Cytokinetics was a surefire takeover candidate — until it wasn't.
On May 22, Cytokinetics surprised Wall Street and the biopharma industry when it struck a funding collaboration with Royalty Pharma worth up to $575 million. That decision — coupled with a separate proposed offering of about $500 million shares — caused Cytokinetics stock to lose almost a fifth of its value on May 23.
The deal wipes the possibility of an acquisition off the map, analysts say.
"The public market investors are being taken for a ride," one investor said in a May survey issued by Mizuho Securities analyst Salim Syed. "I think the deal will largely take out (mergers and acquisitions) if that wasn't obvious already."
But Cytokinetics Chief Executive Robert Blum says investors are missing the point.
"We believe there's a compelling commercial story, a compelling financial story — especially (with) funding now by Royalty Pharma with low cost of capital," he told Investor's Business Daily. "It's also consistent, we believe, with what should be expected of us to generate additional catalysts to support further shareholder value."
Cytokinetics Stock: Focusing On Aficamten
The Royalty deal partially funds the eventual launch of aficamten.
Cytokinetics tested the drug in patients with obstructive hypertrophic cardiomyopathy, a condition in which the heart muscles thicken. This makes it difficult for the heart to pump blood. Patients struggle with shortness of breath, chest pain and fainting during exercise.
Royalty will pay $50 million up front. Cytokinetics can also draw an additional $175 million within a year of aficamten's approval. The capital will be repayable over 10 years. In return, Royalty will receive a 4.5% royalty on annual sales up to $5 billion and 1% on sales above $5 billion.
But the part that riled investors in Cytokinetics stock involved the company's dead-in-the-water drug, omecamtiv mecarbil. Cytokinetics will receive $100 million from Royalty to run a final-phase study of the drug the Food and Drug Administration rejected last year.
Cytokinetics tested omecamtiv mecarbil in patients with heart failure with reduced ejection fraction (how much blood the heart pumps.) In February 2023, the agency said Cytokinetics' single study wasn't enough to win approval. At the time, the company said it "has no plans to conduct an additional clinical trial of omecamtiv mecarbil."
Shift To Omecamtiv Riles Investors
So, why the turnabout?
Blum said the deal "could enable us in a short study, a small study, to confirm something we already saw in a much larger Phase 3 study." It's in "the interest of shareholders to bring omecamtiv into this confirmatory study as we could be bringing this drug also to patients within the next few years," he added.
The market for heart failure drugs is expected to grow considerably over the next decade. There are two types of heart failure. Together, treatments for heart failure with reduced or preserved ejection fraction will generate $18.5 billion in annual sales across the seven major markets in 2034, according to market researcher Imarc. That's up from $6.6 billion in 2023.
Leerink Partners analyst Roanna Ruiz says Cytokinetics could gain FDA approval for omecamtiv mecarbil before year's end 2029. She lowered her price target on Cytokinetics stock to 88 from 92, but kept her outperform rating on shares in a May report.
If omecamtiv mecarbil gains FDA approval, Cytokinetics will pay Royalty $100 million and a 2% royalty on annual sales. If the drug fails, Cytokinetics will pay Royalty up to $237.5 million in quarterly payments over roughly five years.
"Could be one of the worst deals I have ever seen," an investor said in the Mizuho survey. "Cytokinetics takes all the risk. Royalty Pharma is possibly better off if the trial fails. Nobody wants OM back."
What Cytokinetics Stock Investors Are Missing
But Blum says investors in Cytokinetics stock are discounting another component to the deal.
Cytokinetics will receive $50 million up front to fund a midstage study of CK-586 in patients with heart failure with preserved ejection fraction. Royalty will also have the option to invest up to another $150 million to fund the Phase 3 development. For this, it will be eligible to receive a $150 million milestone payment upon FDA approval and a 4.5% royalty on annual sales.
Blum acknowledged investors felt the omecamtiv mecarbil side wasn't fair for Cytokinetics. Royalty gets a payment either way — whether the drug succeeds or fails in testing. Some investors felt "Royalty Pharma gets to have its cake and eat it too," Blum said.
But that's not the case for the CK-586 component, he argued. Royalty is paying up to $200 million. But it won't receive any payment unless the drug gains approval and hits the market.
"One really needs to look at these two (components) together and then one can understand why this is a good deal for Cytokinetics," he said. "We get, in effect, $300 million for which Royalty Pharma gets paid on one component, but not necessarily on the other, larger commitment of capital."
Is Cytokinetics Stock Coming Back?
Cytokinetics was one of the hottest biotech stocks at the end of 2023, spurred higher by strong study results for aficamten in obstructive HCM, a market of roughly 1 million people in the U.S. and 36 million worldwide, according to the Hypertrophic Cardiomyopathy Association.
Needham analyst Serge Belanger acknowledged the Royalty deal and public offering disappointed investors "who were anticipating a Cytokinetics acquisition." UBS analyst Ashwani Verma also said the timing of the public offering was "questionable" as it came when Cytokinetics stock was trading around 51 — far below its all-time high near 108.
But Cytokinetics stock has risen about 19% from a late-May low at 46.25. Shares have a middling IBD Digital Relative Strength Rating of 54 out of a best-possible 99. The RS Rating is a 1-99 measure of a stock's 12-month performance.
"I think this sets a new trajectory for the stock price on a go-forward basis," Blum said. "We have now raised over $1 billion in order to not only bring aficamten to market and expand its development program, but also with Royalty Pharma money, invest in the later-stage pipeline ... unlocking of further shareholder value."
Cytokinetics can be an autonomous and independent biotech company, he said.
"We are not necessarily beholden to M&A," he said.
Follow Allison Gatlin on X, the platform formerly known as Twitter, at @IBD_AGatlin.
