Verastem, Inc. 2019 Q3 Form 10-Q Summary
Business context and reporting period
Verastem is a biopharmaceutical company developing and commercializing cancer medicines. Its only approved product is COPIKTRA (duvelisib), approved in the United States for certain relapsed or refractory CLL/SLL and follicular lymphoma indications. The company also develops duvelisib in additional indications and defactinib, a FAK inhibitor. This filing covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Product revenue | $4.0 million | $0.5 million | $8.7 million | $0.5 million |
| License and collaboration revenue | $5.0 million | $15.0 million | $5.1 million | $25.0 million |
| Total revenue | $9.0 million | $15.5 million | $13.8 million | $25.5 million |
| Operating expenses | $35.1 million | $37.1 million | $112.9 million | $86.0 million |
| Loss from operations | $(26.1) million | $(21.6) million | $(99.0) million | $(60.5) million |
| Net loss | $(30.1) million | $(21.7) million | $(110.4) million | $(61.1) million |
| Net loss per share | $(0.41) | $(0.29) | $(1.49) | $(0.99) |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(101.3) million | $(55.3) million |
Q3 product gross profit was approximately $3.3 million, representing an implied product gross margin of approximately 91%, before considering intangible-asset amortization. Overall operating and net margins were substantially negative because of continued commercialization, research and development, and financing costs.
At September 30, 2019, cash and cash equivalents were $103.3 million, short-term investments were $56.9 million, and total cash, cash equivalents and investments were $160.2 million. Total assets were $192.6 million and stockholders’ equity was $21.5 million. The accumulated deficit was $486.0 million.
Debt included $35.0 million of long-term debt under the Hercules term loan and approximately $101.2 million of convertible senior notes recorded at carrying value. The notes bear fixed interest of 5.00% and mature in 2048. The Hercules facility matures in December 2022, bears interest at a floating rate subject to a 9.75% floor, and provides up to $75.0 million of total borrowing capacity, subject to conditions. Interest expense was $5.0 million in Q3 and $15.2 million for the first nine months, compared with $0.9 million and $1.9 million, respectively, in the prior-year periods.
Material changes versus the prior comparable periods
- Q3 product revenue increased $3.5 million, or 694%, to $4.0 million as COPIKTRA shipments and market penetration increased. Nine-month product revenue increased $8.2 million to $8.7 million.
- Total revenue declined 42% in Q3 and 46% for the nine-month period because the prior-year periods included larger upfront license payments from CSPC and Yakult. The 2019 periods included a $5.0 million upfront payment from Sanofi.
- Q3 selling, general and administrative expense decreased 13% to $22.2 million, primarily because prior-year spending included commercial-launch preparation. Nine-month SG&A increased 52% to $77.5 million due mainly to commercial staffing, post-launch activities, consulting and professional fees, and separation costs.
- Research and development expense decreased 4% for the first nine months to $33.3 million, although Q3 R&D increased 6% to $12.2 million.
- Operating cash use increased to $101.3 million for the first nine months from $55.3 million, reflecting higher commercial operating costs and the absence of prior-year license-payment inflows.
- Cash, cash equivalents and restricted cash declined by $26.5 million during the first nine months, partly offset by $64.5 million of net investment maturities and $10.3 million of financing proceeds.
Guidance, outlook, risks and unusual items
- Management expected continuing significant expenses and operating losses while commercializing COPIKTRA, conducting clinical trials, maintaining intellectual property, and expanding operational and commercial infrastructure. The filing does not provide numerical revenue or earnings guidance.
- Management stated that available funds may be sufficient for obligations for the next twelve months, but the financial statements and risk disclosures conclude that substantial doubt exists about the company’s ability to continue as a going concern. This assessment depends heavily on successful COPIKTRA commercialization, potential additional financing, and reduced cash expenditures.
- On July 25, 2019, Verastem granted Sanofi exclusive duvelisib rights in Russia, the CIS, Turkey, the Middle East and Africa. Sanofi paid a $5.0 million upfront amount; potential additional milestones total up to $42.0 million and double-digit royalties may be payable on regional net sales. The milestones were fully constrained and no royalty revenue had been recognized.
- On October 28, 2019, after quarter-end, Verastem announced a workforce reduction of approximately 40 positions and other cost-saving measures. Management expected approximately $25 million of annualized operating-expense savings beginning in 2020 and an approximately $1.0 million restructuring charge in Q4 2019.
- Key risks include dependence on COPIKTRA as the only approved product, uncertain physician and patient adoption, reimbursement and pricing pressure, clinical and regulatory uncertainty, potential safety events, manufacturing or supply interruptions, competition, intellectual-property risks, debt covenants, and the need for additional capital.
- The Hercules facility contains liquidity and minimum-net-revenue covenants and is secured by substantially all company assets other than intellectual property. Additional borrowing is subject to revenue, lender-approval and other conditions.
Important facts for investors to verify
- Whether COPIKTRA sales growth is sufficient to offset the company’s approximately $100 million annualized operating cash burn and support the going-concern assessment.
- Quarterly prescription demand, net pricing, payer mix, channel inventory, gross-to-net reserves and customer concentration for COPIKTRA.
- Progress and outcomes of the FL confirmatory study, PTCL development, other duvelisib studies, and defactinib programs.
- Compliance with Hercules liquidity and minimum-revenue covenants and the availability of the remaining borrowing capacity.
- Timing, terms and potential dilution of any future equity, convertible-debt, licensing or other financing.
- Actual savings, implementation costs and operational effects of the post-quarter workforce reduction.
- Potential milestone payments, royalties, supply obligations and termination rights under the Sanofi, Yakult and CSPC agreements.