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Eli Lilly, Verastem and the Defenders of Shareholder Value

Stocks in this article: LLY VSTM AMLN QLTI CELG

Last week, Verastem (VSTM) proved my suspicions correct far sooner than I anticipated by "deprioritizing" salinomycin (also known as VS-507) before the drug even reached the clinic. Although management hasn't commented on the exact rationale for salinomycin's demise, I suspect a narrow therapeutic index and the resultant toxicity -- issues well documented in animals but ignored by management and Wall Street analysts until my March column -- doomed what had been the company's lead drug candidate.

Fortunately for the bulls, Verastem buried what would otherwise have been a grim update about salinomycin beneath other news. First, the company announced a research partnership with Eisai. The Japanese pharmaceutical giant will use salinomycin as a "starting point" for the development of related compounds. (Translation: Eisai's chemists will be working late, trying to engineer a workable drug from salinomycin's carcass.) Verastem also acquired a novel drug candidate from Pfizer for an undisclosed sum. The compound, which has completed early clinical studies and has been rebranded VS-6063 (formerly PF-04554878), belongs to a class known as focal adhesion kinase (FAK) inhibitors. (Verastem already has another FAK inhibitor from its internal pipeline in preclinical studies.) Management also made the savvy decision to host an R&D day late last week to drum up analyst excitement about the new landscape.

Verastem's spin show worked. Howard Liang at Leerink Swann and Matt Roden at UBS -- analysts working for the two lead banks in Verastem's IPO syndicate -- quickly published supportive notes. Liang's report calls the Pfizer deal "transformative," whereas Roden asks "Unto which to invest?" Roden seems to be channeling the Old Testament, which despite being a grammatical eyebrow-raiser is at least creative. Meanwhile, Liang's five pages of stapled molasses, which focus on justifying the rejiggered pipeline and explaining a price target based on discounted 2022 estimates, is best enjoyed with a tall glass of sawdust.

Clearly, UBS and Leerink are not going to protect shareholder's best interests.

Neither analyst raises Pfizer's abandonment of Verastem's new crown jewel as a meaningful concern. I haven’t done a lot of work on VS-6063. Data from a dose-ranging Phase I study in multiple tumor types was presented at ASCO in 2011 and appears unremarkable except for some odd side effects like unconjugated hyperbilirubinemia, an excess of the bilirubin formed during hemoglobin catabolism. Pfizer dropping the molecule does concern me. Although Pfizer has been more aggressively rationalizing R&D of late, the pharma behemoth's tendency is likely still development over divestiture. I suspect Pfizer scientists discovered something problematic about PF-04554878 and voted to foist the problem compound on Verastem's unsuspecting Nobel Laureates.

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