RAS Pathway Drug Competition And Financing Risks Will Dominate Yet Long-Term Potential Remains

Catalysts

About Verastem

Verastem Oncology is a commercial stage biopharmaceutical company focused on developing and commercializing targeted therapies for RAS/MAPK pathway driven cancers.

What are the underlying business or industry changes driving this perspective?

• Although the first in disease status of AVMAPKI FAKZYNJA CO-PACK in KRAS mutated recurrent LGSOC has driven early adoption, reliance on a small rare disease population and potential limitations on label expansion could cap long term revenue growth from this franchise and constrain operating leverage improvements.
• While growing recognition of targeted therapies in ovarian and pancreatic cancers supports demand, any delay or unfavorable outcome in RAMP 301 or RAMP 205 readouts would slow label expansion and combination use, which would pressure future revenue inflection and prolong net losses.
• Although the KRAS G12D program VS 7375 benefits from increasing investment and clinical focus on RAS pathway inhibition across multiple solid tumors, intense competition for the same mutation and possible safety or efficacy differentiation shortfalls could limit pricing power and margin expansion.
• While broad payer coverage and relatively rapid time to fill prescriptions are currently enabling access, potential future tightening of oncology reimbursement or step edit requirements could increase gross to net discounts and weigh on net product revenue and gross margins.
• Although the company currently has cash runway into the second half of 2026 supported by initial product revenue and warrant exercises, sustained high R&D and SG&A spending ahead of proof of durable commercial scale or pivotal data could necessitate additional financing that dilutes earnings per share and delays profitability.

Assumptions

This narrative explores a more pessimistic perspective on Verastem compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Verastem's revenue will grow by 120.2% annually over the next 3 years.
• The bearish analysts are not forecasting that Verastem will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Verastem's profit margin will increase from -1802.1% to the average US Biotechs industry of 16.0% in 3 years.
• If Verastem's profit margin were to converge on the industry average, you could expect earnings to reach $22.9 million (and earnings per share of $0.28) by about December 2028, up from $-241.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $88.1 million in earnings, and the most bearish expecting $-273.6 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 61.7x on those 2028 earnings, up from -3.1x today. This future PE is greater than the current PE for the US Biotechs industry at 19.0x.
• The bearish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.25%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company remains deeply loss making, with a non GAAP adjusted net loss of $39.4 million in the quarter against $11.2 million of net product revenue. High structural R&D and SG&A needs for multiple late stage programs could keep earnings and net margins negative for longer than expected, which may pressure the share price if investors lose confidence in the path to profitability.
• Current growth is heavily dependent on a single rare disease product, AVMAPKI FAKZYNJA CO PACK, in KRAS mutated recurrent LGSOC. The modest upsizing of the RAMP 301 confirmatory trial, together with uncertainty around NCCN guideline expansion and real world treatment duration, raises the risk that longer term revenue growth slows once the prevalent patient pool is worked through.
• The VS 7375 KRAS G12D program, although strategically important in a hot oncology target class, still sits in early Phase I IIa with key efficacy readouts and FDA interactions not expected until 2026. Any safety, tolerability, or efficacy setbacks relative to strong global competition could materially reduce future revenue potential and compress valuation multiples.
• The cash balance of $137.7 million and runway only into the second half of 2026, combined with rising clinical and commercial spend to support RAMP 301, RAMP 205, and VS 7375, suggest that additional dilutive equity or warrant driven financing may be required. This would weigh on per share earnings power and could cap upside in the stock.
• Although payers are currently providing broad coverage with fast time to fill and more than 80 percent covered lives, long term U.S. oncology pricing pressure and possible tightening of reimbursement for high cost targeted therapies could increase gross to net discounts. This would hurt net product revenue growth and limit future margin expansion.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Verastem is $14.0, which represents up to two standard deviations below the consensus price target of $16.0. This valuation is based on what can be assumed as the expectations of Verastem's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $20.0, and the most bearish reporting a price target of just $14.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $142.9 million, earnings will come to $22.9 million, and it would be trading on a PE ratio of 61.7x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $9.61, the analyst price target of $14.0 is 31.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.