Verastem, Inc. 2017 First-Quarter Form 10-Q Summary
Business context and reporting period
Verastem is a clinical-stage biopharmaceutical company developing cancer therapies. Its principal candidates were duvelisib, a dual PI3K delta/gamma inhibitor, and defactinib (VS-6063), a FAK inhibitor. The filing covers the unaudited three months ended March 31, 2017, filed May 10, 2017. The company had not generated revenue or achieved profitability.
Duvelisib was being evaluated in the Phase 3 DUO trial for relapsed or refractory CLL/SLL, following completion of the Phase 2 DYNAMO trial in indolent non-Hodgkin lymphoma. Defactinib was being studied in combination trials for pancreatic cancer, ovarian cancer, non-small-cell lung cancer and mesothelioma.
Financial condition and key metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $0 | $0 | No change |
| Research and development expense | $8.4 million | $4.2 million | Up $4.2 million |
| General and administrative expense | $4.8 million | $4.3 million | Up approximately $0.5 million |
| Total operating expenses | $13.1 million | $8.4 million | Up $4.7 million |
| Net loss | $13.0 million | $8.3 million | Loss increased $4.7 million |
| Net loss per share | $0.35 | $0.22 | Loss per share increased |
| Net cash used in operating activities | $10.7 million | $10.8 million | Improved approximately $0.2 million |
Gross margin and profitability margins are not meaningful because the company had no revenue. Operating expenses were $13.1 million, resulting in an operating loss of the same amount. Interest income was $155,000 and interest expense was $12,000.
At March 31, 2017, cash and cash equivalents were $28.2 million, short-term investments were $44.4 million, and total cash, cash equivalents and investments were $72.6 million, compared with $80.9 million at December 31, 2016. Total assets were $76.2 million and stockholders’ equity was $60.5 million. The accumulated deficit was $248.3 million.
The company drew $2.5 million under a new Hercules Capital term loan facility during March. The balance sheet reported $2.25 million of long-term debt after applicable financing adjustments. The facility permits up to $25.0 million of advances, bears interest at a floating rate subject to a 10.5% floor, and matures December 1, 2020. Interest-only payments are required until November 1, 2018, with a potential extension to May 1, 2019 subject to additional financing or partnership proceeds.
Material changes versus the prior comparable period
- Research and development expense more than doubled, primarily due to a $2.8 million increase in contract research organization costs, approximately $965,000 of higher personnel-related costs and approximately $554,000 of higher consulting fees.
- Duvelisib-related research and development expense was $4.0 million in Q1 2017, compared with no separately allocated expense in Q1 2016. Defactinib-related expense decreased to $608,000 from $1.5 million.
- General and administrative expense increased approximately $508,000, mainly from higher consulting and professional fees, partly offset by lower stock-based compensation.
- Net loss increased from $8.3 million to $13.0 million, while basic and diluted loss per share increased from $0.22 to $0.35.
- Operating cash usage was broadly stable year over year, while investing cash inflow increased to $4.1 million because of net investment maturities.
- The company entered into the Hercules term loan and established a new $35.0 million at-the-market equity offering program. No shares had been sold under the new program through March 31, 2017.
Outlook, risks, contingencies and unusual items
Management expected significant expenses and increasing operating losses for the foreseeable future as clinical development, regulatory, intellectual-property and potential commercialization activities continued. Management stated that existing cash, cash equivalents and investments were expected to fund the current operating plan for at least twelve months from the financial statement issuance date, but noted that this estimate depended on assumptions that could prove incorrect.
The company expects to require substantial additional financing. Potential funding sources include equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. Additional equity or convertible debt could dilute existing stockholders; debt may impose restrictive covenants; and collaborations or licenses could require relinquishing valuable rights.
The principal risks include failure or delay of clinical trials, unexpected safety events, inability to obtain regulatory approvals, insufficient patient enrollment, higher-than-expected development costs, reliance on third parties, intellectual-property challenges, competition, inability to complete the transition of the duvelisib program from Infinity Pharmaceuticals, and inability to raise capital on acceptable terms.
The new term loan is secured by substantially all company assets other than intellectual property and includes customary covenants. The company reported no legal proceedings, no off-balance-sheet arrangements and no material subsequent events. It also reported no material changes to previously disclosed risk factors.
Facts investors should verify
- Progress, enrollment, safety and efficacy results for the DUO trial and other duvelisib and defactinib studies.
- Whether additional Hercules loan tranches become available and the impact of the loan’s interest rate, security interest and covenants.
- Cash burn and remaining liquidity relative to the stated twelve-month funding expectation.
- Whether the $35.0 million at-the-market equity program is used, including potential shareholder dilution.
- Regulatory timelines and the prospects for marketing approval of duvelisib or defactinib.
- The company’s ability to secure additional financing or commercial partnerships before existing resources are depleted.