Verastem, Inc. 2019 Form 10-K Summary
Business context and reporting period
Verastem is a biopharmaceutical company developing and commercializing oncology medicines. The filing covers the fiscal year ended December 31, 2019, with quarterly data provided for the fourth quarter. Its marketed product, COPIKTRA (duvelisib), was approved in the United States in September 2018 for relapsed or refractory CLL/SLL and follicular lymphoma. Defactinib and CH5126766 (VS-6766) remained in clinical development.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Product revenue, net | $12.3 million | $1.7 million | Increased $10.6 million |
| License and collaboration revenue | $5.1 million | $25.0 million | Decreased $19.9 million |
| Total revenue | $17.5 million | $26.7 million | Decreased $9.3 million |
| Research and development expense | $45.8 million | $43.6 million | Increased $2.2 million |
| SG&A expense | $101.2 million | $77.3 million | Increased $23.9 million |
| Loss from operations | $(132.3) million | $(94.8) million | Loss increased $37.6 million |
| Net loss | $(149.2) million | $(72.4) million | Loss increased $76.8 million |
| Net loss per share | $(2.00) | $(1.12) basic | Worsened |
| Net cash used in operating activities | $(138.5) million | $(74.5) million | Use increased $64.0 million |
Product cost of sales was $1.2 million, implying an approximate 90% product gross margin before intangible amortization and other operating costs. Total operating expenses were $149.8 million, compared with $121.5 million in 2018.
At December 31, 2019, cash, cash equivalents and short-term investments totaled $75.5 million. Including restricted cash, total cash, cash equivalents, restricted cash and short-term investments were $111.3 million, of which approximately $35.7 million was restricted. Working capital was $55.1 million, total assets were $145.0 million and stockholders’ equity was $7.2 million.
Carrying-value debt totaled $103.6 million, consisting primarily of $35.1 million of term debt and $68.6 million of convertible senior notes. Aggregate principal amount of the 2018 and 2019 Notes was $85.7 million at year-end. The Hercules term loan had $35.0 million outstanding, up to $40.0 million of additional borrowing capacity subject to milestones and conditions, and a stated maturity of December 1, 2022.
Material changes versus the prior comparable period
- COPIKTRA product revenue increased substantially as commercial sales expanded from a partial 2018 launch to a full year of sales in 2019.
- License and collaboration revenue declined because 2018 included $10.0 million from Yakult and $15.0 million from CSPC, while 2019 primarily included Sanofi’s $5.0 million upfront payment and $0.1 million of supply revenue.
- SG&A increased due mainly to commercial staffing, launch support, professional fees and related activities.
- R&D spending increased modestly, including higher CRO costs for the TEMPO and PRIMO studies, partly offset by lower costs associated with completed or winding-down DUO and DYNAMO activities.
- Interest expense rose to $20.6 million from $5.8 million because of the 2018 Notes, higher debt balances and the Hercules refinancing fee.
- The company exchanged approximately $121.7 million of 2018 Notes for approximately $66.9 million of 2019 Notes and approximately $12.1 million in cash, reducing outstanding principal but creating secured second-lien debt and substantial potential equity dilution.
- The company adopted the new lease standard and recorded a $3.1 million right-of-use asset and $3.9 million lease liability at year-end.
Guidance, outlook, commentary and risks
Management did not provide a formal product-revenue or earnings forecast in the filing. It expected continued operating losses and significant spending for COPIKTRA commercialization and clinical development. Following a February 2020 restructuring, management expected annualized operating expenses to decline to approximately $70 million to $85 million beginning in the first quarter of 2020 and expected a one-time restructuring charge of approximately $1.9 million.
The company stated that year-end resources, the March 2020 equity financing and expected COPIKTRA revenue were expected to fund planned operations for at least twelve months from the financial statement issuance date. On March 3, 2020, it raised approximately $100.0 million gross through the sale of 46.5 million shares. From January 1 through the financial statement issuance date, holders converted $51.2 million of 2019 Notes into 31.0 million shares; the remaining $6.2 million was subject to mandatory conversion in March 2020.
- COPIKTRA’s follicular lymphoma indication has accelerated approval and requires confirmatory evidence of clinical benefit; failure could result in label restrictions or withdrawal.
- COPIKTRA carries a boxed warning for serious or fatal infections, diarrhea or colitis, cutaneous reactions and pneumonitis. Serious adverse reactions occurred in 65% of the pooled labeled population.
- The company remains dependent on successful commercialization of COPIKTRA, continued market adoption, reimbursement, pricing and adequate product supply.
- Clinical development of PRIMO, defactinib and CH5126766 is subject to uncertain efficacy, safety, enrollment, regulatory and manufacturing outcomes.
- Approximately $35.0 million of cash was restricted as collateral under the Hercules term loan because the company had not met the initial net-product-revenue threshold.
- The company identified a reasonable possibility of a near-term impairment charge related to its COPIKTRA intangible asset following its strategic shift toward CH5126766 and defactinib; the filing does not provide a recognized impairment amount for 2019.
- Manufacturing relies on third-party contract manufacturers, and the filing notes supply-chain, quality, regulatory and public-health disruption risks.
- The filing identifies the emerging coronavirus outbreak as a potential risk to clinical sites, suppliers, operations and COPIKTRA sales.
Most important facts for investors to verify
- Quarterly and annual COPIKTRA revenue trends, including payer rebates, chargebacks, discounts and channel inventory.
- Progress and confirmatory requirements for the accelerated follicular lymphoma approval and the PRIMO PTCL program.
- Post-2019 debt balances, conversions, dilution and compliance with Hercules liquidity and revenue covenants.
- Actual cash burn after the restructuring, the $100 million equity financing and the remaining convertible-note conversions.
- Whether the COPIKTRA intangible asset requires an impairment charge and how the strategic focus on CH5126766 and defactinib affects resource allocation.
- Commercial acceptance, reimbursement coverage, safety trends and any regulatory actions involving COPIKTRA.