My sentiment today is based on the positive industry outlook but contrasted by the VSTM's lack of operational efficiency thus recommending a HOLD at its current price of $3.02.
Verastem, Inc. (NASDAQ: VSTM) is a biopharmaceutical company focusing on developing and commercializing medicines to improve the survival and quality of life of cancer patients. Its commercial product, Copiktra, utilizes a multi-faceted approach designed to treat cancer patients with relapsed and refractory lymphatic diseases (chronic lymphocytic leukemia, small lymphocytic lymphoma, and non-Hodgkin lymphoma) by directly targeting the cancer cells. They are also developing other products that are in both preclinical and clinical studies as potential therapies for certain cancers, including leukemia, lymphoma, lung cancer, mesothelioma, ovarian cancer, head and neck cancer, colorectal cancer and pancreatic cancer. Verastem believes that their products "may be beneficial as therapeutics either as single agents or when used in combination with immuno-oncology agents, other pathway inhibitors or other current and emerging standard of care treatments in aggressive cancers that do not adequately respond to currently available therapies".
Mission: To become a leading biopharmaceutical company focused on the development and commercialization of novel drugs that use a multi-faceted approach to improving outcomes for cancer patients.
- Continuing to support and maintain a commercial infrastructure in the US for the marketing of their drug Copiktra for patients needing those additional lines of therapy following previous treatment
- Advancing their product candidates through clinical development
- Considering acquisitions/in-licensing of rights to additional agents from third parties that might supplement the firm's internal programs and allow them to initiate clinical development more quickly
- Building and maintaining scientific leadership in the areas of lymphoid malignancies, immuno-oncology, and tumours by continuing to conduct research to further their understanding of the body's immune response and cancer progression
Industry Information and Outlook
- Biopharm market valued at approximately 325.17B (2020) and expected revenue of 496.71B in 2026
- CAGR of 7.32% over the forecast period of 2021-2026.
- Estimated cancer cases in the United States accounted for 2,281,658 with 612,390 deaths (2020)
- Major players in the market include Amgen Inc., Johnson and Johnson, Sanofi SA, AstraZeneca PLC, and Pfizer Inc.
- The market for precision medicine is expected to increase from $39B in 2015 to reach $87.7B by 2023
- Precision medicine to improve cancer diagnosis and treatment
- Between 2010 and 2016, the average cost of bringing a drug to market increased by 33%
- The cancer vaccines market is set to almost triple from $2.5B in 2015 to $7.5B by 2022
Investment Thesis: Lack of Operational Efficiency
- An accumulated deficit increase of 12.9% FY2020 to 2021 to the value of $592.5M
- This value indicates that the firm heavily relies on additional funding to sustain their operations and thus not financially stable
- Their increasing YoY accumulated deficit will make it even more difficult for them to obtain funding as lenders fear the business won't be able to generate enough cash flows from operations to pay off the loan
- Net loss was $67.7M, $149.2M, and $72.4M, for the years ended December 31, 2020, 2019 and 2018, respectively
- Has only generated minimal product revenues
- Significant expenses and operating losses
- High debt levels
- Mainly financed their operations through the public offerings of their stock, market equity offering programs, loans and etc. has increased their debt level and reliance on external cash instead of cash from their operations
- VSTM may not have cash available in an amount sufficient to enable us to make interest or principal payments for their loans
- Failure in clinical trials of their product candidates will incur additional costs and also can delay and cost the development and commercialization of the candidate
- If their product fails to demonstrate safety and efficacy to the satisfaction of regulation or does not produce positive results, it would result in delays or would require the firm to abandon their clinical trial which would decline the company value and limit their ability to obtain additional financing in the future
- Intense competition taking over the market share for the development of products for the treatment of diseases
- Competitors with greater financial resources and expertise in research and development, etc can result in them developing or commercializing products before or more successfully than VSTM
- Failure to successfully commercialize Copiktra
- No market acceptance of Copiktra among physicians, patients, and medical community would significantly decline company revenues and failure to maintain profitability and continued operations
Valuation - Comparable Analysis
For the comps analysis, I found 7 companies that were of similar market cap and competition to VSTM. These companies are Agenus Inc ($AGEN), BioDelivery Sciences Intl ($BDSI), iBIO ($IBIO), Akebia Therapeutics ($AKAB), Fortress Biotech ($FBIO), Sesn Bio ($SESN), and Dynavax Technologies ($DVAX).
Because of VSTM’s negative EBITDA values, we decide to go with using P/S multiple and EV/Sales multiple to get a more accurate fair value.
P/S Ratio - From the P/S ratio, we derive a share price of $2.21 representing an approx. 27% downside. VSTM’s P/S ratio of 38.13 is above the average multiple of 27.85 and signifies an overvalued stock.
EV/Sales - The P/S ratio only accounts for the sales and not earnings or the high debt level that VSTM holds. Since debt levels are high in VSTM, and how the firm is mainly able to finance their operations, we use EV/Sales to estimate a more accurate fair value that includes the debt load. In both years 2021 and projected 2022, we see that EV/Sales multiple for VSTM is above the average amongst competitors and enforces the P/S ratio in showing that its overvalued. The projected 2022 EV/Sales were derived from using YoY sales growth to give an implied share value of $2.11 in its base case but also showing a bear value of $0.97 or bull value of $5.84.
VSTM is a company that is displaying a weak balance sheet going forward but is contrasted with the optimistic industry trends and outlook. I would recommend individuals to neither BUY nor SELL at this current price of $3.02 but rather look for a dip at the price to open a position below the implied share price of $2.11 - $2.21 derived from the comps analysis. Despite the comps analysis arriving at a potential downside of approx. 27-30% for the upcoming year 2022, I believe this stock may hold value in the future if they can successfully commercialize their product Copiktra and generate sufficient cash flows from operations to sustain the business.