Business Context and Reporting Period
Verastem, Inc. is a clinical-stage biopharmaceutical company developing oncology therapies. Its lead programs were duvelisib, an oral PI3K-delta/gamma inhibitor for hematologic malignancies, and defactinib, an oral FAK inhibitor being evaluated in solid-tumor combination studies. This Form 10-K covers the fiscal year ended December 31, 2017, including fourth-quarter results, and was filed March 13, 2018.
Verastem had no approved products or commercial revenue. DUO, a Phase 3 study of duvelisib in relapsed or refractory CLL/SLL, met its primary endpoint, while DYNAMO, a Phase 2 study in double-refractory indolent NHL, had previously met its primary endpoint. In February 2018, after year-end, Verastem submitted an NDA seeking full approval in CLL/SLL and accelerated approval in relapsed or refractory follicular lymphoma.
Financial and Operating Metrics
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $0 | $0 | No change |
| Research and development expense | $46.4 million | $19.8 million | +$26.6 million |
| General and administrative expense | $21.4 million | $17.2 million | +$4.2 million |
| Total operating expenses | $67.8 million | $37.0 million | +$30.8 million |
| Net loss | $67.8 million | $36.4 million | Loss increased $31.4 million |
| Net loss per share | $1.76 | $0.99 | Loss per share increased |
| Operating cash flow | $(57.3) million | $(29.5) million | Cash use increased $27.8 million |
| Cash, cash equivalents and investments | $86.7 million | $80.9 million | +$5.8 million |
| Long-term debt | $14.8 million carrying value | $0 | New borrowing |
| Accumulated deficit | $303.1 million | $235.3 million | Increased $67.8 million |
Fourth-quarter 2017 operating expenses were $18.1 million, comprising $11.3 million of research and development and $6.8 million of general and administrative expense. Fourth-quarter net loss was $18.2 million, or $0.43 per share, compared with a $11.7 million loss, or $0.32 per share, in the fourth quarter of 2016. The filing does not present a meaningful operating margin because the company had no revenue.
FY 2017 financing activities generated $63.2 million of cash, including $24.7 million of net proceeds from an underwritten equity offering, $23.1 million from the at-the-market program and $14.8 million from Hercules debt financing. Investing activities provided $44.0 million, primarily from investment maturities.
Material Changes Versus the Prior Comparable Period
- Research and development expense more than doubled, principally because of increased clinical and outsourced development activity for duvelisib, a $6.0 million Infinity milestone payment, higher consulting costs and increased personnel costs.
- General and administrative expense increased 24%, including $2.5 million of commercial-launch preparation costs.
- The company began borrowing under its Hercules term-loan facility, drawing $15.0 million during 2017. The loan bears interest at a floating rate subject to a minimum of 10.5% and matures December 1, 2020.
- Common shares outstanding increased from approximately 37.0 million at year-end 2016 to 50.8 million at year-end 2017, reflecting equity offerings and option exercises.
- Duvelisib DUO results supported regulatory filing preparation. In October 2017, Verastem paid the $6.0 million clinical milestone to Infinity.
Guidance, Outlook, Risks and Unusual Items
Management expects significant additional operating losses and expenses as it pursues regulatory approval for duvelisib, continues clinical trials and prepares for potential commercialization. The company stated that existing cash, cash equivalents and investments were expected to fund its current operating plan into the second half of 2018, but that additional financing would be required. The audited financial statements include a going-concern explanatory paragraph, and management stated that without additional funding it would not have sufficient funds to meet obligations within the following twelve months.
The Hercules facility was amended in January and March 2018 to increase total borrowing capacity to $50.0 million, leaving $35.0 million available subject to conditions, including FDA acceptance of the duvelisib NDA by September 30, 2018 for certain tranches and Hercules discretion for others. The debt is secured by substantially all assets other than intellectual property and includes financial and operating covenants.
- Regulatory approval is uncertain. The FDA could reject, delay or require additional clinical, manufacturing or post-approval studies for duvelisib.
- Duvelisib carries material safety and tolerability risks, including diarrhea, colitis, pneumonia, neutropenia, anemia, opportunistic infections and treatment discontinuations.
- Clinical results may not be replicated, and defactinib remains in early-stage combination studies with substantial efficacy and safety uncertainty.
- The company has no manufacturing facilities and relies on third parties without redundant supply arrangements.
- Additional equity or debt financing may be dilutive, unavailable or subject to restrictive terms; debt default could accelerate repayment and permit enforcement against collateral.
- Licensing obligations include a potential $22.0 million milestone to Infinity upon regulatory approval of duvelisib, future royalties, and potential Pfizer milestones and royalties for defactinib.
- The company recognized a provisional tax accounting impact from the 2017 Tax Cuts and Jobs Act, but maintained a full valuation allowance against its deferred tax assets.
Most Important Facts an Investor Should Verify
- FDA acceptance, review status and ultimate action on the duvelisib NDA, including any required confirmatory or post-marketing studies.
- Updated cash runway, financing activity and whether additional Hercules loan tranches were drawn after March 13, 2018.
- Current clinical safety, discontinuation and efficacy data for duvelisib, particularly in light of infectious, gastrointestinal and pulmonary adverse events.
- Commercial launch spending, potential pricing and reimbursement, competitive positioning and the company’s ability to establish a sales infrastructure.
- Outstanding debt covenants, maturity obligations, interest costs and the potential $22.0 million Infinity approval milestone.
- Future dilution from equity offerings, at-the-market sales, stock options and any election to satisfy license milestones with common stock.