Verastem, Inc. — Q2 2014 Form 10-Q Summary
Business Context and Reporting Period
Verastem is a clinical-stage biopharmaceutical company developing cancer treatments designed to target cancer stem cells. Its lead programs included the FAK inhibitor VS-6063 (defactinib), VS-4718, and the dual mTORC1/2 and PI3K inhibitor VS-5584. The filing covers the three and six months ended June 30, 2014; financial statements are unaudited and prepared under U.S. GAAP.
The company had no product revenue and remained dependent on equity financings to fund research, clinical development, and operations. Its most advanced program, VS-6063, was in a registration-directed mesothelioma trial, as well as additional ovarian cancer, non-small-cell lung cancer, and mesothelioma studies.
Financial Metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development expense | $8.3 million | $6.0 million | $16.7 million | $11.3 million |
| General and administrative expense | $4.8 million | $4.2 million | $9.5 million | $8.0 million |
| Total operating expenses | $13.1 million | $10.3 million | $26.2 million | $19.4 million |
| Net loss | $13.0 million | $10.3 million | $26.1 million | $19.3 million |
| Net loss per share | $0.51 | $0.49 | $1.02 | $0.94 |
| Net cash used in operating activities | Not provided for quarter | Not provided for quarter | $18.0 million | $12.7 million |
Because the company had no revenue, operating and net margins were negative and are not meaningfully calculable as revenue-based percentages. Stock-based compensation expense was $6.9 million in the first six months of 2014, compared with $5.2 million in the prior-year period.
At June 30, 2014, cash and cash equivalents were $22.4 million, short-term investments were $76.2 million, long-term investments were $5.8 million, and total cash, cash equivalents, and investments were approximately $104.4 million. Total assets were $107.3 million and stockholders’ equity was $99.2 million. Current liabilities were $7.9 million. The filing does not identify outstanding debt; liquidity consisted primarily of cash and marketable investments.
Material Changes Versus the Prior Comparable Period
- Second-quarter research and development expense increased $2.3 million, primarily from a $1.9 million increase in contract research organization costs, higher personnel costs, and higher consulting fees.
- Six-month research and development expense increased $5.4 million, driven by higher clinical and outsourced development costs, a $1.2 million license-related expense from the Encarta asset purchase, increased personnel costs, and higher stock-based compensation.
- General and administrative expense increased approximately $0.6 million in the quarter and $1.5 million for the six-month period, mainly due to higher stock-based compensation, consulting, personnel, travel, and other costs.
- Net loss increased by $2.8 million for the quarter and $6.8 million for the six-month period.
- Operating cash use increased $5.3 million for the six-month period, principally because of increased clinical-development spending and lower accrued expenses.
- Cash and cash equivalents increased from $18.9 million at December 31, 2013 to $22.4 million at June 30, 2014, while total investments declined from $104.8 million to $82.0 million as investments matured or were repositioned.
- Shares outstanding increased to 25.7 million at June 30, 2014 from 25.3 million at December 31, 2013. The increase in weighted-average shares also affected reported loss per share.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected existing cash, cash equivalents, and investments to fund the current operating plan and capital expenditures into the first half of 2016. This estimate was expressly dependent on assumptions that could prove incorrect.
- The company expected continuing and increasing operating losses as it advanced clinical trials, pursued regulatory approvals, expanded operations, protected intellectual property, and potentially prepared for commercialization.
- Management stated that it could not predict the precise cost or timing of completing clinical development or when material cash inflows might begin, if ever.
- Additional capital would likely be required. The company had no committed external source of funds and might seek equity, debt, collaborations, strategic alliances, or licensing arrangements. These alternatives could dilute shareholders, impose restrictive covenants, or require the company to relinquish valuable rights.
- In February 2014, the company acquired assets related to VS-4718 from Encarta for 97,500 common shares, a warrant for 142,857 shares at an exercise price of $17.16 per share, and $25,000 cash. The transaction generated $1.2 million of research and development expense in the first quarter.
- In April 2014, the company entered into a new approximately 15,197-square-foot headquarters and laboratory lease in Needham, Massachusetts. Initial annual base rent was approximately $493,000, increasing to approximately $554,000 in the final year. A $203,000 cash-collateralized letter of credit was recorded as restricted cash.
- The company assumed potential development and regulatory milestone obligations to Scripps of up to $3.0 million and low-single-digit royalties on net sales under the applicable license agreement.
- Key risks included failure or delay of clinical trials, unfavorable regulatory outcomes, inability to raise capital, dependence on third parties, intellectual-property challenges, competition, foreign-currency exposure, and the possibility that product candidates may never generate commercial revenue.
- No material legal proceedings, off-balance-sheet arrangements, defaults, or subsequent events were reported. Management stated that there were no material changes to previously disclosed risk factors.
Important Facts for Investors to Verify
- Progress, results, enrollment, and timing of the VS-6063 COMMAND registration-directed mesothelioma trial and other ongoing clinical studies.
- Whether the projected funding runway into the first half of 2016 remains valid under actual clinical spending and trial outcomes.
- Future capital requirements and the potential dilution or strategic cost of additional equity, debt, or partnership financing.
- Cash burn trends, including the effect of clinical-trial costs, contract research organization spending, stock-based compensation, and license milestones.
- Regulatory prospects for VS-6063 and the commercial potential of VS-4718 and VS-5584.
- Outstanding option, restricted stock, and warrant overhang, including 4.15 million outstanding stock options and the 142,857-share warrant issued in the VS-4718 asset acquisition.
- Lease obligations, Scripps milestone and royalty obligations, and other contractual commitments that may increase as development advances.