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With its stock price trading at a near all-time low, Verastem Inc. (NASDAQ:VSTM) is worth analyzing. The company is a leader in the field of Chronic Lymphotic Leukemia treatment, and what differentiates the company from many of its peers is that they have successfully obtained the FDA’s approval to commercialize their drug. While the FDA’s approval reduces some of the risks involved with investing in a biotechnology company, what is the upside for investors looking to gain exposure in this high-growth industry? The following analysis presents a bullish case on a company with high growth potential, yet having highly speculative features.

Company Details and Business Model

Verastem was founded in 2010 by entrepreneur Christoph Westphal and venture capitalist Michelle Dipp. The firm operates as a bio-pharmaceutical company focused on developing and commercializing medicines to improve the survival and quality of life of cancer patients. The company currently markets COPIKTRA® capsules since 2018 as a treatment for adult patients suffering from refractory chronic leukemia. As investors, we generally tend to search for companies having moats or a form of competitive advantage and Verastem provides an important feature which makes it an appealing growth prospect: COPIKTRA® is the first-approved oral inhibitor in the US of PI3K, a particular type of enzyme responsible for the development of cancer cells.

In addition to the existing product, future growth is expected to come from the company’s product pipeline candidate, defactinib. This is a development-stage drug for the treatment of cancers where there are limited treatment options, including lung, ovarian, lymphoma, pancreatic and other advanced cancers. According to the Centers for Disease Control and Prevention, cancer represents the second most common cause of death in the United States after heart disease. The company is engaged in various licensing agreements to market its product. The firm operates the production and distributes exclusively COPIKTRA® in the United States and Canada, and relies on partners to develop and commercialize its drugs in other territories throughout the world. By engaging in different licensing agreements, the management has positioned the company in a favorable position to expand its current growth. This powerful supply chain will only be beneficial to scale production and distribution. Some of the agreements include:

  • In November 2016, Verastem has acquired a worldwide license to research, develop, manufacture, and exclusively commercialize duvelisib, which is COPIKTRA®’s active ingredient, from Infinity Pharmaceuticals, Inc.
  • CSPC has been granted the exclusive rights to develop and commercialize duvelisib based products in the People’s Republic of China, Hong Kong, Macau and Taiwan.
  • A licensing agreements under which Yakult Honsha Co., Ltd has the exclusive rights to market the product in Japan
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In addition to the existing license portfolio, the firm holds multiple patents to protect its products in over 40 countries, having an average patent expiration date in 2029.


Despite its powerful foreign exclusive distribution network and intellectual property protection provided by the patents, the biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition, and emphasis on proprietary products. The graph below shows the amounts spent on research and development for major industry players compared to Verastem. It points out to the fact that the firm does not have the same resources as other competitors do, which in time could negatively affect the competitive position of its drugs. For the time being, Verastem acknowledges in its 2019 annual report (p. 25) the existence of 17 other pharmaceutical and biotechnology companies which are developing similar products, including such names as Bayer AG (OTCPK:BAYZF), Gilead Sciences Inc. (NASDAQ:GILD), Novartis AG (NYSE:NVS) and Pfizer (NYSE:PFE).

Source: The data has been sourced from each company’s 10-K Report.

Other Risk Factors

The company is currently dependent on its only source of income which is represented by sales of COPIKTRA®. The treatment has been commercialized since 2018 and it is a relatively new product on the market. During its clinical trials, 65% of the patients taking this drug have reported serious adverse reactions. Such adverse reactions can vary in intensity, and as a result, may weight on the future sales of this brand. Similarly, any product lawsuits could cause financial liabilities. As we are writing this analysis, Verastem has two other product candidates which need to pass preclinical and clinical trials. Any failure to comply with the regulations during the trials would severely affect the company as costs of research and development are sunk costs and can therefore not be recovered.

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Source: Verastem, Inc. 2019 Annual Report

In addition to the product risk, the historical returns over the last 5 years on Verastem’s stock price show the substantial market-risk involved when purchasing this security. The graph below depicts wider movements in the stock price, implying higher volatility compared to the Nasdaq Biotechnology index. In fact, investors which have bought the stock in December 2014 had already lost 83.6% of their investment’s value in the upcoming 9 months. On the other hand, investors which had bought the security in September 2015 would have generated a 666% total return if they sold at its peak in August 2018. These calculations above are meant to show the highly volatile nature of this investment, which can be added to a portfolio as a speculative play.

Source: Verastem, Inc. 2019 Annual Report

Revenue and Cash Flow Analysis

In the end, it all comes down to revenue and earnings. The company started generating revenue as of September 2018 when COPIKTRA® was introduced to the market. Sales of its product have increased from $1.7 million in 2018 to $ 12.5 million in 2019, representing an increase of 735% which has been offset by a decrease in revenue generated from its collaboration agreements. It is great to see such a positive response from customers, proving that there is a strong existing demand for the firm’s oral inhibitor treatment. In addition to the above, the revenue guidance provided by management for 2020 is $ 16M, which has a high chance of being exceeded with Q1 2020 results coming at $ 5M.

Source: Morningstar, Inc.

VSTMSource: VSTM’s Investors Presentation

Although sales level for the product are still at an early stage and show much potential for growth, we should point out that Chronic Lymphocytic Leukemia (CLL) represents one of the rarest types of cancer with 21,000 new cases per year (represents 1.2% from total cancer types, according to the National Cancer Institute). In addition to the niche market, the price of the drug appears to be expensive, although covered by national medical programs in the US such as Medicare.

Source: drugs.com

As the company is not yet profitable, it goes without saying that operating cash flow is negative and expected to remain negative in 2020. The company generates cash through massive equity issuance. As early as February 27th, 2020, the company sold 46.5 million shares which were added to the existing 100 million shares outstanding. This represents massive risk of dilution for existing shareholders, and as more shares have entered the market, so does the share price trade at a near all-time low of $ 1.45/share.

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Source: Morningstar, Inc.

Source: sharesoutstandinghistory.com

Investment Rationale and Conclusions

Given the factors above, we can not use a discounted cash flow method to estimate the equity’s value whereas a multiple based valuation would fit better in this case. If we use the iShares Nasdaq Biotechnology ETF (IBB) index as a benchmark for comparison, we would find the following results:







Current Price to Sales Ratio



Current Price to Book Ratio



Source: Ycharts.com

Verastem appears to be overvalued at the current price level based on comparable price/sales analysis. However, an investor which has a high tolerance to risk could potentially be interested to add this security to his portfolio. Although speculative in nature, the company comes with a promise of high growth in revenue for the upcoming years, and the perspective to maintain its position as the market leader in the treatment of Chronic Lymphocytic Leukemia.

My personal view on this investment is that the company will grow in the coming years, and I will certainly place it on my watch list. The main reason behind it is the fact that the firm is just in its revenue’s infancy stage, currently selling its flagship product only in North America, and has a strong potential to grow outside of North America. With the distribution network and licensing agreements already in place to export the product, Verastem is well positioned to maintain its high growth level in the upcoming years and offer investors high rewards.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Via SeekingAlpha.com