Verastem, Inc. — Q2 2018 Form 10-Q Summary
Business context and reporting period
Verastem is a clinical-stage biopharmaceutical company developing oncology therapies, primarily duvelisib and defactinib. The filing covers the three and six months ended June 30, 2018. Duvelisib was under FDA Priority Review for relapsed or refractory CLL/SLL and accelerated approval for relapsed or refractory follicular lymphoma, with an October 5, 2018 target action date.
Financial performance and position
- Revenue: $10.0 million in both the quarter and six-month period, entirely from the non-refundable upfront payment under the Yakult Japan license agreement. There was no revenue in the comparable 2017 periods.
- Net loss: $18.4 million, or $0.30 per basic and diluted share, in Q2 2018, compared with $13.4 million, or $0.36 per share, in Q2 2017. Six-month net loss was $39.4 million, or $0.70 per share, versus $26.4 million, or $0.71 per share.
- Operating expenses: $28.2 million in Q2 and $49.0 million for six months. Research and development expense was $12.4 million for the quarter and $23.3 million year to date; general and administrative expense was $15.8 million and $25.6 million, respectively.
- Operating loss and margin: Operating loss was $18.2 million in Q2 and $39.0 million for six months. Because revenue consisted of a one-time license payment, operating margins were not representative of recurring economics.
- Cash flow: Cash used in operating activities was $32.8 million for the first six months, compared with $25.1 million in the prior-year period. Investing activities provided $3.9 million, and financing activities provided $115.6 million.
- Liquidity: Cash and cash equivalents were $168.7 million at June 30, 2018, compared with $82.2 million at December 31, 2017. Including restricted cash, total cash, cash equivalents and restricted cash was $169.1 million.
- Debt: Total term loans outstanding were $25.0 million, including $10.0 million borrowed in June. The loans mature in December 2020, bear interest at a floating rate with a minimum of 10.5%, and are secured by substantially all assets other than intellectual property. Interest-only payments were extended through May 1, 2019.
- Capitalization: Shares outstanding increased to approximately 73.6 million at June 30, 2018 from 50.8 million at year-end 2017, primarily reflecting equity financings and ATM sales.
Material changes versus the prior comparable period
- Revenue increased from zero to $10.0 million due to the Yakult transaction.
- Q2 research and development expense increased $3.4 million, primarily from higher CRO costs, personnel costs, stock-based compensation, occupancy and other expenses.
- Q2 general and administrative expense increased $11.4 million, including approximately $3.6 million of commercial launch preparation costs. For the six-month period, launch preparation accounted for approximately $5.4 million of the increase in consulting and professional fees.
- Operating cash burn increased by $7.6 million year over year for the first six months.
- Financing proceeds increased substantially, including approximately $81.5 million from underwritten and registered equity offerings, $24.3 million from the ATM program and $9.9 million of net debt proceeds.
- The company adopted ASC 606 using the full retrospective method; management reported no change to the financial statements from adoption. It also adopted updated restricted-cash guidance.
Guidance, outlook, risks and unusual items
- Management expects continued significant expenses and operating losses, particularly from clinical development, regulatory activities, duvelisib launch preparation and potential commercialization infrastructure.
- Management stated that cash and cash equivalents at June 30, 2018 were expected to fund obligations for at least twelve months from the financial statement issuance date, but noted that estimates depend on assumptions that could prove incorrect.
- The Yakult agreement grants exclusive Japanese development and commercialization rights for duvelisib. Verastem retained rights outside Japan, received $10.0 million upfront, and may receive up to $90.0 million in development, regulatory and commercial milestones plus double-digit royalties on Japanese net sales.
- Future milestones were excluded from revenue because achievement remained uncertain. Yakult may terminate the agreement with 180 days’ notice, subject to the agreement’s terms.
- Key risks include failure or delay of FDA approval, inconsistent or unfavorable clinical data, safety or efficacy issues, slower-than-expected enrollment, competition, limited market acceptance or reimbursement, inability to commercialize duvelisib, reliance on collaborators and the need for additional financing.
- The company amended its Needham lease, increasing space and extending the term through May 2025. Minimum remaining lease commitments were $6.6 million at June 30, 2018.
- No material legal proceedings, defaults, off-balance-sheet arrangements or subsequent events were reported. Management concluded disclosure controls were effective.
Investor verification points
- Verify the FDA’s October 5, 2018 action date and the actual regulatory outcome for duvelisib.
- Assess whether future revenue is recurring product revenue or primarily dependent on licensing milestones and royalties.
- Track operating cash burn against the stated cash runway, including commercialization and launch expenditures.
- Review the terms, covenants, interest rate and repayment schedule of the $25.0 million Hercules term loan.
- Monitor dilution from the increased share count, ATM program, outstanding options and any additional equity financing.
- Evaluate Yakult’s development and commercialization progress in Japan and the potential impact of termination or delayed milestones.
- Reconcile clinical, regulatory and commercial progress for duvelisib and defactinib with the company’s stated spending plans and risk disclosures.