Verastem (VSTM) reported earnings on May 9th after the close of the American market and proceeded to plunge 28% during Friday’s trading session. What was the cause of this selloff? Here are three big takeaways from the earnings report and a discussion on why I am cautiously optimistic.
- Chief Commercial Officer Joseph Lobacki is stepping away from the company
- Copiktra (duveslisib) revenue missed revenue estimates by $1.15 million, with only $1.67 million in revenue for the first quarter
- The company provided weaker than expected Copiktra revenue of just $10 to $12 million for 2019
Earnings by the Numbers
Verastem reported an EPS of -0.52 on a GAAP basis, which missed consensus estimates by 0.05. As mentioned above, revenue for the quarter also missed, with just $1.67 million in sales for duvelisib. Other financial metrics include Research and Development costs of $9.8 million (down from $10.9 million in 1Q18) and Selling, General and Administrative costs of $26.0 million (up from $9.8 million in 1Q18). The net loss for the quarter was $38.1 million, topping the net loss of $21.1 in 1Q18. Verastem ended the quarter with $211.7 million in cash, cash equivalents, and short-term investments. Verastem provided guidance for full year 2019 duvelisib revenue ranging from $10 to $12 million dollars. This is well below several analysts’ expectations for the year.
One of my concerns pertains to the slow uptake. The company has focused on the academic setting thus far, and plan to expand into the community. There was a lot of discussion regarding the “differentiated” side effect profile of duvelisib compared to other PI3K agents. Furthermore, being an oral only agent was touted to be a benefit to the community setting where patients could take the medication at home. On the conference call, there was underscored headwinds pertaining to the community setting, which make me more skeptical of duvelisib’s use and growth in this setting.
1Q19 Verastem Conference Call Transcript
“The headwinds that we are already seeing are the negative perceptions around PI3K. And the lack of clinical experience here in the U.S., particularly amongst the community where many of the patients are residing.”
Essentially, if we have seen slow uptake and minimal use in the academic setting seven months into launch, and the company already discussing headwinds in the community setting, I am less hopeful for large sales growth as Verastem begins to target the community setting. Additionally, it appears oncologists may not be sold that duvelisib’s safety profile is that much different than other PI3K agents. In a review published in the Journal of Clinical Oncology at the same time as the results of the DUO trial were published, Dr. Fruman had this comment:
“Of note, it is encouraging that the safety profile of duvelisib seems comparable to the more selective idelalisib, suggesting that adding on PI3K-gamma inhibition does not broaden drug toxicity significantly. Treatment of more patients over longer periods of time will be required to evaluate toxicity more thoroughly.”Targeting PI3K-Gamma in Non-Hodgkin Lymphoma
Saying the duvelisib side effect profile is comparable to idelalisib, does not make a compelling case for differentiation.
Finally, the NCCN guidelines did not provide Verastem any leverage in their recommendations for follicular lymphoma. Looking at the follicular lymphoma recommendations, duvelisib is the least preferred agent. It is not a preferred regimen and ranks below other PI3K inhibitors idelalisib and copanlisib in the order of preferred agents. Furthermore, it is completely left off the recommendations for elderly or infirm patients. With that being said, the recommendations for duvelisib’s use in CLL/SLL is more promising, however, seven months into the launch of this indication, we have seen slow uptake.
Cash Position and Runway
A major concern is a slow growth in sales and a high burn rate. Only $1.7 million of commercial sales for duvelisib in the second full commercial quarter seems low in my opinion, and that is echoed by the analyst’s estimates that Verastem missed. Secondly, is the high burn rate. With a net loss of $38.1 million in the quarter, Verastem has a run rate of around 6 quarters, give and take depending on revenue growth, milestones, etc.
While Verastem has an apparent healthy cash position, I would like to point out that they do have roughly $155 million in liabilities on their balance sheet, of which roughly $122 million is long-term debt and convertible senior notes. On April 23rd, Verastem amended their loan agreement with Hercules, which increased to amount to borrow from $50 million to $75 million. In addition, at this time, Verastem redrew an additional $10 million, bringing their total amount borrowed from this facility to $35 million. This loan will mature on December 1st, 2022. Interest only payments are due until April 1st, 2021, and may be extended to December 1st, 2021 provided Verastem is generating net product revenue of $40 million on a trailing six-month basis on or prior to December 31, 2020. The estimated future principal payments for the amount borrowed at this time is presented in Figure 1.
It is hard to say how things will progress, but as it stands, extending the interest-only period appears to be a long shot at this time, till we have more commercial data. I say that because the revenue guidance for this year is in the $10 to $12 million range. It is likely the second half will be stronger, for an estimated sales in the realm of $6 to $8 million optimistically. That means in the second half of next year, Verastem would need to nearly increase their second-half sales nearly five-fold. With the CCO stepping down, there is just a lot of unknowns and that amount of growth seems to be ambitious in my opinion.
In order to continue, Verastem will need to really get a handle on its expenses. SG&A expenses were $26.0 million in the last quarter, which supports a sales team of 40 to 50 people. Does that mean that 40 to 50 people and SG&A costs of $26.0 million only yielded $1.7 million in Copiktra sales? I really do not like those numbers, and this needs to be addressed by the company.
However, I do expect R&D expenses to rise, which will either add-to or offset the expenses in SG&A. Here is why I expect that. First, Verastem will need to complete a confirmatory trial in Follicular Lymphoma, as it was approved by the FDA under the accelerated approval pathway. Management expects this trial to be initiated later this year, and if successful, will give Copiktra full approval in this indication. This will likely need to be a company-sponsored trial, meaning Verastem will need to foot the bill for the trial.
Also along the lines of R&D expenses is the future of defactinib. This compound is being studied in several investigator-sponsored trials (ISTs). These are a blessing and a curse. They help the company as Verastem does not have to pay the bill for these trials. But the tradeoff is that Verastem loses control of when/where to release and present the data. Either way, Verastem anticipates having data from the defactinib trials within the next 12 months, at which point they may elect to invest in further trials to advance defactinib. This is another avenue of increased R&D expenses that I expect to see in the future.
The news of Joseph Lobacki stepping down is a large blow. However, this is just the most recent executive to step down from the leadership team. Former individuals who have parted ways with the company include: Julie Feder (former Chief Financial Officer), Diep Le (former Chief Medical Officer), and Nadeem Mirza (former SVP, Hematology & Oncology Development). These frequent changes in the leadership team are definitely something to keep an eye on.
There are two very peculiar situations in play for Verastem. The first is how they continue to leverage duvelisib. Verastem has already licensed out duvelisib to companies for commercialization in China and Japan. One might expect that Europe would be the next large market to license duvelisib in, however in the conference call in March, management hinted that a European partner would be unlikely this year. The next market that comes to my mind for this licensing opportunity that management has hinted to would be Canada. But what will happen in Europe? It appears that management plans to hold on to the rights to duvelisib in Europe at this time. I am a bit concerned that if Verastem intends to market duvelisib in Europe there will be significant expenses incurred. We have seen the massive SG&A expenses associated with the US commercialization, but starting an operation in Europe, that could only add to the costs. And then secondly, with such a slow launch seven months into the US launch, what should our expectations be for the same type of launch in Europe be? Or will Lobacki’s successor provide hope of a more successful launch? That is yet to be seen at this point.
Management seemed to hint that they are actively exploring options for which to purchase or in-license additional products. This is what was said in the most recent conference call:
“What other drugs can we bring forward that can benefit from both our developments, our regulatory and our now – our commercial capabilities? Already we have in the portfolio defactinib and there were a couple of questions earlier about defactinib and we’ll see whether that is a drug that deserves further investment. And then there could be new drugs that we can bring it at some point in the near term or in the medium or late – longer term. We are actively looking for things, but I’m not going to give any guidance around whether we found anything or whether we’d like to do something shortly or not. But we have a high bar in terms of what we’re looking for, and we will be patient to make sure we find something that really fits in well with our skill sets.”Verastem 1Q19 Conference Call
Such a move would likely eat into the nice cash position of Verastem, which is arguably one of the most attractive aspects of this company. Without the cash position, Verastem is much less attractive until (if) duvelisib’s sales grow. But purchasing a new compound will also require back-end expenses, as that will add additional R&D expenses to develop. This type of discussion could also foreshadow very low expectations for defactinib, so much that this new compound would replace defactinib moving forward. It is too early to say if this is the case, but it should be considered.
Along the lines of both points above, is what has been done with once duvelisib has been licensed. Verastem has only sponsored one trial (PRIMO) with duvelisib since licensing from Infinity Pharmaceuticals in late 2016. As with defactinib, all other trials initiated have been IST, which do save money, however typically are slower and Verastem loses control of when/where data is announced. There has been a lot of discussion building and expanding duvelisib, but there has been little action thus far, especially considering the large cash position and minimal R&D expenses at this time. It is likely that the confirmatory trial in Follicular Lymphoma this year will be just the second trial Verastem has sponsored with its lead compound in nearly three years. Personally, when I evaluate companies, I like to see a sense of urgency in the development of their lead compounds.
As discussed above, there are several risks associated with Verastem at the current time. With that being said, I think those willing to take on the risk could see lucrative rewards, remember just a year ago, this stock touched $10. Here are a few thoughts on the long side of the trade. First, this company is trading at a market cap of $95.3 million and an enterprise value of $14.8 million during Monday’s trading session. Furthermore, total cash per share for Verastem is 2.87. If one can get over the future debt that is due and the slow launch, it seems Verastem is being steeply discounted and undervalued at this time.
From a technical standpoint, Verastem is trading just above all-time lows ($1.05). The $1.05 level has held as support twice in past, denoted by arrows on the weekly chart below. As such, any stop losses would likely need to be placed just under this level, should this support fail moving forward. In combination with this, the RSI currently under 30, sitting at 23 at the time of writing this article, signaling over-sold conditions.
When looking at the daily chart, a gap was opened on Friday following the earnings report. As such, if Verastem can generate some positive momentum from its near all-time low, paired with a cooperative macroeconomic environment, this could turn into a fruitful swing trade as the gap fills.
Moving back to the fundamentals, Verastem’s lack of a partner in Europe may signal speculation of a larger deal or even M&A activity. Seeing as Europe is a large market, any suitor of Verastem’s would likely want the rights to duvelisib for this territory to maximize return on investment. Another potential scenario is a co-development agreement for duvelisib. Such an agreement may greatly benefit Verastem, as it would likely provide them an upfront infusion of cash, followed by splitting commercialization costs and profits. Additionally, assuming the partner was a larger pharma company, Verastem could gain insight and infrastructure from their partner. Until more information is released regarding a path forward in Europe, I find these options very plausible.
Patience may be the key to the commercial launch as well. One point that Robert Gagnon made during the conference call pertained to the launch venetoclax:
“And our estimate for this year is really based on the traction that we’re currently seeing in the market and our plans to continue the acceleration of the commercial rollout over the coming months. It’s also based on the revenues to date, what we’re seeing in run rates in our near-term expectations. If you look at other drugs within this indication, for example, I’ll mention VENCLEXTA, they had $30 million of sales in the first 12 months post launch and the second year was $114 million.”Verastem 1Q19 Conference Call
Such growth in duvelisib sales in the second year of commercialization would make it hard to believe Verastem’s valuation could remain depressed to a market cap of less than $100 million.
I believe there are potentially exciting clinical results due in 2019 as well, that could benefit the stock price from the R&D standpoint, instead of from the commercial side. Verastem will hopefully present data from the initial portion of the company sponsored PRIMO study that is being conducted in patients with peripheral T-cell lymphoma. Secondly, I am very intrigued to see the results of the IST of duvelisib in combination with venetoclax. This combination, an oral only combination, could prove to be very interesting and effective given the preclinical data available. My only concern will be the tolerability of the combination, but initial data should shed light on this.
Finally, defactinib appears to have been given little to no value. I do not have high expectations for the ongoing trials. But with four ISTs ongoing and anticipated data readouts in the next 12 month, any surprise positive data could provide a spark to the upside for the stock price. I find it hard to believe that any negative data could drag the stock price much lower.
Verastem is not devoid of risks moving forward. In the medium term, I believe there is a favorable benefit/risk ratio given its current valuation. With outstanding catalysts including the PRIMO and duvelisib/venetoclax combination trial, ex-US partnership, and four defactinib ISTs, Verastem has several shots on goal. The peculiar moves in their approach to Europe make me think there is more going on than meets the eye, and I am intrigued to see what happens. I do not think this is a good time to spend money on licensing another drug product at this time, I would rather see the money used to advance duvelisib to avoid the need for any dilution at a depressed share price, which would destroy shareholder value. Pair these developments with the technicals and the share price being near all-time lows, any potential upward traction could result in a nice gain for investors. At these prices, I am definitely cautiously optimistic. I would remiss I failed to recognize that these are volatile times with trade-war fears swirling, and investors need to carefully consider if investing in these volatile markets at this time fits their risk appetite.
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I/we have no position in any of the stocks mentioned, but I may buy/sell shares of VSTM in the next 48 hours.
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