Investors Displeased as Cytokinetics Hinders M&A with Complex Royalty Deal

Cytokinetics has effectively ruled out a potential buyout in the near future by entering into a substantial funding agreement with Royalty Pharma to support its heart drug, aficamten. This $575 million deal caused significant investor dissatisfaction, leading to a 14% drop in Cytokinetics' stock price during premarket trading and a further decline to $48.62 from $59.23 when markets opened on Thursday.

For a long time, Cytokinetics was seen as a prime candidate for acquisition, especially after positive phase 3 trial results of aficamten in treating cardiomyopathy. Novartis had shown interest last fall but withdrew in January. During a fourth-quarter earnings call, CEO Robert Blum made it clear that no sale process was ongoing. This new agreement with Royalty Pharma solidifies that position and commits Cytokinetics to significant long-term payments to Royalty.

The complex deal comprises several elements: an initial $50 million, with a potential $175 million accessible within a year of aficamten's approval. Repayment will occur over a decade in quarterly installments. Royalty Pharma's share of aficamten royalties has been restructured to 4.5% on annual net sales up to $5 billion and 1% thereafter, a change from the previous structure.

Additionally, Cytokinetics will receive $100 million upfront to fund a new phase 3 study for omecamtiv mecarbil, another heart drug previously rejected by the FDA. If successful, Royalty Pharma will get $100 million in fixed payments; if not, Cytokinetics will owe Royalty $237.5 million over 18-22 quarters.

The agreement also includes $50 million for a phase 2 trial of another heart failure drug, CK-586. Royalty Pharma has an option to invest an additional $150 million for a phase 3 trial and is entitled to a $150 million milestone payment if the drug is approved, plus 4.5% royalties. If Royalty Pharma opts out of the phase 3 trial, it will still receive a 1% royalty.

Moreover, Royalty Pharma is acquiring a $50 million equity stake in Cytokinetics through a private placement, providing the company with $250 million in near-term funding. As of March 31, Cytokinetics had $634.3 million in cash and equivalents.

Cytokinetics also launched a public offering of common stock at $51 per share, expected to generate $500 million in gross proceeds. This move drew mixed reactions from investors, with some expressing frustration over the timing and scale of the deal. Mizuho analyst Salim Syed noted significant discontent among investors, who labeled the deal as poorly timed and unnecessarily large.

Leerink Partners provided a more balanced view, suggesting that Cytokinetics is preparing to independently launch aficamten in the U.S. and EU, a prudent step given the uncertainty of a buyout. They acknowledged that this might not align with investor expectations but viewed the move as strategic for long-term stability.

Investors were particularly upset about the renewed funding for omecamtiv mecarbil, which they had considered a lost cause. Syed’s note mentioned that Royalty Pharma bears almost no risk in this deal, potentially profiting even if the drug fails again.

Cytokinetics remains hopeful about the future, with plans to meet specific trial success criteria by June 2028 and aim for FDA approval in 2029. However, Leerink Partners maintains a cautious outlook on the program, not including omecamtiv in their valuation.

Some investors suggested that an activist might step in to take control of Cytokinetics, given the perceived loss of credibility in the company’s leadership. This scenario introduces a new dynamic, with some holding onto hopes of a takeover despite diminishing odds.