Long thought to be a target for a big M&A deal, Cytokinetics has taken a step toward going it alone for the commercialization of the heart drug aficamten by securing a $575 million funding deal with Royalty Pharma.
The complicated strategic funding deal drew the ire of investors, who sent the stock down 14% in premarket trading Thursday morning. The stock fell 17% when the markets opened on Thursday to $48.62, compared to $59.23 at close.
Here’s why: Investors have been hoping for a nice fat M&A deal after the company’s lead drug aficamten had positive results in the phase 3 SEQUOIA-HCM trial in patients with cardiomyopathy. Novartis was reportedly circling the cardiovascular biopharma company last fall, only to back out in January. The next month, CEO Robert Blum was clear that there was no sale process underway during a fourth-quarter earnings call.
Cytokinetics has now all but assured that a buyout is nowhere in the near future with the Royalty Pharma deal. But more than that, the deal’s terms put Cytokinetics on the hook for some major payments to Royalty over many years.
The complex deal, announced after market Wednesday, includes $50 million with an additional $175 million available to draw from within 12 months of the approval of aficamten in obstructive hypertrophic cardiomyopathy. This capital will be repayable over 10 years in quarterly installments, according to the Thursday release.
Royalty already had a share of the royalties for aficamten, but that has now been restructured. The company will now receive 4.5% up to $5 billion of annual net sales of the drug and 1% thereafter. Previously, the deal had been set at 4.5% up to $1 billion of annual net sales and 3.5% above $1 billion of annual net sales.
Cytokinetics will also receive $100 million in upfront capital to fund a new phase 3 study of omecamtiv mecarbil, a heart failure drug that was rejected by the FDA in February 2023. If that trial is successful and Cytokinetics finally manages to get the drug approved, Royalty Pharma will receive fixed payments totaling $100 million.
That’s if the drug is successful. If it isn’t, Cytokinetics will be on the hook for $237.5 million to be paid to Royalty over 18 or 22 quarters.
But wait, there’s more: Cytokinetics will get $50 million in upfront capital for a phase 2 proof-of-concept trial for another heart failure drug called CK-586. Royalty will have an option to invest $150 million more for a phase 3 test and then will be eligible to receive a $150 million milestone if CK-586 is approved, plus royalties of 4.5%. Even if Royalty does not opt into the phase 3, the company will receive a 1% royalty.
And finally, Royalty is snagging a $50 million equity stake of Cytokinetics stock through a private placement.
All told, Cytokinetics will see $250 million in near-term funding to help stretch its cash runway. While the Royalty deal announcement did not include an update on the cash situation, Cytokinetics had cash and equivalents totaling $634.3 million as of March 31, according to a May earnings report.
More specific details of the Royalty deal were included in a related SEC filing submitted Wednesday.
“We have enjoyed a longstanding relationship with Royalty Pharma and this expanded strategic collaboration reinforces our shared conviction in the value of our cardiac myosin-focused pipeline of drug candidates,” said Cytokinetics CEO Robert Blum. “This diversified access to capital from a trusted partner supports our launch of aficamten while also fortifying our capital structure and lowering our cost of capital as we become a sustainable company. We believe this deal delivers on stated objectives of advancing our later-stage portfolio of potential medicines alongside our goal of increasing shareholder value.”
Meanwhile, Royalty’s CEO Pablo Legorreta said: “This is our third transaction with Cytokinetics and highlights our ability to structure creative, win-win funding solutions and underscores the breadth of our funding capabilities.”
Outside of the Royalty deal, Cytokinetics also launched a public offering of common stock priced at $51 per share that is expected to raise $500 million in gross proceeds.
Let’s unpack some of this. Mizuho analyst Salim Syed said in a Wednesday evening note that he had “a lot of (frustrated) investors in my inbox” after the two press releases were dropped.
The firm also ran a quick investor survey following the news Wednesday evening. Some key comments included: “no bueno,” “The timing is terrible,” “horrible,” “unnecessarily large,” “Stock is going to get murdered,” “Just let that drug die already,” “Good deal for Royalty Pharma,” and many others. There were a few who viewed the deal as a positive, including one who said it was “good for the long run.”
Leerink Partners’ analysts were slightly more pragmatic about the news, suggesting that Cytokinetics is just getting prepared for a future where a buyout doesn’t materialize.
“Although this may add another 'layer' to investor debate around strategic interest in the company, we think Cytokinetics is taking prudent steps to be well-capitalized ahead of a possible 'go-it-alone' launch for afi in the U.S./EU, which management believes they should be able to execute in an efficient manner,” Leerink Partners wrote Wednesday evening.
“However, we acknowledge that this might not be what investors were hoping for, and the updates today have multiple moving pieces that investors now need to get comfortable with going forward.”
Leerink Partners was therefore not surprised to see the stock dip 14% aftermarket.
Prior to the deal announcement, Cytokinetics was trading around $60, compared to a high of $108. This “felt washed out to many” with no M&A premium considered in the stock, Syed said.
Investors were most angry about the revival of omecamtiv mecarbil, according to Mizuho.
“Investors had thought this asset was effectively dead and certainly not warranting further spend by the company,” Syed wrote. “And now Cytokinetics is back to funding the asset, and the risk is seemingly being entirely borne by Cytokinetics.”
Royalty bares almost no risk to funding the failed drug and may ultimately make more if the asset fails yet again.
In the release, Cytokinetics’ executive vice president of research and development Fady Malik, M.D., Ph.D., said the company had received feedback from the FDA on a confirmatory phase 3 trial design that should help replicate earlier findings that omecamtiv mecarbil can help higher risk patients with heart failure with reduced ejection fraction.
Leerink Partners views this as helpful for this next attempt to get the long-struggling medicine approved. The companies also have set a specific bar for success of meeting the trial’s main endpoint by June 30, 2028 and a goal of securing an FDA approval in 2029. Nevertheless, “we currently do not include omecamtiv in our valuation as we remain cautious on the program,” Leerink Partners wrote.
Investors also suggested to Mizuho that an activist could step in and try to wrest control of the company since “the Cytokinetics story has lost credibility tonight,” according to Syed’s note.
“This is a new element to the story. Bulls may hold onto the premise of an even further washed-out stock with a large financing behind it, with the prospects of a takeout, despite perceived diminished odds, and now the hopes of an activist opportunity,” the note said.
At the end of the survey, Mizuho asked investors to sum up their thoughts—but keep it clean. Investors tried, but in the end a few asterisks replaced key words in a few comments: “Please fire the CEO and replace with someone who is not a [*].”