Cytokinetics, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Cytokinetics is a clinical-stage biopharmaceutical company developing muscle-function therapies; it had no revenue from commercial drug sales.
Financial performance
Amounts below are in millions of dollars, except per-share data. The filing does not report gross profit or gross margin.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $5.8 | $6.5 | $14.2 | $11.0 |
| Research and development expense | $9.7 | $12.6 | $23.3 | $21.6 |
| General and administrative expense | $7.1 | $4.5 | $13.9 | $8.9 |
| Operating loss | $(11.0) | $(10.6) | $(23.0) | $(19.5) |
| Net loss | $(11.6) | $(10.6) | $(24.1) | $(19.4) |
| Net loss per share, basic and diluted | $(0.29) | $(0.27) | $(0.61) | $(0.50) |
- For the first six months, operating cash used was $28.7 million, versus $25.2 million provided in the comparable 2015 period. The prior-period inflow included a large collection of related-party receivables.
- Investing activities used $24.1 million, principally reflecting investment purchases exceeding maturities. Financing provided $15.5 million, primarily from debt proceeds.
- Cash and cash equivalents were $27.7 million at June 30, 2016; short- and long-term investments totaled $70.3 million. Combined cash and investments were $98.0 million, down from $111.6 million at December 31, 2015.
- Long-term debt had a $30.0 million gross principal balance and a $29.6 million carrying value. The loans bear 7.5% interest; the reported effective rate, including discount and fees, was 9.3%. Principal is due in installments beginning October 2017, with maturity in October 2020.
- Current liabilities were $26.3 million and total liabilities were $57.4 million at quarter-end. No profitability or positive operating cash flow was reported.
Material changes and operating developments
- First-half revenue increased $3.3 million year over year, mainly from Astellas collaboration revenue. Q2 revenue declined $0.7 million, as lower Astellas license revenue more than offset other revenue.
- First-half R&D expense increased $1.7 million, including higher clinical-trial and personnel costs; Q2 R&D fell $2.9 million, partly because of a $4.5 million settlement credit against R&D expense.
- G&A expense rose $5.1 million in the first half, reflecting increased personnel and stock-based compensation, outsourced costs, and legal fees. Interest expense also increased following the debt financing begun in 2015.
- At quarter-end, VITALITY-ALS, the Phase 3 tirasemtiv trial, had more than 500 participants enrolled; the filing later reported enrollment above 600 and screening closed in July. CK-2127107 Phase 2 trials were underway in SMA and COPD.
- Management reported discussions with regulators and Amgen concerning a potential Phase 3 program for omecamtiv mecarbil, with an advancement decision expected in Q3 2016.
Outlook, risks and unusual items
- Management expected R&D and G&A expenses to increase significantly in 2016 versus 2015. It believed existing cash, cash equivalents, investments and investment income would fund projected operating requirements for at least 12 months from the reporting date; this is an estimate, not a guarantee.
- The July 2016 Astellas amendment, a subsequent event not reflected in June 30 balances, was subject to antitrust clearance. If effective, it provides for a $35 million amendment fee, a $15 million tirasemtiv option fee, an accelerated $15 million CK-2127107 ALS milestone, and approximately $30 million of sponsored research and development funding through 2017. These amounts were prospective and conditional as described in the filing, not Q2 receipts.
- Astellas received an option to enter a global tirasemtiv collaboration. Exercise payments would range from $25 million to $80 million depending on timing; further milestones and royalties are contingent on development and commercialization. Cytokinetics remains responsible for tirasemtiv development costs during the option period.
- The company reported an accumulated deficit of $558.8 million and anticipated continuing operating losses and cash outflows. It may need additional collaboration funding, equity or debt financing; financing may be unavailable or dilutive, and debt carries covenants and collateral rights.
- Key development risks include whether tirasemtiv’s respiratory-function endpoint will be accepted by regulators, clinical trial outcomes and timing, partner decisions, manufacturing and CRO execution, and the possibility that additional trials or funding will be required. The lenders’ security covers substantially all assets other than intellectual property; default could permit acceleration and enforcement against collateral.
- The $4.5 million settlement of the BENEFIT-ALS CRO dispute was recorded as a reduction of R&D expense and a receivable at June 30; payment was received in July. The dispute was subsequently dismissed with prejudice.
Important facts for investors to verify
- Cash use and runway assumptions against actual spending, trial costs, and the timing and availability of financing.
- Effectiveness and accounting of the Astellas amendment, including receipt of its fees and research funding, tirasemtiv option exercise, and Cytokinetics’ future cost-sharing obligations.
- VITALITY-ALS enrollment, results, and regulatory acceptance of SVC and other endpoints; CK-2127107 trial progress; and Amgen’s Phase 3 decision for omecamtiv mecarbil.
- Debt covenant compliance, conditions for the remaining potential $10 million borrowing, repayment obligations, and potential dilution from outstanding warrants, options, or equity issuance.
- The extent to which collaboration revenues and reimbursements continue, given the concentration of first-half revenue in related-party arrangements and the absence of product sales.