You spoke and we listened! The winner of the Reader’s Choice article was Verastem Oncology (VSTM). After the brief summary provided, you voted for a full report on Verastem, which is included in this piece, so sit back, read, and enjoy.
Verastem is a company edging between a small cap and micro cap company with a market cap of just under $300 million. The company is led by CEO Brian Stuglik, who stepped into this role in July of 2019. Other members of the leadership include Dan Paterson (president and COO), Rob Gagnon (Chief Business and Financial Officer), and Jonathan Pachter (Chief Scientific Officer). Over the past 52 weeks, Verastem have traded down to a low of $0.83 (November of 2019) up to $4.67 (April of 2020). So lets take a look at the pipeline.
In early 2020, Verastem unexpectedly announced the licensing of a compound formerly known as CH5126766 (now known as VS-6766) from Chugai Pharmaceuticals. This was the result of previously unpublished data from an on-going Phase 1 trial of the companies asset defactinib in combination with VS-6766 in KRAS mutated cancers. In addition to these two assets, Verastem has a commercial stage product called duveslisib (marketed under the brand name Copiktra), with confirmatory and expanded indication trials under way. So lets start with the most advanced product, duvelisib.
Duvelisib is an orally available (capsule) that is FDA approved for the treatment of relapsed/refractory chronic lymphocytic leukemia (CLL) or small lymphocytic lymphoma (SLL) after at least two prior therapies. This indication received full FDA approval. Duvelisib has also received approval for relapsed or refractory follicullar lymphoma (FL) after at least two prior systemic therapies. This indication was approved by the FDA under the accelerated approval program. This means that Verastem will need to conduct a confirmatory trial in order to maintain this indication. Finally, duvelisib works by inhibiting the protein PI3K, and specifically the PI3K- delta and – gamma isoforms. Thus, it falls in the class of PI3K inhibitors with other agents such as idelalisib, copanlisib, and umbralisib.
First, I will highlight that Verastem utilizes a combination of company sponsored trials and investigator sponsored trials (ISTs). Utilization of ISTs is a benefit and a curse. For one, ISTs are conducted a little costs to Verastem, which helps with reducing expenses. Conversely, ISTs are run on the investigators timelines. Thus, Verastem looses the ability to estimate when data will be available and/or presented.
So moving onto the trials, we have yet to see much information on the required confirmatory trial that Verastem needs to conduct in order to maintain its accelerated approval indication in relapsed or refractory FL. This will likely need to be started in the near future, and be conducted as a company sponsored trials, which will incur expenses for Verastem. Of the ongoing trials, the PRIMO trial is the most interesting and important. This is a registration directed trial is the evaluation of duvelisib in the treatment of relapsed or refractory peripheral T-cell lymphoma (PTCL). Based on Verastem’s estimates, the total addressable market for this indication is around 2,800. This is not the largest indication at all, however the kicker is the data we have seen thus far (Figure 1).
As seen in the comparisons drawn, Verastem’s duvelisib has very favorable overall and complete response rates when looking at other agents that have received accelerated approval in PTCL. Furthermore, you will notice that there are two rows for the duvelisib investigation. That is because Verastem in funding the company sponsored PRIMO trial to evaluate duvelisib as monotherapy for the treatment of PTCL, but there is also an IST being conducted using duvelisib in combination with romidepsin. This is being conducted by an investigator at the Memorial Sloan Kettering Cancer Center. This initial data was so encouraging that Verastem was selected for the Leukemia and Lymphoma Society’s Therapy Acceleration Program. This will help cover some of the costs of development for Verastem.
Timeline wise, Verastem anticipates completing accrual for the PRIMO trial here in 2020, which hopes for an interim analysis. This analysis will most likely be presented at the ASH conference in December. If positive, we could expect regulatory filing in 2021 pending the amount of follow up and timelines (or delays) associated with the impact of COVID-19.
Additionally, Verastem has initiated a trial called TEMPO, which intends to evaluate intermittent dosing of duvelisib for non-Hodgkin lymphoma. Historically, PI3K inhibitors have been known as toxic drugs associated with severe side effects. Some have postulated that the dual PI3K inhibition of duvelisib leads to superior efficacy and tolerability. However, there has been zero scientific data to support these claims. The association with the toxicity of the PI3K class is likely what lead to the slow uptake upon approval. Now, the TEMPO trial is how Verastem hopes to circumvent this. The goal of this trial is to evaluate if duvelisib given two weeks on and two weeks off (the experimental arm) versus the approved dosing schedule, which is daily dosing. The idea is to evaluate if less drug results in the same efficacy, with less side effects. This is a novel idea that could pay off, however there could adverse financial considerations of this approach. Essentially, if this comes to fruition, patients would need half the drug for the same treatment course, meaning roughly half the revenue. Now this is overly simplified and there are ways this could in fact boost revenue. This could occur if A) patients are currently stopping trial drug early due to side effects and intermittent dosing would allow them to be on therapy longer or B) the intermittent dosing is much more tolerable to the point where more oncologist begin using the regimen. One thing is certain though, Verastem would need patients to either be on therapy for roughly twice as long or double the amount the patients on therapy in order to recoup the lost revenue associated with intermittent dosing.
Finally, duvelisib is being tested in combination with Abbvie’s venetoclax in relapsed and refractory CLL/SLL in an IST. This is a fascinating combination to try, and is not unheard, as TG Therapeutics (TGTX) is attempting a similar approach with their candidate umbralisib. The initial combination data from Verastem showed somewhat positive results, however I am not expecting but to come of this approach in the near future. Here is why, first, in general, the TGTX approved more promising and overall, umbralisib appears to be better tolerated. And second, TGTX has advanced their trial to the registration stage, so TGTX will have a head start in this market arena.
Defactinib and VS-6766
We will talk about defactinib and VS-6766 together, given their integral relationship together. Now defactinib is an oral candidate that inhibits the proteins FAK and PYK2. Defactininb has been studied in many cancer types in different combinations, but nothing has really gained positive traction (till recently). The majority of defactinib development at this time is via ISTs. Defactinib’s new found sibling is VS-6766. VS-6766 was licensed from Chugai and is an orally available inhibitor of the RAF/MEK pathway. Now the biological rationale for the combination relies on data that suggests RAF/MEK inhibition (VS-6766) induces activation (phosphorylation) of FAK (target of defactinib) (Figure 2). Now this activation leads to cell division and survival. Thus the theory is that using both agents prevents the body’s natural response to RAF/MEK inhibitor.
Now the combination is being studied in KRAS mutated cancers. Some refer to this mutation as the “holy grail” of cancers, as it makes a significant portion of several common cancers (lung cancer, colorectal cancer, pancreatic, etc.). When reading about KRAS mutated cancers, you will see see a letter, number, followed by another number. This nomenclature refers to the specific KRAS mutation that “drives” the cancer growth. Targeting KRAS is not a novel approach, and other companies such as Mirati (MRTX) and Amgen (AMGN) are developing agents. However, Verastem has one important difference from their counterparts: Verastem’s approach does not target one specific mutation, while Mirati and Amgen are targeting just the G12C specific mutation. This means if Verastem’s combination is successful, it could have broader implications compared to being limited to one mutation type.
So how does the data look so far? We got our first look at the data during the AACR 2020 Virtual I meeting. Overall, this data was very much a mixed bag. We saw data in patients with Low Grade Serious Ovarian Cancer (LGSOC) and Non-Small Cell Lung Cancer (NSCLC). Given the fact that Mirati and Amgen are ahead, we had a measuring stick with which to compare the data. Despite this, neither company is prioritizing development of their respective compounds for LGSOC. This is likely because the majority of LSGOC KRAS mutations are not G12C. The 67% response rate and 100% disease control rate seen in the combination for KRASm LGSOC was highly encouraging, and far exceed my “goal” or a 15% ORR and 80% DCR given available literature. Furthermore, it is extremely encouraging to see three of the four patients were on therapy for over 48 weeks.
Moving on to the NSCLC, results were much less positive. There was only one patient with a response, which was far below my “goal” based on available literature and competition, which was an ORR of 50%. So what could explain some of this? This trial included dose escalation, essentially looking to see how high the dose of the two medication can be pushed in order to maximize safety and efficacy. Unfortunately, due to side effects, the lowest dose combination was selected as the recommended Phase 2 dose. This could limit the efficacy moving forward in various indications.
Now Verastem is working outside the box and analyzed the data looking at the G12V specific mutation. This was a very targeted approach and combined old and new data, which Verastem claims is suggestive of higher response rates in this mutations. Now moving forward with this approach would be similar to the approach of Mirati and Amgen, as they are developing drugs for just the G12C specific mutation. However, focusing on the G12V mutation removes any competition from Amgen and Mirati. Furthermore, there is no clinical data in KRAS G12V mutations, meaning Verastem could blaze the trail for these mutations. That being said, the the KRAS space is heating up, and companies such as Boehringer Ingelheim who is developing a pan-KRAS inhibitor could quickly enter the arena and challenge Verastem in this indication.
So finally, what is the addressable markets and path forward? Verastem intends to meet with the FDA and develop a registrational plan forward for the combination of defactinib with VS-6766 in LGSOC. The goal where would be to obtain accelerated approval based on ORR. The goal is to initiate this trial by the of of 2020. Furthermore, Verastem intends to continue to explore the combination in NSCLC, however more focus will be given to those with the G12V mutation. To assess this, enrollment will focus on patients with this specific mutation. The LGSOC is likely the most near term and likely to be successful, unfortunately, it is also a rather small indication. The estimated market for KRASm LGSOC is only around 1000 patients annually. It is unclear how many of these 1000 patients would be willing to try therapy in the relapsed and refractory setting which is where the Verastem combination would likely find its initial approval. Moving onto the NSCLC indication, the G12V is the second most common KRAS mutation. These leads to an estimated addressable market of around 7000 patients annually. But again, these are newly diagnosed patients, and its unclear how many of these patients would be willing to try therapy in the relapsed and refractory setting.
Sales and Commercial Rights
Now Verastem does not have a productive internal lab, and as such, the products with markets and develops were licensed from other companies. Verastem acquired rights to defactinib from Pfizer (PFE) in 2012. Of a present time, Verastem may owe Pfizer up to $2 million in developmental milestone and up to an additional $125 million in regulatory and commercial sales milestones. Moving to VS-6766, this was licensed from Chugai Pharmaceutical. As part of this agreement, Verastem is required to pay Chugai double-digit royalties on sales of CH5126766 if approved. Interestingly, Chugai still has the rights to opt-back development and commercialization rights for CH5126766 in the European Union and in Japan and Taiwan. If exercised, with would leave Verastem with the rights to half the KRAS cocktail in the US, but limited rights in other major markets.
With regards to duvelisib, this product was licensed from Infinity Pharmaceuticals in November of 2016. As part of this agreement, Verastem is required to pay Infinity royalties on worldwide net sales of any products in an oncology indication containing duvelisib ranging from the mid-single digits to the high single digits. Additionally, Verastem will need to may Infinity an additional 4% royalty on worlwide sales of duvelisib to cover the reimbursement of research and development costs owed by Infinity to Mundipharma International Corporation Limited (MICL) and Purdue Pharmaceutical Products L.P. (Purdue). After this, the additional royalty will be reduced to just 1% of US sales. Duvelisib has been licensed out to various partners in international markets, however the last large market yet to be partnered in is Europe, which Verastem anticipates signing a deal here in 2020.
So how have the sales been for duvelisib? Encouragingly, they have been steadily growing, albeit slowly. Most recently, Verastem reported $5.0 million in quarterly sales. What is intriguing is the Verastem is guiding for 2020 annual sales of $16 million. This seems like a rather low estimate on the basis of the first quarter sales. Meaning Verastem either sees this quarter as an anomaly and sales will shrink (would be very bad) or they will need to raise guidance here soon. What is nice is that we have some insights into the sales using third party data. April was a very strong month, however May has shown some cooling off, so where it goes from here is very important. However, I believe that Verastem should easily hit their $16 million guidance, and hopefully exceed that, and hope to see revenue for the second quarter come in around $4 to $5 million.
At the end of the first quarter of 2020, Verastem had cash, cash equivalents, and short-term investments totally $170.7 million. During the quarter, the net product revenue (as mentioned above) was $5.0 million. The total operating expenses for the quarter were $31.4 million, which is down roughly $5 million compared to the same quarter in 2019. It is encouraging to see this reduction in operating expenses, but even more notable is that this quarter included some non-recurring costs such as the $3.0 million license payment to Chugai and $1.8 million in severance expense. So overall, the reduction in operating expenses compared to last year is indeed closer to $10 million after accounting for those non-recurring expenses.
Breaking things out, R&D expenses for the quarter were slightly higher than the year prior (~$1.0 million), but again, this is related to the non-recurring license payment to Chugai. SG&A expenses were starkly lower in the quarter compared to the year prior ($19.6 million versus $26.0 million). The reduction in SG&A expenses were the result of reduced consulting expenses, personnel expenses, and travel expenses.
The net loss for the quarter was $38.0 million, which is flat with the same quarter in 2019. This included ~$8 million in non-call expenses related to the conversion of the Convertible Senior Notes. On a non-GAAP basis, the net loss was $21.3 million, compared to a non-GAAP net loss of $33.8 million in the year prior.
What is note worthy, is that all of the 2019 Convertible Senior Notes have been converted to common stock after the first quarter, leaving the company with $63.3 million in outstanding debt. Most notably, this debt includes the 2018 senior notes and the Hercules Loan facility. The 2018 convertible notes carry an interest rate of 5% per annum. As of the end of the quarter, there was roughly $20 million in debt on the balance sheet related to these 2018 Senior Notes. Additionally, there was roughly $35 million in long-term debt related to the Hercules Capital Loan Facility. This loan has a total borrowing limit of $75 million, however currently has $35 million drawn out. Based on the terms set, it is unlikely that Verastem will hit the sales milestone to drawn additional cash for the one tranche, however an additional $25 million may be drawn at the approval of Hercules. In accordance with this agreement, must maintain $35 million in cash (equal to the amount drawn under the loan) until Verastem records net product revenues of at least $20 million on or before December 31, 2020 in the trailing 6 months, which is unlikely to occur at the current growth rate. The loan matures on December 1, 2022, with interest only payments being due till April 1, 2021, which principal payments begin. The interest only period may be extended to December 1, 2021 if Verastem generates $40 million in net product revenue in the trail six months as of December 31st, 2020, which is unlikely to occur at the current growth rate. Thus, in 2021 Verastem estimates there will be ~$14 million in principal payments due.
Overall, I believe that the cost reductions that Stuglik has implemented are coming to fruition, and are net positive. The company’s financial position is becoming more sturdy with reduced expenses, a maturing pipeline, and sales growth. Obviously, Verastem will need to pay back the Hercules loan in the coming years, but the current cash position should place them in a favorable position to efficiently repay the debt less any large reversal in expense reduction or starkly diminished sales of duvelisib.
Verastem has transformed from the dismal company that existed just a year ago. This has been the result of thoughtful cost reductions and a new combination candidate in defactinib and VS-6766. Furthermore, the balance sheet is much stronger, with a series of catalysts due. These include meeting with the FDA for a registrational LGSOC trial, initiating said trial, interim analysis of the PRIMO trial (ASH), and signing a partnership in Europe. Given the current value proposition, I am cautiously optimistic on the VSTM stock at current prices, seeing upside available for investors. In the next six months, pending the European partner news and macro-economic headlines (COVID-19), I see roughly 50% upside, with the potential to push new 52 week highs. Best of luck all and thank you for voting in our readers choice! Make sure to tune in for our next readers choice special!
This is in no form a recommendation to buy/sell stocks.
I/we long TGTX.