I’ve written about Cytokinetics, Inc. (NASDAQ:CYTK), a biopharmaceutical company that is the industry leader in developing drugs that modulate muscle function, a couple times and have been in and out of the stock. In 2013, I wrote an article detailing why investors should buy the stock in anticipation of a nice run leading up to the amyotrophic lateral sclerosis (ALS) drug Tirasemtiv Phase 2 read-out. In accordance, the stock doubled from ~$6 to $13. In this instance, I sold my shares before the Tirasemtiv data was released as I thought the primary endpoint of achieving a global improvement in everything from speech to walking ability was too aggressive to achieve. As expected, the Phase 2 results did not meet the primary endpoint and the stock tumbled down to $3.5. Although Tirasemtiv did not meet the primary endpoint, it was the first drug to ever show any significant effect on breathing and strength in ALS patients.

Therefore, in November I recommended investors buy the stock on weakness. The stock quickly doubled over the next 2 months. The general sell-off in biotech over the last several weeks has dropped Cytokinetics ~25% on no company specific news, creating another fantastic entry point. In fact, nothing but good news seems to be flowing out the company. After nearly a decade of drug development, Cytokinetics has a mature innovative pipeline with several high profile partnerships and drugs preparing to enter Phase 3 clinical trials. The current market cap of the company is ridiculously low at ~$219M, which is absurd with two of the most exciting drugs in the industry, Tirasemtiv in ALS and Omecamtiv Mercarbil (OM) in heart failure, heading for Phase 3. What makes it even more crazy, is the company has over $100M in cash on hand. With its mature drug pipeline, strong partnerships and a hoard of cash, Cytokinetics is trading at a price that offers investors huge upside with minimal risk. In my opinion, Tirasemtiv or OM alone could easily justify double the current market cap. I’ll explain below why I am loading up on the stock. As Warren Buffett once said, “When it’s raining gold, reach for a bucket, not a thimble.”

ALS Drug Tirasemtiv to Begin Phase III

Cytokinetics has elucidated the function of Tirasemtiv on muscle function for years and numerous clinical trials in both ALS and Myasthenia Gravis, and has been granted orphan drug status and fast track status by the FDA. The Phase 2b BENEFIT ALS trial, the biggest ALS clinical trial ever conducted consisting of over 700 patients from 75 different centers, revealed a highly statistically significant improvement in the decline of slow vital capacity (SVC) compared to placebo. SVC is the measure of strength of the skeletal muscles during breathing.

*Slide from 27th Annual ROTH Conference in March 2015

Respiratory failure is the main cause of death in ALS patients and breathing complications are a major quality of life issue for patients. Therefore, Tirasemtiv may not only improve survival in patients but at the very least improve daily life such as making it easier to sleep at night. Cytokinetics management has reviewed all the data with neuromuscular and pulmonary thought leaders and regulatory authorities and are advancing the drug into Phase 3 studies in Q2 2015.

The Phase 3 trial will assess the measure of respiratory function, including SVC following 24 weeks of treatment. There will also be a secondary end point assessed at 48 weeks of treatment. Tirasemtiv has a very strong chance of success in the Phase 3 trial for numerous reasons:

1. Due to the enormous size of the Phase II BENEFIT-ALS trial and the resounding statistical significance observed (<.0001), there is a high probability the data will be reproduced.

2. The Phase 2 data was robust as the effects were observed in all time points over the 12 week study and in all pre-specified sub groups.

*Slide from 27th Annual ROTH Conference in March 2015

3. Most of the same centers involved in the Phase 2 trial will be in the Phase study and thus already have experience with the drug and managing side-effects

4. Any benefit observed in Phase 3 will justify approval

I think point number 4 here is very important and why I believe the chance for Tirasemtiv approval is so high. The FDA and the ALS community are eager to approve and accept any drug that can show any benefit for these patients. Make no mistake, if Tirasemtiv can illustrate any benefit in Phase 3 on any of the endpoints it will be approved. Sanofi SA (ADR) (NYSE:SNY)’s riluzole is the only drug available for ALS patients and it only improves survival by a couple months. The other over 20 ALS drugs that have failed did not show any benefit in any metric studied including SVC.

Tirasemtiv is the first drug to show any benefit in a large clinical trial. Patients are so ready for any other drug option they have been supporting accelerated approval of Genervon’s ALS drug GM604 and putting pressure on the FDA. The FDA actually responded to these requests, which is unheard of, stating that the data was really weak. In fact, Genervon’s drug was only tested in 8 patients so nothing can really be concluded on the drug’s effect. Cytokinetics Tirasemetiv is on another level and I predict will be the next drug approved for use in ALS patients. Importantly, Cytokinetics has enough cash to bring Tirasemtiv all the way through to approval and they own the full rights to the drug.

Omecamtiv Mecarbil Heading Towards Phase 3

OM is the initial reason I invested in Cytokinetics. It is one of the most exciting heart failure drugs currently in clinical trials. It is a cardiac specific myosin activator drug being co-developed with Amgen, Inc (NASDAQ:AMGN) to treat chronic and acute heart failure. The mechanism, safety and tolerability of OM have been studied extensively in over 1000 patients to date. All metrics studied have been consistent over all trials. The decision to progress the drug into Phase 3 studies will be based on the results from the Phase 2 ATOMIC-AHF and COSMIC-HF which studied the effect of the drug on patients with left ventricular systolic dysfunction hospitalized for acute and chronic heart failure respectively. The ATOMIC-AHF trial was a double-blind placebo controlled study enrolling ~600 patients with a primary endpoint of dyspnea relief 48 hours following IV infusion. Although, the data did not meet the primary endpoint there was a dose related effect on dyspnea relief with the highest dose having a significant reduction (p=.03).

*Slide from 2014 annual meeting

In addition, there was a 45% reduction in the 7-day incidence of worsening heart failure, compared with the 17% rate in controls.

*Slide from 27th Annual ROTH Conference in March 2015

Amgen and the cardiovascular clinician community appeared happy with the data. As a vote of confidence, after seeing the data Amgen paid Cytokinetics $25M to expand the OM license to include Japan.

The COSMIC-HF trial is a double-blind, placebo controlled study enrolling ~530 patients with a primary endpoint of pharmacokinetics and tolerability following 20 weeks of oral formulation exposure. The trial is expected to report out in Q4 2015 and I believe has a high chance of success since the main objective is to assess the pharmacokinetics and tolerability of OM in patients which has been consistent in all trials including ATOMIC. There is no pre-specified clinical endpoint like in the ATOMIC trial which can be misinterpreted by investors.

The timing could not be better for OM. Amgen is looking to build its cardiovascular division and recently achieved approval of Corlanor in patients with chronic heart failure. The first drug approved by the FDA for chronic heart failure in nearly a decade. Amgen is also preparing to launch their PCSK9 inhibitor Repatha. The launch of these drugs and the establishment of a cardiovascular related division and sales force at Amgen creates a lot of synergies for OM. In accordance, during Amgen’s earnings call they mentioned OM and Cytokinetics several times as an important piece of their cardiovascular portfolio. Amgen has paid Cytokinetics ~$150M to date for OM and just this month extended the research program with Cytokinetics to discover new cardiac sarcomere activator compounds. All signs point towards OM moving into Phase 3 studies and a continued strong relationship with Amgen.

CK-107 to Start Phase 2 in Spinal Muscular Atrophy

As if Tirasemtiv and OM were not enough of a pipeline, Cytokinetics in partnership with Astellas is moving CK-107 into Phase 2 studies for spinal muscular atrophy. This trial will be funded completely by Astellas and will begin in Q2 2015. This achievement resulted in a $45M milestone payment recently to Cytokinetics. The safety, tolerability and PK/PD have been well characterized in five Phase 1 clinical trials in over 100 patients. To date, the drug has illustrated statistically significant dose related effects on muscle force measures compared to placebo. Recent preclinical data suggests the drug could be used in treating a wide variety of diseases and conditions associated with muscle fatigue. For example, a recent publication illustrates the drug could be effective in increasing exercise performance in heart failure patients. CK-107 is another exciting compound being developed by Cytokinetics with the backing of a strong partner in Astellas.

Risks and Financial Position

All small cap biotech traders realize the risks involved in investing in these highly volatile stocks. Cytokinetics has several catalysts on the horizon which all have a significant chance of being positive and sending the stock much higher. At the current enterprise value hovering around $100M, I see very little downside in the stock price. The financial position of the company is strong, holding over $100M in cash or cash equivalents. In addition, Amgen and Astellas fund a significant portion of the OM and CK-107 studies respectively. However, a significant chunk of their money will be needed to fund the Phase III Tirasemtiv trial.

A Billion Dollar Market Cap is Realistic

Make no mistake Cytokinetics is ready to play with the big boys. The mature pipeline and partnerships that is coming to fruition is a long time in the making. They are by the far the industry leaders in drug development related to muscle function. The current market cap would suggest the company is struggling but as I’ve detailed above they have several innovative drugs with a good chance of progressing and is in a better position than ever before. The amount of potential revenue that could be realized upon approval in the conditions being studied is enormous. For example, over 1 million people in the US alone are hospitalized with heart failure as the primary diagnosis, which would be the target cohort for OM. Both SMA and ALS have ~30K patients each in the US.

The potential for any of the drugs in Cytokinetics pipeline to reach a billion dollars in sales is real. Following the Phase 2 readout for Tirasemtiv I believe the Phase 3 trial is de-risked and has a high chance of success. Tirasemtiv approval alone would make Cytokinetics similar to a company like Acorda Therapeutics Inc (NASDAQ:ACOR) which sports a $1.3B market cap. I strongly believe Amgen will move OM into Phase 3 trials which will trigger a substantial milestone payment to Cytokinetics and at least double the stock. CK-107 and Astellas partnership is a bonus mostly ignored by investors. Cytokinetics is currently trading near a $200M market cap with over $110M of it being cash. To value the whole pipeline under $100M is so crazy that I’ve bought all the stock I can afford at these levels. I would not consider selling any shares under $12.

*Slide from 27th Annual ROTH Conference in March 2015