Is there Value in Verastem?

The recent news for Verastem (Nasdaq:VSTM) has been terrible. Yesterday they announced a layoff of 50% of their workforce which will get the company down to 20 people and save $4.9M a year in operating costs. They still have $132M in cash. With a market capitalization of $80M the question is whether or not there is value to be had in the shares now.

In late September the company announced that the Phase 2 trial around their lead drug candidate (VS-6063) would be terminated because initial results made it clear that “there was not a sufficient level of efficacy to warrant continuation of the study.” In other words their lead drug didn’t work. That sends the company back to the drawing board after years of development and over three years as a public company.

Verastem did their IPO back in early 2012 and cut a very impressive figure in the market at that time. We published a brief article on Seeking Alpha which is still up there: Verastem: Killing Cancer at the Root. Their story was about going after cancer stem cells. The approach sounded promising. They built solid management team and an extremely impressive scientific advisory board. Two of the three co-founders of the company, Robert Weinberg and Eric Lander are generally considered “rock stars” in the biotechnology world. The investors were savvy and consistently funded the company through the A, B and C rounds for a total of about $68M. Even the venerable Peter Lynch personally came into the C round.

The essence of the story was that existing drugs to treat cancer tumors leave some of the cancer stem cells (CSCs) behind. By surviving these CSCs allow the tumor to recur. The Verastem approach is based on blocking certain metabolic pathways that these stem cells need to survive. At the time of the IPO they presented two drug candidates – VS507 which went after something called the Wnt/B-Catenin pathway and VS4718/VS5095 which inhibited the Focal Adhesion Kinase pathway (FAK). These drugs showed effectiveness in the lab but had yet to start their Phase I trials.

Soon after going public Verastem licensed in a FAK inhibitor from Pfizer that is now the basis if their lead drug candidate VS-6063. With the acquisition it appears that the VS507 drug was dropped from further development efforts and the company concentrated all their efforts around FAK and VS-6063.

For two years or so Verastem kept making the same presentations. We’ve reviewed the annual company research update slide decks for 2013, 2014 and 2015 and while impressive say the same thing and point to VS-6063 as the lead candidate and that be working against Mesothelioma will open the door to trials for ovarian cancer, breast cancer and ultimately lung cancer. [We’ve uploaded these research slide decks to the IPOIQ Verastem Page.]

One Theory

Taking a step back from all the science it seems like the target these drugs go after keeps splitting and getting smaller. For example in Mesothelioma they break tumor types down by “low Merlin” and “high Merlin” which respond differently to a drug like VS-6063. To make matters worse it seems that individual cell types vary tremendously in terms of resistance and sensitivity to outside factors. This means that the mechanism of action for a FAK drug like VS-6063 will work in some cases, but not in others.  Worse still it’s not easy to identify the circumstances where the drug will work. The numbers of patients treated in early trials seems too small to be conclusive. In many cases we are talking about single digit numbers.

Another way of saying this is that the targeting of specific types of cancer cells and inhibiting specific pathways is really still a science project. To be successful a new therapy either has to be 1) a drug that can pinpoint a very specific and readily identifiable type of cancer cell and kill it or 2) a broad action drug or set of drugs that work more generically against cancer cells of different types.

Our high-level takeaway from the research decks is that there are circumstances where a drug like VS-6063 can work but you can’t figure them out easily and the number may be very small. However in concert with other drugs the ability for a FAK inhibitor to kill cancer stem cells might be useful.

Looking for Value

As we look at what’s left at Verastem here is what we see:

• There may still be hope for VS-6063 but probably more as an additional drug therapy to be combined with other known broad therapies like Paclitaxel. Still this could be useful because it might apply to other cancer types including ovarian, breast and lung but as a companion not a primary therapy.
• The company has their “screening technology” which may help identify new markets and pathways to develop treatments. We don’t know how strong this is however. At this point anything from 2012 is considered “old technology” at the interface of IT and biologics and it’s not clear if Verastem has continued to invest heavily in or to simply thrown their efforts behind FAK inhibitors.
• Verastem has not built a large research lab operation internally but rather focused on research collaborations to expand their position and add to their options. While “asset lite” it doesn’t create a creative engine or competitive “moat” to build the company long-term. There is some IP but given the limited commercial success it might not be very valuable.
• Management has attended far too many investment conferences. The company has consistently appeared at many investment conferences. So far in 2015 the company has presented at ten which is an extremely high number for a company of their success with little if any commercial success. It’s a worry because it seems like senior management fails to grasp the urgency of the task at hand and is more interested in going out and promoting than production. If anyone there is listening they should just put an end to wasting time and the expense of presenting at these meetings for the foreseeable future.

Conclusion

When you add it up we can’t find a ton of value here. With the cash they have they could close up shop and distribute about $3.50/share in cash but that’s probably not going to happen with this management team. They would almost certainly be open to selling the company and right now a buyer at or below $3.50/share has nothing to lose.

If they can show some efficacy for VS-6063 as a companion therapy in different cancers they would finally have some potential path to commercial sales but after all these years the company is still in early stages with no Phase 2 in sight.

The positioning of the company might also benefit from by being re-crafted as focusing on being a complementary drug development company targeting CSCs and pathway inhibitors. If collaboration is really their game plan then shifting away from a story that claims to have the “silver bullet” to cure cancer would be a good idea.

It will take some humility to resurrect something of value here. Failing that they should be able to sell the company for a substantial premium to the current share price if they do it before too long.