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Cytokinetics secures up to $575M in royalty deal, frustrating investors

Dive Brief:

  • Shares in Cytokinetics sank by about one-fifth Thursday on news of a funding deal the biotechnology company struck with Royalty Pharma, in which it traded away a stake in future sales of its experimental heart drug for upfront cash.
  • The agreement will give Cytokinetics $250 million at closing and as much as $575 million in total. Royalty Pharma, a specialist in these types of transactions, will earn a higher royalty rate on annual net sales of the drug, aficamten, than it previously had under a prior agreement.
  • To Wall Street analysts and, seemingly, investors, the deal lowers the likelihood of an imminent large pharmaceutical company buyout of Cytokinetics, the prospect of which had buoyed the company this year. Reports in January indicated Novartis, Johnson & Johnson, and AstraZeneca had explored an acquisition.

Dive Insight:

Cytokinetics’ deal with Royalty has several parts, tying funding to the biotech’s preparations for a commercial launch of aficamten, as well as to new development plans for two other experimental heart drugs. Royalty also agreed to purchase $50 million in Cytokinetics equity as part of a secondary stock offering the company is using to raise approximately $500 million.

Taken together, the moves suggest a company preparing to remain independent, rather than readying for a buyout.

“The substantial financing we think reduces the probability of a takeout, consistent with management’s commentary on ability to go it alone,” wrote Sean McCutcheon, an analyst at Raymond James, in a client note.

Among 29 investors polled by Mizuho Securities, meanwhile, 21 estimated the probability of a Cytokinetics acquisition to now be 1-in-5 or lower, according to a note from Mizuho’s Salim Syed. Seventeen had rated the chances of a buyout at 50% or higher prior to news of the Royalty deal.

The reported interest in Cytokinetics centers on aficamten, which treats a condition that causes heart muscle to thicken. Known as obstructive hypertrophic cardiomyopathy, it can block the flow of blood and cause symptoms like chest pain, shortness of breath and irregular heartbeats.

In December, data from a trial named Sequioa-HCM showed that aficamten treatment helped increase oxygen uptake and improved self-assessed symptom, function and quality of life scores, compared to a placebo.

Cytokinetics plans to submit an approval application to the Food and Drug Administration in the third quarter. If cleared by the FDA, aficamten would compete with a marketed drug from Bristol Myers Squibb called Camzyos.

Fifty million dollars of the Royalty funding will go towards supporting Cytokinetics’ preparation for that event. Royalty would get a 4.5% share of annual net sales up to $5 billion, and then 1.0% on any annual net sales above that mark. Previously, Royalty had rights to a 4.5% share of sales up to $1 billion, and 3.5% thereafter.

Notably, however, the Royalty deal also gives Cytokinetics what is essentially a loan to fund a Phase 3 study of another heart drug, omecamtiv mecarbil, that the FDA rejected last year and investors had largely written off.

The biotech will get $100 million to support that trial in patients with heart failure and reduced ejection fraction. If it’s successful and omecamtiv mecarbil is approved, Cytokinetics will pay $100 million back to Royalty in installments as well as an incremental 2% royalty. If it fails or the drug isn’t approved, Cytokinetics will pay Royalty up to $237.5 million over 4.5 to 5.5 years in fixed quarterly payments.

Akash Tewari, an analyst at Jefferies, noted that this provision of the deal has been “particularly polarizing” for investors, who Tewari said consider omecamtiv mecarbil as a financial burden for Cytokinetics.

Additionally, Tewari added, the $500 million stock offering will dilute current shareholders — something Cytokinetics CEO Robert Blum previously indicated he was trying to avoid.

Shares in the biotech fell by as much as 19.6% Thursday morning to trade at just under $50 apiece. They traded above $100 in December and early January after news of the positive Sequoia-HCM data.