Verastem, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Verastem is a biopharmaceutical company developing and commercializing cancer therapies. Its marketed product is COPIKTRA (duvelisib), approved in the United States for certain relapsed or refractory CLL/SLL and follicular lymphoma patients. Development programs include VS-6766, a RAF/MEK inhibitor, and defactinib, a FAK inhibitor. The filing covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $5.1 million | $1.7 million | +203% |
| Product revenue | $5.0 million | $1.7 million | +201% |
| Operating expenses | $31.4 million | $36.3 million | -14% |
| Loss from operations | $(26.4) million | $(34.7) million | Improved by $8.3 million |
| Net loss | $(38.0) million | $(38.1) million | Broadly unchanged |
| Basic and diluted loss per share | $(0.35) | $(0.52) | Improved |
| Cash used in operating activities | $(34.0) million | $(38.8) million | Improved by $4.8 million |
Product revenue growth reflected increased COPIKTRA shipments and market penetration. Product cost of sales was $0.5 million, and intangible amortization was $0.4 million. Research and development expense increased to $10.9 million, primarily because of the $3.0 million upfront payment for the Chugai VS-6766 license. Selling, general and administrative expense declined to $19.6 million from $26.0 million, reflecting lower consulting, personnel, travel and other costs. Interest expense increased to $10.7 million, largely because of non-cash expense associated with conversion of the 2019 Notes. The filing does not present a separately defined consolidated operating or net margin.
At March 31, 2020, cash and cash equivalents were $135.1 million, and total cash, cash equivalents and restricted cash were $170.7 million, including $35.7 million of restricted cash. The company also had $4.4 million of accounts receivable and $4.4 million of inventory. Management stated that existing cash resources, together with expected COPIKTRA revenue, should fund planned operations for at least 12 months from the filing date, while noting that additional capital may be required.
Cash provided by investing activities was $32.1 million, primarily from investment maturities. Financing activities provided $93.4 million, mainly from the March 2020 PIPE offering. Cash, cash equivalents and restricted cash increased by $91.5 million during the quarter.
Material changes versus the prior comparable period
- COPIKTRA product revenue increased by $3.4 million, or 201%.
- Research and development expense increased by $1.2 million, including the Chugai upfront license payment.
- SG&A expense decreased by $6.4 million following cost reductions and lower commercial-launch spending.
- The company recorded $1.8 million of one-time severance and related costs from the February 2020 restructuring, which eliminated approximately 31 positions.
- Net loss was essentially unchanged because operating improvements were offset by higher interest expense, a $1.3 million mark-to-market loss on the 2019 Notes make-whole derivative, and lower interest income.
- All remaining 2019 Notes, with $57.4 million aggregate principal converted during the quarter, were exchanged for 34.8 million common shares and $1.8 million of make-whole payments. The remaining 2018 Notes had $28.3 million aggregate principal outstanding at March 31, 2020.
- The company issued 46.5 million common shares in a PIPE at $2.15 per share, generating approximately $93.8 million in net proceeds.
Debt, liquidity and other financial matters
The company had $35.3 million of long-term debt outstanding under its Hercules term loan facility, which matures in December 2022 and bears interest at a floating rate subject to a 9.75% floor. The facility requires restricted cash collateral and contains liquidity, revenue and other covenants. The company had not met the initial net product revenue threshold as of March 31, 2020 and therefore maintained approximately $35.0 million of restricted cash related to the facility.
The remaining 2018 Convertible Senior Notes had a carrying value of approximately $19.9 million and a stated principal amount of $28.3 million. These senior unsecured notes bear 5.00% interest and mature in 2048 unless earlier converted, repurchased or redeemed. The company reported no legal proceedings, defaults or off-balance-sheet arrangements.
Guidance, outlook, commentary and risks
- Management expects continuing operating losses and significant expenses while commercializing COPIKTRA and advancing VS-6766, defactinib and duvelisib. The company may never achieve profitability.
- Management planned regulatory discussions during the first half of 2020 with the goal of initiating a registration-directed study of the VS-6766 and defactinib combination as soon as possible.
- Preliminary FRAME study data showed reported response rates of 50% in eight patients with low-grade serous ovarian cancer and 67% in six patients with KRAS-mutant low-grade serous ovarian cancer. The filing characterizes these results as preliminary and from small, investigator-sponsored cohorts.
- COVID-19 reduced in-person commercial and medical interactions and slowed clinical-site initiation, recruitment and enrollment. FRAME enrollment slowed, and initiation of a New York site for the PRIMO PTCL study was paused.
- The company had not experienced supply-chain delays as of the filing date, but identified potential risks involving manufacturers, distributors, clinical sites, regulators, employees, capital markets and future COPIKTRA demand.
- Future funding may require equity, debt, collaboration or licensing transactions, potentially on unfavorable terms or with dilution to existing stockholders.
- COPIKTRA’s follicular lymphoma approval is subject to accelerated-approval requirements, including confirmation of clinical benefit in confirmatory trials.
Important facts for investors to verify
- Whether COPIKTRA revenue growth continues and whether COVID-19 affects prescriptions, patient visits, reimbursement or distribution.
- Remaining liquidity after excluding restricted cash and the timing of future operating cash burn.
- Compliance with Hercules debt covenants, collateral requirements and revenue thresholds.
- The terms and potential dilution associated with the outstanding 2018 convertible notes and other equity awards.
- Clinical enrollment, regulatory progress and reproducibility of the preliminary VS-6766/defactinib data.
- Results of confirmatory work supporting COPIKTRA’s accelerated follicular lymphoma indication.
- Whether additional capital will be required before the company reaches sustainable positive cash flow.