Sources: ACC/AHA/ECS Guidelines for the Management of Patients With Atrial Fibrillation; Meta-analysis for ACP/AAFP Guidelines, Ann Intern Med. 2003;139:1018-1033.

V-W = Vaughan Williams Classification: I (block sodium channel), II (beta-blockers), III (affect potassium efflux), IV (affect conduction between the atria and ventricles, the AV node), V (other).
SVA=Sustained Ventricular Arrhythmia, a dangerous side effect. TdP=Torsade de Pointes, a type of ventricular arrhythmia.

Recommendations for which drug to use varies based on underlying conditions a patient may have. Much of this is due to safety concerns. As seen in the table above, most of the currently available drugs have potentially severe side effects, such as ventricular arrhythmias, though these are more of an issue in patients with underlying heart disease. Amiodarone has less of a proarrhythmic risk, but it can take a significantly longer time to work in cardioversion and has significant noncardiac side effects with long term use. These limitations in current treatment create a market need for an efficacious drug that is safer, while also having a rapid onset of action. RSD1235 was designed with these concerns in mind.

RSD1235 – Mechanism of Action

The electrical impulse that causes beating of the heart is propagated by charged molecules (e.g. sodium, potassium, calcium) moving through channels across the membranes of the heart muscle and conducting cells. The mechanism of RSD1235’s rhythm control is through a greater effect on certain potassium channels that are thought to play more of a role in the atria, and a rate-dependent blockage of sodium channels, which theoretically makes it more specific for the actual site of the arrhythmia. It does not appear to have a significant clinical effect on the potassium channels that have been associated with the dangerous ventricular arrhythmia, Torsade de Pointes, which is seen with a number of potassium channel blocking drugs (a warning sign of this effect is prolongation of the QT interval on an EKG).

RSD1235 – Intravenous

The intravenous formulation of RSD1235 has been studied in two pivotal phase III trials, ACT 1 and ACT 3, and the upcoming NDA will be based on efficacy data from these trials. Another phase III trial, ACT 2, is evaluating the drug in atrial fibrillation that occurs after cardiac surgery (which does not usually require long term antiarrhythmic therapy). Though results had been expected by the end of last quarter, the company noted in November that the trial was ongoing. A safety trial, ACT 4, began in October of 2005. Data from this trial is expected to be submitted as a supplement to the NDA.

In ACT 1 and ACT 3, RSD1235 showed a rapid median time to conversion (11 minutes), and overall 38-41% of patients compared to 3-4% of placebo patients converted to normal rhythm within 90 minutes of dosing. In those in whom atrial fibrillation had been present < 7 days, 52% versus 4% placebo converted in both studies. In those who had the arrhythmia longer than 7 days, only 8-9% versus 0-3% converted (most drugs have limited efficacy in this scenario). RSD1235 was not effective in patients with atrial flutter (a related, more organized atrial arrhythmia).

The placebo subtracted rates of conversion from atrial fibrillation are on the high end of what has been seen in studies of existing drugs, though comparisons are difficult due to differences in patient populations and timing. For example, there is a high spontaneous rate of conversion for patients with recent onset atrial fibrillation. Hence studies that look at a longer time period may see a narrower gap between drug and placebo. Since most drugs take longer to work than RSD1235, the time frame of their studies were likely to be longer. Indeed per company communication, in the ACT trials there was indeed an increase in spontaneous conversion for the placebo group with time, but a significant difference was still maintained at 24 hours. Despite these difficulties in making comparisons, on the whole, we think that RSD1235 has good efficacy compared to existing treatment.

While more detail on the drug-related serious adverse events seen in the trials is needed, RSD1235 appears to be safer than most existing treatments, and no drug-related cases of the life-threatening ventricular arrhythmia Torsade de Pointes has been seen.

Overall, while we would like to see more data on subgroups of patients with underlying conditions and use with various oral maintenance drugs, intravenous RSD1235 has a good efficacy and safety profile compared to existing treatment, and we think it is highly likely to be approved. Its rapid action is a particular advantage, since physicians can quickly ascertain whether it works and patients can avoid potential consequences of continuing in atrial fibrillation for a longer period. We expect it will be used for cardioversion in both new onset and recurrent atrial fibrillation (but not flutter) patients, as long as the arrhythmia has lasted less than a week. Its safety suggests it can be used in a broad range of patients, though details on patients with specific conditions is not available and certain high risk groups were excluded from the clinical trials.

RSD1235 – Oral

The oral formulation of RSD1235 is in phase II development. A phase IIa trial was initiated in December 2005, with interim results expected mid-2006. A phase IIb trial is slated to start the second half of 2006. Though without data it is premature to make predictions, the results for the IV formulation bode well for the oral formulation. It will be particularly important to look for safety signals in longer term use of the drug.

Preclinical Program: Artesian Candidates

With its acquisition of Artesian Therapeutics, Cardiome acquired two pre-clinical small molecule discovery programs in the indication of congestive heart failure (CHF). CHF is a cardiac condition with impaired cardiac pumping and blood flow, leading to pooling of fluid in body tissues and an overworked heart.

The lead pre-clinical program focuses on a series of compounds designed to simultaneously inhibit two cardiac receptors: the cardiac phosphodiesterase enzyme (PDE3), which produces an inotropic effect (i.e. increasing the strength of the heart muscle contraction), and the L-type calcium channel, in order to minimize increases in calcium levels in heart cells that are thought to play a role in the increased mortality that has been seen with some inotropes. The second program focuses on a way to lessen the harmful effects of excessive neurohormonal activation that is seen in heart failure.

PARTNERSHIPS

In October 2003, Cardiome granted Astellas exclusive North American commercialization rights for the intravenous formulation of RSD1235. Under the terms of the agreement, Astellas is financially responsible for 75% of the future clinical development costs with Cardiome responsible for the remaining 25%. Cardiome will receive royalties on end-user sales of RSD1235 reflective of Cardiome's 25% share of development costs, with a maximum royalty rate of 30%.

PATENTS

As of their last annual report, the patent status for RSD1235 was as follows: Cardiome had 13 pending U.S. provisional patent applications, ten pending U.S. non-provisional patent applications, 31 pending non-U.S. patent applications, and five granted patents in various countries, including with the European Patent Office. Cardiome had a granted European patent that covers classes of compounds of which RSD1235 is a member, and they were pursuing various claims specific to RSD1235.

UPCOMING CATALYSTS

Major upcoming catalysts for Cardiome are the NDA filing for IV RSD1235, expected in the first quarter of this year, the past due data for ACT 2, which we expect to be released the first half of this year, and data for the phase IIa trial of oral RSD1235, with interim results expected mid-year and final results towards the end of the year.

REVENUE POTENTIAL

While intravenous RSD1235 is likely to be approved and be a favorable option for pharmacological cardioversion, we believe its market segment is more limited. We see the biggest opportunity for the oral formulation of the drug used for maintenance treatment, though without clinical data there is considerable risk. The oral formulation would also be worth more in the hands of a larger company, as it would have the ability to commercialize the drug without giving up significant royalties.

RSD1235-Intravenous for Atrial Fibrillation Cardioversion

The current market for antiarrhythmics, many of which are used for other arrhythmias and are available generically, is under $500 million. For cardioversion, there is a smaller segment of patients with new disease, and a larger segment of those with recurring disease. Though more information on its use in sub-groups and with other maintenance medications is needed, we believe that because of its good efficacy-safety profile, RSD1235 will take a healthy share and grow the market somewhat. However, because of the poor efficacy of drugs used to maintain patients in a normal rhythm, we believe there is limited potential for overall market growth, particularly as physicians are likely to be more inclined towards rate control in patients who fail rhythm control. (On the other hand, if an extremely effective rhythm maintenance drug comes on the market, there will be fewer recurrences to treat.)

One potential competitor in phase II development, AZD7009 (AstraZeneca), has shown higher conversion rates than RSD1235: 78% of those with onset of atrial fibrillation within 1 week and 46% of those with a duration over 1 week converting compared to none in the placebo group. Conversion was within 2 hours. Of concern, however, was QT prolongation in some patients and an asymptomatic case of a short-lasting run of abnormal ventricular beats. We believe this may relegate it to second line use in recent onset patients (i.e. atrial fibrillation duration of less than 1 week).

Our 5 and 10-year US revenue projections for intravenous RSD1235 are $249.0 million and $208.4 million, with corresponding worldwide revenues of $407.0 million and $574.4 million.

RSD1235-Oral for Prevention of Recurrent Atrial Fibrillation

This is a large market opportunity if RSD1235 is successful. Currently Amiodarone is the most effective drug. Though in atrial fibrillation, Amiodarone has shown a relatively lower proarrhythmia risk than other currently available drugs, it has potentially serious noncardiac side effects. A potential competitor, Dronedarone (Sanofi-Aventis), is an Amiodarone derivative in phase III development. It does not appear to be more efficacious than current treatment, and is probably not as good as Amiodarone. On the other hand, it appears relatively safe, except in patients with heart failure. A trial in heart failure patients was stopped early due to an excess mortality in the treatment group. This safety concern could make it a less attractive candidate. There are other drugs in phase II development without released clinical data, including another drug based on Amiodarone, ATI- 2042 (ARYx). Hence RSD1235 could well face a number of competitors.

Our 5 and 10-year US revenue projections are $138.8 million and $549.2 million, with corresponding worldwide revenues of $222.5 million and $1.3 billion.

VALUATION

Cardiome has indicated that the average royalty rate it will receive for intravenous RSD1235 is an average of 25%, with a maximum rate of 30%. It has not partnered the oral formulation. We believe it will, but given the market size, will attempt to co-develop the drug in the US for a higher royalty rate, estimated at 50%. As mentioned above, the oral drug could provide more valuation to a company who has the ability to commercialize it without splitting the profits in half.

We currently project Cardiome to reach profitability in 2010 and value its 5 and 10-year pipeline at $7.38/share and $10.83/share. Our 5-year valuation of Cardiome rests on the approval and subsequent revenues from the intravenous formulation of RSD1235, with a smaller contribution from the oral drug. Our analysis is based on our view that the market for the intravenous formulation is fairly limited, with growth potential restrained by the absence of more effective drugs in the large oral maintenance market.

The valuation potential for Cardiome lies in the oral formulation, which makes up a large part of our 10-year valuation. Because there is little clinical information there is still considerable risk. But if the oral formulation were to advance, there is significant upside potential for the company’s valuation.

Upcoming Catalysts and Valuation

Intravenous RSD1235 is due to be submitted for an NDA the first quarter of this year. This would change our 5 and 10-year valuations to $9.37/share and $12.06/share.

Negative ACT 2 results would decrease our valuation slightly, as we have included post- cardiac surgery in our revenue models (12% of the eligible patients). Positive phase II data for the oral formulation, expected at the end of the year (it will probably be too early to see an efficacy signal with the interim data), could give the stock a boost. Though the phase IIa study is short, the final data could give some preliminary indication of the potential for the drug. The phase IIb trial is not set to start until the second half of the year.