Verastem: A Solid Player On A Crowded Field

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About: Verastem, Inc. (VSTM), Includes: ABBV, BAYZF, GILD, MEIP, TGTX
by: George Crist
Summary

Treatments for CLL/SLL and other B-cell malignancies represent an exploding field of innovation.

PI3K inhibition represents a minor component of the current treatment paradigm, but will likely hold its place in treatment-refractive CLL and NHL.

Verastem’s Duvelisib possesses a differentiated PI3K inhibitor with advantages over the existing approved product in Idelalisib (Zydelig).

Recent science improves the case for a treatment advantage for Duvelisib.

Duvelisib will likely see FDA approval in CLL and represents an attractive valuation at current levels.

My investment thesis is narrow, I focus on niche players in biotech. I have developed my bias over years of investments in companies in different situations. While I love to make the right investment, getting it wrong has provided me with the more valuable education that has enabled me to pick more likely winners in this volatile space. I gravitate towards smaller companies in the $100M-$1B space, usually with one or less established product and little or no revenue.

I don’t just invest in this space, I invest exclusively in this space. Call me crazy, but it’s the space that I know, it gets me up in the morning and it feeds my addiction to research and learning. I’ve only recently begun sharing some of my investment ideas on this forum, but having received some affirming support, I will continue to do so with a “tilt” towards the emerging science in this wild sector.

I’d like to add the following: I am a “long” only in biotech. The reason is when you root for one of these companies to win, you’re also rooting for patients, quality of life, and innovation. These are things that any investor should feel good about, in addition to the return. If I don’t like a company, I don’t invest in it. In other words, I don’t short this sector. I also don’t like shorting because it creates the opportunity for price manipulation of a small company’s stock and while many would argue this is just business, I would argue that in this sector this means potentially depriving patients access to life-saving drugs. Off the soap box now.

If I were to pick one of the most active areas of biotech over the last couple of years, I would have to point my finger at Chronic Lymphocytic Leukemia (CLL) and Small Lymphocytic Lymphoma (SLL). I can’t say that there was ever a “good” time to be a cancer patient, but in the realm of CLL/SLL, this is certainly an eventful time, which has brought a ton of innovation and hope to what was once a relatively grim diagnosis.

CLL/SLL are both B-Cell cancers and are essentially the same cancer except in where the cancer is located. For CLL, the cancer is located in the bone marrow and the blood. For SLL, the cancer is located in the spleen and the blood. Treatments are the same for both and they are often thought of interchangeably.

CLL/SLL, as B-Cell cancers, share many similarities with the various Non-Hodgkin Lymphomas (NHL) and many of the drugs used/studied for CLL/SLL have also seen studies and efficacy in the more common NHLs, Mantle Cell Lymphoma (MCL), Follicular Lymphoma (FL) and Diffuse Large B Cell Lymphoma (DLBCL). Taken together, I think it would be very fair to say that treatments for B-Cell cancers have evolved more in the last five years than in the last fifty years.

In numbers, about 26,000 patients were diagnosed with CLL/SLL (20,000/6,000) in 2017 (Cancer Facts).

Options, options, options…

Breaking down CLL/SLL treatment today, there are many options. I can imagine for hematological oncologists, it’s literally hard to keep up with the emerging advances. To understand variety of options it’s probably best to break it down into the following categories. To these, I’ve also added some info on advertised efficacy, but please keep in mind that not all of these numbers can be compared to each other apples to apples:

  • Chemotherapy
    • Bendamustine(Bendeka,Treanda)
      • As a single agent in front line untreated CLL, 18 month PFS, 8% CR
    • Chlorambucil(Leukeran)
      • As a single agent in front line untreated CLL, 6 month PFS, <1% CR
  • Anti-CD20 (Single agent + Combo with chemo)
    • Rituximab(Rituxan)
      • As a single agent in front line untreated CLL, 18.6 month PFS, 8% CR (2)
    • Rituximab(Rituxan)/Bendamustine(Bendeka) combo (referred to as “BR”)
      • Front line untreated CLL, 33.9 month PFS, 23.1% CR (3)
    • Rituximab(Rituxan)/Chlorambucil combo
      • Front line untreated CLL, 23.5 month PFS, 10.3% CR (4)
    • Fludarabine/Cyclophosphamide/Rituximab combo (referred to as “FCR”)
      • Front line untreated CLL, 46.9 month PFS, 69.8% CR (5)
      • Front line untreated CLL excluding del17p (high risk CLL), 55.2 month PFS (6).
    • Obinutuzumab(Gazyva)/Chlorambucil combo
      • Front line untreated CLL, 26.7 month PFS, 20.7% CR (comparator arm was Rituximab/Chlorambucil for CLL-11 P3 trial in which they found 11.1 month PFS, 7.0% CR) (7)
    • Ofatumumab(Arzerra)/Chlorambucil combo
      • Front line untreated CLL for patients not candidates for FCR, 22.4 month PFS (8)
  • Anti-CD52
    • Alemtuzumab(Campath)
      • As a single agent for relapsed/refractory CLL, 15.4 month PFS, 2.4% CR (9)
  • Bruton’s Tyrosine Kinase Inhibitor
    • Ibrutinib(Imbruvica)
      • Front line untreated CLL, 60+ month PFS, 14% CR (10)
      • Relapsed/refractory CLL, 52 month PFS
  • BCL2 Inhibitor
    • Venetoclax(Venclexta)
      • Second line in del17p (high risk), 80.2% ORR, 5.7% CR (11)
  • PI3K Inhibitor
    • Idelalisib(Zydelig) + Rituximab
      • Relapsed/refractory CLL, 10.7 month PFS (vs. 5.5 month on Rituxumab alone)

Remember, we’re talking about one disease and many of the approved therapies above came into the fray in the last five years (Gazyva in 2013, Imbruvica in 2014, Zydelig in 2014, Arzerra expansion in 2014, Venclexta in 2016). If this weren’t enough to make your head spin, contemplate all of the potential combination therapies that need to be tested. Some are reviewed here (12).

One tricky fact with drug studies that keep getting better is that they take longer to run. While the metrics of old may have been PFS/ORR/CR/OS, there have been many trials run in the last five years for which the PFS is immeasurable because the response rates have been so good. Wild times…

Some combo studies in CLL are highly anticipated. The addition of BCL2 inhibition appears to be synergistic with a number of existing therapies. Two weeks ago, in the NEJM, a study in Mantle Cell Lymphoma was released with Venetoclax in combo therapy with Ibrutinib. The combination yielded a CR of 62% (13)!

Bruton Tyrosine Kinase Inhibition - A game changer

The introduction of Bruton Tyrosine Kinase inhibition has radically changed the landscape for B-cell cancer treatment. Ibrutinib, marketed by AbbVie, is already a multi-billion-dollar blockbuster drug. However, how long this rock star gets in the spotlight will be challenged by second generation BTKi’s. Acalabrutinib, marketed as Calquence, was the first to reach market and is currently approved in NHL. Calquence is not yet approved for CLL, but I’ll go out on a limb and say It’s just a matter of time.

There is currently a head-to-head Phase III trial in Calquence vs. Imbruvica being run. Other second generation BTKi’s will likely speed to market and one to keep an eye on is BeiGene’s BGB-3111. While Ibrutinib is definitely the biggest thing to happen in CLL since Rituximab, the toxicities, and subsequent discontinuations paint a more complicated picture for physicians. To get an inside view from a physician’s perspective, this recent publication was a good read (15).

The bottom line is that options are needed because we’re dealing with a patient population from 33 years old and up, at various stages of disease, who present with various complicating factors and co-morbidities that preclude physicians from throwing the whole armada at every patient who walks in the clinic. As game-changing as Ibrutinib was in transforming CLL as a front line therapy, nearly a quarter need to switch off after six month due to various complicating factors.

PI3K Inhibition - A diminished but still-present role in CLL

Idelalisib(Zydelig) is approved for refractory/relapsed CLL in combination with Rituxumab. After Gilead received approval for Idelalisib, a PI3K-delta inhibitor, they had been pursuing front line therapy labels for CLL that were stopped due to toxicities. Some analysts called Idelalisib "dead in the water", but it continues to have a place in treatment of resistant CLL.

Revenue was down for Zydelig from $168M in 2016 to $149M for 2017. It is currently thought that Idelalisib will continue to have a role for patients who progress on Ibrutinib and Venetoclax, although more effective combo therapies and the eventual approval of Calquence in this space will likely narrow the slice of the pie.

An interesting observation with the toxicities found in Idelalisib is that the issues are more likely in younger and less heavily treated patients. This paradoxical finding is likely due to a drug-induced decrease of regulatory T cells in younger patients (16). While more research is needed, this does create an opportunity for Verastem’s drug Duvelisib and TG Therapeutics (NASDAQ:TGTX) drug TG-1202 to take market share from it in the Ibrutinib/Venetoclax-refractory treatment space.

Like Idelalisib, Duvelisib has strong affinity for the delta isoform. It possesses an IC50 of 2.5nM for PI3K delta, but also a 27.4nM for PI3K gamma (this is key, remember this). Affinities for the other isoforms (alpha and beta) are relatively low. TG-1202 is active selectively on the PI3K delta isoform, similar to Idelalisib. However, TG-1202 has a toxicity profile (so far) that appears better than Idelalisib.

One other player in the PI3Ki space was approved last year in the form of Copanlisib, marketed as Aliqopa, although not yet for CLL/SLL. Their indication is only in Follicular Lymphoma as a third line although their data suggests that a CLL indication could be approved at some point.

The key differentiator here is that Copanlisib is administered via IV only, not oral, which makes it a competitor only in terms that it targets the same kinase. Its specificity is for the alpha and delta isoforms, not the gamma. I do not anticipate that Copanlisib will be a dominant player in the CLL space, or the FL market in which it is currently approved, once Duvelisib is on the market as an oral alternative.

Recent research suggests that Duvelisib should possess an advantage in efficacy for B-cell cancers over other PI3Kis

PI3K expression has been known to be predominantly of the delta variety in mature B cells. Young B cells express both alpha and delta, but drug development really focused on the delta isoform as the best targeted path to drug development in this space (17).

However, a recently published paper in this space indicates that while the delta isoform expression is dominant in normal B cells, there is also a significant signaling role for the gamma isoform in cancerous B cells (18). Selective inhibition of the gamma isoform impaired CLL cell migration. Gamma inhibition also reduced CLL cellular adhesion to Stromal cells. This seemingly anecdotal finding, however, is very relevant to Verastem.

It had also been thought that in B cells, cell signaling via PI3K converged through the same signaling pathway. PI3K delta (and most PI3K signaling) functions through coupling with an adapter molecule, p85, which when activated generates the secondary signaling molecule, PIP3. PI3K gamma, however, through a different adapter molecule, P101, engages in cross-talk with G protein signaling, which suggests that turning down gamma may offer a new mechanism to impact B cell proliferation, growth and mobility independent from what is obtained with delta isoform inhibition (19).

By also inhibiting PI3K-gamma, Duvelisib may be far more efficacious in Ibrutinib-refractory patients than Idelalisib (or Copanlisib)

I believe it’s particularly relevant that dual isoform inhibition reduced CLL cellular adhesion to Stromal cells because adhesion in the bone marrow microenvironment has been specifically implicated in resistance to BTKi. This feature would suggest that combo or sequential therapy with Imbrutinib, or perhaps rather Calquence could have value and synergy (20, 24, 25). We will likely never see a trial of Duvelisib directly up against Idelalisib or Copanlisib. But based on the science, in an Ibrutinib-refractory patient, there is a cogent argument to be made that Duvelisib would win that fight.

Verastem possesses a second pipeline candidate, Defactinib, that is worth mentioning in this context, as well. The studies around the role of the Tumor Micro Environment have also pointed at Integrins as mediators of drug resistance to BTKi in Mantle Cell Lymphoma. Therefore, Verastem’s Focal Adhesion Kinase (FAK) inhibitor in Defactinib is highly likely to also be efficacious in BTKi-resistance Mantle Cell Lymphoma (21). Currently, Defactinib is being looked at for Ovarian, NSCLC, Pancreatic cancer and Mesothelioma.

Micro-environment factors complicate the treatment of several "hard-to-treat" cancers and I am particularly interested in the efficacy of FAK inhibition in pancreatic cancer (26). However, based on this recent discovery, it's worth looking at Defactinib as a combo therapy with BTKi sooner than later.

While it’s highly unlikely that Duvelisib will ever represent a first line therapy in CLL, the market potential for Duvelisib is nevertheless tremendous.

Duvelisib’s clinical data in the Duo and Dynamo trials was solid and clearly supports approval in refractory CLL. Their DUO Phase III trial was appropriately sized and demonstrated a clear PFS advantage over Ofatumumab with a healthy measurement of statistical significance. The PFS advantage was consistent in all subgroups analyzed including the high risk del17p group. The discontinuation due to adverse events was also low in this study. In a population of patients refractory to Imbrutinib, I think there is data to hypothesize that Duvelisib could further differentiate itself as a better secondary treatment option to Idelalisib and others.

In differentiating itself from Idelalisib specifically, it’s worth remembering that Idelalisib is only approved in combination with Rituximab. Duvelisib may offer patients who are older or who present with co-morbidities a solid alternative to Idelalisib, and as an oral mono-therapy. The convenience and quality of life that an oral pill offers will represent a relevant value proposition for elderly patients with CLL.

Oral convenience will be the differentiator that sets Duvelisib apart from competition in the refractory space

In a study that looked at patient preference, 85% stated a preference for an oral regimen over an IV drug (28). To state this is also to say that 15% would still prefer an IV. The study quoted “perception of efficacy” as a potential driving force in this finding. The United States (and a good portion of the world in step with us) is increasingly a convenience-driven society. To say one prefers driving to a clinic and having an IV stuck in our arm as we contemplate the inevitable is like saying, “I want the chemo that grandpa got,” or “If it doesn’t hurt, how do I know it’s working?”

These perceptions of what medicines are “supposed” to be and do are engrained in culture, especially with cancer drugs. But as an increasing percentage of cancer therapies convert to oral, this perception will succumb to convenience and also to the modern truth that you don't need to appear bare-headed to the world to be fighting cancer your hardest.

In their company presentation after the NDA acceptance, the company outlined its go to market strategy which referenced the inability of older Americans in rural settings to get to clinics. It’s a cogent and in-fact compassionate approach to taking this to market by addressing access-deprived individuals. But I’m going to argue that the value proposition of an oral-only therapy will be equally appreciated at the other end of the socioeconomic spectrum.

The average age of a person developing CLL is their late 60's. A person of means will not want to live out their days getting to the clinic every week, they will want to live life, take that cruise, visit family, you get the point. Duvelisib went head to head against an optimized anti-CD20 therapy, and won. It works and since most patients will be on various therapies during their time with CLL, Duvelisib, like Ibrutinib, will be a compelling product.

Since the NDA was accepted, some investors appear to have remembered that the company exists and the stock is up from its recent lows of $2.88 by nearly 32%. By granting Priority review, the FDA has given the company a fairly short runway before it will be evaluated in CLL/SLL and also in Follicular Lymphoma. I am fairly certain there will be an AdCom and I am certain that the company will ultimately be approved in the CLL/SLL indication.

I think the FL indication is 75% likely, as well, with the current data. The company has already stated their peak revenue goal for the drug at $250-300M in CLL/SLL and $100M for FL. Even half of that target, and despite the recent rise, suggests that the company is still discounted heavily from its likely intrinsic value (dare I say multiples?), which begs the question…

Why is Verastem currently undervalued?

For a company with an efficacious drug, an accepted NDA, and priority review, you would expect something much higher than its current valuation of $180M. I think the inherent issue with Verastem’s valuation is the market’s inability to value anything in the CLL and NHL space at this point. How do you project discounted future cash flow and mesh that with a valuation in an environment as rapidly changing as CLL? And with conjecture that some of the myriad combo therapies may yield complete response rates in excess of 60%, it just feels "Bitcoinesque" for any of these drugs.

In order to build a valuation for Verastem, we need to recognize that no matter how good the numbers become for the front-line standard of care, there will still always be a need for refractory options as well as treatment options that consider the underlying health of the patient. In that sense, more options are always a better thing and as the oral single-agent alternative, Verastem will outsell a lot of its competition. Verastem reported the market size for refractory CLL/SLL at $2.6 Billion by 2024.

Drugs are getting better. It sounds silly, but the science in developing targeted therapies will only improve. This means there will continue to be innovation on the existing targets within B-cell malignancies, but there will also be new targets. One that comes to mind is MEI Pharma’s Voruciclib, which is an inhibitor of CDK9 which could suppress MCL-1, a pathway to resistance to BCL2 inhibition (29).

There will be additional combo therapies studied, and Duvelisib will undoubtedly participate in numerous investigator-sponsored combo therapies with some of the established and emerging players on this field. Successful combinations (as well as off-label use) will only increase its slice of the pie.

I’d offer this thought as well. I think continued innovation and refinement around the dominant first line therapy in CLL will hurt the established players much, much more than the smaller guys. Consider Calquence. If Calquence, or some other second gen BTKi unseats Imbruvica, we’re talking about displacing Billions in revenue from AbbVie. It won’t do much to the refractory therapies. For example, if Calquence displaces Imbruvica, the second line therapy won't be Imbruvica, it will still be a different line of attack like Duvelisib. In sports talk, if the team swaps quarterbacks, we’ll still need plenty of other players.

TG Therapeutics, a competitor or not?

Several years ago, I had been a huge fan of TG Therapeutics and their unique differentiated play at CLL with a combo approach involving their own PI3Ki and glyco-engineered anti-CD20. However, given the other activity in the indication with BTKi, I just don't know how to value their product at this point. When I contemplate the potential of BTKi (first/second gen) and BCL2 inhibition as a likely eventual front-line combo, I really think TG's realistic best case in the clinic is in the rear seat as a second line.

I don’t think this was what TG set out to accomplish, but to be fair, we're still waiting on more data from TG's Unity trial. As a second line, especially in a compromised or elderly population, an oral mono therapy in Duvelisib will have a marketing advantage over TG's combo therapy, even if TG’s therapy on paper appears more efficacious to Duvelisib.

In comparison to Verastem, TGTX's market cap is far more generous while the ultimate opportunity size in a BTKi/Venetoclax-refractory space may be similar for the two stocks or tilt in Verastem's favor (27). I recognize there are many other fundamental differences between the two companies and I continue to be a big fan of TG's management, but these are unique times. I like TG’s bank account, but I like Verastem’s oral mono-therapy in Duvelisib more at this point.

Verastem’s value may also be low due to the circumstances of Duvelisib, itself. Infinity Pharma had Duvelisib licensed out to AbbVie for development originally. In 2016, AbbVie scrapped the partnership due to weak data (and probably some guilt by association from Idelalisib) (AbbVie scraps Infinity collab in wake of weak data; biotech slashes jobs).

Infinity then licensed it out to Verastem six months later, and Verastem turned trash into treasure by finishing the job bringing in Phase III numbers for the DUO trial that probably made AbbVie feel a little sore. Verastem will owe Infinity a $22M milestone payment if Duvelisib is approved inside or outside the US. It has already paid a $6M milestone payment and if approved, Infinity will also yield royalties from Duvelisib sales.

Where will Verastem go from here? I think a good answer to the question would be for it to get tucked into a larger company. AbbVie, knowing now what it couldn’t have known when it left the partnership with Infinity, could be an appropriate candidate to line up a differentiated competitor to Gilead’s Idelalisib or Bayer’s Copanlisib (which could eventually play in CLL). As the owner of Imbrutinib and co-marketer to Venetoclax, they’re already heavily invested in the space already. I am certain that if buy out rumors emerge the stock price will rise quickly.

Verastem is currently seeking to hire a geographically diverse sales force, which would indicate that they are preparing for a commercialization ramp up on their own. However, I've seen other companies do so at similar stages just to be snapped up by a larger company. The key at this point is taking risk off the table and with the NDA accepted, the company would be wise to consider their M&A prospects, especially now before an ex-US partnership is locked in for Duvelisib.

If Verastem does decide to take the longer road and build out their own sales force, their funding will be a near-term math problem that will need solved. Their cash burn during 2017 was $57.3M. While their R&D expense will certainly be lower in 2018 ($46.4M for 2017 including the $6M milestone to Infinity), the expense associated with building out a sales force will be significant.

As of December 31, 2017, they held $86.7M in cash and also had access to $35M on their existing credit facility. Remember, post approval they will owe Infinity a $22M milestone payment, but an ex-US partnership for Duvelisib could offset this. While the company could raise money via equity, if it were me, I would wait until I could do so on much more favorable valuation terms.

In the meantime, with an October PDUFA date for Duvelisib, Verastem is in good shape to negotiate a more favorable credit facility either through Hercules, or a new relationship. On January 4, they were successful in increasing the line from $25M to $50M ($15M currently extended) (Hercules Debt Facility Increased). Post approval, and with the sales numbers they are projecting, this ceiling could easily be increased to $100-150M.

Whether they sell or develop Verastem into a more long-term platform company, as part of a differentiated biotech portfolio, Verastem merits consideration.

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Disclosure: I am/we are long VSTM.

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