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Verastem (VSTM) is a small-cap company that is developing cancer therapeutics targeting the cancer stem cells (CSC). Verastem's lead programs feature small molecule inhibitors of cancer stem cell regulating pathways - Focal Adhesion Kinase (FAK) and PI3K/mTOR - backed by data pointing to clinical activity mesothelioma and other chemo-resistant solid tumor indications. Verastem embodies all the necessary elements of any biotech success story - world-class science, exciting compounds with early signs of anti-tumor activity, and a management team and board with a track record of success in multiple endeavors within the biopharma landscape. Verastem CEO and President, Christoph Westphal, MD, PhD, has a demonstrated track record of successful company creation, having been responsible as a venture capitalist in the founding of Momenta (MNTA), Alnylam (ALNY), Sirtris (sold to GlaxoSmithKline in 2009 for $725 million) and now, Verastem.

The Company's Pipeline:

1. Defactinib (VS-6063) - The Company's most advanced candidate is VS-6063, which was licensed from Pfizer (PFE) in July 2012 and is a small molecule inhibitor of FAK. FAK is a cytoplasmic protein that mediates integrin activity and has been implicated in CSC resistance. GlaxoSmithKline (GSK) reported last year positive Phase I results for GSK2256098 in 2nd-line mesothelioma, showing a median progression free survival (PFS) in MERLIN- negative patients of 24 weeks, which compares very favorably to the approximately 6 week PFS for historical controls. Based on these results, Verastem recently announced the initiation of the COMMAND (Control Of Mesothelioma with MAiNtenance Defactinib) pivotal study in mesothelioma patients. Mesothelioma is a rare, aggressive and invasive cancer that develops in the cells of the mesothelium, a protective lining of several internal organs, such as the lungs (pleural). The study will enroll 350-400 patients in the maintenance setting and patients will be randomized 1:1 to receive defactinib (400 mg twice daily) or placebo. Patients enrolled will have seen either a partial response or stable disease following 1st line chemotherapy. The trial also includes an adaptive design component which can help boost the chances of success for the study. Full enrollment for the PFS endpoint is expected to take 24 months and the company plans to provide its first study update on its year end 2013 conference call in March 2014 with regard to enrollment and target dates. In addition, a Phase I bridging study should begin in the third quarter in Japan with defactinib in order to make Japanese clinical sites available by the end of 2014 for the mesothelioma study.

The current standard of care for mesothelioma is Eli Lilly's Alimta (pemetrexed) in combination with cisplatin, which has been shown to extend median survival to 12.1 months from 9.3 months versus cisplatin alone. Treatment typically consists of 4-6 cycles of Alimta + cisplatin, as tolerability and toxicity allow, followed by monitoring until disease progression. Progression-free survival after first- line therapy has been shown to be four months (as measured from the completion of treatment) and six weeks in a second-line setting.

In addition to defactinib in mesothelioma, a Phase I/Ib trial evaluating VS-6063 in patients with advanced or refractory ovarian cancer completed the dose-escalation portion of the trial earlier this year and reported one complete response in a patient receiving 400 mg twice daily that was sustained through the end of cycle 4. The complete response is significant given the trial only enrolled 3 patients on the 400 mg BID dose. Prior treatment included carboplatin and paclitaxel as adjuvant therapy following surgery for 7.4 months; however, the patient relapsed in 3 months and received doxorubicin (Doxil and Adriamycin) as first-line therapy for 1.6 months before stopping due to safety issues. The patient started VS-6063 and weekly paclitaxel in March 2013, and achieved a complete response. The trial is enrolling another 15 patients on the 400 mg BID dose, with data expected in 2014.

As part of its goal to expand into other cancers, Verastem also outlined plans for an upcoming Phase II trial of VS-6063 in KRAS-mutated Non-Small Cell Lung Cancer during the third quarter of 2013. Mutations in the KRAS gene are found in approximately 50 percent of Non-Small Cell Lung Cancers, and KRAS-mutated lung cancer, accompanied by a second mutation in INK4a/ARF or p53, has been shown to be especially sensitive to FAK inhibition. In the Phase I conducted in 46 solid tumors that included NSCLC, stable disease (SD) was observed in 43% of the patients. In a particular example provided by Verastem, a metastatic NSCLC patient when treated with VS-6063 showed a SD of more than 50 months. In preclinical models VS-6063 has proven to be very efficacious in NSCLC. Remarkably, treatment with VS-6063 resulted in significant tumor regression in K-RAS + INK4a/ARF mutated mice, whereas it had anti-proliferative effects in non-mutated mice. Detailed histologic evaluation determined that the treatment with VS-6063 significantly suppressed the number and size of K-RAS + INK4a/ARF mutated lung adenocarcinomas compared with the placebo-treated mice. In mouse xenograft studies using NSCLC cell lines, VS-6063 was able to significantly increase the survival of mice when compared to mice treated with placebo.

2. VS-4718 - Verastem's pipeline also includes VS-4718 (the company's second FAK inhibitor) in a Phase I trial involving patients with advanced cancer, with results due in 2014. Preclinical data from a triple negative breast cancer model measuring aldeflour positive cancer stem cells observed VS-4718's potent efficacy via inhibition of FAK signaling. VS-4718 is strategically important for VSTM, as the compound provides insurance against potential side effect issues with VS-6063, as VS-4718's structure is unrelated to VS-6063. Therefore, the off-target side effect profile of the drugs should be non-overlapping, diversifying risk in Verastem's FAK inhibitor program.

3. VS-5584 - Verastem's third compound is VS-5584, a PI3K/mTOR dual inhibitor for treatment for multiple solid cancers. VS-5584 targets both the PI3K and mTOR molecules that are frequently mutated or amplified in various solid and hematological cancers. Preclinical data has shown strong efficacy in multiple cancer cell lines in vitro and in vivo in mice xenograft models. VS-5584 will potentially enter clinical Phase I evaluation for dose escalation and safety studies by the end of 2013 with data available in the second half of 2014.

Market Opportunity for Mesothelioma

In the U.S., the prevalence of mesothelioma was 4,538 new cases in 2010 according to the Surveillance Epidemiology and End Results (SEER) database. Jefferies analysts estimate 80% of patients will be suitable for VS-6063 maintenance therapy, which represents the malignant pleural mesothelioma type that largely results from prior asbestos exposure. The analysts assume annual net sales for VS-6063 of $35,700 per patient after 15% gross-to-net reduction, using Eli Lilly and Company's (LLY) Alimta as a proxy. That said, VS-6063 can achieve a peak market penetration of 85% by 2023, driving $171 million in peak sales. On a risk-adjusted basis using a 30% discount rate to reflect the potential risk associated with the Phase II trial, peak sales of $120 million by 2023 is estimated.

Mesothelioma is a global problem, and Verastem may have the opportunity to address the mesothelioma market with VS-6063 outside U.S. According to Br J Cancer, Europe will reach about 9,000 each year by 2018, and then decline rapidly. The incidence rate appears particularly high in the U.K.; in 2009, there were 2,558 new cases of mesothelioma in the U.K. with a crude incidence rate of 4.1 per 100,000. Under similar pricing assumptions as the U.S., Jefferies analysts estimate EU peak sales for VS-6063 at $192 million by 2023 with 80% penetration rate. On a risk-adjusted basis using a 30% discount rate, peak sales of $134 million by 2023 is estimated.

In summary, although mesothelioma is a relatively rare cancer, it presents an attractive initial market for Verastem, given the company's current size and the expectation that commercial resources necessary to address this market would be small in scope.

Market Opportunity for Ovarian Cancer

Ovarian cancer is the fifth most frequent cause of death from gynecological malignancy in women behind lung, breast, colorectal, and pancreas, according to the Surveillance Epidemiology and End Results (SEER). In 2010, the prevalence of ovarian cancer was approximately 186,138 in the U.S. Assuming a 2% annual growth rate, the prevalence could be approximately 197,500 in 2013. According to Roche (OTCQX:RHHBY), symptoms are often misdiagnosed, so majority of patients are only identified in the advanced stages of disease. Based on the highly unmet need, Guggenheim analysts believe VS-6063 could reach peak sales of over $400M in the U.S. and E.U. by 2024 in this setting.

Market Opportunity for Non-Small Cell Lung Cancer

Lung cancer remains the leading cause of cancer-related deaths with 221,130 new cases and 156,940 deaths estimated by the National Cancer Institute in 2011. The majority of the patients with lung cancer have been found to harbor multiple mutations in the crucial development and signaling pathways. Mutations of p53, K-Ras and INK4a/ARF are observed in 50%, 30% and 5-7% of NSCLC patients, respectively. In patients diagnosed with early-stage NSCLC, surgery may be curative. However, surgery and radiation are not options in patients with advanced NSCLC (stage IIIB/IV). Advances in chemotherapy with doublet regimens have led to increased median survival times of 11 months. Platinum-based doublet therapies are the standard of care in NSCLC with negative EGFR status. Chemotherapies that may be combined with platinum agents include Gemzar, Navelbine, Taxotere, Taxol, and Alimta.

Financial Position

With completion of a secondary offering in July, Verastem should have ample cash runway to take it through 2015. The combination of cash of $78 million at the end of the second quarter plus $59.8 million from the secondary provide the company with $137.8 million, which should provide funding through the pivotal study in mesothelioma. With a strong cash balance and the right team in place, Verastem is now entering the key execution phase in the company's history.

Risks

Verastem's core technology, and the larger cancer stem cell space, is still relatively immature. Thus far, only a small number of cancer stem cell therapeutic candidates have reached clinical development. The intellectual property (IP) landscape in the cancer stem cell space is complex, and many companies hold IP as a result of the rapid and geographically heterogeneous development of the field in academia before industry. That said, the IP landscape in the cancer stem cell space continues to carry risk, and this uncertainty could have a negative impact on investor enthusiasm for Verastem shares.

Conclusion

Investors should look towards rapid advancement of Verastem's drug candidates led by VS-6063 and the important potential to address a critical unmet medical need in mesothelioma patients. Next on the horizon for Verastem is the Phase II study in KRAS mutant NSCLC, the initiation of a bridging study in Japan, and VS-5584 is currently in IND-enabling studies and is expected to enter clinical development in the second half of 2013. However, it is the mesothelioma study that holds the promise of near-term commercialization as it is structured as a registration trial, suggesting revenue is possible in 2016. Viewed together, Verastem is becoming full-fledged clinical stage oncology company, representing a unique play in cancer stem cell space. At the current levels, Verastem shares offer several opportunities for upside potential, and they should be appreciated in the next year as clinical progress and high-profile scientific publications further validate the company's approach.

VSTM Chart

Source: Verastem: An Attractive Long-Term Investment In The Cancer Stem Cell Space

Additional disclosure: Biomed Group is a group of investment professionals and writers. This article was written by Amit Cohen. This information is not to be construed as an offer to buy or sell any security mentioned on this article.