fold increase. While we do not think this will happen with Cytokinetics, we do think the stock has a good chance to see $6 + in the longer short term, and potentially a double in the longer term.

Ariad Pharma (NASDAQ:ARIA) began an epic stock price run in 2009, when the stock was trading at around $0.75 a share, then hit a high of $23 a share about four years later. However, in October of 2013, the company reported that it was halting its "EPIC" trial of Iclusig after it was reported that the drug was potentially causing blood clots in some patients. Ariad's decision to suspend the trial came after the FDA placed a clinical hold on the trial. The cumulative result of this bad news was Ariad's stock price, which plummeted from $17.14 down to $2.15 in about 3 weeks. This represents about an 88% loss in stock value, which is needless to say a huge decline. However, in December of 2013, the FDA lifted the hold on the drug, allowing Ariad to sell it again with a more restrictive label and updated safety information. Also, the number of patients who suffer from chronic myeloid leukemia and Philadelphia chromosome positive acute lymphoblastic leukemia was narrowed significantly by the organization. Doctors must fully make patients aware of the potential blood clot risks, and together must decide if the benefits outweigh the risks in order for the patient to consider taking Iclusig.

Ariad's stock price rebounded significantly after the reinstatement, and currently trades over $7 a share. Representing over a 200% gain in the mid-short term.

The above 2 examples are given to show that small cap biotech companies frequently rebound significantly after a binary event failure. These odds increase when a company has a good cash position and other drugs in its pipeline as Cytokinetics does. In contrast, Companies that are single drug focused with a poor cash position almost never recover. This offers no guarantee that Cytokinetics will in fact recover significantly, but we believe it will based on each factor we mention in this article.

Partnerships and related buyout scenario

Although the most significant drug has failed its primary endpoint, there are other products that offer significant monetary support for the company via partnerships. These partnerships in place could provide Cytokinetics over $1 billion if all the elements are achieved.

Of this $1 billion, the two drugs involved in these deals could earn Cytokinetics approximately $500 million associated with the preclinical milestone portion of the equation.

Because of the way one of its partnerships is structured, the logic exists for a buyout. The reason is pretty simple. The relationship with Amgen (AMGN) for its cardiac muscle drug, omecamtiv mecarbil, creates the opportunity for very large payments to flow Cytokinetics' way. Within this partnership, the company is eligible for up to $650 million in milestone and commercialization payments. Cytokinetics would also have an opportunity for royalty payments on future sales, while Amgen would be responsible for sales and marketing expenses along the way. Now that the market cap has been decimated to a mere $160 million or so, we think it's a good bet they would rather pay a few hundred million dollars for the entire company and simply buy out Cytokinetics. This is of course if Amgen felt it was possible for Cytokinetics to achieve any reasonable percentage of these milestone/commercialization payments. If Amgen offered half of what is potentially due Cytokinetics, which is about $325M, this would represent double the current Cytokinetics stock price while still relieving Amgen of paying potentially much more down the road.

Cytokinetics is currently engaged in a Phase II trial for omecamtiv mecarbil, known as COSMIC-HF, designed to evaluate the safety and efficacy of a novel cardiac muscle activator in patients with heart failure and left ventricular dysfunction.

In parallel, Cytokinetics has begun making preparations for the Phase I clinical trial of omecamtiv mecarbil, known as CY 1211. This trial is a single-center, placebo controlled, double-blind study comparing the pharmacokinetics of omecamtiv mecarbil between healthy Japanese and Caucasian volunteers.

Cytokinetics expects both the enrollment of patients in the expansion phase of COSMIC-HF, as well as the conduct of CY 1211 to be completed in 2014.

Another significant partnership that the company has is with Astellas Pharma Inc. Under the agreement, the company granted Astellas an exclusive license to co-develop and jointly commercialize CK-2127107. CK-2127107 is a skeletal muscle activator structurally distinct from tirasemtiv, for potential application in non-neuromuscular indications worldwide. Obviously, now that tirasemtiv has failed, it is good to know that it is structurally distinct.

Cytokinetics will be primarily in charge of the Phase I clinical trials and certain Phase II readiness activities for CK-2127107, while Astellas will be primarily responsible for the conduct of subsequent development and commercialization activities for the drug.

Based on the achievement of pre-specified criteria, Cytokinetics may receive over $250 million in milestone payments relating to the development and commercial launch of collaboration products, including up to $112 million in development and commercial launch milestones for CK-2127107. The company may also receive up to $200 million in payments for the achievement of pre-specified net sales milestones of all collaboration products under the Astellas agreement.

Conclusion

We feel there is a lot of upside with Cytokinetics after losing about 2/3rds of its value. When completely ignoring tirasemtiv, the company pipeline should be worth far more than the $163 million market cap that currently exists. A strong cash position along with large milestone payment potential gives reason to give the stock a look at these price levels. If Cytokinetics somehow salvages value from tirasemtiv down the road, it would just be a bonus since some analysts will most likely assign no value to the drug in its current status, but there is at least one analyst who does give tirasemtiv value, so all hope for that drug is not entirely lost.

Source: Cytokinetics Binary Failure Provides Solid Buying Opportunity

Additional disclosure: Disclaimer: This article is intended for informational and entertainment use only, and should not be construed as professional investment advice. They are my opinions only. Trading stocks is risky -- always be sure to know and understand your risk tolerance. You can incur substantial financial losses in any trade or investment. Always do your own due diligence before buying and selling any stock, and/or consult with a licensed financial adviser.