Verastem (VSTM)

[realfast95]

Verastem: An Undervalued Rare Oncology Gem With Big Upcoming Catalysts

https://seekingalpha.com/article/4199215-verastem-undervalued-rare-oncology-gem-big-upcoming-catalysts

Aug. 14, 2018 10:50 PM ET|


Summary

Duvelisib CLL/SLL (Chronic Lymphotic Leukemia/Small Lymphotic Leukemia) FDA priority review approval decision imminent.

Duvelisib will be the only drug of its kind - a monotherapy PI3K dual inhibitor that can be taken orally at home without traveling to an infusion center.

Defactinib FAK inhibitor combination treatment might be a huge catalyst based on early clinical results.

Strong financial position with $170 million cash and minimal debt - management has indicated the company is well-funded into 2020. $600 million market cap signals clear undervaluation in an oncology peer analysis.

AbbVie owns two other competing oral monotherapies and has a history with Duvelisib.

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Introduction

Verastem, Inc. (NASDAQ:VSTM), an IPO from 2012 and a company that some say started the IPO craze again after the bank crisis, describes itself as: “a biopharmaceutical company focused on developing and commercializing drugs to improve the survival and quality of life of cancer patients”. It has two drugs (Duvelisib and Defactinib) in the pipeline with multiple applications and collaborators. Both work by inhibiting critical signaling pathways in cells, and thus, also the defense of cancer cells.

Duvelisib is an orally given PI3K (PI 3-kinase) Delta/PI3K Gamma inhibitor for different types of leukemia and Non-Hodgkin’s Lymphoma. The PI 3-kinase is a big part of cell and cancer development, so by inhibiting it, one can also affect cancers and even induce the killing of cancer cells.

AbbVie licensed Duvelisib (NYSE:ABBV) from Infinity Pharma (NASDAQ:INFI) for $805 million in 2014, but after AbbVie purchased the competing drug Imbruvica (Ibrutinib) in a buyout of Pharmacyclics for $21 billion in 2015, it quickly scrapped Duvelisib 2016 to focus on the development of Imbruvica.

After the event, Verastem was able to snatch the Duvelisib license from a substantially weakened Infinity Pharma in 2016 for just $28 million in milestone payments and high-single digit royalties. This potential “gold strike” for Verastem could be considered a case of good timing or being in the right place at the right time. As Joseph Lobacki, VSTM CCO, recently said about the license agreement: "It was really due to some corporate missteps and miscalculations to move this forward."

Defactinib is a Focal adhesion kinase (FAK) inhibitor that is researched in combination with different cancer drugs for Ovarian, Non-small-cell lung carcinoma, Mesothelioma, Pancreatic and relapsed pancreatic cancers. Like Duvelisib, Defactinib is an orally administered treatment. FAK is a protein that affects how cells stick together and spread, and because it is also involved in many cancers, FAK inhibition is thought also to help cure cancers by weakening their defenses. This mechanism is now thought to aid other cancer drugs, such as PD-1, to better penetrate the cancer cells. Verastem licensed Defactinib from Pfizer (NYSE:PFE) in 2012 and will likely pay royalties for the future sales for an undisclosed amount. Defactinib failed its monotherapy study for Mesothelioma in 2016, causing the stock price to crash and Verastem to lay off half its staff, but the company is now seeking redemption in new combination studies.

The pipeline can be seen below. The company has 12 current clinical trials in the pipeline, with multiple Big Pharma collaborators.

pipeline

(Source: Verastem pipeline)

The company has a wealth of information on the hard science behind both drugs on its website. For example, the multiple different presentations here, corporate presentation here or the website the company has dedicated to PI3K inhibition. So, I’m not going to delve that deep into it.
Past and future catalysts

On April 9th, the FDA approved the NDA filed for Duvelisib in relapsed/refractory CLL/SLL after a successfully ended Phase 3 study (DUO) in February 8th. Duvelisib clearly beat the standard first line care, Novartis's (NYSE:NVS) Arzerra (Ofatumumab).

"The NDA is supported by clinical data from the randomized Phase 3 DUO™ study demonstrating significant efficacy, along with a consistent and manageable safety profile, of duvelisib monotherapy in patients with relapsed or refractory CLL/SLL. The DUO study met its primary endpoint with oral duvelisib monotherapy achieving a statistically significant improvement in progression-free survival (PFS) compared to ofatumumab in patients with relapsed or refractory CLL/ SLL (median PFS of 13.3 months versus 9.9 months, respectively; HR=0.52; p<0.0001), representing a 48% reduction in the risk of disease progression or death." (Source)

The FDA granted priority review with a deadline of October 5th, which is understandable, since every year there are about 60,300 new cases of leukemia, about 24,370 deaths from leukemia, about 20,940 new cases of chronic lymphocytic leukemia (CLL) and about 4,510 CLL deaths in the US (Source: American Cancer Society). The numbers are increasing because of the ageing baby boomer populace, as leukemia mostly affects older people. Getting new treatments into the market saves and extends lives, and it can increase the quality of life of the ill, thus it is not uncommon for priority reviews to be approved before the deadline.

As stated, CLL mainly affects older people, and a relapse can be devastating. To have the option of not going to a treatment center on regular basis to take intravenous medication but rather to take the treatment orally at home can enhance the quality of life considerably, even if no cure is in sight. Consider spending more time with your loved ones. Only two other oral monotherapies exist for CLL, and both are owned by AbbVie: Imbruvica (Ibrutinib) and Venclexta (Venetoclax). Duvelisib could, if approved, be the only PI3K inhibitor monotherapy for CLL/SLL that can be taken orally at home.

In June 2018, the results of the Verastem Duvelisib pipeline phase Ib/II study combining Duvelisib with Fludarabine-cyclophosphamide-rituximab (FCR) in younger people with CLL were presented in the European Hematology Association Congress in Stockholm. The results were an astounding overall response rate of 94%, complete response (no signs of cancer) of 52% and 42% partial response - one of the most effective outcomes of any CLL treatment ever. Other combination studies are also underway, and more will likely follow in the future, creating a large market possibility.

During the summer, the company has hired over 50 new employees, mostly sales personnel, and is ready to launch the drug commercially in the US beginning of September, a month before the FDA approval deadline. This will start creating steady revenue for the company. The overall sentiment is that the approval will happen due to the strong data, and there are some statistics also to confirm that priority reviews are usually very likely to be approved. No advisory committee has been requested by the FDA, so everything seems to be in order.

In June 2018, Verastem licensed the rights for Duvelisib in Japan to Yakult (OTC:YKLTF), a large Japanese conglomerate, for an upfront payment of $10 million and $90 million in milestone payments (probably the official US or Japanese drug approval) and double-digit royalties. The first payment of $10 million already created the $8+ million revenue beat of Q2 2018. Also: “Yakult will also fund certain global development costs on a pro-rata basis. Verastem will retain all rights to duvelisib outside of Japan.” The company has indicated another ex-US partnership by the end of 2018 as seen below.

(Source: Verastem corporate presentation)

Defactinib will complete its combination study with Pembrolizumab for Non-small-cell lung carcinoma, Mesothelioma and Pancreatic cancers around May 2019. The average lifetime risk of pancreatic cancer for men is about 1 in 63. For women, the lifetime risk is about 1 in 65. About 44,330 people die from it in the US every year, and pancreatic cancers account for about 3% of all cancers and about 7% of all cancer deaths in the US (Source: American Cancer Society), so advanced therapies are obviously needed. Also worth mentioning is a combination study on advanced solid tumors with Pembrolizumab. The market opportunity with advanced FAK inhibition combination treatments for different cancers worldwide is huge and present an even bigger opportunity for investors with a long-term perspective.
Valuation, peer comparison and future sales

Between 2010 and 2017, only 10 small- to mid-cap companies have had a cancer drug approved:

(Source: Verastem company presentation)

The skilled StockTwits user and VSTM investor “LonoTrader” compiled a paper, used with his kind permission, with historical data of these companies: valuation before and after approval, FDA approval stock price reaction and buyout prices, among other statistics:

(Data source: Amigobulls and Yahoo Finance)

The smallest market cap/valuation pre-approval has been Exelixis (NASDAQ:EXEL) at $844 million and the highest was Pharmacyclics’ $9.2 billion. Pharmacyclics developed Imbruvica (Ibrutinib) and was later sold to AbbVie for an incredible $21 billion in 2015, just after AbbVie had licensed Duvelisib from INFI. Imbruvica is now creating huge revenues and is the most successful oral monotherapy for CLL/SLL and a straight competitor (but different kind of inhibitor) for Duvelisib. The average pre-FDA approval market cap of small- and mid-cap oncology companies after 2010 in the US is $3.25 billion.

The smallest annual revenue 12 months post approval was Exelixis at $15 million and the largest again was Pharmacyclics’ CLL drug Imbruvica at $548 million, with an average 12 months post-approval revenue of $184.6 million. To my knowledge, these companies did not have revenues pre-approval.

The market cap of Verastem during the writing of this article is just under $600 million with 73 million outstanding shares. For the sake of comparison, the average pre-approval market cap of other small- and mid-cap oncology peers with recently launched drugs was $3.25 billion. This is an astounding 441% higher than Verastem’s current market cap. Given the recent revenue projections of analysts (e.g., the $850 million peak sales by BTIG), and the substantial pre-launch efforts of the company, it seems reasonable that a valuation correction to the upside is highly likely, even if not reaching its peers from before. And based on the massive inflow of money from institutional investors in 2Q, Verastem’s days of flying “under the radar” are quickly coming to an end. I will return to the subject later.

In an investor conference earlier this year, Verastem management indicated that Duvelisib annual US peak sales will be in the range of $300-500 million. The BTIG analyst Robert Hazlett has predicted worldwide annual peak sales reaching upwards of $850 million. The total global market value of CLL/SLL is predicted to rise from around $4 billion in 2016 to around $15 billion in 2026 as seen below. For a comparison, AbbVie’s 2015 (purchase of Pharmacyclics) Imbruvica's (Ibrutinib) sales figure for the second quarter of 2018 internationally was $850 million. A successful purchase, I would say, even for a price tag of $21 billion.

(Source: Verastem company presentation)

Verastem has $170 million of cash due to well-done offerings with an approximate $20 million quarterly burn and only $27 million debt and an undrawn debt facility of $25 million. INFI will receive an approximate $20 million milestone payment upon the FDA approval of Duvelisib. Company management indicated in the Q2 earnings that "it expects to have sufficient cash and cash equivalents to fund operations into 2020." However, in July, it filed a $200 million shelf registration in case further offerings are needed in the future. As many mix this into 200 million shares, for the sake of an example and if used, it would mean an additional 20 million shares at an exemplary price of $10, increasing the float to around 90-100 million outstanding shares. The last offerings are from spring, so none should be in immediate near sight, especially considering the exceptional cash situation, but clearly, the company has the means to do so if needed. Revenues and more milestone payments from Yakult will likely also come after a possible FDA approval or approval in Japan.

With the FDA approval deadline being less than two months away and likely being an early approval, there exists a massive disconnect between Verastem’s valuation and the valuation of every single small- or mid-cap oncology drug company in the US after 2010.
Institutional ownership

As of 8/11, institutions hold 31% of shares:

(Source: Nasdaq)

Large positions have been bought in Q3 until the latest reported date (during the writing of this article) of 6/30/2018, with BlackRock tripling their position recently to 3.5 million shares and Fidelity starting a new 4 million share position. Basically, institution filings have increased during the last days.

The largest institutional owner and not yet counted into the institutional ownership percentage still probably is Consonance Capital, a fund specializing in pharma and managed by MDs, which bought 7.16 million (approx. 10% of current outstanding shares) shares in a direct offering in June for $6. The situation was made special due to the fact that they purchased the shares $0.5 above the market price, thus avoiding increasing the price much more if the 7 million shares had been bought on the open market. Because of this rare win-win situation, the shares jumped 10.2% the next day. In retrospect, VSTM management smelled an excellent way to increase their cash position and signal to the market the worth of their pipeline with a higher-than-market-price direct offering, which is the best way to dilute if one has to dilute for the owners.
Leadership

The management has shown very good market understanding after the NDA approval and increasing the company's cash position for commercialization with regard to the stock price appreciation - which has impressed me recently. The leadership team is very experienced, with over 30 drug launches combined, including Venetoclax, the second real oral monotherapy competitor of Duvelisib, in addition to many other oncology drugs (Source: Verastem corporate presentation):

(Source: Verastem company presentation)
A quick glance at the stock chart

The stock tried a large volume breakout after the last ER but encountered resistance above 9, and is now back at just above the support level of the solid rising trend line since April. If this clear trend line holds for the near future, this might be a good time to buy a first position, however remembering the binary situation the company faces in the immediate future and the possible risks it might bring.

(Source: Yahoo Finance)
Price targets

The steadily increasing average analyst price target is $14.5, with a high value of $18 and low of $10. With the stock price being $8.14 at the time of the writing of this article, it means an average upside of 74%. Why does the 441%, or $3.25 billion, valuation gap to pre-approval peers after 2010 exist?

Since I do not have any clear data on analyst price targets of all pre-approval oncology peers after 2010 (surely it exists), I cannot say if the recent VSTM analyst price targets differ from them, only that the valuation does. Could analysts be more realistic in their expectations, since not all peers have been able to provide big enough revenues on a quarterly basis to reflect their huge valuations pre- and after approval, and some have even experienced price decline? Peer 12 months after-approval revenues do not really differ that much from the predicted VSTM after approval ones, apart for some analysts. An annual meager VSTM $100 million revenue for 2019 gets the price much closer to the analyst target as demonstrated earlier. This might be one reason. 40% of peer companies after 2010 companies have been acquired for hefty sums but the 12 months after-approval revenues vary from $15 million to $548 million. Maybe the days for huge valuations for small- and mid-cap oncology companies are over?

Below are two pictures of the after-approval and the current situation compiled by the StockTwits user "LonoTrader":

mkt_caps

(Data source: Amigobulls and Yahoo Finance)

The average P/S 12 months after approval is 33.02. The average current P/S value is 15.78. The pre-mentioned situation is obvious - small- and mid-cap oncology companies struggle to keep up with their valuation.

The average pharma P/S value is around 5, but younger, more speculative companies are many times given a higher P/S due to their growing nature. These also are oncology companies that are seeking a cure to probably the most pervasive deadly disease there is.

Let's speculate with the possible FDA approval of Duvelisib, and let's also take a very conservative stance: VSTM creates a meager $100 million of sales in the first 12 months (remember, Yakult will pay an additional $90 million of milestone payments probably after the FDA/Japanese approval of Duvelisib, but let’s think it won't happen). Also add 27 million shares of dilution (adding a speculative $200-300 million cash) to the float to get an outstanding share count of 100 million shares. A P/S value of 15.8 creates a valuation of $1.58 billion, which in turn means a share price of $15.8, which is close to the analyst estimates. Sales of $200 million will double this figure to $3.16 billion and a stock price of $31.6. And remember, dilution in share amounts that is likely greater than the recent $200 million shelf registration is added into this!

Even with a low P/S value for a young small-/middle-cap of 10, the market cap would be $1 billion with $100 million/$200 million sales, meaning with 100 million shares and a share price of $10/$20. And this is with a terrible P/S value compared to pre-approval peers and 27 million added outstanding shares.

Without any dilution, a meager $100 million annual revenue for 2019 and P/S of 10 would mean a stock price of $13.7, being again very near the average analyst target and meaning an upside of 68% from the price now (8/11/18).

A very low estimate of an average annual Duvelisib CLL/SLL sales of $300 million from 2020 until the Duvelisib licence expiration in 2030 would mean a 10-year revenue of $3 billion and would indicate a profitable buyout value in the billions, not even considering any other of the eleven trials in the pipeline.

The company is clearly still undervalued by the market, even considering a more conservative stance than its peers had, which seems to be the trend. Is it just flying under the radar in spite of the impending Duvelisib FDA decision, strong pipeline and institutions slowly adding shares? Or, could it just be kept relatively down by traders, insecure investors and shorts? Shorting increased in the summer because of the quick rise in the price YTD. Or are there other bear arguments that can justify the situation?
Bear Thesis

For long investors, there is nothing better than a good bear thesis/argument, so let’s address most that I have encountered. There have been mainly six against Duvelisib.

Side effects: An early bear thesis from phase 3 earlier this year. All oral CLL drugs (Imbruvica side effects/adverse reactions) (Venclexta side effects/adverse reactions in Chapter 6 (6.1)) have side effects and toxicity but are mainly well-tolerated, also Duvelisib according to Phase 3 data. Duvelisib's side effects are mostly characteristic of PI3K inhibitors, pneumonitis and colitis, but most patients are able to stay in therapy (Source: DYNAMO and DUO studies). There is also some new KOL (Key Opinion Leader) talk that the toxicity of Duvelisib could actually be better managed especially by older patients than that of the BTK or BCL-2 inhibitors Ibrutinib and Venetoclax, or be a very good alternative to chemotherapy, especially in older people with FL (follicular lymphoma). Some adverse effects with PI3K are based on the immune system and are less of a problem with older people, where in turn, the prevalence of these diseases is the highest. Many others also develop resistance to these other oral drugs, other IV drugs or even chemotherapy and require options. There is also talk of combination treatments completely curing this terrible disease. We also need to remember that people who take the monotherapy at home are often very seriously, in many cases terminally, ill and want to increase their quality of life by just taking a pill, which is seen as the future form of treatment, compared to an IV solution or chemotherapy in a remote treatment center. Possible side effects against life is a choice many cancer patients need to make.
A more official opinion on side effects: "So there are different patient populations for different inhibitors. And even though these inhibitors are not chemotherapy, they have very significant side effects unique to each class of drugs. For example, with BTK inhibitors, Ibrutinib in particular, cardiac comorbidity is a significant problem. You’ve heard about a trial fibrillation, we also see congestive heart failure. And this is particularly a problem with increasing age in older patients, and we know the median age is diagnosis of CLL is 72, so most of our patients are in their 70’s and 80’s. Leading risk is also a significant problem, and we worry about combining anticoagulation with BTK inhibitors because of the risk of bleeding. So, none of that is a problem for Duvelisib.

And then for the BCL-2 inhibitors, Venetoclax, renal failure is a problem because the primary risk there is tumor lysis. And in order for us to be able to safely manage that, we need the patients to have good renal function. And of course, with increasing age, there is natural decline in renal function. And then the patients are not so enthusiastic about frequent clinic or even hospital monitoring for more than a month, if they can avoid it. Again, not a problem for Duvelisib." (Jennifer Brown, Associate Professor of Medicine, Harvard Medical School Director, and Director, CLL Center of the Division of Hematologic Malignancies, Dana-Farber Cancer Institute) (Source: Verastem analyst day transcript)
Dilution: A characteristic of newly FDA-approved drug companies starting commercialization. As stated before, the management has strongly indicated that the company is fine going into 2020. The strong, slowly already accumulated cash position of $170 million, which now represents almost 30% of market cap, and minimal debt, indicates a robust financial situation for the company, which now can tackle the huge number of mostly new sales personnel. But as counted before, even in the case of additional dilution over the recent $200 million shelf registration, the company is still hugely undervalued. That meaning, if Duvelisib is approved.
Sell the news: A recent Motley Fool article speculated that since the stock is up 180% this year, “meaning the upside could be limited or even result in a sell-the-news event.” Nothing but guesswork was presented as evidence in the obviously quickly written and even a possibly short position-motivated article. 40% of all 10 peer oncology companies in US stock market history have been bought, and all 10 others have had much larger market caps even before approval. The two other oral monotherapies, Ibrutinib and Venetoclax, are both owned by AbbVie - owning all three would probably make sense financially. An approval also opens an immediate possibility of actual revenue and milestone payments from Yakult. I also suggest you read the article before this paragraph (again) for some contrary evidence on price appreciation and overall valuation.
Competition: It is true that there are more effective drugs for CLL, but there are only two oral monotherapies that don’t require travel to an infusion center: Ibrutinib and Venetoclax. Duvelisib is/will be the only monotherapy PI3K inhibitor for CLL that can be completely taken at the safety of home. Venetoclax requires up to 5 weeks for dose ramp-up, might require hospitalization and is mainly meant for people with the 17p deletion genetic mutation, who are a minority in the field of CLL. According to Jennifer Brown, Associate Professor of Medicine, Harvard Medical School Director, and Director, CLL Center of the Division of Hematologic Malignancies, Dana-Farber Cancer Institute: "Venetoclax has been very challenging to give in a community setting. And as you know, it has not been widely adopted since its approval likely because of the barriers to initiation. Duvelisib in contrast is easily given. There are no infusions required. It's highly effective. It has a novel mechanism adding gamma to delta. And personally, I am very much looking forward to the opportunity to use Duvelisib for my patients." (Source: VSTM analyst day) Duvelisib is in a phase I study to combine Venetoclax for relapsed CLL/SLL. Ibrutinib is a clear oral monotherapy market leader with ridiculous amounts of annual revenue (likely $3 billion in 2018), and about 40% of CLL patients use it, but 24% of CLL/SLL patients discontinue Ibrutinib after a median of 7 months (Source: Mato et al., ASH 2016 abstract 3222 and Mato et al., ASH 2017 abstract 3011). As mentioned before, these two with Duvelisib represent different kinds of oral monotherapy inhibitors, and it is important to have options in case of resistance forming or if the home treatment, which is an alternative to IV drugs and chemotherapy, does not work. I repeat, AbbVie would benefit from owning all three.
(Source: Verastem corporate presentation)
No FDA approval for Duvelisib: This is, of course, always a possibility, but the FDA giving priority review and strong study data speaks otherwise. Also, no advisory committee was formed, so things seem to be pretty much in order. The recent recruitments (company headcount now well over a hundred) tell how strongly the management feels about the approval - and remember, the FDA approval process requires strong communication between the FDA and the company, per FDA goals and procedures. Also, if the FDA recognizes a public health need, it can expedite the process: "... the review team plans to act at least 1 month before the PDUFA goal date provided that no significant application deficiencies prevent an early action." (Source, page 7&8) The start of September is also when Verastem is ready for launch, as stated earlier. Worst case, the pipeline also offers some stock price protection with all the other studies Duvelisib is involved in and Defactinib.
FDA approval is already counted into the price: Based on all 10 oncology small- and mid-cap peer valuations and 12-month after-approval sales in US stock history after 2010, before the company's first FDA drug approval, this claim is most likely without merit.

Conclusions

The PI3K inhibitor Duvelisib has a clear market niche in front of it in as the only PI3K inhibitor oral monotherapy choice for CLL/SLL that can be taken at the safety of home in a pill form. In addition to other possible applications. The FAK inhibitor Defactinib could have an absolutely huge, even disrupting, global market in combination cancer treatments with different drugs in front of it in the 2020’s. Counting the likely FDA approval and meager speculative 2019 revenues from Duvelisib and, in addition, a speculative dilution of 27 million shares to get 100 million outstanding shares, the company is extremely undervalued compared to all pre-approval small- and mid-cap oncology peer companies in US stock market history after 2010, and also 74% below recent analyst price targets. Valuations of peers pre-approval were mostly in the billions (VSTM's market cap at the moment: $600 million). AbbVie owns the two oral monotherapy competitors (and licensed Duvelisib from Infinity Pharma 2014-2016) and would benefit from owning all three.

Will Duvelisib be approved for CLL/SLL? In my opinion, yes. The drug clearly works for CLL/SLL, as the final phase 3 DUO study indicated. It even beat a first line treatment with flying colors - it saves lives. There is likely a decent market for an additional alternative in the CLL/SLL field, as Duvelisib clearly differentiates itself from its oral monotherapy competitors in the way it works and what kind of toxicity it may or may not provide to different patient groups compared to the alternatives. Medical key opinion leaders have stated they would prescribe it for their patients. The company is betting heavily on the approval in its commercialization efforts.

The situation presented before presents itself as a great long-term and even short-term investment possibility, even after the stock has risen 180% this year and considering all six bear theses. That is, if one can stand the binary situation of the upcoming Duvelisib CLL/SLL FDA decision, which is likely positive, but remember, it is not all that the robust pipeline has to offer as a safety net.

If you have thoughts, positive or negative, long or short, bear or bull, please contribute in the comments!

Disclosure: I am/we are long VSTM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.