CYTOKINETICS INC annual report, FY2018

Cytokinetics, Inc. — 2018 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2018, compared principally with fiscal 2017; this is an annual report, not a standalone fourth-quarter filing. Cytokinetics is a clinical-stage biopharmaceutical company developing muscle-activating and muscle-inhibiting drug candidates. It reported no revenue from commercial product sales.

Financial performance and position

Metric	2018	2017
Total revenue	$31.5 million	$13.4 million
Research and development expense	$89.1 million	$90.3 million
General and administrative expense	$31.3 million	$36.5 million
Operating loss	$88.9 million	$113.4 million
Net loss	$106.3 million	$127.8 million
Basic and diluted loss per share	$1.95	$2.59
Net cash used in operating activities	$101.2 million	$101.8 million

• Revenue rose by $18.1 million, primarily reflecting collaboration revenue. The 2018 total included $26.4 million of research, development, grant and other revenue and $5.1 million of license revenue. Revenue comparisons are affected by adoption of ASC 606 in 2018; prior-year statements were not recast.
• The 2018 loss narrowed versus 2017. Lower operating expenses and higher revenue more than offset higher interest expense, including non-cash interest on the royalty-sale liability.
• Research and development spending shifted among programs: skeletal-muscle expenses fell to $50.9 million from $75.4 million, while cardiac-muscle expenses increased to $19.0 million from $10.6 million and other research increased to $19.2 million from $4.3 million. The company attributed the overall R&D decrease chiefly to stopping tirasemtiv development, partly offset by work on reldesemtiv, omecamtiv mecarbil and CK-274.
• At year-end, cash, cash equivalents and investments totaled $198.7 million, down from $285.4 million a year earlier. Cash and cash equivalents alone were $42.3 million; short-term investments were $156.5 million. Management said available resources and investment interest were expected to fund projected requirements for at least 12 months from issuance of the financial statements, subject to assumptions.
• Year-end debt had a carrying value of $42.4 million, including $2.6 million classified as current. The loan bears interest at the greater of 8.05% or 6.81% plus 30-day U.S. LIBOR; substantially all assets other than intellectual property secure the debt. The separate liability for sold future royalties was $122.5 million. Total liabilities were $185.2 million and stockholders’ equity was $25.9 million.
• Operating cash use was $101.2 million. Investing activities provided $5.1 million, mainly reflecting investment maturities net of purchases; financing activities provided $13.1 million, including $10.0 million of additional debt proceeds. No commercial-product margins were reported.

Material developments and outlook

• Omecamtiv mecarbil: In collaboration with Amgen, it was in Phase 3 trials for heart failure. GALACTIC-HF was planned to enroll about 8,000 patients; METEORIC-HF about 270. Cytokinetics had co-funded $40 million of Phase 3 development in exchange for incremental royalties of up to 4% on increasing sales outside Japan and North American institutional co-promotion rights. Amgen controls development decisions and may discontinue the program.
• Reldesemtiv: The company and Astellas were developing it for ALS and SMA. FORTITUDE-ALS completed enrollment in November 2018, with results expected in the second quarter of 2019. A Phase 2 SMA study showed concentration-dependent improvements in six-minute walk distance and maximal expiratory pressure, but several other assessments did not differ from placebo. The FDA later indicated the six-minute walk test could be an acceptable primary endpoint for an SMA registration program in ambulatory patients, with a global function scale as a recommended secondary endpoint.
• Reldesemtiv’s COPD Phase 2 trial did not meet its primary endpoint or show statistically significant differences on secondary endpoints. Astellas halted further enrollment in the elderly limited-mobility study after an interim analysis met prespecified lack-of-efficacy criteria. Tirasemtiv development had been suspended after its Phase 3 ALS trial failed its primary endpoint; a managed access program was established for certain prior participants.
• Other pipeline: CK-274, a cardiac myosin inhibitor for hypertrophic cardiomyopathy, and Amgen-partnered AMG 594 were in Phase 1 studies. CK-601, a next-generation skeletal-muscle activator, entered IND-enabling studies, triggering a $2 million Astellas milestone.
• The filing provides no clear numerical 2019 revenue, R&D expense or G&A expense guidance. Management expected continued operating losses and cash outflows, and anticipated ongoing development spending. In March 2019, after year-end, the company entered a new at-the-market facility allowing discretionary sales of up to $35 million of common stock; the prior facility had not been used by December 31, 2018.

Risks, contingencies and unusual items

• Management identified a material weakness in financial-reporting controls related to review and verification of internally prepared reports during the close process, following turnover and staffing gaps. Management and the auditor concluded internal control over financial reporting was ineffective at year-end; the auditor issued an adverse opinion on controls but an unqualified opinion on the financial statements. The weakness did not result in a restatement. Remediation included recruiting accounting staff and using temporary resources as needed.
• The business depends on clinical and regulatory success, additional financing and continued partner support. The filing highlights risks of trial failure or delay, adverse events, regulatory uncertainty, competition, intellectual-property challenges, and reliance on Amgen and Astellas. The company had an accumulated deficit of $743.3 million and had never generated product-sale revenue.
• ASC 606 adoption changed the timing and presentation of collaboration revenue. The filing reports a $9.0 million reduction in accumulated deficit on adoption and states that adoption affected 2018 revenue and loss per share; reported 2018 loss per share was $1.95 versus $2.28 under the prior guidance.
• The royalty monetization with RPI was treated as debt financing and generated $17.8 million of non-cash interest expense in 2018. The transaction was non-refundable even if omecamtiv mecarbil is never commercialized.
• No material legal proceedings were reported. The filing disclosed no material off-balance-sheet arrangements.

Investor verification priorities

• Check subsequent FORTITUDE-ALS results and further FDA feedback on a potential SMA registration path for reldesemtiv.
• Track GALACTIC-HF and METEORIC-HF progress, outcomes and Amgen’s development and commercialization decisions.
• Assess cash burn, remaining liquidity, debt service and covenants, the $122.5 million royalty liability, and any use of the $35 million ATM facility.
• Monitor remediation of the financial-reporting material weakness and whether management and the auditor later conclude controls are effective.
• Separate underlying collaboration economics from ASC 606 timing effects and milestone or reimbursement revenue when evaluating revenue trends.