Cytokinetics lands $575M royalty deal, irking investors

Cytokinetics' shares dropped by approximately 20% on Thursday following the announcement of a funding agreement with Royalty Pharma. In the deal, Cytokinetics exchanged a portion of future sales from its investigational heart drug aficamten for immediate cash. The arrangement provides Cytokinetics with $250 million initially, potentially rising to $575 million in total. As part of the deal, Royalty Pharma, a company specializing in such transactions, will receive higher royalty rates on annual net sales of aficamten than previously agreed.

The agreement has led analysts and investors to believe that a major pharmaceutical company acquisition of Cytokinetics is now less likely. Earlier in the year, there were reports that Novartis, Johnson & Johnson, and AstraZeneca had shown interest in acquiring Cytokinetics. However, this new deal appears to signal the company's intent to stay independent.

The deal includes multiple components, tying the funding to Cytokinetics' commercial launch preparations for aficamten as well as to the development of two other heart drugs. Additionally, Royalty Pharma agreed to purchase $50 million in Cytokinetics' equity as part of a secondary stock offering aimed at raising around $500 million. This overall strategy suggests that Cytokinetics is gearing up for independence rather than a buyout.

Raymond James analyst Sean McCutcheon remarked that the substantial financing decreases the likelihood of a takeover, aligning with management's statements about their ability to operate independently. A survey by Mizuho Securities reported that out of 29 investors, 21 now estimate the probability of a Cytokinetics acquisition to be 1-in-5 or lower. Previously, 17 investors had rated the likelihood at 50% or higher.

Aficamten, which is designed to treat obstructive hypertrophic cardiomyopathy, has been at the center of interest in Cytokinetics. This condition leads to the thickening of the heart muscle, obstructing blood flow and causing symptoms such as chest pain, shortness of breath, and irregular heartbeats. Data from a December trial named Sequioa-HCM indicated that aficamten significantly improved oxygen uptake, self-assessed symptoms, function, and quality of life compared to a placebo.

Cytokinetics plans to file for FDA approval for aficamten in the third quarter. If approved, the drug would compete with Bristol Myers Squibb's Camzyos. Fifty million dollars from the Royalty funding will support Cytokinetics' preparations for this event. Royalty Pharma will receive a 4.5% share of annual net sales up to $5 billion, and 1.0% on sales exceeding that amount. Previously, Royalty had rights to a 4.5% share of sales up to $1 billion and 3.5% thereafter.

Interestingly, the Royalty deal also includes funding for a Phase 3 study of another heart drug, omecamtiv mecarbil, which the FDA rejected last year. Investors had largely abandoned hope for this drug, but the new agreement gives Cytokinetics $100 million to support a trial in patients with heart failure and reduced ejection fraction. If successful, Cytokinetics will repay Royalty in installments along with a 2% royalty. If the trial fails or the drug is not approved, Cytokinetics will make fixed quarterly payments totaling up to $237.5 million over 4.5 to 5.5 years.

This aspect of the deal has been divisive among investors, according to Jefferies analyst Akash Tewari, who mentioned that many see omecamtiv mecarbil as a financial burden. Additionally, the $500 million stock offering will dilute existing shareholders, a move that Cytokinetics CEO Robert Blum had previously suggested he wanted to avoid.

Following these announcements, Cytokinetics' stock fell by as much as 19.6% on Thursday morning, trading just below $50 per share. In contrast, the shares had been trading above $100 in December and early January following the positive Sequioa-HCM data release.