Cytokinetics, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. The company is a late-stage biopharmaceutical developer of muscle-activating therapies and has no commercial product sales. Financial amounts below are in U.S. dollars; “m” means millions.
Financial performance and liquidity
- Revenue: Q2 revenue was $6.2m, versus $3.1m a year earlier; first-half revenue was $11.5m, versus $7.2m. Revenue was primarily collaboration-related. Comparisons are affected by adoption of ASC 606 in 2018, which increased first-half R&D revenue by $9.6m and reduced license revenue by $4.7m.
- Loss and expenses: Q2 net loss was $27.5m ($0.51 per share), compared with $29.1m ($0.60 per share). First-half net loss was $57.8m ($1.07 per share), versus $54.9m ($1.22 per share). First-half R&D expense rose to $43.7m from $39.1m; G&A rose to $17.3m from $16.6m. No profit margin is meaningful given the absence of product sales and ongoing losses.
- Cash flow: Cash used in operations was $56.7m in the first half, versus $52.2m in 2017. Investing activities used $24.1m; financing provided $2.5m. Cash and cash equivalents declined to $47.0m from $125.2m at year-end.
- Liquidity: Cash, cash equivalents and short-term investments totaled $231.9m at June 30, compared with $285.4m including long-term investments at December 31, 2017. Working capital was $216.9m. Management states in MD&A that existing resources should fund requirements for at least 24 months, while the financial-statement note says at least 12 months from the filing date.
- Debt and other obligations: Debt carrying value was $32.4m, including $1.7m current; the stated interest rate is the greater of 8.05% or 6.81% plus 30-day LIBOR, with interest-only payments through May 2019. The liability for monetized future royalties was $113.1m. Related non-cash interest expense was $8.5m for the first half.
- Balance sheet: Total assets were $247.2m, total liabilities $172.1m and stockholders’ equity $75.2m. Accumulated deficit was $688.2m.
Material changes and business developments
- Reported revenue increased year over year, but ASC 606 materially shifted the timing and classification of collaboration revenue; prior-period statements were not restated.
- First-half R&D spending increased, driven chiefly by reldesemtiv clinical activity and preclinical work on an unpartnered cardiac compound. Cardiac program spending increased while skeletal muscle program spending declined.
- The company completed its $40m co-investment commitment for Phase 3 omecamtiv mecarbil development with Amgen, making the final $6.3m payment in July 2018. In return, it is eligible for incremental royalties of up to 4% on increasing sales outside Japan and specified co-promotion rights.
- In June, the company reported Phase 2 SMA study results for reldesemtiv: the study met its pharmacodynamic primary objective and showed dose-related changes in selected measures, including six-minute walk distance and maximal expiratory pressure. Other functional assessments did not show meaningful differences versus placebo; adverse events were similar between groups.
- Development of tirasemtiv remains suspended after the VITALITY-ALS Phase 3 trial failed to meet its primary and secondary endpoints in 2017.
Outlook, risks and unusual items
- Management expected 2018 R&D and G&A expenses to decrease versus 2017, principally reflecting suspended tirasemtiv development and lower commercial-development spending. It also expected R&D expenses to continue to depend on program priorities and clinical progress.
- Key development milestones anticipated at the time included FORTITUDE-ALS enrollment completion in Q4 2018 and results in the first half of 2019; reldesemtiv COPD results in Q3 2018; an interim analysis in the limited-mobility study in Q3 2018; and initiation of Phase 1 work on new cardiac compounds around late 2018 or early 2019. These are forward-looking expectations, not reported outcomes.
- Omecamtiv mecarbil is in Amgen-led Phase 3 GALACTIC-HF, planned to enroll about 8,000 patients. Astellas and Cytokinetics are advancing reldesemtiv in ALS and other indications. Both partners have significant influence over program continuation and timing.
- The company has never generated product-sales revenue, expects ongoing losses and cash outflows, and may need additional financing. Funding, milestone and royalty receipts are uncertain; financing could be dilutive or restrictive. Drug-development, regulatory, enrollment, safety, manufacturing, intellectual-property, reimbursement and partner-dependence risks remain significant.
- The royalty-sale liability is accreted using a 17% annual pre-tax rate; non-cash interest expense is expected to rise over time. Future royalty payments depend on potential product sales and approval.
- The filing reports an unauthorized intrusion into the company’s email server discovered in February 2018; management said it did not believe the incidents had caused material losses. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the stated cash runway: at least 24 months in MD&A versus at least 12 months in the financial-statement note, and assess assumptions behind both estimates.
- Evaluate the effect of ASC 606 on revenue timing, contract assets and liabilities, and comparability with prior periods.
- Track clinical-trial progress and results for omecamtiv mecarbil and reldesemtiv, including the limitations of the reported SMA findings and the suspended tirasemtiv program.
- Review cash burn, the debt repayment schedule and covenants, and the growth and estimation sensitivity of the future-royalty liability.
- Monitor partner decisions, milestone or royalty prospects, financing needs, and any further information about the reported cybersecurity intrusion.