Verastem, Inc. 2018 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, 2018, with quarterly information for the fourth quarter included. COPIKTRA (duvelisib) became the company’s first commercial product after FDA approval on September 24, 2018 for relapsed or refractory CLL/SLL after at least two prior therapies and follicular lymphoma after at least two prior systemic therapies. Defactinib remains an investigational FAK inhibitor for solid tumors.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $26.7 million | $0 | New revenue stream |
| Net product revenue | $1.7 million | $0 | Commercial launch in September |
| License revenue | $25.0 million | $0 | Upfront payments from Yakult and CSPC |
| Research and development expense | $43.6 million | $46.4 million | Down $2.8 million |
| Selling, general and administrative expense | $77.3 million | $21.4 million | Up $55.9 million |
| Loss from operations | $94.8 million | $67.8 million | Higher operating investment |
| Net loss | $72.4 million | $67.8 million | Loss increased $4.6 million |
| Basic net loss per share | $1.12 | $1.76 | Improved due primarily to share issuance and other items |
| Net cash used in operating activities | $74.5 million | $57.3 million | Greater commercialization spending |
Fourth-quarter 2018 revenue was $1.2 million, all from COPIKTRA product sales. Fourth-quarter net loss was $11.3 million. The quarter included $25.6 million of other income from the mark-to-market adjustment of the convertible notes’ conversion feature, partially offset by $4.0 million of interest expense.
Cash, cash equivalents and short-term investments were $249.7 million at December 31, 2018, compared with $86.7 million at December 31, 2017. Working capital was $216.2 million, and total stockholders’ equity was $124.3 million. The company stated that available liquidity was expected to fund its current operating plan and capital expenditures for at least twelve months from the financial statement issuance date, before considering future COPIKTRA revenue.
Debt, financing and liquidity
- Hercules term loan principal outstanding was $25.0 million at year-end, with $25.0 million of additional borrowing capacity subject to conditions. The loan bears a floating rate with a minimum of 10.5% and matures December 1, 2020.
- In October 2018, Verastem issued $150.0 million principal amount of 5.00% convertible senior notes due November 1, 2048, generating $145.3 million of net proceeds. The initial conversion price was approximately $7.16 per share.
- The company raised approximately $105.2 million net from common stock offerings and at-the-market sales during 2018.
- Debt obligations are subject to covenants and, for the Hercules facility, substantially all company assets other than intellectual property secure the borrowings.
Material changes versus the prior comparable period
- Verastem transitioned from a development-stage company with no product revenue to a commercial-stage company following COPIKTRA approval and launch.
- Revenue increased to $26.7 million, but license payments accounted for approximately 94% of revenue; product sales remained limited to the launch period.
- SG&A increased substantially as the company hired commercial personnel and funded launch preparation. The company had 169 full-time equivalent employees at year-end versus a smaller pre-commercial organization in the prior period; the filing does not provide the comparable 2017 employee count in the supplied text.
- R&D expense declined modestly because 2017 included a $6.0 million Infinity milestone payment, partially offset by higher personnel and outsourced clinical costs in 2018.
- Cash used in operations increased by $17.2 million, while financing activities provided $261.2 million, primarily from the convertible notes, equity offerings and Hercules borrowings.
- The company paid Infinity a $22.0 million regulatory approval milestone, capitalized as an acquired intangible asset, and began amortizing it in 2018.
Guidance, outlook, commentary and risks
Management expects continued significant expenses and operating losses as it commercializes COPIKTRA, expands clinical development and supports defactinib and other programs. No quantified product sales or profitability guidance was provided. Planned 2019 activities included additional duvelisib studies, a confirmatory follicular lymphoma study, continued development in peripheral T-cell lymphoma, investigator-sponsored studies and reporting of defactinib combination-study data.
- COPIKTRA’s follicular lymphoma approval is accelerated approval based on overall response rate. Continued approval depends on confirmatory evidence of clinical benefit.
- COPIKTRA carries a boxed warning for serious or fatal infections, diarrhea or colitis, cutaneous reactions and pneumonitis, and is subject to an informational REMS.
- In pooled safety data for 442 patients receiving the recommended dose, 65% experienced serious adverse reactions. The most frequent included infections, diarrhea or colitis, pneumonia and rash.
- Commercial success depends on physician and patient adoption, reimbursement, pricing, safety, competition, manufacturing capacity and the effectiveness of the company’s commercial infrastructure.
- The company relies on third-party manufacturers, specialty pharmacies, specialty distributors, contract research organizations and license partners. Supply interruptions, partner underperformance or agreement termination could adversely affect results.
- The company has substantial accumulated losses: $375.6 million at December 31, 2018. It expects to require additional capital over time, and future equity or convertible financing could dilute existing stockholders.
- Potential future obligations include royalties and development, regulatory and commercial milestones under the Infinity, Pfizer, Yakult and CSPC agreements. The timing and amount of contingent payments are not fully estimable.
- The filing reports no material pending legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Quarterly COPIKTRA prescription demand, refill trends, gross-to-net deductions, channel inventory and payer coverage following the initial launch.
- Timing, design and enrollment of the required confirmatory follicular lymphoma trial and the consequences of any failure to verify clinical benefit.
- Post-launch safety trends, including infections, colitis or diarrhea, pneumonitis, rash and treatment discontinuations.
- Cash burn, remaining Hercules borrowing capacity, debt maturities and compliance with loan covenants.
- Whether COPIKTRA revenue can grow sufficiently to offset commercialization, research and development, royalty and debt-service costs.
- Execution by Yakult and CSPC in Japan and Greater China, including regulatory progress, milestone potential and termination provisions.
- Potential dilution from the convertible notes, which could result in issuance of approximately 20.9 million shares upon conversion at the initial conversion rate.