Verastem, Inc. 2016 Form 10-K Summary
Business context and reporting period
Verastem is a clinical-stage biopharmaceutical company developing oncology therapies. The filing covers the fiscal year ended December 31, 2016; fourth-quarter information is provided in the unaudited quarterly data. The principal programs were duvelisib, a dual PI3K-delta/gamma inhibitor, and defactinib, a FAK inhibitor. The company had no approved products and no commercial revenue.
- Duvelisib: Phase 3 DUO study in approximately 300 patients with relapsed or refractory CLL/SLL; topline data were expected in mid-2017. The Phase 2 DYNAMO study in refractory iNHL reported a 46% overall response rate and 10-month median duration of response.
- Defactinib: Phase 1/1b and Phase 1/2 combination studies with pembrolizumab, gemcitabine and avelumab in pancreatic, ovarian, lung cancer and mesothelioma.
- VS-4718 and VS-5584 were earlier-stage programs nearing completion of Phase 1 testing, with no further development planned at that time.
Financial performance and liquidity
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $0 | $0 | No commercial revenue |
| Research and development expense | $19.8 million | $40.6 million | Down $20.8 million |
| General and administrative expense | $17.2 million | $17.6 million | Down $0.4 million |
| Total operating expenses | $37.0 million | $58.2 million | Down $21.2 million |
| Net loss | $36.4 million | $57.9 million | Loss improved by $21.4 million |
| Net loss per share | $0.99 | $1.61 | Improved |
| Cash used in operating activities | $29.5 million | $45.6 million | Use decreased $16.1 million |
| Cash, cash equivalents and investments | $80.9 million | $110.3 million | Down $29.4 million |
| Accumulated deficit | $235.3 million | $198.9 million | Increased $36.4 million |
Interest income was $0.6 million. Operating margin and gross margin are not meaningful because the company had no revenue and incurred only operating losses. Working capital was $70.3 million at year-end, and total liabilities were approximately $11.3 million, with no term debt reported on the December 31, 2016 balance sheet. Cash generated from investing activities primarily reflected $37.0 million of investment maturities.
Material changes versus the prior comparable period
- Research and development spending fell 51% year over year, primarily because of lower external CRO and clinical-development costs, reduced personnel costs following the October 2015 workforce reduction, and lower stock-based compensation.
- The company assumed operational and financial responsibility for the duvelisib program from Infinity under a November 2016 amended and restated license agreement.
- The company focused resources on duvelisib and defactinib and deprioritized further development of VS-4718 and VS-5584 after their Phase 1 work.
- Cash and investments declined despite lower operating cash burn, reflecting the absence of equity financing in 2016 and continued losses.
- Shares outstanding increased modestly to 36.99 million at December 31, 2016 from 36.94 million at December 31, 2015.
Guidance, outlook, risks and unusual items
- Management expected existing cash, cash equivalents and investments to fund the current operating plan for at least twelve months from the filing date and into 2018, but stated that substantial additional funding would be required.
- On March 21, 2017, after year-end, the company entered a Hercules term-loan facility of up to $25.0 million and drew $2.5 million initially. The loan bears interest at a minimum floating rate of 10.5%, matures December 1, 2020, is secured by substantially all assets other than intellectual property, and includes liquidity and other restrictive covenants.
- The Infinity agreement includes a potential $6.0 million milestone upon successful completion of DUO, a potential $22.0 million regulatory milestone, and royalties ranging from mid-single digits to high single digits, plus an additional royalty initially equal to 4% of worldwide duvelisib net sales.
- The company remains dependent on favorable clinical results, regulatory approval and additional financing. Neither duvelisib nor defactinib had received marketing approval.
- Reported DYNAMO safety risks included Grade 3 or 4 neutropenia, infection, diarrhea, thrombocytopenia, anemia, pneumonia, hepatotoxicity, rash, colitis and pneumonitis. Four treatment-related deaths were reported in the DYNAMO program.
- Key contingencies include clinical-trial failure or delay, patient enrollment, safety signals, regulatory holds, dependence on third-party CROs and manufacturers, intellectual-property challenges, competition, reimbursement uncertainty and potential dilution from future equity financing or milestone payments made in shares.
- Contractual lease obligations totaled $1.5 million at December 31, 2016. Potential license milestones and royalties were excluded from contractual-obligation totals because their occurrence and timing were uncertain.
- The company reported effective disclosure controls and effective internal control over financial reporting as of December 31, 2016, and no unresolved SEC staff comments or legal proceedings.
Most important facts for investors to verify
- DUO Phase 3 results, regulatory filing status and the safety profile of duvelisib.
- Actual cash runway after the 2017 Hercules borrowing, subsequent financing, clinical spending and milestone obligations.
- Terms, conditions and availability of the remaining Hercules loan tranches, including the favorable-data requirement and liquidity covenant.
- Whether defactinib combination trials demonstrate meaningful efficacy beyond safety and dose-finding objectives.
- Potential dilution from equity offerings, stock-based compensation and any Infinity milestone payments settled in common stock.
- Patent terms, license compliance and royalty economics for duvelisib and defactinib.