Verastem(VSTM) - 2019 Q2 - Quarterly Report

PART I—FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for the reporting period Item 1. Condensed Consolidated Financial Statements (unaudited) The company presents its unaudited condensed consolidated financial statements, including balance sheets, statements of operations, equity, and cash flows, with detailed explanatory notes - Verastem, Inc. is a biopharmaceutical company focused on developing and commercializing cancer medicines, with COPIKTRA™ (duvelisib) as its first commercial product approved by the FDA in September 2018 for certain hematologic cancers[20] - The company has an accumulated deficit of $455.9 million as of June 30, 2019, and anticipates continued losses, raising substantial doubt about its ability to continue as a going concern[22][23] Condensed Consolidated Balance Sheets (in thousands) | Metric | June 30, 2019 (unaudited) | December 31, 2018 | | :-------------------------------- | :------------------------ | :------------------ | | Assets | | | | Cash and cash equivalents | $113,080 | $129,867 | | Short-term investments | $74,173 | $119,786 | | Total current assets | $192,346 | $253,259 | | Total assets | $218,541 | $277,236 | | Liabilities and Stockholders' Equity | | | | Total current liabilities | $31,204 | $37,077 | | Long-term debt | $34,673 | $19,506 | | Convertible senior notes | $99,163 | $95,231 | | Total liabilities | $169,234 | $152,937 | | Total stockholders' equity | $49,307 | $124,299 | | Total liabilities and stockholders' equity | $218,541 | $277,236 | Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands, except per share amounts) | Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Product revenue, net | $3,019 | $0 | $4,690 | $0 | | License and collaboration revenue | $117 | $10,000 | $117 | $10,000 | | Total revenue | $3,136 | $10,000 | $4,807 | $10,000 | | Total operating expenses | $41,413 | $28,194 | $77,753 | $48,955 | | Loss from operations | $(38,277) | $(18,194) | $(72,946) | $(38,955) | | Net loss | $(42,194) | $(18,367) | $(80,296) | $(39,417) | | Net loss per share—basic and diluted | $(0.57) | $(0.30) | $(1.09) | $(0.70) | Condensed Consolidated Statements of Cash Flows (in thousands) | Metric | Six months ended June 30, 2019 | Six months ended June 30, 2018 | | :------------------------------------------ | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(73,449) | $(32,767) | | Net cash provided by investing activities | $46,893 | $3,905 | | Net cash provided by financing activities | $9,769 | $115,619 | | Increase (decrease) in cash, cash equivalents and restricted cash | $(16,787) | $86,757 | 1. Nature of Business Verastem, Inc. is a biopharmaceutical company focused on developing and commercializing cancer medicines, with COPIKTRA™ as its first FDA-approved product - Verastem, Inc. is a biopharmaceutical company focused on developing and commercializing cancer medicines, with COPIKTRA™ (duvelisib) as its first commercial product approved by the FDA in September 2018 for certain hematologic cancers[20] - The company's lead product candidate, defactinib, and COPIKTRA utilize a multi-faceted approach to treat blood and organ system cancers, with ongoing preclinical and clinical studies for various cancer types[20] - As of June 30, 2019, the company had $187.3 million in cash, cash equivalents, and short-term investments, but an accumulated deficit of $455.9 million, leading to substantial doubt about its ability to continue as a going concern[22][23] 2. Summary of Significant Accounting Policies This section outlines the company's critical accounting policies, including revenue recognition, lease accounting, and going concern assumptions for interim financial reporting - The financial statements are prepared under GAAP for interim reporting, assuming the company will continue as a going concern for the next twelve months, despite uncertainties[24] - Effective January 1, 2019, the company adopted ASC 842, Leases, requiring recognition of lease liabilities and right-of-use assets on the balance sheet for leases over one year[26][27] - Revenue recognition follows ASC 606, with product revenue from COPIKTRA sales recognized upon delivery, net of variable consideration like discounts, rebates, and returns, while license and collaboration revenue is recognized based on performance obligations and milestone probabilities[30][31][43] 3. Cash, Cash Equivalents and Restricted Cash This section details the composition of cash, cash equivalents, and restricted cash, including amounts held for specific R&D studies and security deposits Cash, Cash Equivalents and Restricted Cash (in thousands) | Metric | June 30, 2019 | December 31, 2018 | | :----------------------------------- | :------------ | :---------------- | | Cash and cash equivalents | $113,080 | $129,867 | | Restricted cash | $741 | $741 | | Total cash, cash equivalents and restricted cash | $113,821 | $130,608 | - Restricted cash includes approximately $0.5 million for specific R&D studies under a Research Funding Agreement with Leukemia & Lymphoma Society, Inc. (LLS) and $0.2 million for a security deposit for office space[60] 4. Fair Value of Financial Instruments The company's financial instruments are valued using a fair value hierarchy, with details provided for cash equivalents, investments, long-term debt, and convertible senior notes - The company determines fair value using a hierarchy (Level 1, 2, 3) based on observable inputs, with cash equivalents and short-term investments valued using third-party pricing services and market observable data[61][62] Financial Instruments Measured at Fair Value (in thousands) | Description | June 30, 2019 Total | June 30, 2019 Level 1 | June 30, 2019 Level 2 | December 31, 2018 Total | December 31, 2018 Level 1 | December 31, 2018 Level 2 | | :-------------------- | :------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Cash equivalents | $111,174 | $111,174 | — | $127,689 | $60,092 | $67,597 | | Short-term investments | $74,173 | — | $74,173 | $119,786 | — | $119,786 | | Total financial assets | $185,347 | $111,174 | $74,173 | $247,475 | $60,092 | $187,383 | - The fair value of long-term debt at June 30, 2019, was approximately $37.1 million (carrying value $34.7 million), determined using Level 3 inputs[63] - Convertible Senior Notes had a fair value of approximately $77.6 million (carrying value $99.163 million), determined using Level 2 inputs[64] 5. Investments This section provides a breakdown of the company's cash, cash equivalents, and short-term investments, noting no realized gains or losses for the period Cash, Cash Equivalents, and Short-Term Investments (in thousands) | Category | June 30, 2019 Fair Value | December 31, 2018 Fair Value | | :----------------------------------- | :----------------------- | :----------------------- | | Cash and money market accounts | $113,080 | $62,270 | | Corporate bonds and commercial paper (due within 90 days) | — | $67,597 | | Corporate bonds and commercial paper (due within 1 year) | $74,173 | $119,786 | | Total cash, cash equivalents and investments | $187,253 | $249,653 | - There were no realized gains or losses on investments for the three and six months ended June 30, 2019 or 2018[66] - As of June 30, 2019, there were zero investments in an unrealized loss position, compared to fourteen at December 31, 2018[66] 6. Inventory The company's inventory, primarily work in process and finished goods for COPIKTRA, is valued at the lower of cost or net realizable value - The company began capitalizing inventory costs for COPIKTRA in Q3 2018, prior to which manufacturing costs were expensed as R&D[67][68] - Inventory is valued at the lower of cost or net realizable value[68] Inventory (in thousands) | Category | June 30, 2019 | December 31, 2018 | | :--------------- | :------------ | :---------------- | | Raw materials | $0 | $0 | | Work in process | $119 | $63 | | Finished goods | $175 | $264 | | Total inventories | $294 | $327 | 7. Intangible Assets Intangible assets consist mainly of acquired and in-licensed rights related to COPIKTRA, amortized over a 14-year useful life - Intangible assets primarily consist of $22.0 million in acquired and in-licensed rights, a milestone payment to Infinity Pharmaceuticals, Inc. upon FDA marketing approval of COPIKTRA in September 2018[69] Intangible Assets (in thousands) | Category | June 30, 2019 | | :-------------------------- | :------------ | | Acquired and in-licensed rights | $22,000 | | Less: accumulated amortization | $(1,207) | | Total intangible assets, net | $20,793 | - Amortization expense for finite-lived intangible assets was approximately $0.4 million for Q2 2019 and $0.8 million for the six months ended June 30, 2019, using the straight-line method over a 14-year useful life[69][70] 8. Accrued Expenses This section details the company's accrued expenses, including compensation, contract research organization costs, and commercialization costs Accrued Expenses (in thousands) | Category | June 30, 2019 | December 31, 2018 | | :-------------------------- | :------------ | :---------------- | | Compensation and related benefits | $6,689 | $8,749 | | Contract research organization costs | $6,516 | $6,682 | | Commercialization costs | $2,298 | $1,979 | | Interest | $1,534 | $1,786 | | Consulting fees | $1,267 | $494 | | Professional fees | $661 | $482 | | Other | $407 | $936 | | Total accrued expenses | $19,372 | $21,108 | 9. Product Revenue Reserves and Allowances Product revenue reserves and allowances for COPIKTRA sales account for variable consideration such as trade discounts, rebates, and potential returns - Product revenue reserves and allowances for COPIKTRA sales include trade discounts, Third-Party Payer chargebacks and discounts, government rebates, other incentives, and product returns[73] Product Revenue Allowance and Reserve Categories (in thousands) | Category | Beginning Balance (Dec 31, 2018) | Ending Balance (June 30, 2019) | | :----------------------------------- | :------------------------------- | :----------------------------- | | Trade discounts and allowances | $29 | $52 | | Third-Party Payer chargebacks, discounts and fees | $88 | $153 | | Government rebates and other incentives | $157 | $199 | | Returns | $2 | $8 | | Total | $276 | $412 | - Trade discounts and Third-Party Payer chargebacks are reductions to accounts receivable, while other allowances are recorded as accrued expenses[73][41] - The company has not received any product returns to date[73][41] 10. Leases The company's office space is accounted for as an operating lease, with a recognized right-of-use asset and corresponding lease liability under ASC 842 - As of June 30, 2019, the company's Needham, Massachusetts office space is accounted for as an operating lease, with a right-of-use asset of $3.2 million and a lease liability of $4.0 million[75][77] Operating Lease Information (in thousands) | Metric | Six months ended June 30, 2019 | | :------------------------------------------ | :----------------------------- | | Operating lease expense | $444 | | Operating cash flows paid for amounts included in measurement of lease liabilities | $331 | | Weighted average remaining lease term (in years) | 5.9 | | Weighted average discount rate | 14.60% | | Lease Liability (June 30, 2019) | $3,988 | - The company adopted ASU 2016-02 (Leases) effective January 1, 2019, using the optional transition method, and elected to account for lease and non-lease components as a single lease component[76][59] 11. Long-Term Debt This section details the company's amended loan agreement with Hercules Capital, Inc., including increased borrowing capacity and repayment terms - On April 23, 2019, the company amended its loan agreement with Hercules Capital, Inc., increasing the total borrowing capacity to $75.0 million, with $35.0 million outstanding as of the Amendment Date[79][80] - The 2019 Term Loan matures on December 1, 2022, accrues interest at a floating rate (greater of 9.75% or a formula involving prime rate), and requires a final payment of 5.25% of the aggregate principal[81] Future Principal Payments Under 2019 Term Loan (in thousands) | Year | Principal Payments | | :--- | :----------------- | | 2021 | $14,234 | | 2022 | $20,766 | | Total | $35,000 | 12. Convertible Senior Notes The company issued $150.0 million in 5.00% Convertible Senior Notes due 2048, convertible into common stock at a specified rate - In October 2018, the company issued $150.0 million aggregate principal amount of 5.00% Convertible Senior Notes due 2048, bearing interest semi-annually[86] - The Notes are convertible into common stock at an initial rate of 139.5771 shares per $1,000 principal amount, corresponding to an initial conversion price of approximately $7.16 per share[87] - The conversion feature was initially bifurcated as an embedded derivative but later qualified for a scope exception after stockholders approved an increase in authorized common stock shares[89] 13. Stock-Based Compensation This section outlines stock option activity and the fair value estimation using the Black-Scholes model, along with unrecognized compensation costs for unvested awards Stock Option Activity (Six months ended June 30, 2019) | Metric | Shares | Weighted average exercise price per share | | :------------------------------------------ | :------------- | :-------------------------------------- | | Outstanding at December 31, 2018 | 12,522,867 | $5.42 | | Granted | 4,978,840 | $2.58 | | Exercised | (46,803) | $1.60 | | Forfeited/cancelled | (819,147) | $4.31 | | Outstanding at June 30, 2019 | 16,635,757 | $4.64 | - The fair value of stock options granted was estimated using the Black-Scholes model, with a weighted-average risk-free interest rate of 2.16% and volatility of 86% for the six months ended June 30, 2019[92] - As of June 30, 2019, there was $21.4 million of unrecognized compensation cost for unvested stock options (expected to be recognized over 4.06 years) and $2.0 million for unvested RSUs (over 2.90 years)[92][94] 14. Net Loss Per Share Basic and diluted net loss per common share calculations are presented, excluding potentially dilutive securities due to their anti-dilutive effect - Basic net loss per common share is calculated by dividing net loss by the weighted-average common shares outstanding[96] - Diluted net loss per share includes potentially dilutive securities unless their effect is anti-dilutive[96] Potentially Dilutive Securities Excluded from Diluted Net Loss Per Share Calculation | Security Type | Three months ended June 30, 2019 | Six months ended June 30, 2019 | | :-------------------------- | :------------------------------- | :----------------------------- | | Outstanding stock options | 16,635,757 | 16,635,757 | | Outstanding restricted stock units | 739,117 | 739,117 | | Convertible senior notes | 20,936,548 | 20,936,548 | | Total potentially dilutive securities | 38,311,422 | 38,311,422 | 15. License and Collaboration Agreements The company has exclusive license agreements for duvelisib with Yakult Honsha and CSPC Pharmaceutical Group, involving upfront payments, milestones, and royalties - The company has an exclusive license and collaboration agreement with Yakult Honsha Co., Ltd. (June 2018) for duvelisib in Japan, including an upfront payment of $10.0 million and potential milestones up to $90.0 million[99][100] - An exclusive license and collaboration agreement with CSPC Pharmaceutical Group Limited (September 2018) covers duvelisib in China, Hong Kong, Macau, and Taiwan, with potential milestone payments up to $160.0 million[103][105] - Both agreements include double-digit royalties on net sales and funding for global development costs, with specific termination clauses[100][102][105][106] 16. Income Taxes No federal or state income tax provision or benefit was recorded due to expected losses and a full valuation allowance against deferred tax assets - The company did not record federal or state income tax provision or benefit for the three and six months ended June 30, 2019 and 2018, due to expected losses and a full valuation allowance against net deferred tax assets[107] 17. Commitments and Contingencies The company's commitments primarily include a lease agreement for office space, with future minimum lease payments detailed - The company has a lease agreement for office space in Needham, Massachusetts, with future minimum lease commitments detailed in Note 10[108] - A security deposit of $0.2 million in the form of a letter of credit is held for this lease[108] 18. Subsequent Events Subsequent events include the registration of Verastem Europe GmbH and an exclusive license agreement with Sanofi for COPIKTRA in various regions - On July 11, 2019, Verastem Europe GmbH, a wholly-owned subsidiary, was registered in Munich, Germany, as the company pursues regulatory approval and commercialization strategies for COPIKTRA in the European Union[110] - On July 25, 2019, the company entered into an exclusive license agreement with Sanofi for COPIKTRA in Russia, CIS, Turkey, the Middle East, and Africa, receiving an upfront payment of $5.0 million and eligibility for up to $42.0 million in milestones plus double-digit royalties[111] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management discusses the company's financial performance, liquidity, and capital resources, emphasizing the commercialization of COPIKTRA and ongoing R&D - Verastem is a biopharmaceutical company developing and commercializing cancer medicines, with COPIKTRA™ (duvelisib) approved for certain hematologic cancers and defactinib in clinical development for various solid tumors[114][115][117] - The company reported net losses of $42.2 million and $80.3 million for the three and six months ended June 30, 2019, respectively, and expects continued significant operating losses, raising substantial doubt about its ability to continue as a going concern[120][121] - Product revenue, net, for the three and six months ended June 30, 2019, was $3.0 million and $4.7 million, respectively, from COPIKTRA sales, marking the first product revenue since its September 2018 launch[160][173] - License and collaboration revenue decreased significantly by $9.9 million for both periods compared to 2018, primarily due to a $10.0 million upfront payment from Yakult in Q2 2018 not recurring[161][174] - Selling, general and administrative expenses increased by $13.5 million (85%) for Q2 2019 and $29.7 million (116%) for the six-month period, driven by commercialization efforts for COPIKTRA, including staffing sales teams and professional fees[166][168][179][181] - Interest expense increased by $4.7 million (905%) for Q2 2019 and $9.1 million (916%) for the six-month period, mainly due to the issuance of Convertible Senior Notes in October 2018 and a higher principal balance on the Hercules loan[171][184] Overview Verastem is a biopharmaceutical company focused on cancer treatments, with COPIKTRA commercialization and defactinib development driving significant operational expenses - Verastem is a biopharmaceutical company focused on developing and commercializing cancer treatments, with COPIKTRA™ (duvelisib) approved for certain hematologic cancers and defactinib in preclinical and clinical studies for various cancers[114][115][117] - The company has financed operations through public offerings, equity programs, a loan agreement with Hercules, upfront payments from license agreements (Yakult, CSPC), and Convertible Senior Notes[119] - Verastem expects significant expenses and increasing operating losses due to COPIKTRA commercialization and R&D, with an accumulated deficit of $455.9 million as of June 30, 2019, raising substantial doubt about its going concern ability[120][121] Critical Accounting Policies and Significant Judgments and Estimates This section details key accounting policies requiring significant judgment, including revenue recognition, accrued R&D, stock-based compensation, and lease accounting - Key accounting policies requiring significant judgment include accrued R&D expenses, stock-based compensation, revenue recognition, collaborative arrangements, accounts receivable, inventory, and intangible assets[123] - The company adopted ASC 842, Leases, effective January 1, 2019, which requires lessees to recognize lease liabilities and right-of-use assets on the balance sheet for leases over one year[123][156] - Revenue recognition for product sales (COPIKTRA) and license/collaboration agreements involves a five-step model under ASC 606, requiring estimates for variable consideration, milestone probabilities, and standalone selling prices[124][128][138][139][145] Results of Operations This section analyzes the company's financial performance, detailing changes in product and license revenue, operating expenses, and net loss for the reported periods Comparison of Three Months Ended June 30, 2019 and 2018 (in thousands) | Metric | 2019 | 2018 | Change | % Change | | :-------------------------------- | :----- | :----- | :----- | :------- | | Product revenue, net | $3,019 | $0 | $3,019 | 100% | | License and collaboration revenue | $117 | $10,000 | $(9,883) | -99% | | Total revenue | $3,136 | $10,000 | $(6,864) | -69% | | Research and development | $11,346 | $12,381 | $(1,035) | -8% | | Selling, general and administrative | $29,298 | $15,813 | $13,485 | 85% | | Net loss | $(42,194) | $(18,367) | $(23,827) | 130% | Comparison of Six Months Ended June 30, 2019 and 2018 (in thousands) | Metric | 2019 | 2018 | Change | % Change | | :-------------------------------- | :----- | :----- | :----- | :------- | | Product revenue, net | $4,690 | $0 | $4,690 | 100% | | License and collaboration revenue | $117 | $10,000 | $(9,883) | -99% | | Total revenue | $4,807 | $10,000 | $(5,193) | -52% | | Research and development | $21,103 | $23,315 | $(2,212) | -9% | | Selling, general and administrative | $55,331 | $25,640 | $29,691 | 116% | | Net loss | $(80,296) | $(39,417) | $(40,879) | 104% | - R&D expenses decreased by $1.1 million (QoQ) and $2.2 million (YoY) primarily due to reduced consulting and CRO costs, partially offset by increased personnel and occupancy costs[163][176] Liquidity and Capital Resources The company's liquidity position, cash flow activities, and substantial future funding requirements are discussed, with reliance on COPIKTRA commercialization and external financing - As of June 30, 2019, the company had $187.3 million in cash, cash equivalents, and short-term investments[186] - The company believes it has sufficient funds for the next twelve months, but successful commercialization of COPIKTRA is critical[187] Cash Flows (Six months ended June 30, in thousands) | Activity | 2019 | 2018 | | :------------------------------------------ | :----------- | :----------- | | Net cash used in operating activities | $(73,449) | $(32,767) | | Net cash provided by investing activities | $46,893 | $3,905 | | Net cash provided by financing activities | $9,769 | $115,619 | | Increase (decrease) in cash, cash equivalents and restricted cash | $(16,787) | $86,757 | - Operating cash used increased by $40.7 million in 2019 due to higher SG&A expenses for COPIKTRA commercialization and the absence of the $10.0 million Yakult license payment received in 2018[189] - Financing activities in 2019 primarily included $9.7 million from the Hercules loan amendment, while 2018 saw $105.7 million from common stock sales (underwriting and ATM) and $9.9 million from the Hercules loan[191] - Future funding requirements are substantial and depend on COPIKTRA commercialization, clinical trials, intellectual property, and potential acquisitions[207] - The company plans to finance needs through equity, debt, collaborations, and licensing[209] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses Verastem, Inc.'s exposure to market risks, primarily related to interest rate fluctuations on its cash, cash equivalents, short-term investments, and variable-rate debt - The company's primary market risk exposure is interest rate sensitivity, affecting its $187.3 million in cash, cash equivalents, and short-term investments, which are mostly interest-bearing[212] - Due to the short-term duration and low-risk profile of its investment portfolio, a 100 basis point change in interest rates would not materially affect the fair market value of the portfolio[212] - The 2019 Term Loan Agreement with Hercules bears a floating interest rate, making interest charges susceptible to changes in prime rates[214] - A 10% increase in current interest rates would have an immaterial impact on cash interest expense for the reported periods[214] - The Convertible Senior Notes bear a fixed interest rate, limiting exposure to interest rate changes, but potentially leading to higher relative interest payments if credit ratings improve[215] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2019, with no material changes to internal control over financial reporting - Management, with CEO and Chief Business and Financial Officer participation, concluded that disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2019[216] - There were no material changes in internal control over financial reporting during the three months ended June 30, 2019[217] PART II—OTHER INFORMATION This section provides additional information including legal proceedings, risk factors, equity sales, and required exhibits Item 1. Legal Proceedings. The company reports no legal proceedings - The company has no legal proceedings to report[220] Item 1A. Risk Factors. Updated risk factors highlight the company's need for additional financing and its dependence on COPIKTRA's commercial success to continue as a going concern - The company may require additional financing to execute its operating plan and continue as a going concern, as it has historical operating losses and anticipates continued losses[222] - Verastem's ability to continue as a going concern relies heavily on the successful commercialization of COPIKTRA and potentially raising additional capital or reducing cash expenditures[222] - There are no assurances that the company will be able to obtain necessary capital on favorable terms or at all, which could force delays, reductions, or termination of commercial or R&D efforts[222] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. The company had no unregistered sales or repurchases of its equity securities during the reporting period - The company did not have any recent sales of unregistered securities[223] - The company did not purchase any of its equity securities during the period covered by this Quarterly Report on Form 10-Q[224] Item 3. Defaults Upon Senior Securities. The company reports no defaults upon senior securities - The company has no defaults upon senior securities[225] Item 4. Mine Safety Disclosures. The company has no mine safety disclosures to report - The company has no mine safety disclosures[226] Item 5. Other Information. The company has no other information to report - The company has no other information to report[227] Item 6. Exhibits. This section lists the exhibits filed as part of this Quarterly Report on Form 10-Q, including certifications from the Principal Executive Officer and Chief Financial Officer, and XBRL documents - The report includes certifications from the Principal Executive Officer and Chief Financial Officer as required by the Sarbanes-Oxley Act of 2002[232] - XBRL (eXtensible Business Reporting Language) documents are filed, including Instance, Schema, Calculation, Definition, Label, and Presentation Linkbase Documents[232]