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VSTM > SEC Filings for VSTM > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for VERASTEM, INC.

Form 10-Q for VERASTEM, INC.


12-Nov-2013

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 drugs to treat cancer by the targeted killing of cancer stem cells. 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 tumors, their recurrence and metastasis. We have proprietary technology to create a stable population of cancer stem cells that we use to screen for and identify small molecule compounds that target cancer stem cells. Our most advanced programs target the Focal Adhesion Kinase, or FAK, and the PI3K/mTOR signaling pathways. Our lead FAK inhibitor, VS-6063, has been assigned defactinib as the United States Adopted Name (USAN). We have received orphan drug designation for the use of VS-6063 in mesothelioma in the European Union and in the United States. VS-6063 is currently in a registration-directed trial (COMMAND) in patients with mesothelioma, a Phase 1b trial in combination with weekly paclitaxel for patients with ovarian cancer, a Phase 2 study in patients with non-small cell lung cancer and a Phase 1 trial in Japan. In addition to VS-6063, our FAK inhibitor VS-4718 is in a Phase 1 clinical trial in patients with advanced cancers and we expect our dual mTORC1/2 and PI3K inhibitor VS-5584 to enter a Phase 1 clinical trial in patients with advanced cancers by year end 2013.

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, undertaking preclinical studies of our most advanced product candidates and conducting clinical trials for VS-6063 and VS-4718. As of September 30, 2013, we have not generated any revenues and have financed our operations with net proceeds from the private placement of our preferred stock and public offerings of our common stock.

As of September 30, 2013, we had a deficit accumulated during the development stage of $76.3 million. We had net losses of $29.9 million, $24.1 million and $76.3 million for the nine months ended September 30, 2013 and 2012 and for the period from August 4, 2010 (inception) to September 30, 2013. 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 initiate and conduct additional 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. 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 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, 2012 related to accrued research and development expenses and stock-based compensation. There were no changes to these critical accounting policies in the three and nine months ended September 30, 2013. 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 26, 2013.

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, 2013 and September 30, 2012

Research and development expense. Research and development expense for the three months ended September 30, 2013 (2013 Quarter) was $6.8 million compared to $8.1 million for the three months ended September 30, 2012 (2012 Quarter). The $1.3 million decrease from the 2012 Quarter to the 2013 Quarter was primarily related to a decrease of $2.7 million in license fee expense related to our agreement with Pfizer, Inc., including the issuance of 192,012 shares of common stock in the 2012 Quarter. This was partially offset by an increase of approximately $534,000 in contract research organization expense for outsourced biology, chemistry and development services, an approximately $426,000 increase in personnel costs primarily due to increased headcount and an approximately $158,000 increase in stock-based compensation expense.

General and administrative expense. General and administrative expense for the 2013 Quarter was $3.9 million compared to $2.3 million for the 2012 Quarter. The $1.6 million increase from the 2012 Quarter to the 2013 Quarter primarily resulted from an increase of $1.0 million in stock-based compensation expense associated with restricted stock units and restricted stock units with performance-based vesting provisions, an increase in consulting costs of approximately $183,000 and an approximately $137,000 increase in personnel costs primarily due to increase in salaries and headcount.

Interest income. Interest income decreased to approximately $53,000 for the 2013 Quarter from approximately $63,000 for the 2012 Quarter. This decrease was due to lower coupon rates on investments for the 2013 Quarter compared to the 2012 Quarter.

Comparison of the Nine Months ended September 30, 2013 and September 30, 2012

Research and development expense. Research and development expense for the nine months ended September 30, 2013 (2013 Period) was $18.1 million compared to $17.6 million for the nine months ended September 30, 2012 (2012 Period). The approximately $513,000 increase from the 2012 Period to the 2013 Period was primarily related to an increase of $2.3 million in contract research organization expense for outsourced biology, chemistry and development services, a $1.2 million increase in personnel costs primarily due to increased headcount and an approximately $317,000 increase in stock-based compensation expense. These increases were partially offset by a decrease of $3.4 million in license fee expense related to our agreement with Pfizer, Inc., including the issuance of 192,012 shares of common stock.


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General and administrative expense. General and administrative expense for the 2013 Period was $11.9 million compared to $6.6 million for the 2012 Period. The $5.3 million increase from the 2012 Period to the 2013 Period primarily resulted from an increase of $3.0 million in stock-based compensation expense associated with restricted stock units, an increase in professional fees and other costs of $1.1 million, an increase in consulting fees of approximately $460,000, an approximately $244,000 increase in corporate franchise taxes and an approximately $137,000 increase in personnel costs primarily due to increase in salaries and headcount.

Interest income. Interest income decreased to approximately $131,000 for the 2013 Period from approximately $191,000 for the 2012 Period. This decrease was due to lower coupon rates on investments for the 2013 Period compared to the 2012 Period.

LIQUIDITY AND CAPITAL RESOURCES

Sources of liquidity

As of September 30, 2013, we have not generated any revenues. Since our inception in August 2010, we have financed our operations principally through private placements and public offerings of our common stock. As of September 30, 2013, we had $130.3 million in cash, cash equivalents, and investments. We primarily invest our cash, cash equivalents and investments in a U.S. Treasury money market fund, government-sponsored enterprise securities, corporate bonds and commercial paper.

In July 2013, we closed a public offering in which we sold 4,255,000 shares of common stock at a price of $15.00 per share, including 555,000 shares issued pursuant to the exercise of the underwriters' option to purchase additional shares. This offering was completed under the shelf registration statement that was filed on Form S-3 and declared effective by the Securities Exchange Commission on February 14, 2013. The net proceeds to the Company from this offering were approximately $59.8 million, after deducting underwriting discounts and commissions and other offering expenses payable by the Company.

Cash flows

Operating activities. The use of cash in all periods resulted primarily from our net losses adjusted for non-cash charges and changes in the components of working capital. The significant increase in cash used in operating activities for the 2013 Period compared to the 2012 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 2013 Period reflects the net purchases of investments of $26.2 million and the purchase of property and equipment totaling $36,000. The cash used in investing activities for the 2012 Period reflects the net purchases of investments of $50.4 million and the purchase of $321,000 of property and equipment.

Financing activities. The cash provided by financing activities in the 2013 Period reflects the net proceeds from the public offering of our common stock and cash paid to settle restricted stock awards. The cash provided by financing activities in the 2012 Period reflects the net proceeds from our initial public offering less issuance costs paid in prior periods.

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 the first half of 2016. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the


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development and commercialization of our product candidates, and the extent to which we may enter into collaborations with third parties for development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the development of our current product candidates. Our future capital requirements will depend on many factors, including:


the scope, progress, results and costs of compound discovery, preclinical development, laboratory testing and clinical trials for our product candidates;


the extent to which we acquire or in-license other products and technologies;


the costs, timing and outcome of regulatory review of our product candidates;


the costs of future commercialization activities, including product sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive marketing approval;


revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval;


the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; and


our ability to establish collaborations on favorable terms, if at all.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

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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