Verastem, Inc. — Q3 2018 Form 10-Q Summary
Business context and reporting period
Verastem is a biopharmaceutical company developing and commercializing oncology medicines. The quarterly report covers the three and nine months ended September 30, 2018. The company received FDA approval for its first commercial product, COPIKTRA (duvelisib), on September 24, 2018, for certain relapsed or refractory CLL/SLL and follicular lymphoma patients, and began U.S. shipments on September 25, 2018.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $15.5 million | $25.5 million |
| License revenue | $15.0 million | $25.0 million |
| Net product revenue | $0.5 million | $0.5 million |
| Operating expenses | $37.1 million | $86.0 million |
| Loss from operations | $(21.6) million | $(60.5) million |
| Net loss | $(21.7) million | $(61.1) million |
| Net loss per share | $(0.29) | $(0.99) |
| Net cash used in operating activities | Not separately reported | $(55.3) million |
Operating and net margins were approximately negative 139% and negative 140%, respectively, in the third quarter; for the nine-month period, both were approximately negative 237% and negative 239%, respectively. These margins are distorted by the early-stage commercial launch and nonrecurring license revenue.
- Research and development expense was $11.6 million in the quarter and $34.9 million for the nine months, compared with $17.7 million and $35.2 million, respectively, in the prior-year periods.
- Selling, general and administrative expense increased to $25.4 million in the quarter and $51.1 million for the nine months, primarily reflecting commercial infrastructure, personnel, consulting and launch preparation costs.
- Cash, cash equivalents and investments totaled $145.6 million at September 30, 2018, including $130.7 million of cash and cash equivalents and $14.9 million of short-term investments.
- Total debt was approximately $25.1 million at September 30, 2018, consisting of $25.0 million borrowed under the Hercules term loan facility. The facility had an additional $25.0 million of potential borrowing capacity, subject to conditions and lender discretion.
- Cash, cash equivalents and restricted cash increased by $48.8 million during the first nine months, primarily due to $115.7 million of financing proceeds, partly offset by operating and investing cash uses.
- Accumulated deficit was $364.2 million at September 30, 2018.
Material changes versus the prior comparable period
- The company transitioned from a development-stage business to initial commercialization of COPIKTRA, generating $0.5 million of net product revenue versus none in the prior-year periods.
- License revenue of $10.0 million from Yakult and $15.0 million from CSPC was recognized in 2018; there was no license revenue in 2017. The CSPC amount included a $10.0 million receivable at September 30 that was paid in November 2018.
- Third-quarter SG&A increased 371% year over year, while nine-month SG&A increased 250%, reflecting the build-out of commercial operations.
- Third-quarter R&D expense declined 35%, primarily because the prior-year quarter included a $6.0 million one-time Infinity license milestone.
- Common shares outstanding increased to 73.7 million at September 30, 2018 from 50.8 million at December 31, 2017, following equity offerings and at-the-market sales.
- The company recorded $22.0 million of acquired intangible assets related to the FDA approval milestone payable to Infinity and began amortizing the asset. The milestone was paid in November 2018.
- Inventory capitalization began in the third quarter for COPIKTRA manufactured in preparation for the U.S. launch; prior manufacturing costs had generally been expensed as incurred.
Guidance, outlook, commentary and risks
Management expects substantial ongoing expenses and operating losses as it commercializes COPIKTRA, conducts clinical trials, expands its commercial infrastructure and develops defactinib and other programs. Management stated that cash, cash equivalents and investments were expected to fund obligations for at least twelve months from the filing date, based on assumptions that could prove incorrect.
- Management planned to initiate a confirmatory follicular lymphoma study, expand COPIKTRA development in peripheral T-cell lymphoma, report interim data from investigator-sponsored studies and pursue additional international partnerships.
- Yakult received exclusive Japanese rights and CSPC received exclusive rights in China, Hong Kong, Macau and Taiwan. The agreements provide for potential milestone payments and double-digit royalties, but no royalty revenue had been recognized.
- On October 17, 2018, after quarter-end, the company issued $150.0 million of 5.00% convertible senior notes due 2048, receiving approximately $145.1 million of net proceeds. The notes have an initial conversion price of approximately $7.16 per share.
- COPIKTRA’s follicular lymphoma indication received accelerated approval, with continued approval contingent on confirmatory evidence of clinical benefit. The product labeling includes a boxed warning for serious or fatal infections, diarrhea or colitis, cutaneous reactions and pneumonitis, and an informational REMS is required.
- Key risks include commercial adoption, pricing and reimbursement, manufacturing and supply continuity, third-party distribution, post-marketing regulatory obligations, clinical-trial results, competition, intellectual-property protection and the company’s continuing need to manage cash burn.
- The Hercules term loan is secured by substantially all company assets other than intellectual property, bears a high variable interest rate and includes restrictive covenants. The convertible notes are unsecured and effectively subordinated to secured debt.
Important facts for investors to verify
- Whether COPIKTRA sales expand materially beyond the initial $0.5 million launch-quarter revenue and whether gross margins improve as expensed pre-approval inventory is depleted.
- The progress and results of the required confirmatory follicular lymphoma trial and the status of COPIKTRA’s accelerated approval.
- Actual cash burn, commercial spending and the resulting duration of liquidity after the October convertible-note financing.
- Terms, covenant compliance and repayment requirements for the Hercules facility, including the availability of the remaining $25.0 million.
- Potential dilution from the convertible notes, stock options and future equity financing; 12.9 million stock options and 0.3 million restricted stock units were outstanding at September 30, 2018.
- Reliability of revenue reserves for chargebacks, rebates, co-pay assistance and returns as commercial sales scale; the recorded product-revenue reserve was $129,000 at September 30.