Verastem, Inc. 2019 Q2 SEC Filing Summary
Business Context and Reporting Period
Verastem is a biopharmaceutical company developing and commercializing cancer therapies. Its only approved and marketed product is COPIKTRA (duvelisib), approved in the United States for certain relapsed or refractory CLL/SLL and follicular lymphoma patients. The company also develops duvelisib for additional indications and defactinib, an investigational FAK inhibitor.
This Form 10-Q covers the three and six months ended June 30, 2019, compared primarily with the corresponding 2018 periods. The filing was signed August 1, 2019. COPIKTRA U.S. commercial sales began in September 2018.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Product revenue | $3.0 million, versus $0 | $4.7 million, versus $0 |
| License and collaboration revenue | $0.1 million, versus $10.0 million | $0.1 million, versus $10.0 million |
| Total revenue | $3.1 million, down 69% | $4.8 million, down 52% |
| Research and development expense | $11.3 million, down 8% | $21.1 million, down 9% |
| SG&A expense | $29.3 million, up 85% | $55.3 million, up 116% |
| Loss from operations | $38.3 million | $72.9 million |
| Net loss | $42.2 million, versus $18.4 million | $80.3 million, versus $39.4 million |
| Net loss per share | $0.57 | $1.09 |
| Operating cash flow | $73.4 million used in the first six months, versus $32.8 million used in 2018 |
Product cost of sales was $0.4 million in the quarter and $0.5 million year to date, implying approximate product gross margins of 87.5% and 88.6%, respectively, before intangible-asset amortization. The filing does not provide a consolidated net or operating margin that is meaningful given the company’s early commercial stage and substantial operating losses.
Cash, cash equivalents and short-term investments totaled $187.3 million at June 30, 2019, compared with $249.7 million at December 31, 2018. Cash, cash equivalents and restricted cash decreased by $16.8 million during the first six months. Investing activities provided $46.9 million, primarily from investment maturities, and financing activities provided $9.8 million, primarily from the Hercules debt amendment.
At June 30, 2019, the company reported $35.0 million of long-term debt under the Hercules term loan and $99.2 million carrying value of 5.00% convertible senior notes. The term loan matures December 1, 2022, while the convertible notes mature November 1, 2048 unless earlier converted, repurchased or redeemed. Total reported debt carrying values were approximately $133.8 million.
Material Changes Versus the Prior Comparable Period
- Commercial product revenue began contributing $3.0 million in the second quarter and $4.7 million year to date, but was more than offset by the absence of the $10.0 million Yakult upfront license payment recognized in 2018.
- SG&A increased substantially as Verastem hired and staffed commercial and sales teams following the COPIKTRA launch. The 2019 quarter also included $2.3 million of executive and non-executive separation costs.
- Research and development spending declined, primarily because of lower consulting and CRO costs, partially offset by spending on the PRIMO study and an intermittent-dosing study.
- Interest expense increased to $5.2 million in the quarter and $10.1 million year to date, reflecting the 2018 convertible notes, higher Hercules borrowings and an accelerated Hercules end-of-term fee.
- The company amended its Hercules facility in April 2019. Total borrowing capacity increased to $75.0 million, with $35.0 million outstanding and up to $40.0 million potentially available subject to revenue, approval and other conditions.
- Adoption of ASC 842 on January 1, 2019 added a $3.2 million right-of-use asset and approximately $4.0 million lease liability at June 30, 2019; the accounting change did not produce a cumulative-effect adjustment to accumulated deficit.
Guidance, Outlook, Risks and Unusual Items
Management expects continued significant expenses and operating losses as it commercializes COPIKTRA, conducts clinical trials, develops defactinib and expands commercial, regulatory and infrastructure capabilities. The filing does not provide formal product-revenue, earnings or profitability guidance.
- Planned activities include a confirmatory follicular lymphoma study, additional duvelisib-sponsored trials, continued development in peripheral T-cell lymphoma and reporting data from investigator-sponsored studies.
- Management states that available funds may be sufficient for obligations over the next twelve months, but the financial statements disclose substantial doubt about the company’s ability to continue as a going concern. The assessment depends in part on successful COPIKTRA commercialization, potential additional financing and reduced cash expenditures.
- COPIKTRA is the company’s only approved product, creating significant dependence on its commercial adoption, reimbursement, safety profile, supply chain and regulatory status.
- Revenue estimates are subject to chargebacks, discounts, rebates, co-pay assistance, returns and other payer adjustments. The company had not received product returns through June 30, 2019.
- The company is subject to clinical, regulatory, manufacturing, intellectual-property, competitive and financing risks. Continued approval of the accelerated follicular lymphoma indication may depend on confirmatory evidence of clinical benefit.
- The Hercules facility is secured by substantially all company assets other than intellectual property and contains liquidity, minimum-revenue and other restrictive covenants.
- Two customers represented more than 60% of accounts receivable, and five customers each represented more than 10% of second-quarter revenue, indicating material customer concentration.
- After quarter-end, Verastem registered Verastem Europe GmbH and entered into a Sanofi license agreement covering COPIKTRA in Russia, the Commonwealth of Independent States, Turkey, the Middle East and Africa. The agreement provides a $5.0 million upfront payment, up to $42.0 million in milestones and double-digit royalties, subject to the agreement’s terms and future performance.
Most Important Facts for Investors to Verify
- Whether COPIKTRA sales growth is sufficient to reduce the company’s cash burn and address the disclosed going-concern uncertainty.
- Net product revenue trends, payer deductions and customer concentration, rather than relying solely on gross commercial launch metrics.
- Remaining liquidity after operating cash usage, debt service and commercial and clinical-development expenditures.
- Compliance with Hercules liquidity and minimum-revenue covenants and the conditions required to access the remaining borrowing capacity.
- Progress, enrollment and outcomes of confirmatory and other duvelisib studies, including the requirements supporting continued follicular lymphoma approval.
- Potential dilution from the convertible notes, stock options, restricted stock units and any future equity financing.
- Execution and economic terms of the Sanofi, Yakult and CSPC arrangements, including milestone achievement, royalties, termination rights and supply obligations.