Verastem, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2020. Verastem is a development-stage oncology biopharmaceutical company focused on VS-6766, a RAF/MEK inhibitor, and defactinib, a FAK inhibitor. On September 30, 2020, the company completed the sale of its COPIKTRA (duvelisib) oncology license and related assets to Secura Bio, Inc.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $78.6 million | $9.0 million | $88.0 million | $13.8 million |
| Product revenue | $5.8 million | $4.0 million | $15.1 million | $8.7 million |
| License and collaboration revenue | $2.8 million | $5.0 million | $2.9 million | $5.1 million |
| COPIKTRA license and asset-sale revenue | $70.0 million | — | $70.0 million | — |
| Net income (loss) | $13.1 million | $(30.1) million | $(47.9) million | $(110.4) million |
| Operating income (loss) | $15.0 million | $(26.1) million | $(32.6) million | $(99.0) million |
| Net income (loss) per diluted share | $0.08 | $(0.41) | $(0.32) | $(1.49) |
- Q3 total gross profit was approximately $46.6 million, or 59.2% of revenue, including the COPIKTRA transaction. Product gross margin was approximately 85.1%.
- Nine-month total gross profit was approximately $54.3 million, or 61.7% of revenue. These margins are not representative of the expected post-divestiture business because they include the $70.0 million asset-sale payment.
- Research and development expense declined 10% to $11.0 million in Q3 and 6% to $31.2 million for nine months. Selling, general and administrative expense declined 7% to $20.6 million in Q3 and 28% to $55.7 million for nine months.
- Q3 operating expenses included $31.2 million of cost of sales associated with the COPIKTRA asset sale, including $19.2 million of intangible-asset carrying value and $6.0 million of inventory.
- Nine-month cash used in operating activities was $11.8 million versus $101.3 million in the prior-year period. Investing activities provided $32.0 million, principally from investment maturities, and financing activities provided $106.2 million, primarily from equity offerings.
- Cash, cash equivalents and restricted cash totaled $205.7 million at September 30, 2020, including $35.2 million of restricted cash. The company reported an accumulated deficit of $572.6 million.
- At September 30, debt consisted of $35.0 million of Hercules term loans and $28.3 million of 2018 convertible notes. The balance-sheet carrying value of long-term debt, including the current portion, was approximately $35.7 million, excluding the convertible notes.
Material changes versus the prior comparable periods
- Revenue increased substantially because Verastem recognized the $70.0 million Secura upfront payment in Q3 2020. Product revenue also increased 45% in Q3 and 73% for nine months, reflecting greater COPIKTRA shipments and market penetration.
- License and collaboration revenue decreased because Q3 2019 included a $5.0 million Sanofi upfront payment, while Q3 2020 included approximately $2.5 million of Sanofi development milestones and $0.3 million of product shipments.
- Verastem issued 46.5 million common shares in a March 2020 PIPE for approximately $93.8 million net proceeds and sold 6.8 million shares under its at-the-market program for approximately $12.2 million net proceeds during the nine-month period.
- Holders converted all $57.4 million of 2019 convertible notes into 34.8 million common shares during the first quarter of 2020. The company recognized $1.3 million of other expense related to the associated make-whole derivative.
- The company recorded $4.8 million of restructuring costs for the February and August 2020 restructurings, including a workforce reduction of approximately 41 positions in August primarily affecting commercial operations.
- Common shares outstanding increased to approximately 169.5 million at September 30, 2020 from approximately 80.1 million at December 31, 2019, reflecting equity issuance and note conversions.
Outlook, commentary, risks and unusual items
- Following the Secura transaction, Verastem is concentrating on VS-6766 and defactinib. Management expected defactinib/VS-6766 spending to increase as registration-directed trials were initiated, while COPIKTRA-related spending would significantly decline.
- The company had initiated regulatory discussions in the second quarter and met with regulators in the third quarter, targeting commencement of registration-directed trials for the defactinib/VS-6766 combination by the end of 2020.
- Management stated that existing cash resources were expected to fund planned operations for at least 12 months from the filing or financial-statement issuance date. Future funding may include Secura milestones and royalties, collaborations, equity offerings or debt financing; none is guaranteed and equity financing could dilute shareholders.
- COVID-19 reduced clinical-site initiation, recruitment and enrollment, particularly in the FRAME study, and may delay clinical timelines. The company reported no supply-chain interruptions through September 30, 2020, but continued to identify risks related to trial delays, manufacturing and capital-market disruption.
- FRAME preliminary results were encouraging but remain early-stage and investigator-sponsored. Updated LGSOC data showed a 41% overall response rate in 17 patients and a 56% response rate in nine patients with KRAS-G12 mutations; these data are not assurance of later-stage success.
- Secura’s future milestone and royalty payments are contingent on the development and commercial success of COPIKTRA. The agreement provides for up to $45.0 million of regulatory milestones, up to $50.0 million of sales milestones, low-double-digit royalties on specified sales above $100.0 million, and specified shares of partner payments.
- Subsequent to quarter-end, on November 9, 2020, Verastem repaid the Hercules term loan in full for $37.4 million, including principal, fees, penalty and accrued interest, and released substantially all related liens.
- On November 6, 2020, Verastem agreed to exchange approximately $28.0 million of 2018 Notes for newly issued 2020 convertible notes, subject to closing conditions. The proposed notes have an initial conversion price of approximately $3.25 per share and could initially result in approximately 23.3 million shares issuable upon conversion.
Investor verification checklist
- Verify the accounting and one-time nature of the $70.0 million Secura upfront payment and the $31.2 million related asset-sale costs.
- Assess post-divestiture recurring revenue prospects, since COPIKTRA product revenue will not continue to be recognized by Verastem.
- Review Secura’s ability and willingness to achieve the contingent regulatory and sales milestones and generate royalties.
- Track the timing, design, enrollment and regulatory status of registration-directed VS-6766 and defactinib trials.
- Reconcile the company’s cash runway after the $37.4 million Hercules repayment, the 2020 Notes exchange and continuing clinical-development spending.
- Evaluate potential dilution from the 2020 Notes, outstanding options and restricted stock units, and any future equity financing.
- Monitor COVID-19 effects on enrollment, trial timelines, regulatory interactions and third-party manufacturing.