Verastem Licenses COPIKTRA To Sanofi Ahead Of Critical Q2 Earnings

Jul. 31, 2019 8:12 AM ETVerastem, Inc. (VSTM)SNY14 Comments

Summary

  • Verastem announced they out-licensed COPIKTRA to Sanofi Develop and Commercialize in emerging markets. Verastem will receive an upfront payment of $5M, plus milestones and royalties.
  • I review the details of the agreement and why investors should embrace this deal with Sanofi.
  • This news injected some positive momentum into the depressed VSTM stock ahead of critical Q2 earnings. I review my plans to add to my speculative position around the Q2 earnings.

Verastem Oncology (NASDAQ:VSTM) recently announced that it entered into a licensing agreement with Sanofi (SNY) to develop and commercialize their COPIKTRA in several emerging markets; these regions include Russia, Turkey, the Middle East, and Africa. In return, Verastem will collect an upfront payment of $5M and additional $42M in milestones, plus a double-digit royalty on net sales. Sanofi will have exclusive rights to develop and commercialize COPIKTRA in all oncology indications in the licensed regions.

Why Is This Important?

Sanofi is a first-rate pharma with superlative abilities in developing and commercializing products, which will ensure that COPIKTRA receives the proper support in these territories. This will be COPIKTRA's third ex-U.S. partnership, which will allow Verastem to collect revenue without committing to the full costs of development and commercialization.

Figure 1: COPIKTRA Territories (Source VSTM)

In addition to the finances, the fact that Sanofi considers COPIKTRA to be worth their time and money, which validates the drugs clinical and commercial potential. VSTM investors should see this agreement as a positive event and an indication that the company is looking to maximize COPIKTRA's exposure.

What is Next?

Looking at the company's 2019 milestones (Figure 2), I have my eye on the "initiating additional investigational studies of duvelisib (COPIKTRA) as a monotherapy and in combination." COPIKTRA is the first approved oral dual inhibitor of PI3K-delta and PI3K-gamma, so I expect the company to investigate several other indications that could lead to an expanded label and collaborations.

Figure 2: VSTM 2019 Milestones (Source VSTM)

I am also looking forward to hearing the company's plan for COPIKTRA in Europe. Verastem is still looking to file in the EU and is evaluating whether to find a partner or go-it-alone. Personally, I hope the company can come to an agreement with Sanofi as their development and commercial partner in Europe. The company is having a hard enough time trying to go-it-alone in the U.S., so having a big pharma partner who is located in Europe would be an obvious choice. Even if it is not Sanofi, a European partnership/licensing deal would most likely involve an upfront payment, milestone payments, and a healthy royalty on sales.

Upcoming Q1 Earnings Report

The next expected catalyst will be the company's Q2 earnings report, which has been scheduled for August 1st. The street is expecting Verastem to report a -0.49 EPS and $2.44M in revenue. COPIKTRA's Q1 numbers were abysmal, which caused the company to forecast their full-year guidance to only $10M-12M vs. the projected $40M. I immediately doubted the company's commercialization plan and their capability to go-it-alone. Despite COPIKTRA's advantages over other products, Verastem is not living up to the street's expectations. As a result, the market decimated the share price, which it has yet to recover from.

Now, investors prepare for the market's reaction to Q1 earnings. Personally, I am expecting the company's report to be in line with the street's expectations, with the market playing some tug-of-war with the share price. However, if the company beats expectations we could a strong move towards $2.00 per share and analyst updates to their 2019 revenue estimates (Figure 3). On the other hand, if the company misses on revenue, the market will punish the stock for falling short of fairly low-bar that already set by the company.

Figure 3: VSTM Annual Revenue Estimates (Source Seeking Alpha)

Planning My Next Buy

Looking at the daily chart (Figure 4), we can see how the share price has been stuck below $2.00 per share since early May. However, the Sanofi news has lifted the stock off the $1.25 support and could help set up a potential breakout if the market approves of the earnings results. This has me debating on adding to my speculative position.

Figure 4: VSTM Daily (Source Trendspider)

I am anticipating an increase in volatility as we approach the earnings report, so I will be looking for an opportunity to add to my VSTM position if the market provides a mispriced discount. I will use a bounce off the $1.25 support or the breakout above $2.00 per share to trigger another buy.

Downside Risks

I believe Verastem's COPIKTRA launch progress will continue to be the determining factor of how the stock will trade until the company reveals some evidence their current strategy has started to gain some traction. The stock has been punished due to the lack of a commercial partner and the subsequent disappointing launch. Therefore, I expect VSTM will continue to be hammered down if the company cannot begin to show significant growth in the upcoming quarters.

Conclusion

Inking a deal with Sanofi is a noteworthy event for Verastem and its shareholders. Sanofi is a respectable pharmaceutical company with the capabilities to maximize COPIKTRA in these regions which could provide a reliable source of revenue once commercialized. In addition, it the deal provides me some hope that Verastem and Sanofi will come to an agreement for COPIKTRA in Europe.

It appears the market has embraced the Sanofi licensing deal and injected some momentum into the stock ahead of a crucial Q2 earnings. If the company reports amiable Q2 results, we could see the share price return to the $2.00 handle. If the company fall short of expectations, I expect a new 52-week low and an extended recovery.

Is VSTM a Buy? I still believe VSTM is worth a speculative buy based on its current valuation, cash position, and expected revenue growth. Verastem had $211.7M in cash and cash equivalents at the end of the first quarter, which should give the company enough time to grow into their current market cap of ~$110M. If the company can execute on the commercial side of their business and hit the next year's revenue estimate of 44.57 (Figure 3), we could a rapid revival in the share price. Using the sector's average price-to-sales of 5x, we would get a market cap of about $222.85M or about $3.00 per share in 2020.

What's My Plan? I am going to stick to my previous plan and will hold on to my shares and will look to add to my position in the coming weeks. However, I am still going to keep my position size very small due to the company only projecting $10M-$12M in net sales this year and will weather the volatility. Considering the expected revenue growth (Figure 3), I plan on holding VSTM for at least 5 years with a price target of $15 per share.

I would like to close out with a passage from my first VSTM article,

Accurately projecting the stock price in the near-term is unknowable. Bearing this in mind, I would like to promote caution that VSTM is a speculative stock despite the regulatory approvals and commercial launch of COPIKTRA. There is a risk that investors lose all or a substantial amount of their investment. Even though the upside of VSTM is great, it is a long way from being a risk-free investment.

This article was written by

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7.51K Followers
Diagnosing the market to compound capital in the healthcare sector.

After years of working in the medical field, I have developed a passion for biotech and lifesaving therapies. Now, I am a full-time healthcare investor who is in search of the next breakthrough therapy, device, or pharmaceutical. My trade focus is around catalysts and potential acquisitions. In addition, I provide a marketplace service, Compounding Healthcare through Seeking Alpha.


Disclosure: I am/we are long VSTM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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