Verastem, Inc. — Form 10-Q Summary
Business context and reporting period
Verastem is a development-stage biopharmaceutical company focused on discovering and developing small-molecule cancer therapies targeting cancer stem cells, initially in breast and other cancers, together with companion diagnostics. The company commenced active operations in 2010, has not generated revenue, and remains in preclinical development. This report covers the three months ended March 31, 2012, and was filed May 14, 2012.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $0 | $0 | No revenue in either period |
| Research and development expense | $4.8 million | $0.7 million | Increase of $4.1 million |
| General and administrative expense | $2.1 million | $0.5 million | Increase of $1.7 million |
| Total operating expenses | $6.9 million | $1.1 million | Increase of $5.8 million |
| Net loss | $6.9 million | $1.1 million | Loss increased by $5.7 million |
| Net loss per share | $0.47 | $1.06 | Loss per share improved due primarily to increased share count |
| Cash used in operating activities | $4.9 million | $0.9 million | Use increased by $4.0 million |
There were no meaningful operating margins because the company had no revenue and recorded an operating loss. Comprehensive loss was $6.9 million in Q1 2012. Stock-based compensation expense was $1.5 million, compared with $54,000 in Q1 2011.
At March 31, 2012, cash and cash equivalents were $25.5 million, short-term investments were $15.6 million, and long-term investments were $68.3 million. Total cash, cash equivalents and investments were approximately $109.3 million, compared with approximately $56.8 million at December 31, 2011. Total assets were $110.7 million and stockholders’ equity was $107.7 million. Current liabilities were $2.9 million. The filing reports no debt or off-balance-sheet arrangements.
Investing activities used $48.2 million, primarily reflecting net purchases of investments and $130,000 of property and equipment. Financing activities provided $57.6 million, principally from the February 2012 initial public offering. Management stated that existing cash, cash equivalents and investments were expected to fund the current operating plan and capital expenditure requirements into 2016, although substantial additional funding will eventually be required.
Material changes versus the prior comparable period
- Research and development spending increased substantially because of higher contract research organization costs, personnel and stock-based compensation, license-related expense, and laboratory supplies.
- General and administrative expense rose because of increased personnel costs, public-company legal and accounting fees, consulting expenses, and insurance.
- The company completed its initial public offering of 6.325 million shares at $10.00 per share, generating approximately $56.8 million in net proceeds. All preferred stock converted into common stock in connection with the offering.
- Common shares outstanding increased materially; 19.8 million shares were outstanding at March 31, 2012, and 21.1 million were outstanding as of May 4, 2012.
- The company adopted new fair-value and comprehensive-income accounting guidance on January 1, 2012; management reported no significant financial-statement impact.
Guidance, outlook, commentary, risks and unusual items
Management expects operating losses and expenses to increase as research and preclinical development expand and as the company eventually begins clinical trials, seeks regulatory approvals, and prepares for potential commercialization. No formal revenue or earnings guidance was provided. The company expects to require substantial additional financing and has no committed external source of funds.
All product candidates remained in preclinical development, including VS-507, VS-4718 and VS-5095. Key risks include the unproven cancer-stem-cell approach, failure of preclinical or future clinical studies, regulatory delays or denials, inadequate intellectual-property protection, dependence on contract research and manufacturing organizations, competition, inability to obtain additional capital, and potential dilution from future equity financings.
On May 11, 2012, after the reporting period, Verastem acquired PI3K/mTOR dual-inhibitor compounds and related patent rights from S*Bio. The transaction included a $350,000 upfront payment, potential milestone payments of approximately $21.0 million, and tiered low- to mid-single-digit royalties on net sales.
The company recorded a $431,000 increase in the fair value of its obligation to issue a warrant to Poniard, which was reclassified to additional paid-in capital following the IPO. Product liability insurance totaled $3.0 million in aggregate, with a $3.0 million per-incident limit. Management concluded that disclosure controls and procedures were effective as of March 31, 2012.
Important facts for investors to verify
- Whether the stated cash runway into 2016 remains adequate after subsequent acquisitions, increased development spending, and any clinical-trial expansion.
- The timing and cost of advancing VS-507, VS-4718, VS-5095 and the acquired PI3K/mTOR compounds into clinical development.
- The company’s future financing needs, potential equity dilution, and the availability and terms of additional capital.
- The status and strength of patents and licenses, including rights obtained from the Whitehead Institute, Poniard, Scripps and S*Bio.
- Future obligations under the S*Bio agreement, including approximately $21.0 million of potential milestones and sales-based royalties.
- The effect of stock-based compensation and outstanding equity awards on future expenses and share dilution.
- Whether the cancer-stem-cell scientific approach produces reproducible preclinical and clinical efficacy and acceptable safety outcomes.