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VSTM > SEC Filings for VSTM > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for VERASTEM, INC.

Form 10-Q for VERASTEM, INC.


13-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing elsewhere in this quarterly report. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those discussed below and elsewhere in this quarterly report or in our annual report on Form 10-K.

OVERVIEW

We are a biopharmaceutical company focused on discovering and developing proprietary small molecule drugs targeting cancer stem cells in breast and other cancers along with proprietary companion diagnostics. A cancer stem cell is a particularly aggressive type of tumor cell, resistant to conventional cancer therapy, that we believe is an underlying cause of tumor recurrence and metastasis. Our scientific co-founders, Robert Weinberg, Ph.D., Eric Lander, Ph.D., and Piyush Gupta, Ph.D. made discoveries on the underlying biology of cancer stem cells. We are building on these discoveries to identify and develop small molecule compounds that target cancer stem cells.

We commenced active operations in the second half of 2010. Our operations to date have been limited to organizing and staffing our company, business planning, raising capital, acquiring and developing our technology, identifying potential product candidates and undertaking preclinical studies of our most advanced product candidates. To date, we have not generated any revenues and have financed our operations with net proceeds from the private placement of our preferred stock and our initial public offering. In February 2012, we completed an initial public offering of 6,325,000 shares of our common stock at a public offering price of $10.00 per share and received net proceeds of approximately $56.8 million, after deducting underwriting discounts and commissions and offering expenses.

As of September 30, 2012, we had a deficit accumulated during the development stage of $38.5 million. We had net losses of $24.1 million, $7.7 million and $38.5 million for the nine months ended September 30, 2012 and 2011 and for the period from August 4, 2010 (inception) to September 30, 2012. We expect to incur significant expenses and increasing operating losses for the foreseeable future. We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research and development and later initiate clinical trials of, and seek marketing approval for, our product candidates. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Furthermore, we expect to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. Adequate additional financing may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts. We expect our existing cash, cash equivalents and investments will enable us to fund our current operating plan and capital expenditure requirements into late 2015 or early 2016. This is based on our current estimates, and we could use our available capital resources sooner than we currently expect. We will need to generate significant revenues to achieve profitability, and we may never do so.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as "critical" because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the


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estimate, and different estimates-which also would have been reasonable-could have been used, which would have resulted in different financial results.

The critical accounting policies we identified in our most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2011 related to accrued research and development expenses and stock-based compensation. There were no changes to these critical accounting policies in the three or nine months ended September 30, 2012. It is important that the discussion of our operating results that follows be read in conjunction with the critical accounting policies disclosed in our Annual Report on Form 10-K, as filed with the SEC on March 30, 2012.

The Company has elected to follow the extended transition period guidance provided for in Securities Act Section 7(a)(2)(B) for complying with new or revised accounting standards. The Company will disclose the date on which adoption of such standards is required for non-emerging growth companies and the date on which the Company will adopt the recently issued accounting standards.

RESULTS OF OPERATIONS

Comparison of the Three Months ended September 30, 2012 and 2011

Research and development expense. Research and development expense for the three months ended September 30, 2012 (2012 Quarter) was $8.1 million compared to $3.1 million for the three months ended September 30, 2011 (2011 Quarter). The $5.0 million increase from the 2011 Quarter to the 2012 Quarter is primarily related to an increase of $3.4 million in license fees due to our agreement with Pfizer, Inc., including the issuance of 192,012 shares of common stock, an increase of $1.3 million in contract research organization expense and an increase of $528,000 for personnel costs, including stock-based compensation of $325,000, primarily due to increased headcount and a higher fair value of our common stock. These expenses are partially offset by decreases in consulting expense of $146,000 and lab supplies of $114,000.

General and administrative expense. General and administrative expense for the 2012 Quarter was $2.3 million compared to $965,000 for the 2011 Quarter. The $1.3 million increase from the 2011 Quarter to the 2012 Quarter principally resulted from an increase of $821,000 for personnel costs, including stock-based compensation of $640,000, primarily due to a higher fair value of our common stock, an increase of $385,000 in professional fees primarily related to additional legal and accounting fees for being a publicly traded company and an increase of $100,000 in insurance costs primarily related to being a publicly traded company.

Interest income. Interest income increased to $63,000 for the 2012 Quarter from none for the 2011 Quarter. During the 2011 Quarter, our cash was deposited in non-interest bearing accounts.

Accretion of preferred stock. We did not record accretion in the 2012 Quarter due to our initial public offering and the related conversion of all preferred stock into common stock in February 2012 compared to $10,000 in the 2011 Quarter reflecting the periodic accretion of issuance costs associated with our series A and B preferred stock.

Comparison of the Nine Months ended September 30, 2012 and September 30, 2011

Research and development expense. Research and development expense for the nine months ended September 30, 2012 (2012 Period) was $17.6 million compared to $5.5 million for the nine months ended September 30, 2011 (2011 Period). The $12.1 million increase from the 2011 Period to the 2012 Period is primarily related to an increase of $4.3 million in license fees due to our agreement with Pfizer, Inc., including the issuance of 192,012 shares of common stock, our Asset Purchase Agreement with S*Bio Pte Ltd and the revaluation of the obligation to issue the warrant to Poniard


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Pharmaceuticals, an increase of $3.8 million in contract research organization expense, an increase of $3.1 million for personnel costs, including stock-based compensation of $1.9 million, primarily due to increased headcount and a higher fair value of our common stock, an increase of $402,000 for laboratory supplies and an increase of $180,000 in occupancy and depreciation due to costs of a new facility in May 2011.

General and administrative expense. General and administrative expense for the 2012 Period was $6.6 million compared to $2.2 million for the 2011 Period. The $4.4 million increase from the 2011 Period to the 2012 Period principally resulted from an increase of $2.7 million for personnel costs, including stock-based compensation of $2.0 million, primarily due to higher fair value of our common stock, an increase of $976,000 in professional fees primarily related to additional legal and accounting fees for being a publicly traded company, an increase of $293,000 in insurance costs primarily related to being a publicly traded company and an increase of $266,000 in consulting fees.

Interest income. Interest income increased to $191,000 for the 2012 Period from none for the 2011 Period. During the 2011 Period, our cash was deposited in non-interest bearing accounts.

Accretion of preferred stock. We recorded $6,000 of accretion in the 2012 Period reflecting the periodic accretion of issuance costs associated with our series A, series B and series C preferred stock from December 31, 2011 through the date of our initial public offering and conversion of all outstanding shares of preferred stock into common stock upon consummation of our initial public offering compared to $18,000 in the 2011 Period reflecting the periodic accretion of issuance costs associated with our series A and B preferred stock.

LIQUIDITY AND CAPITAL RESOURCES

Sources of liquidity

To date, we have not generated any revenues. Since our inception in August 2010, we have financed our operations principally through private placements and through our initial public offering, which we completed in February 2012. As of September 30, 2012, we had $97.4 million in cash, cash equivalents, and investments. We primarily invest our cash equivalents and investments in a U.S. Treasury money market fund, government-sponsored enterprise securities and commercial paper.

Cash flows

Operating activities. The use of cash in all periods resulted primarily from our net losses adjusted for non-cash charges and favorable changes in the components of working capital. The significant increase in cash used in operating activities for the 2012 Period compared to the 2011 Period is due to an increase in research and development expenses as we increased our research and development headcount and increased spending on external research and development costs.

Investing activities. The cash used in investing activities for the 2012 Period reflects the net purchases of investments of $50.8 million and the purchase of $321,000 of property and equipment. For the 2011 Period, cash used in investing activities reflects the purchase of $754,000 of property and equipment.

Financing activities. The cash provided by financing activities in the 2012 Period reflects the $56.8 million of net proceeds from our initial public offering less issuance costs paid in prior periods. The cash provided in the 2011 Period reflects $43.9 million of net proceeds from the sale and issuance of shares of our series A and B preferred stock in April and July 2011, respectively.


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Funding requirements

We expect our existing cash, cash equivalents and investments will enable us to fund our current operating plan and capital expenditure requirements into late 2015 or early 2016.

Contractual obligations

There have been no material changes to our contractual obligations outside the ordinary course of business from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011, except for potential milestones and royalties under new agreements with Pfizer and S*Bio. We may be obligated to pay Pfizer up to $2 million in developmental milestones and up to $125 million based on the successful attainment of regulatory and commercial milestones. We may also be obligated to pay Pfizer a high single to mid double digit royalty on future net sales of products containing Pfizer's inhibitors of focal adhesion kinase. We may be obligated to pay S*Bio up to $21 million based on the successful attainment of development and regulatory milestones. We may also be obligated to pay S*Bio a low to mid single digit royalty on future net sales of products containing any S*Bio compounds.

OFF-BALANCE SHEET ARRANGEMENTS

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under Securities and Exchange Commission rules.

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