Verastem, Inc. Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2016; filed November 7, 2016. Verastem is a clinical-stage biopharmaceutical company developing oncology candidates, including duvelisib, defactinib (VS-6063), VS-4718 and VS-5584. The company had no revenue and reported 36.99 million common shares outstanding as of October 31, 2016.
Financial Position and Performance
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Research and development expense | $4.2 million | $11.3 million | $12.9 million | $32.9 million |
| General and administrative expense | $3.8 million | $4.2 million | $12.3 million | $13.4 million |
| Total operating expenses | $8.1 million | $15.5 million | $25.2 million | $46.2 million |
| Net loss | $7.9 million | $15.4 million | $24.8 million | $46.0 million |
| Net loss per share | $0.21 | $0.42 | $0.67 | $1.29 |
| Cash used in operating activities | Not separately provided | Not separately provided | $23.5 million | $35.4 million |
Liquidity: At September 30, 2016, cash and cash equivalents were $37.3 million, short-term investments were $49.6 million, and total cash, cash equivalents and investments were approximately $86.9 million. Total assets were $89.0 million, current liabilities were $6.2 million, and stockholders’ equity was $82.4 million. The filing reports no debt and no off-balance-sheet arrangements.
Cash flow and funding: Nine-month operating cash use declined by $11.8 million year over year, primarily because of lower clinical-trial and research spending. Investing activities provided $35.9 million, mainly from net investment maturities. Financing activities used approximately $5,000; no equity offering proceeds were received in 2016, compared with $63.9 million of net equity proceeds in the comparable 2015 period.
Material Changes Versus Prior Period
- Quarterly R&D expense decreased $7.1 million, or approximately 63%, primarily due to lower contract research organization costs, reduced personnel costs following the 2015 workforce reduction, and lower consulting, laboratory and stock-based compensation expenses.
- Nine-month R&D expense decreased $20.0 million, or approximately 61%, including a $14.5 million reduction in CRO costs and lower personnel and stock-based compensation expense.
- Quarterly G&A expense decreased approximately $0.4 million; nine-month G&A expense decreased $1.1 million, principally because of lower stock-based compensation and personnel costs, partly offset by higher professional and consulting expenses.
- Net loss declined by $7.5 million for the quarter and $21.2 million for the nine-month period. The reduction reflects lower operating expenses rather than revenue growth.
- The 2015 reduction in force reduced the workforce by approximately 50% to 20 full-time employees and was expected to reduce annual cash operating expenses by approximately $5.1 million. One-time severance and related costs of $1.1 million were fully paid by September 30, 2016.
Outlook, Commentary, Risks and Unusual Items
Management expects continuing substantial operating expenses and losses as clinical development proceeds. The company stated that its existing cash, cash equivalents and investments were expected to fund its current operating plan and capital expenditures into 2018, although this estimate depends on assumptions that may prove inaccurate. No committed external funding source exists, and additional equity, debt, collaboration or licensing financing may be required. Additional equity financing would dilute existing stockholders.
Clinical programs included the Phase 3 DUO study of duvelisib in approximately 300 patients with relapsed or refractory chronic lymphocytic leukemia, as well as studies of defactinib, VS-4718 and VS-5584 in various solid-tumor and lymphoma indications. The company cannot reliably estimate the timing or cost of completing development or when material cash inflows might begin.
After quarter-end, Verastem entered into an exclusive worldwide license agreement with Infinity Pharmaceuticals for duvelisib. Verastem assumed financial and, after a transition period, operational responsibility for the duvelisib program, including the DUO study. Infinity retained responsibility for certain study shutdown costs up to $4.5 million. Potential payments include $6.0 million upon successful completion of the DUO study and $22.0 million upon specified regulatory approval, payable in cash or, at Verastem’s election, common stock. The agreement also provides for worldwide royalties ranging from the mid-single digits to the high single digits, plus additional royalties initially equal to 4% of worldwide net sales to reimburse certain third-party development costs. The accounting treatment was still under evaluation.
Key risks include failure of the DUO study or other clinical trials, unexpected safety events, regulatory delays or non-approval, inability to raise capital, higher-than-expected development and integration costs associated with the Infinity license, dependence on third parties, intellectual-property challenges and the absence of product revenue. The filing states that there was no substantial doubt about the company’s ability to continue as a going concern for at least one year from issuance of the financial statements.
There were no legal proceedings, defaults, unregistered equity sales or share repurchases reported. Disclosure controls and procedures were assessed as effective, with no material changes to internal control over financial reporting during the quarter.
Investor Verification Items
- Verify the cash runway, particularly after incorporating the assumed costs of the duvelisib program and potential milestone obligations under the Infinity license.
- Monitor DUO study execution, enrollment, results and whether the specified criteria for the $6.0 million milestone and regulatory approval are achieved.
- Assess the potential dilution from future equity financing and any stock-based milestone payments to Infinity.
- Review the final accounting treatment, including any intangible assets, liabilities or expenses recognized for the Infinity license.
- Evaluate whether reduced spending reflects sustainable cost control or simply the scale-back and timing of clinical programs.
- Track regulatory, safety and efficacy developments for duvelisib, defactinib, VS-4718 and VS-5584, noting that positive earlier-stage results may not predict later-stage success.