Verastem, Inc. 2020 Q2 Form 10-Q Summary
Business context and reporting period
Verastem is a biopharmaceutical company developing oncology therapies. Its marketed product was COPIKTRA (duvelisib), approved in the United States for certain relapsed or refractory CLL/SLL and follicular lymphoma. Its principal development programs were VS-6766, a RAF/MEK inhibitor, and defactinib, a FAK inhibitor. The filing covers the three and six months ended June 30, 2020, and was filed August 10, 2020.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $4.3 million, versus $3.1 million in 2019 | $9.4 million, versus $4.8 million in 2019 |
| Product revenue | $4.2 million, up 40% | $9.3 million, up 98% |
| Operating loss | $21.3 million, versus $38.3 million | $47.6 million, versus $72.9 million |
| Net loss | $23.0 million, or $0.14 per share | $61.0 million, or $0.45 per share |
| Net loss in prior-year period | $42.2 million, or $0.57 per share | $80.3 million, or $1.09 per share |
| Operating cash flow | $56.6 million used in the first six months, versus $73.4 million used in 2019 |
Quarterly operating and net loss margins were approximately negative 494% and negative 534%, respectively. Six-month operating and net loss margins were approximately negative 509% and negative 652%, respectively. These margins reflect the company’s substantial research, development and commercial infrastructure costs relative to revenue.
- Research and development expense was $9.3 million in the quarter and $20.3 million year to date, down 18% and 4%, respectively. The six-month period included a $3.0 million non-refundable payment for the VS-6766 license from Chugai.
- Selling, general and administrative expense declined 47% in the quarter and 37% year to date, primarily because of lower personnel, consulting, professional-fee and commercial-launch costs.
- At June 30, 2020, cash and cash equivalents were $125.3 million; total cash, cash equivalents and restricted cash were $160.8 million, including $35.5 million of restricted cash. The company had no short-term investments at quarter end.
- Debt included $35.0 million of Hercules term loans and $28.3 million principal amount of 2018 convertible notes. The 2019 convertible notes had been fully converted into common stock by June 30, 2020. The carrying value of the 2018 notes was $20.4 million.
- Cash increased by $81.6 million during the first six months, primarily from $93.8 million of net PIPE proceeds, $12.2 million of net at-the-market offering proceeds and $32.1 million of investment maturities, partly offset by operating cash use.
- Common shares outstanding increased to approximately 169.3 million at June 30, 2020 from approximately 80.1 million at December 31, 2019, principally due to equity issuance and conversion of the 2019 notes.
Material changes versus the prior comparable periods
- COPIKTRA product revenue increased to $4.2 million in the quarter and $9.3 million year to date, driven primarily by greater product shipments and market penetration.
- Total operating expenses declined $15.8 million, or 38%, in the quarter and $20.8 million, or 27%, year to date. The reduction reflected restructuring and lower commercial-launch spending.
- The net loss improved by $19.2 million, or 45%, in the quarter and $19.3 million, or 24%, year to date, despite lower interest income and higher year-to-date interest expense.
- Year-to-date interest expense included approximately $8.1 million of non-cash expense associated with conversion of the 2019 notes. A $1.3 million other expense reflected the change in fair value of the related interest make-whole derivative.
- In February 2020, Verastem announced a restructuring involving approximately 31 positions and recorded $1.8 million of termination-related costs during the first six months.
- Verastem paid $3.0 million to Chugai for an exclusive worldwide VS-6766 license and recorded the amount as research and development expense.
Guidance, outlook, commentary and risks
Management did not provide formal revenue or earnings guidance. It stated that existing cash resources, together with expected COPIKTRA revenue, were expected to fund planned operations for at least the next 12 months from the filing date. The company expects continuing operating losses and will likely require substantial revenue growth or additional financing to achieve profitability.
- Management planned to focus development resources on VS-6766 and defactinib and intended to pursue registration-directed trials of the combination by the end of 2020, subject to regulatory and clinical developments.
- COVID-19 reduced in-person commercial interactions, oncology clinic visits, site initiation and clinical-trial enrollment. The FRAME study experienced slower enrollment, and a new PRIMO site in New York was paused. Further delays remained possible.
- The Hercules term loan matures December 1, 2022, carries a floating rate with a stated floor of 9.75%, and requires restricted cash support. The company had not met the required trailing six-month net product revenue threshold as of June 30, 2020. The $15.0 million Term B borrowing opportunity expired without its conditions being met.
- Interest-only payments on the Hercules loan were scheduled through April 1, 2021, with a possible extension to December 1, 2021 if specified revenue conditions were satisfied.
- COPIKTRA’s follicular lymphoma approval was under accelerated approval and remained contingent on confirmatory evidence of clinical benefit. Key risks included clinical-trial failure or delay, regulatory uncertainty, safety events, competition, reimbursement, manufacturing and supply interruptions, intellectual-property risks and the need for additional capital.
- On August 10, 2020, after quarter end, Verastem agreed to sell its worldwide oncology rights and related assets for duvelisib to Secura Bio for a $70 million upfront payment, potential milestone payments of up to $95 million and low-double-digit royalties on specified net sales. Closing was expected in the quarter ending September 30, 2020. This transaction was not reflected in the June 30 financial statements.
Important facts for investors to verify
- Whether the Secura Bio transaction closed on the expected timetable and whether the $70 million upfront payment was received.
- The post-transaction revenue outlook for COPIKTRA and the effect of transferring duvelisib commercialization and development responsibilities.
- Clinical, regulatory and enrollment progress for VS-6766 and defactinib, including registration-directed trial timing.
- Compliance with Hercules liquidity and revenue covenants and the timing of principal amortization beginning in 2021.
- The company’s cash-burn rate, restricted-cash requirements and need for future equity, debt or collaboration financing.
- The effect of COVID-19 on COPIKTRA demand, clinical-trial enrollment, data timing and supply continuity.
- Potential dilution from the substantially increased share count, outstanding 2018 convertible notes, stock options and additional equity financing.