Business Context and Reporting Period
Verastem, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. The development-stage biopharmaceutical company was focused on discovering and developing small-molecule cancer stem-cell therapies and companion diagnostics. The company had commenced active operations in 2010 and had generated no revenue.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | None | None |
| Research and development expense | $8.1 million | $17.6 million |
| General and administrative expense | $2.3 million | $6.6 million |
| Total operating expenses | $10.4 million | $24.3 million |
| Net loss | $10.4 million | $24.1 million |
| Net loss per share | $0.51 | $1.32 |
| Net cash used in operating activities | Not separately provided | $16.7 million |
At September 30, 2012, cash and cash equivalents were $11.1 million, short-term investments were $35.7 million, long-term investments were $50.6 million, and total cash, cash equivalents and investments were approximately $97.4 million. Total assets were $98.8 million, current liabilities were $3.1 million, and stockholders’ equity was $95.6 million. The filing does not report debt; disclosed liabilities primarily consisted of accounts payable, accrued expenses, deferred rent and other limited obligations.
Profitability and operating margins were not meaningful because the company had no revenue and remained in the development stage. The accumulated development-stage deficit was $38.5 million.
Material Changes Versus the Prior Comparable Period
- Third-quarter research and development expense increased to $8.1 million from $3.1 million, primarily due to a $3.4 million Pfizer license-related charge, higher contract research organization costs and increased personnel costs.
- Third-quarter general and administrative expense increased to $2.3 million from $1.0 million, driven principally by higher personnel, legal, accounting and insurance costs associated with expanded operations and being a public company.
- Nine-month research and development expense increased to $17.6 million from $5.5 million, while general and administrative expense increased to $6.6 million from $2.2 million.
- Nine-month net loss increased to $24.1 million from $7.7 million, and net cash used in operating activities increased to $16.7 million from $5.3 million.
- The company completed its initial public offering in February 2012, selling 6.325 million shares at $10.00 per share and receiving approximately $56.8 million of net proceeds. All preferred stock converted into common stock.
- Common shares outstanding increased to 21.3 million at September 30, 2012 from 1.6 million at December 31, 2011, reflecting the IPO, preferred-stock conversion and other issuances.
- Cash, cash equivalents and investments increased to approximately $97.4 million from $56.8 million at December 31, 2011, although cash and cash equivalents alone declined to $11.1 million from $21.0 million as funds were placed into investments.
Guidance, Outlook, Risks and Unusual Items
Management expected significant expenses and increasing operating losses for the foreseeable future as research and development progressed toward clinical trials and potential regulatory approval. Based on its then-current operating plan, the company expected existing cash, cash equivalents and investments to fund operations and capital expenditures into late 2015 or early 2016, but cautioned that it could use capital sooner and would require substantial additional financing.
- In May 2012, the company acquired PI3K/mTOR compounds from S*Bio for $350,000, with potential development and regulatory milestone payments of approximately $21.0 million and low- to mid-single-digit royalties on future net sales.
- In July 2012, the company licensed focal adhesion kinase inhibitors from Pfizer for $1.5 million in cash and 192,012 common shares valued at $2.0 million. Pfizer could receive up to $127.0 million in development, regulatory and commercial milestones, plus high-single- to mid-double-digit royalties on future net sales.
- The Pfizer license and S*Bio acquisition were recorded as research and development expense because the acquired in-process research and development had no alternative future use. The Pfizer transaction contributed approximately $3.5 million to third-quarter and nine-month R&D expense.
- Stock-based compensation expense was $4.6 million for the first nine months of 2012. At September 30, 2012, unrecognized compensation expense totaled $6.5 million for restricted stock and $7.4 million for restricted stock units.
- Principal risks included the need to raise additional capital, the uncertainty of preclinical and clinical development, regulatory approval risk, reliance on third parties, intellectual-property protection, competition and potential adverse legislative or regulatory developments.
- There were no material legal proceedings, no material changes to previously disclosed risk factors, no off-balance-sheet arrangements and no material subsequent events through the filing date.
Most Important Facts for Investors to Verify
- Verify the company’s cash runway assumptions and whether subsequent spending or financing altered the projected funding period extending into late 2015 or early 2016.
- Verify development progress, clinical-trial timing and milestone obligations for the Pfizer, S*Bio and other licensed or acquired programs.
- Assess the effect of continuing operating losses, stock-based compensation and potential future equity financings on dilution.
- Review the terms and probability of Pfizer’s potential $127.0 million milestone payments, S*Bio’s approximately $21.0 million milestone payments and related future royalty obligations.
- Confirm that no revenue, product approvals or commercial cash flows had been generated as of September 30, 2012.