Cytokinetics: Small Cap Biotech Investment And Catalyst Trade In Focus

Written by Michael Kovar.

Today, we are going to focus on a developmental biotech with significant 2014 catalysts that we feel could make a positive impact on its stock price. Cytokinetics Inc. (NASDAQ:CYTK) is a clinical-stage biopharmaceutical company focused on the discovery and development of novel small-molecule therapeutics for the potential treatment of serious diseases and medical conditions. The company's lead drug candidate from its cardiac muscle contractility program is omecamtiv mecarbil, a drug in Phase II clinical development for the potential treatment of heart failure.

Cytokinetics is independently developing tirasemtiv, a fast skeletal muscle activator, as a potential treatment for medical conditions associated with neuromuscular dysfunction. Tirasemtiv is currently involved in a Phase IIb clinical trial, and has been granted orphan drug designation and fast-track status by the U.S. Food and Drug Administration (FDA) for the potential treatment of amyotrophic lateral sclerosis (ALS).

Cytokinetics is also collaborating to develop CK-2127107, a skeletal muscle activator structurally distinct from tirasemtiv, for non-neuromuscular indications. This drug has the opportunity to address needs within diseases and disorders such as Multiple Sclerosis and Parkinson's.

Most Significant Upcoming Catalyst

In the fourth quarter of 2013, Cytokinetics completed the enrollment of its Phase IIb trial for tirasemtiv called BENEFIT-ALS. This trial includes 711 patients, and is designed to document the effects of tirasemtiv in the treatment of ALS.

Commonly known as Lou Gehrig's disease, ALS is a progressive neurodegenerative disease that affects nerve cells in the brain and the spinal cord. Motor neurons reach from the brain to the spinal cord and from the spinal cord to the muscles throughout the body. The progressive degeneration of the motor neurons in ALS eventually leads to death. In April or May, the company will present results from its BENEFIT-ALS study.

Cytokinetics said in the fourth quarter conference call that the last patient visit for this trial is at the end of March. Its objective is to have everything ready for a platform session at the annual American Academy of Neurology (AAN) meeting in Philadelphia at the end of the April. If the required data resolutions and statistical analysis is not complete, it plans to present the results one month later in Istanbul at the joint Congress of European Neurology.

In January, the Data Safety Monitoring Board (DSMD) for BENEFIT-ALS convened and reviewed data relating to potential safety, tolerability, and efficacy of tirasemtiv from the trial. The DSMD recommended that BENEFIT-ALS proceed to completion without any changes to the protocol.

In addition, the most updated data from the study shows the drug appearing well-tolerated and demonstrating improvements in patient respiratory function and muscle strength. Keep in mind, the goal for most of the indicators in this trial are to demonstrate a reduced deterioration of these symptoms in ALS. So, showing improvement in these functions versus simply a reduced decline goes well beyond this objective.

An accelerated Phase III trial is possible, as presented on March 3rd, 2014. However, even at a normal pace, this is on track to be started prior to the end of the year.

ALS treatment is a significant unmet need in the medical industry, so progress and upcoming positive data for Cytokinetics' tirasemtiv should be accompanied by a strong movement in stock price to the upside.

Partnership Support and Milestone Payments

Although the most significant catalyst has to do with a drug that Cytokinetics does not have a partnership for, there are other products that offer significant monetary support to 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. This preclinical figure alone represents more than the entire fully diluted market capitalization of the company. In addition, the structure of these deals was done so that along with significant milestone payment incentives, the company can still enjoy some of the profits after commercialization.

This is most notable from its partnership with Amgen (NASDAQ:AMGN) for its cardiac muscle drug, omecamtiv mecarbil. 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.

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

In parallel, the company 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.

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.

Share offering and Cowen and Company

A history of success is one thing we like to focus on. We've written several articles recently that document the Baker Brothers' track record related to the purchase of pharmaceutical stocks. After a certain amount of time, it becomes more obvious that certain organizations in the industry are flat out good at what they do. A trend of winning is tough to ignore, and over time, gradually reduces the luck factor that math may suggest is possible.

It was interesting how Cytokinetics reported 16-18 months of cash at the end of the fourth quarter, yet still entered into an underwriting agreement with a historically successful Cowen and Company, LLC on February 20th. Looking at this agreement, we found the following:

Underwriters have agreed to purchase the shares from the Company pursuant to the Underwriting Agreement at a price of $7.52 per share."

Additionally, the underwriters have exercised their option to purchase 656,250 additional shares.

The main conclusion we see as to why Cowen and Company got involved is both parties feel it will be mutually beneficial. Cytokinetics will be able to get more exposure and have a good relationship with a high-level finance organization, while Cowen and Company is able to buy stock at a discounted price.

The deals we see Cowen and Company, LLC working on are typically completed with other high-level organizations, such as Goldman Sachs (NYSE:GS). When looking at a deal it co-managed on last year, we see how a similar string of purchases happened compared to Cytokinetics. Isis Pharmaceuticals (ISIS) was around $20/share in May of last year. An offering happened, exercise of additional shares occurred, and less than one year later, the stock price has nearly tripled. Underwriters like this don't usually enter into deals without a plan on how to make those dollars go to work.

Another example of this is with Epizyme (NASDAQ:EPZM). Cowen and Company, along with Citigroup and Leerink Partners, recently exercised its option to purchase 673,901 additional shares from a public offering completed in February of this year. When Epizyme completed its initial public offering in 2013, Cowen and Company was a part of that as well. The IPO was priced at $15/share, and less than one year later, the stock has hovered around twice that amount, or $30/share.


From the fourth quarter conference call, the company noted that the resources in the next twelve months will largely be focused on the completion of BENEFIT-ALS, analysis of data from that trial, as well as readiness activities necessary to support substantial further development and commercialization of tirasemtiv. Clearly, this is the biggest focus for the company.

Even with this trial being the biggest focus of the company, it is still involved in two other drugs that can bring it over $1 billion in milestone and development payments. This is a nice mix that involves a solid income stream along with strong potential related to the tirasemtiv platform, which Cytokinetics owns 100% of at this time.

With the upcoming data in April/May, we think speculation could ramp up prior, which would result in upward pressure on the stock price. Cowen and Company making a recent investment in the company gives us the impression that the confidence level is pretty high surrounding this data.

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.

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