Verastem, Inc. — Q1 2019 Form 10-Q Summary
Business context and reporting period
Verastem is a biopharmaceutical company developing and commercializing cancer therapies. This report covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018. COPIKTRA (duvelisib) received FDA approval in September 2018 and began U.S. commercial shipments on September 25, 2018. The company also develops defactinib and other pipeline programs.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net product revenue | $1.7 million | $0 | New revenue stream |
| Cost of revenues, excluding intangible amortization | $0.2 million | $0 | New commercial activity |
| Research and development expense | $9.8 million | $10.9 million | Down 11% |
| Selling, general and administrative expense | $26.0 million | $9.8 million | Up 165% |
| Total operating expenses | $36.3 million | $20.8 million | Up 75% |
| Loss from operations | $34.7 million | $20.8 million | Loss increased |
| Net loss | $38.1 million | $21.1 million | Loss increased 81% |
| Net loss per share | $0.52 | $0.41 | Loss per share increased |
| Net cash used in operating activities | $38.8 million | $22.5 million | Use increased $16.3 million |
The filing does not present a standard gross margin. Reported product revenue was affected by trade discounts, payer chargebacks, government rebates, co-pay assistance, returns and other reserves. Revenue reserves totaled $0.4 million at March 31, 2019. Certain COPIKTRA manufacturing costs had been expensed before inventory capitalization began, limiting comparability of reported cost of revenues.
At March 31, 2019, cash and cash equivalents were $91.5 million, short-term investments were $120.1 million, and total cash, cash equivalents and short-term investments were $211.7 million. Cash, cash equivalents and restricted cash declined by $38.3 million during the quarter to $92.3 million. Management stated that available cash, cash equivalents and short-term investments were expected to fund U.S. commercial scale-up, development plans and other operations for at least twelve months from the filing date.
Total liabilities were $154.9 million and stockholders’ equity was $88.5 million at March 31, 2019. Debt included $24.8 million of long-term debt and $97.2 million carrying value of 5.00% convertible senior notes due 2048. The notes had a principal amount of $150.0 million and an estimated fair value of approximately $118.2 million. The company had borrowed $25.0 million under its Hercules term loan facility as of quarter-end.
Material changes versus the prior comparable period
- Q1 2019 included the first full quarter of COPIKTRA product revenue, while Q1 2018 had no product revenue.
- SG&A increased by $16.2 million, primarily due to sales and commercial staffing, commercial consulting and professional fees, travel and related launch costs.
- R&D expense decreased by $1.2 million, mainly from lower consulting and contract research organization costs. COPIKTRA-related R&D declined, while defactinib-related expense increased.
- Interest expense increased to $4.9 million from $0.5 million because of higher debt balances and rates, the Hercules financing-related end-of-term fee acceleration, and the October 2018 convertible notes issuance.
- Operating cash burn increased substantially as the company invested in commercialization after COPIKTRA approval.
- The company adopted ASC 842 on January 1, 2019, recognizing a $3.3 million right-of-use asset and $4.0 million lease liability at March 31, 2019. The adoption did not affect accumulated deficit.
Guidance, outlook, risks and unusual items
Management did not provide a quantitative revenue or earnings forecast. The company expects significant expenses and operating losses to continue as it commercializes COPIKTRA, conducts clinical trials, expands infrastructure and supports its pipeline. Planned activities included a confirmatory follicular lymphoma study, continued duvelisib development in peripheral T-cell lymphoma, investigator-sponsored studies and defactinib combination studies.
On April 23, 2019, after quarter-end, Verastem amended its Hercules facility. Total potential borrowing increased to $75.0 million, with $35.0 million outstanding after an additional $10.0 million draw. The remaining $40.0 million is subject to revenue milestones, lender approval and other conditions. The amended facility matures December 1, 2022, bears interest at a floating rate with a stated floor of 9.75%, and includes liquidity, minimum net revenue and other covenants. A $1.1 million final payment fee was due in connection with the amendment.
Key risks include dependence on the successful commercialization and market adoption of COPIKTRA, safety and efficacy concerns, reimbursement and payer restrictions, competitive products, regulatory requirements, confirmatory trial obligations for the accelerated follicular lymphoma indication, clinical and manufacturing uncertainties, intellectual property risks, debt covenants and the possibility that additional financing will be required. Two customers represented more than 60% of accounts receivable, and five customers each accounted for more than 10% of quarterly revenue.
There were no legal proceedings reported and no material changes to previously disclosed risk factors. On May 9, 2019, Chief Commercial Officer Joseph Lobacki resigned to pursue other opportunities and intended to remain until a successor was appointed.
Most important facts for investors to verify
- Whether COPIKTRA revenue growth and payer mix support the company’s revenue milestones and long-term commercialization strategy.
- The sustainability of the $38.8 million quarterly operating cash burn relative to the stated twelve-month liquidity runway.
- Progress, costs and outcomes of COPIKTRA confirmatory and PTCL studies, including the accelerated-approval obligation for follicular lymphoma.
- Compliance with the amended Hercules facility’s liquidity and minimum-revenue covenants and availability of contingent borrowing tranches.
- The impact of revenue reserves, rebates, chargebacks, co-pay assistance and potential product returns on net product revenue.
- Future dilution risk from the convertible notes, stock options, restricted stock units and any potential equity financing.