Verastem: Too Cheap


A de-risked biotech company. Considerable newsflow during the next 12 months. The presentation of P3 data at American Soc. of Hematology, Dec 10, 2017) will likely lead to greater awareness.

My base case, fair value resides at $12.00, and assumes peak revenues of US$ 400m, representing just 6.5% of the CLL market. Bull case fair value resides at $28/ share.

Probability of non approval appears low – the drug works + safety is comparable to other approved agents and it is more convenient. Current valuation assumes just $15m in revenues.Toolow.

Significant buying from sophisticated hedge funds during the past quarter likely occurred at prices higher than the current price following the announcement of the headline DUO data.

This creates an opportunity for investors with fresh capital who can invest in small cap stocks. Previous clinical failures mean the company has little goodwill among those with long memories. The company flies below the radar screen of a lot of institutional investors.

The focus of this report is Duvelisib which is the near-term driver of value for Verastem (VSTM) shareholders

This report focuses on Duvelisib, as this is the product that is likely to drive a near term inflection in the valuation of Verastem. While we haven’t yet seen the full clinical data set (full DUO data on Dec 10 at ASH), based on data currently in the public domain it appears likely that Duvelisib will gain FDA approval. Safety appears consistent with other drugs for refractory cancer and the efficacy appears satisfactory compared to other currently approved agents. Therefore the investment debate in the future is more likely about market penetration and market opportunity rather than approval prospects.

As shown in the valuation section of this report, I believe assuming Verastem management can successfully commercialize Duvelisib, fair value for the stock with modest revenue assumptions resides at US$ 12/ share or 250% above the current share price. As with all biotech stocks, under the worst case outcome where the drug fails to gain FDA approval, the stock’s worst case outcome is essentially zero.

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