INITIATING COVERAGE                                                                                                       ...
KEY DRIVERS TO MONITOR                                              TRADING / DIVIDEND DATA1) Preclinical development of l...
INVESTMENT THESISFounded by world-class cancer biologists and experienced venture capitalists,Verastem is developing small...
having a fundamentally solid understanding of the biology of CSCs is important.Co-founders Robert Weinberg, Ph.D., Eric La...
As of 2011, the total breast cancer population, defined as women alive today who                       have or had breast ...
Our DCF analysis is depicted in Exhibit 2. We used a weighted average cost of                            capital (WACC) of...
The epithelial-mesenchymal transition (EMT) is a process that is believed toallow epithelial cells that typically interact...
Exhibit 4. Verastem Proprietary TechnologySource: Company filings and presentation.INITIAL EFFORTS TARGET TNBCVerastem’s i...
Wnt Pathway is Focus of Initial EffortsVS-507 is Verastem’s lead drug candidate and the compound is a small-moleculeinhibi...
of each graphic. Noteworthy is the fact that expression of CD24 was higherrelative to cells treated with placebo as compar...
Exhibit 8. Verastem clinical trial designVS-4718 IS VERASTEM’S NEXT SHOT ON GOALVS-4718 is a small molecule inhibitor of t...
777). In those experiments, VS-4718 (designated as PND-1186 in the journal            article) was shown to be effective a...
Exhibit 11. VS-4718 treatment results in 4T1 cell apoptosis   Source: Tanjoni et al., Cancer Bio & Ther. 2010             ...
Exhibit 13. Verastem Upcoming MilestonesCOMPETITIONVerastem may face competition from at least three other companies that ...
Exhibit 14. Verastem Competition                            PATENT PORTFOLIO                            Verastem’s intelle...
Exhibit 15. Verastem patents and their applications         Source: Company materials                                     ...
would likely raise additional capital after that. In our model, we forecast the next                                      ...
Exhibit 18. Verastem Balance SheetSource: Company reports, LCM Research estimates                                         ...
Exhibit 19. Verastem Statement of Cash FlowsSource: Company reports, LCM Research estimates                               ...
VERASTEM SCIENTIFIC ADVISORY BOARD                                Exhibit 22 lists Verastem’s Scientific Advisory Board. I...
ANALYST CERTIFICATIONAll of the recommendations and views about the securities and companies in this report accurately ref...
DISCLAIMERSThis report has been prepared by Lazard Capital Markets LLC (“LCM”) in New York. It may not bereproduced, redis...
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Initiating Coverage on Verastem - March 2012

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Lazard Capital Markets rates Verastem (VSTM) as a "Buy" with a $20 price target. March 7, 2012.

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Initiating Coverage on Verastem - March 2012

  1. 1. INITIATING COVERAGE March 7, 2012 VERASTEM (VSTM) 13.0 RATING: BUYBIOTECHNOLOGY 12.5 PRICE: $11.10 PRICE TARGET: $20 12.0WILLIAM TANNER, PHD MARKET CAP: $224.6 M212-632-1512 11.5william.tanner@lazardcap.com S&P 500: 1,343COLLEEN MACKEY NBI: 1,209 11.0212-632-6413colleen.mackey@lazardcap.com 10.5 JanMEREDITH CHENG SOURCE: FactSet212-632-1944meredith.cheng@lazardcap.com VSTM: Attacking cancer at the root; initiating coverage with BUY rating and $20 price target We believe VSTM shares will appeal to investors by virtue of the company’s world-class scientific founders, highly experienced management team and a research focus that may possess the potential to dramatically change the manner in which cancer is treated. Targeting CSCs could improve treatment outcomes. Verastem is pioneering the development of therapies that target cancer stem cells (CSCs). Emerging evidence suggests that, while standard cancer treatments may be effective at killing cancer non-stem cells, CSCs may survive, providing opportunities for re- growth. Technology platform designed to provide steady supply of CSCs. Verastem’s proprietary technology platform allows for the production of stable CSCs. Identification of potent CSC-killing agents may be facilitated through standard high-throughput screening techniques. VS-507 likely first in man for treating TNBC. Human testing of lead drug candidate VS-507 is expected to begin in 2012. A modulator of the Wnt signaling pathway, VS-507 will initially be tested for treating triple-negative breast cancer (TNBC). Valuation and risks. Our $20 PT is derived from a DCF analysis that values VS-507 for treating TNBC. Risks include successful development and regulatory approval of drug candidates as well as market competition. DECEMBER YEAR 2010 2011E 2012E 1Q11A 2Q11A 3Q11A 4Q11 YEARRevenue (M) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0EBITDA (M) NM NM NM NM NM $(10) $(16)EPS $(0.59) NM NM NM NM $(1.75) $(0.82)FCF/S NM NM NM NM NM NM NM CAPITALIZATION VALUATION 2010 2011E 2012EShares Outstanding (M) 20.2 P/E NM NM NMTotal Net Debt (M) $(62) Rel. to S&P 500 NM NM NMEnterprise Value (M) $163 EV/EBITDA NM NM NMTotal Debt / Capitalization NM FCF Multiple NM NM NMEffective May 10, 2005, Lazard Frères & Co. LLC (“LF&Co.”) transferred its capital markets business (which includesequity research, syndicate, sales and trading) to a new privately-held company, Lazard Capital Markets LLC, which isneither owned nor controlled by LF&Co. LF&Co., which is part of publicly-traded Lazard Ltd, has retained, amongother things, its investment banking business (including its mergers and acquisitions and financial restructuringpractices). Please see pages 21-22 for important disclosures and analyst certification.
  2. 2. KEY DRIVERS TO MONITOR TRADING / DIVIDEND DATA1) Preclinical development of lead drug candidate VS-507 52-Week Range $12-$112) Initiation of human clinical testing of VS-507 Avg. Daily Trading Volume (000) 173) Advancement of other candidates (VS4718 and VS-5095) Dividend / Yield $0.00 / 0.0% Share Float (M)/% Sh. Out 7 / 36.9% KEY RISKS TO MONITOR BENCHMARKS1) Successful clinical development of drug candidates ROIC NM2) Regulatory approval of drug candidates Book Value P/S * NM3) Ability to secure favorable reimbursement Price/Book * NM Free Cash Flow Yield * NM Projected 3-year EPS Growth Rate NM Institutional Ownership 6% * Last actual quarterFOREC AST PERCENT CH ANGE (Y/Y) DECEMBER YEAR 2010 2011E 2012E 1Q11A 2Q11A 3Q11A 4Q11 YEARRevenue NM NM NM NM NM NM NMEBITDA NM NM NM NM NM NM NMEPS NM NM NM NM NM NM NMFCF/S NM NM NM NM NM NM NM COMPANY DESCRIPTION Verastem debuted in the public equity markets through an IPO completed in January 2012. The company is leveraging expertise in molecular and cellular biology to develop therapies intended to kill cancer stem cells (CSCs). The approach may address a potential shortcoming of typical cancer therapies that, while somewhat effective at killing differentiated cancer cells, may spare progenitor stem cells that can allow for tumor re-growth. A key element of Verastem’s effort is a platform technology that allows for creation of CSCs with which drug candidates are screened. The ability to generate stable CSCs is fundamentally important for the discovery and development of more effective cancer treatments. The company is well funded and should have capital resources adequate to reach human proof of concept. Verastem is headquartered in Cambridge, Massachusetts. 2
  3. 3. INVESTMENT THESISFounded by world-class cancer biologists and experienced venture capitalists,Verastem is developing small-molecule drugs for the treatment of cancer, withthe specific focus of targeting cancer stem cells (CSCs). The underpinning theorybehind Verastem’s approach is that, while typical cancer therapies may beeffective in killing mature and differentiated cancer cells, ineffective killing ofCSCs may provide the means for the tumors to re-grow. To facilitatedevelopment of CSC-targeting therapies, Verastem’s founders developedtechnologies to manipulate the epithelial-to-mesenchymal transition (EMT) tocreate CSCs. With them, standard high-throughput screening processes areapplied to identify promising leads. Capital raised in the company’s IPO shouldsupport activities through to potential human proof of concept (POC). IfVerastem is successful in the development of drugs that target CSCs, we believethere may be a high level of interest from other biopharma industry companiesfocused on developing cancer therapies.REASONS TO BUYVSTM shares are undervalued. As detailed in the Valuation section of thisreport, we believe VSTM shares are undervalued. Our financial analysis assumesthat Verastem successfully develops VS-507 and that the drug reaches the marketand is used for treating so-called triple-negative breast cancer (TNBC). If theCSC theory is valid and if killing CSCs yields a more effective treatment forcancer, Verastem could define a new paradigm in medical management of thedisease.Platform technology may provide means to accomplish what might havebeen challenging before. Hampering the ability to develop drugs that kill CSCshas been the inability to obtain the cells in sufficient quantities for screening ofdrug candidates. Verastem scientists discovered methods to create CSCs bymanipulating the epithelial-to-mesenchymal transition (EMT). Obviously, iftargeting CSCs does not alter the course of the disease, then the ability togenerate the cells may have limited utility, especially as it relates to their use fordrug candidate screening.Companion diagnostics could provide insight into how cancers should betreated and provide another revenue stream. The importance of havingcompanion diagnostics to “marry” with the use of therapies cannot be overstated,particularly when the genetic/phenotypic profile is predictive of whether a patientshould be treated with the drug at all and if a prediction as to the likelihood of anacceptable outcome can be made. Because Verastem’s therapies would likelyfunction mostly through the killing of CSCs, it will be important to ensure thatthe patients treated have tumors populated with them. It may also be important toensure that the specific therapy is matched to the cellular defect(s) characteristicof the cancer.Verastem’s founders are world renowned cancer biologists. We are mindfulthat numerous companies have been founded by accomplished scientists, yetachievement of the primary business goals has not occurred. Still, we believe that Verastem (VSTM) 3
  4. 4. having a fundamentally solid understanding of the biology of CSCs is important.Co-founders Robert Weinberg, Ph.D., Eric Lander, Ph.D. and Piyush Gupta,Ph.D. have demonstrated expertise as it relates to cancer biology and CSCs andtheir work in the area has been published in prestigious scientific journals.Verastem’s CEO has a strong track record of identifying technologies thatmay generate broad interest within the biopharma industry. In the currentcapital markets environment, the ability to go public at a pre-clinical stage couldlikely be attributed to the fact that the company is pursuing a potentiallyrevolutionary way to treat cancer, a truly “big idea” in an industry that oftenpresents relatively undifferentiated ones. We believe investors may also havebeen attracted to the caliber of the company’s founders. A unique element to theVerastem story may be prior investor experiences in companies founded by CEOChristoph Westphal. Companies he has co-founded include Alnylam, a leadingdeveloper of RNA-interfering technologies; Momenta, a developer of noveldrugs based on a fundamental understanding of sugar biology; and Sirtris, adeveloper of drugs that may alter the aging process. Sirtris may resonate moststrongly with investors given that the company was sold slightly over a year aftergoing public (at $10 per share) for $22.50 per share. Whether Verastem could besold remains to be determined. If, however, the company’s strategy gains greatervalidity (e.g., through demonstration of human POC), we believe numerousbusiness development opportunities could unfold.RISKSAs with practically any development-stage biotechnology company, theprimary risk relates to the feasibility of technical success. Verastem is seekingto prove a hypothesis for which no clear-cut human clinical study data exist tosupport it. If targeting CSCs does not improve treatment outcomes, thenVerastem may have to modify its business model/strategy to more closelyresemble the prototypical small-cap biotech companies that develop new (if notdifferentiated) cancer treatments.For pre-commercial-stage biotech companies, the need for additional capitalshould always be considered a risk, in our opinion. Based on Verastem’sexpectations regarding capital requirements to reach human POC, we believeinvestors may not face a significant risk of dilution before a value-creating eventcould occur. If POC is established and the company needs to raise additionalcapital, we believe it likely that the raise would occur at a valuation above thelevel at which the stock currently trades.VALUATIONOur valuation of VSTM shares is based on a DCF analysis of the commercialopportunity for treating TNBC. Until human POC has been demonstrated, thereinpotentially highlighting the power of Verastem’s technology, we are disinclinedto attribute much value to it. Obviously, if the technology’s fidelity supports areproducible drug development effort, we believe it would be reasonable toconsider some value for the platform over and above the intrinsic value of thedrugs developed using it. Verastem (VSTM) 4
  5. 5. As of 2011, the total breast cancer population, defined as women alive today who have or had breast cancer, was approximately 2.6M patients (National Cancer Institute). In 2011, an estimated 230,500 new cases of invasive breast cancer were diagnosed, in addition to 58,000 non-invasive cases (American Cancer Society, Surveillance Research, 2011), representing an incidence rate of ~2% of the U.S. female population. Of the newly diagnosed patients, we assume a survival rate of 85% based on current five-year relative survival rates of 99% for localized disease, 84% for regional disease and 23% for distant-stage disease in all ages and races (American Cancer Society). Approximately 39,500 women will die in the same year from the disease, which represents 1.3% of the total breast cancer population (American Cancer Society, Surveillance Research, 2011). Lastly, of the net breast cancer population, about 15% of those will have TNBC. We maintained this net growth trajectory to 2017, the year in which we believe Verastem could launch the first drug candidate from the ongoing development efforts. By 2017, we project a population of approximately 400,000 TNBC patients, 15% of the projected ~2.7M breast cancer patients in the U.S. With a market penetration rate of 1%, and an initial price of $65,000/year for treatment, we estimate that lead drug candidate VS-507 will capture around $260M of sales in its first year on the market. From 2017 to 2021, we project market penetration growing to 10% and, with 5% price increases taken each year, annual sales growing to $3.2B. We assume cost of sales will be 30% in 2017, falling to 25% by 2019. Exhibit 1 depicts our revenue estimates for VS-507.Exhibit 1. Verastem Revenue ModelSource: LCM Research Verastem (VSTM) 5
  6. 6. Our DCF analysis is depicted in Exhibit 2. We used a weighted average cost of capital (WACC) of 25% and a probability of technical success (pTS) of 25%. Based on our analysis, we estimate a fair value for the stock at $20 per share.Exhibit 2. Verastem Discounted Cash Flow AnalysisSource: LCM Research A sensitivity analysis around the per annum cost of therapy and pTS is depicted in Exhibit 3. We assumed prices and probabilities ranging from $55,000 to $85,000 and 15% to 30%, respectively. Based on these inputs, we estimate a fair value range of $11-$35. Exhibit 3. Verastem Valuation Sensitivity Source: LCM Research TARGETING CANCER AT ITS ROOT The existence of stem cells in normal tissues has been known for some time, and they are believed to play an important role in tissue-specific functions. Stem cells are capable of self renewal as well as creation of “committed” progenitor cells that may ultimately differentiate into the cells that carry out necessary activities characteristic of the organ or tissue. Stem cells have also been identified in tumors, where they exist as a minor component of the tumor but are, nevertheless, important because they are believed to have the ability to seed new tumors. Verastem (VSTM) 6
  7. 7. The epithelial-mesenchymal transition (EMT) is a process that is believed toallow epithelial cells that typically interact with basement membranes and are,therefore, immobile, to resemble mesenchymal cells. Loss of need for adhesionto a basement membrane, for example, allows the mesenchymal cells to bemobile and disseminate throughout the body. Cancer cells that have undergonethe EMT process, therefore, may be uniquely suited for giving rise to metastases.Verastem is pioneering the treatment of cancer by focusing on the role of CSCsin the disease pathology. The underpinning theory is simple but elegant: Typicaltherapies may kill the differentiated tumor cells but may be relatively ineffectiveat killing CSCs. As a consequence, although the tumor may be de-bulked, theresident CSCs that remain, because they are not killed by the therapy, areavailable to repopulate the tumor (and perhaps metastasize to other parts of thebody). Verastem scientists believe that the combination of CSC-targeting agentswith typical therapies could produce a more robust treatment effect than eithertreatment alone.CSC CREATION − A KEY TECHNOLOGYTumor cell lines/models that may be useful for screening drug candidates existbut, likely in part because the CSC theory has only recently been put forward,suitable tools are less prevalent for identifying compounds that effectively killthem. Consequently, the ability to create CSCs in adequate quantity is ofparamount importance to the drug development process. In a paper in the journalCell (“The epithelial-mesenchymal transition generates cells with properties ofstem cells”, 2008, 133, 704-715), Verastem scientists and collaborators describea means of transforming immortalized, but not tumorigenic, human mammaryepithelial cells (HMLE cells) into cells with a genotypic and phenotypic profilethat resembled neoplastic mammary stem cells. Specifically, expression ofmRNA of epithelial markers was downregulated and mRNA of mesenchymalmarkers was upregulated. Cell-surface expression of the CD44 antigen increasedwhereas expression of the CD24 antigen decreased.The altered genotype/phenotype was effected by expression of nucleartranscription factors Snail or Twist. Verastem scientists have developed a processwherein stable CSCs can be created from cancer “non-stem” cells. Verastembelieves that the stability of the CSCs is amenable to high-throughput screening.Obviously, instability that led to genetic drift and perhaps differential response toexperimental agents would undercut the reproducibility or comparability ofresults.Exhibit 4 depicts the general schema for Verastem’s drug development efforts.Accessing chemical libraries and establishing high-throughput screening assaysshould be relatively routine as there is an abundance of compounds and cell-killing assays should be straightforward to develop. Key to the process, then, islikely the ability to generate CSCs. Verastem (VSTM) 7
  8. 8. Exhibit 4. Verastem Proprietary TechnologySource: Company filings and presentation.INITIAL EFFORTS TARGET TNBCVerastem’s initial drug development efforts are focused on the treatment oftriple-negative breast cancer (TNBC). For background, breast cancer is typicallycategorized by the presence of the estrogen receptor (ER), the progesteronereceptor (PR) or the human epidermal growth factor receptor 2 (HER2). Cellsthat express none of these receptors are considered “triple negative” and thediagnosis is triple-negative breast cancer (TNBC). Approximately 15% of allbreast cancers are considered to be of the TNBC variety and a poorer prognosisand lower survival rate is typically observed as compared with cancers for whichsome of the receptors are expressed. Owing to the absence of the receptors, andbecause they are drug targets themselves, traditional chemotherapy is typicallynot effective. Importantly, with respect to targeting CSCs, TNBC also has theproclivity to recur more often and cause patients to relapse.Exhibit 5. TNBC growth after chemotherapySource: www.triplestepforthecure.org Verastem (VSTM) 8
  9. 9. Wnt Pathway is Focus of Initial EffortsVS-507 is Verastem’s lead drug candidate and the compound is a small-moleculeinhibitor of the so-called Wnt pathway. Activation of the pathway is believed tobe important for normal development but a role in cancer biology is also believedto exist. As depicted in Exhibit 6 (left side of the graphic), Wnt proteins bind to acell surface receptor called Frizzled and a complex is formed with the LRP6protein (which may serve to stabilize the complex). VS-507, a proprietaryformulation of the antibiotic salinomycin, is believed to disrupt the complex,thereby inhibiting signaling of the Wnt pathway.Exhibit 6. VS-507 mechanism of actionSource: Verastem presentationIn vitro data supporting the cell-killing ability of VS-507 were published in thejournal Cell in 2009 (“Identification of selective inhibitors of cancer stem cellsby high-throughput screening”, 138, 1-15). Using HMLE cells that had beenmodified to produce E-cadhedrin at a lower level than normal, an EMT ensuedand acquisition of a mesenchymal phenotype emerged. As described in thejournal article, 16,000 compounds were screened for their ability to reduce cellviability. The authors reported that 10% of the compounds that were testedreduced the viability of the modified HMLEshEcad cells but that 98% also inhibitedthe viability of control HMLEshCntrl cells, meaning that the compounds might notbe selective for CSCs. Eight of 32 compounds that showed selective toxicity toHMLEshEcad cells were selected for additional testing. From the subsequentscreening attempts, only salinomycin consistently showed cell-killing abilityacross a range of concentrations. The authors reported that the three othercompounds tested − abamectin, etoposide and nigericin − exhibited more modestselective toxicity (2X) as compared with salinomycin (8X).Exhibit 7 depicts results from in vitro testing of HMLER cells (HMLE cellstransformed with V12H-Ras oncogene). The data depicted in the three panels onthe left side of the Exhibit represent the relative levels of CD44 and CD24antigens. As noted previously, CSCs are believed to highly express CD44relative to CD24 and non-stem cell cancer cells are believed to express highlevels of CD24 and low levels of CD44. “High” expressing CD44 cells and“low” expressing CD24 cells are framed by the pentagon shapes on the left side Verastem (VSTM) 9
  10. 10. of each graphic. Noteworthy is the fact that expression of CD24 was higherrelative to cells treated with placebo as compared with cells treated withpaclitaxel. The interpretation may be that the relatively low number of CSCs inplacebo-treated cells (vs. non-CSCs) reflects the normal stoichiometry and thatthe high number in paclitaxel-treated cells merely reflects the effectiveness ofpaclitaxel at killing non-CSCs and the relative insensitivity of CSCs to the drug.By comparison, the vast majority of cells treated with VS-507 that survive arenon-CSCs. On the surface, these data support the notion that VS-507, combinedwith paclitaxel, might be useful for eradicating CSCs and non-CSCs.Exhibit 7. VS-507 vs. placebo and paclitaxelSource: Gupta et al., Cell 2009VS-507 is currently in preclinical toxicity testing. It is anticipated that an INDwill be filed by YE12 and that Phase I clinical testing will commence in early2013. The Phase I trial will likely be a typical dose-escalation study to assess thedrug’s safety and tolerability. Verastem has also discussed plans to conduct asmall Phase Ib trial (n = 10-15 patients) that will primarily focus on CSC-enriched TNBC patients. Patients with tumors known to over-express the focaladhesion kinase (FAK) including ovarian, lung and prostate tumors, may beincluded in the trials. The efficacy endpoints of this study may includebiomarkers and RECIST measurements. Exhibit 8 depicts the preliminary designof the VS-507 studies. Verastem (VSTM) 10
  11. 11. Exhibit 8. Verastem clinical trial designVS-4718 IS VERASTEM’S NEXT SHOT ON GOALVS-4718 is a small molecule inhibitor of the FAK enzyme. Exhibit 9 depicts theputative role of FAK in intracellular signaling processes, particularly as theyrelate to a possible intersection/overlap with the Wnt pathway. Note that FAK isbelieved to lie downstream of RTKs (receptor tyrosine kinases or growth factorreceptors). To the extent that growth factors are involved in aberrant cancer cellgrowth, inhibition of FAK might be predicted to have an effect.Exhibit 9. VS-4718 mechanism of actionSource: Company presentationResults of in vitro testing of VS-4718 were published in the journal CancerBiology and Therapy in 2010 (“PND-1186 FAK inhibitor selectively promotestumor cell apoptosis in three-dimensional environments”, vol. 9, no. 10, 764- Verastem (VSTM) 11
  12. 12. 777). In those experiments, VS-4718 (designated as PND-1186 in the journal article) was shown to be effective at killing 4T1 breast carcinoma cells and ID8 ovarian carcinoma cells. The 4T1 cell line was derived from a spontaneously arising mammary tumor in BALB/c mice and is regarded as a model that resembles human breast cancer. The ID8 cell line was derived from mouse ovarian surface epithelial cells from C57B6 mice. Exhibit 10 depicts results from a so-called scratch-wound motility assay, a measure of cell migration. 4T1 cells were seeded on fibronectin-coated plates and then “wounded” with a pipette tip. The cells were cultured with VS-4718 or without (placebo) and migration was assessed by the degree to which the cells repopulated the cleared area. Evident in the micrographs at the top of Exhibit 10 is that VS-4718 inhibited migration. The bottom figures highlight the outcome of experiments of Balb/C mice, in which 4T1 cells were injected into the hindflank, treated with VS-4718. Noteworthy is that treatment resulted in fewer metastases and smaller tumor volume than mice treated with a placebo (PEG: PBS).Exhibit 10. VS-4718 inhibition of 4T1 cell migration and metastasisSource: Tanjoni et al., Cancer Bio & Ther. 2010. Exhibit 11 depicts results from experiments testing the ability of VS-4718 to kill 4T1 tumors in Balb/c mice. In the experiments, mice were treated with VS-4718 or placebo and the viability of the tumors was assessed. In the photomicrographs at the top of the panel, the green fluorescence represents cleaved caspase-3, an enzyme the presence of which is generally believed to be indicative of apoptosis (programmed cell death). Verastem (VSTM) 12
  13. 13. Exhibit 11. VS-4718 treatment results in 4T1 cell apoptosis Source: Tanjoni et al., Cancer Bio & Ther. 2010 Exhibit 12 depicts Verastem’s pipeline and anticipated milestones related to the advancement of the assets.Exhibit 12. Verastem PipelineSource: Company filings Verastem (VSTM) 13
  14. 14. Exhibit 13. Verastem Upcoming MilestonesCOMPETITIONVerastem may face competition from at least three other companies that aredeveloping therapies targeting CSCs.OncoMed Pharmaceuticals’ lead development compound is OMP-21M18(demcizumab), a MAb currently in Phase Ib development that targets CSCsthrough the Delta-like ligand (DLL4). DLL4 is believed to be an activator ofNotch, a signaling pathway important in stem cells and cancer. OMP-21M18 hasexhibited single-agent activity in a Phase I study in heavily pretreated solid tumorpatients. Phase Ib combination studies with chemotherapy in advanced non-smallcell lung and pancreatic cancers are also ongoing. A second drug candidate,OMP-18R5, is in Phase I testing and it is an antibody that binds to the Frizzledreceptor. By binding to Frizzled, OMP-18R5 could be predicted to have a similareffect as VS-507.Boston Biomedical’s lead compound is BBI608, a compound thatsimultaneously inhibits multiple key cancer stemness pathways. The drug is inpreparation for Phase III testing in patients with colorectal cancer and in variousPhase II and Ib trials for multiple solid tumors. On February 29, 2012, DainipponSumitomo Pharma Co. announced that it reached an agreement to acquire BostonBiomedical for up to $2.63B.Stemline Therapeutics’ drug candidates target myeloid leukemia (AML) andmyelodysplastic syndrome (MDS). A multi-center Phase I/II trial of SL-401 wasrecently completed and single-agent activity, including durable completeresponses and overall survival benefits, were observed. In addition, the drug waswell tolerated by patients and non-toxic to their bone marrow. SL-401 iscurrently advancing into later-stage clinical trials in patients with advancedAML. Verastem (VSTM) 14
  15. 15. Exhibit 14. Verastem Competition PATENT PORTFOLIO Verastem’s intellectual property portfolio is composed mostly of patents licensed from other entities including The Whitehead Institute, The Broad Institute and Poniard Pharmaceuticals. Verastem has filed two patent applications pertaining to VS-507. Verastem has licensed patents around its technology for screening for CSCs, EMT induction and biomarkers and inhibitors of CSC survival. Verastem’s patents and patent applications protect various parts of its technology and drugs from the mid-2020s to the early 2030s. Exhibit 16 pictorially depicts the general nature of Verastem’s patents. Note that the patents include processes of creating CSCs, methods of screening for drug targets and the pharmacophores (or uses) themselves. Thus, we believe that the company has created a robust patent portfolio that covers all of the key aspects of the drug development process. Verastem (VSTM) 15
  16. 16. Exhibit 15. Verastem patents and their applications Source: Company materials Exhibit 17 depicts the specific patents licensed by Verastem. Note that the company licensed patents related to FAK inhibitors. That IP could provide protection for drug candidates that follow VS-507 and function through the inhibition of that pathway.Exhibit 16. Verastem patents FINANCIAL FORECAST Our financial model for Verastem includes revenue for only one product, VS- 507, which we estimate will reach the market in the 2017 time frame. We assume that the company has adequate financial resources to reach human POC and Verastem (VSTM) 16
  17. 17. would likely raise additional capital after that. In our model, we forecast the next equity raise occurring in 2016, one year before the projected launch of VS-507. R&D is projected to grow by 50% in 2012 and 20% in 2013, with SG&A projected to grow by 100% and 93% in the same periods, respectively. We believe these expenses will increase significantly in both 2016 and 2017 in preparation for the drug’s launch and filing of an NDA. We currently project EPS of $(0.82) and $(1.19) for 2012 and 2013, respectively.Exhibit 17. Verastem Income StatementSource: Company reports, LCM Research estimates Verastem (VSTM) 17
  18. 18. Exhibit 18. Verastem Balance SheetSource: Company reports, LCM Research estimates Verastem (VSTM) 18
  19. 19. Exhibit 19. Verastem Statement of Cash FlowsSource: Company reports, LCM Research estimates VERASTEM EXECUTIVE MANAGEMENT Exhibit 21 lists senior Verastem management. As we noted previously, Verastem’s CEO has substantial experience founding biopharma companies that possess unique assets such as technology platforms (e.g., Alnylam) or companies that may be at the forefront of certain aspects of biology (e.g., Sirtris). Exhibit 21. Verastem Executive Management Source: Verastem and LCM Research Verastem (VSTM) 19
  20. 20. VERASTEM SCIENTIFIC ADVISORY BOARD Exhibit 22 lists Verastem’s Scientific Advisory Board. In our opinion, the strength and experience of the SAB is relatively peerless in the industry for companies the size of Verastem. As noted previously, we believe investors are apt to gravitate towards the quality of the SAB, particularly given the relatively early stage of development of the theory of cancer stem cells and their viability as drug targets.Exhibit 22. Verastem Scientific Advisory BoardSource: Verastem and LCM Research VERASTEM BOARD OF DIRECTORS Exhibit 23. Verastem Board of Directors Source: Verastem and LCM Research Verastem (VSTM) 20
  21. 21. ANALYST CERTIFICATIONAll of the recommendations and views about the securities and companies in this report accurately reflectthe personal views of the research analyst named on the cover of this report. No part of this researchanalyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations orviews expressed by the research analyst in this research report.IMPORTANT DISCLOSURESLazard Frères & Co. LLC has received compensation for investment banking servicesfrom VSTM within the past twelve (12) months.Lazard Capital Markets LLC has acted as manager or co-manager of a securitiesoffering on behalf of VSTM within the past twelve (12) months.Lazard Capital Markets LLC makes a market in VSTM securities. VSTM - Current Rating: BUY, Price Target: $20 21 20 19 18 17 16 15 14 13 12 11 10 Dec 11 Jan 12 Feb 12 Mar 12 Data source: FactSet prices / LCM ratings and target prices DISTRIBUTION OF INVESTMENT RATINGS (AS OF 03/05/12) OVERALL DISTRIBUTION BANKING CLIENT DISTRIBUTION* BUY NEUTRAL SELL BUY NEUTRAL SELL 59% 40% 1% 15% 5% 0%* Indicates the percentage of each category in the Overall Distribution that were banking clients of Lazard Frères in the previous 12 months.RATING GUIDELINE (return targets may be modified by risk or liquidity issues)BUY Expected to produce a positive total return of more than 10% in the next 12 months.NEUTRAL Fairly valued; expected to product a total return of ±10% in the next 12 months.SELL Expected to product a negative total return of more than 10% in the next 12 months. Verastem (VSTM) 21
  22. 22. DISCLAIMERSThis report has been prepared by Lazard Capital Markets LLC (“LCM”) in New York. It may not bereproduced, redistributed or copied in whole or in part for any purpose. This report has been approved by, andis being distributed in the US or to US persons, by LCM, which accepts responsibility for its contents in the US.Transactions undertaken in the US in any security mentioned herein must be effected through LCM or anotherUS-registered broker-dealer, in conformity with SEC Rule 15a-6.Neither this report nor any copy or part thereof may be distributed in any other jurisdictions where itsdistribution may be restricted by law and persons into whose possession this report comes should informthemselves about, and observe, any such restrictions. Distribution of this report in any such other jurisdictionsmay constitute a violation of US securities laws, or the law of any such other jurisdictions.This report does not constitute an offer or solicitation to buy or sell any securities referred to herein. It shouldnot be so construed, nor should it or any part of it form the basis of, or be relied on in connection with, anycontract or commitment whatsoever. The information in this report, or on which this report is based, has beenobtained from sources that LCM believes to be reliable and accurate. However, it has not been independentlyverified and no representation or warranty, express or implied, is made as to the accuracy or completeness ofany information obtained from third parties. The information or opinions are provided as at the date of thisreport and are subject to change without notice. The information and opinions provided in this report take noaccount of the investors’ individual circumstances and should not be taken as specific advice on the merits ofany investment decision. Investors should consider this report as only a single factor in making any investmentdecisions. Further information is available upon request. LCM may provide specialized research products orservices to certain customers focusing on the prospects for individual covered stocks as compared to othercovered stocks over varying time horizons or under differing market conditions. While the views expressed inthese situations may not always be directionally consistent with the long-term views expressed in the analystspublished research, the analyst has a reasonable basis and any inconsistencies can be reasonably explained.LCM does not accept any liability whatsoever for any direct or consequential loss howsoever arising, directly orindirectly, from any use of this report or its contents.By accepting this report you agree to be bound by the foregoing limitations.Lazard Capital Markets LLC30 Rockefeller Plaza, New York, NY 10020Member NYSE and FINRACopyright 2012 Lazard Capital Markets LLC. All rights reserved. Verastem (VSTM) 22

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