Verastem, Inc. Form 10-Q Summary
Business Context and Reporting Period
Verastem is a clinical-stage biopharmaceutical company developing oncology candidates, primarily duvelisib, a PI3K delta/gamma inhibitor, and defactinib, a FAK inhibitor. The company has not generated product revenue and remains dependent on external financing. This report covers the three and nine months ended September 30, 2017; the filing was signed November 7, 2017.
Financial Position and Key Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | None | None |
| Research and development expense | $17.7 million | $35.2 million |
| General and administrative expense | $5.4 million | $14.6 million |
| Total operating expenses | $23.1 million | $49.8 million |
| Net loss | $23.1 million | $49.6 million |
| Net loss per share | $0.61 | $1.33 |
| Net cash used in operating activities | Not separately provided | $37.0 million |
Operating and profit margins are not meaningful because the company had no revenue. At September 30, 2017, cash and cash equivalents were $51.3 million, short-term investments were $9.0 million, and total cash, cash equivalents and investments were $60.3 million. Total assets were $63.1 million, total liabilities were $22.2 million, and stockholders’ equity was $41.0 million. The accumulated deficit was $284.9 million.
Long-term debt was $2.3 million at September 30, 2017, representing the initial $2.5 million draw under a Hercules Capital term loan, net of financing-related amounts. The facility permits up to $25.0 million of borrowings, bears interest at a rate that was 10.5% at quarter-end, matures December 1, 2020, and is secured by substantially all assets other than intellectual property.
Cash increased by $18.9 million during the first nine months, primarily because $39.4 million of investment maturities and $16.5 million of financing cash inflows exceeded $37.0 million of operating cash use. Financing inflows included $14.1 million of net at-the-market equity proceeds and $2.4 million of net debt proceeds.
Material Changes Versus Prior Comparable Period
- Third-quarter research and development expense increased $13.5 million, to $17.7 million from $4.2 million. The increase included a $6.0 million duvelisib milestone, $4.8 million of additional contract research organization costs, approximately $2.0 million of additional consulting expense, and higher stock-based compensation and personnel costs.
- For the first nine months, research and development expense increased $22.3 million, to $35.2 million from $12.9 million, primarily due to higher clinical and outsourced development costs, the $6.0 million milestone, consulting costs, and personnel costs.
- General and administrative expense increased $1.6 million in the quarter and $2.3 million year to date, primarily from higher consulting, professional and personnel costs, partly offset by lower year-to-date stock-based compensation.
- Net loss increased from $7.9 million to $23.1 million in the quarter and from $24.8 million to $49.6 million year to date. Interest expense of $110,000 in the quarter and $231,000 year to date was new in 2017 and related to the Hercules facility.
- Cash, cash equivalents and investments declined from $80.9 million at December 31, 2016 to $60.3 million at September 30, 2017, despite $18.9 million of cash growth during the first nine months because the beginning balance included substantially more short-term investments.
- Shares issued and outstanding increased to 39.9 million at September 30, 2017 from 37.0 million at December 31, 2016, reflecting equity issuance and potential dilution from continued financing activities.
Guidance, Outlook, Risks and Unusual Items
Management reported positive top-line results from the Phase 3 DUO study of duvelisib and stated that it anticipated submitting an FDA New Drug Application in the first quarter of 2018 for full approval in CLL/SLL and accelerated approval in follicular lymphoma. The company also stated that the Phase 2 DYNAMO study achieved its primary endpoint. Final DUO results remained subject to further analysis and could differ from the top-line results.
A $6.0 million milestone became payable to Infinity Pharmaceuticals after the DUO study met specified criteria. The amount was recorded as research and development expense for the quarter ended September 30 and paid in October 2017. On October 12, 2017, Verastem drew an additional $7.5 million under the Hercules facility and used $6.0 million for the milestone payment.
Through September 30, 2017, Verastem sold 2.9 million shares under its at-the-market program for approximately $14.1 million of net proceeds. The program was increased from $35.0 million to $75.0 million in August 2017. Through November 6, 2017, the company sold an additional 544,368 shares for $2.5 million of net proceeds.
Management expects significant operating losses and expenses to continue or increase as it advances clinical trials, prepares regulatory submissions, and develops potential commercialization capabilities. The filing states that, without additional funding, the company does not believe it has sufficient funds to meet its obligations during the twelve months following issuance of the financial statements. This raises substantial doubt about the company’s ability to continue as a going concern.
- Key risks include the possibility that final DUO data will be less favorable than top-line results, regulatory authorities may require additional studies, clinical or safety results may not support approval, and duvelisib may not achieve commercial acceptance.
- Duvelisib’s clinical side effects may require management and could limit labeling, reimbursement, market acceptance or profitability.
- Additional equity, debt, partnership or licensing financing may be unavailable or unfavorable. Equity financing would dilute existing holders, while debt financing introduces covenants, interest obligations and collateral risks.
- The Hercules loan is secured by substantially all assets other than intellectual property; failure to comply with covenants could result in default and accelerated repayment.
- The company reported no legal proceedings, no off-balance-sheet arrangements and no material changes in internal control over financial reporting. Management concluded that disclosure controls were effective.
Important Facts for Investors to Verify
- Whether the final DUO study dataset confirms the reported top-line efficacy and safety results.
- The timing, scope and outcome of the planned first-quarter 2018 NDA submission and subsequent FDA review.
- Available liquidity after the October $7.5 million debt draw, the $6.0 million milestone payment and subsequent equity issuance.
- The amount and terms of any additional Hercules borrowing, including covenants, interest expense and required cash balances.
- The pace of cash consumption and whether additional financing will be required within the stated twelve-month going-concern period.
- Potential dilution from the remaining $75.0 million at-the-market authorization, outstanding options and future capital raises.
- The clinical development, safety and regulatory status of defactinib and the company’s ability to commercialize any approved product.