Verastem, Inc. 2013 Form 10-K Summary
Business context and reporting period
Verastem is a development-stage biopharmaceutical company focused on small-molecule cancer treatments targeting cancer stem cells and related companion diagnostics. The filing covers the fiscal year ended December 31, 2013, with unaudited quarterly information for the fourth quarter ended December 31, 2013.
- Lead candidate VS-6063 (defactinib) was being evaluated in a registration-directed mesothelioma trial, ovarian cancer, non-small cell lung cancer and a Japanese solid-tumor study.
- VS-4718 and VS-5584 were in Phase 1 trials for advanced cancers.
- The company had no approved products and had generated no revenue from planned principal operations.
Financial performance and liquidity
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $0 | $0 | No revenue in either period |
| Research and development expense | $25.9 million | $21.7 million | Up $4.2 million |
| General and administrative expense | $15.5 million | $10.5 million | Up $5.0 million |
| Total operating expenses | $41.4 million | $32.2 million | Up $9.2 million |
| Net loss | $41.2 million | $32.0 million | Loss increased $9.2 million |
| Net loss per share | $1.82 | $1.70 | Loss per share increased |
| Cash used in operating activities | $26.3 million | $22.6 million | Use increased $3.7 million |
| Cash, cash equivalents and investments | $123.7 million | $91.5 million | Up $32.2 million |
Fourth-quarter 2013 operating expenses were $11.4 million and net loss was $11.3 million, or $0.45 per share. Research and development expense was $7.8 million and general and administrative expense was $3.6 million.
At December 31, 2013, total assets were $125.3 million, working capital was $94.2 million and stockholders’ equity was $117.4 million. Current liabilities were $7.8 million. The filing does not disclose material long-term debt; debt is not identified as a significant source of financing.
Operating cash use was funded primarily through equity financing. The July 2013 follow-on offering generated approximately $59.8 million of net proceeds. In December 2013, the company established an at-the-market facility for up to $35 million, but no shares had been sold under it through February 28, 2014.
Material changes versus the prior comparable period
- R&D expense increased primarily because of higher contract research organization and clinical-trial costs, increased personnel costs, stock-based compensation and trial-related travel. These increases were partly offset by lower Pfizer license-fee expense.
- G&A expense increased primarily because of higher stock-based compensation, professional fees, consulting costs, franchise taxes and personnel costs.
- Cash used in operations increased as clinical development activities expanded.
- Cash and investments increased following the July 2013 equity offering, despite continued operating losses.
- Shares outstanding increased from approximately 20.4 million at year-end 2012 to 25.3 million at year-end 2013, reflecting the follow-on offering and other equity activity.
- Stock-based compensation expense was approximately $10.4 million in 2013, and unrecognized compensation cost at year-end totaled approximately $14.5 million across options, restricted stock units and restricted stock awards.
Guidance, outlook, risks and unusual items
- Management expected significant expenses and increasing operating losses for the foreseeable future as clinical trials and development programs advance.
- Management stated that existing cash, cash equivalents and investments were expected to fund the current operating plan and capital expenditures into the first half of 2016, although actual cash usage could be faster than projected.
- The company’s principal risks include clinical-trial failure or delay, patient-enrollment difficulties, regulatory non-approval, uncertain efficacy of its cancer-stem-cell approach, competition, dependence on third-party clinical and manufacturing providers, intellectual-property challenges and the need for additional financing.
- VS-6063 had orphan-drug designation for mesothelioma in the United States and European Union, but designation did not assure approval or commercial success.
- The company relied on third parties for clinical-trial execution and manufacturing and had no redundant bulk-drug supply source or long-term manufacturing supply arrangements.
- License agreements could require future milestone payments and royalties, including potential Pfizer regulatory and commercial milestones of up to $127 million in aggregate, plus high-single- to mid-double-digit royalties on future net sales. These payments were contingent on future events.
- Subsequent to year-end, in February 2014, the company acquired assets related to VS-4718 from Encarta for $25,000, 97,500 common shares and a warrant for 142,857 shares at a $17.16 exercise price. The company expected approximately $1.3 million of 2014 R&D expense from the transaction.
- The company had federal and state net operating loss carryforwards of approximately $65.7 million and $65.0 million, respectively, but recorded a full valuation allowance against deferred tax assets.
Important facts for investors to verify
- Progress, enrollment, interim analyses and final outcomes of the COMMAND mesothelioma trial and other VS-6063 studies.
- Whether clinical data support regulatory submissions and whether the FDA or foreign regulators require additional trials or analyses.
- Actual cash burn and runway relative to management’s first-half-2016 funding estimate.
- Future equity issuance, including use of the $35 million at-the-market facility and resulting dilution.
- Terms, timing and potential magnitude of milestone and royalty obligations under the Pfizer, Whitehead, Scripps and S*Bio-related agreements.
- Development and regulatory status of the proposed merlin companion diagnostic and other biomarker programs.
- Changes in stock-based compensation, unrecognized awards and fully diluted share count.